<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
( X ) 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 March 22 , 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 $55,392,974.
As of March 22, 1999, the Registrant had 4,869,712 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for the
Registrant's 1999 Annual General Meeting of Shareholders
incorporated by reference into Part III.
The index to Exhibits appears on page 40.
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<PAGE>
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") joystick, the TOP GUN Platinum (includes
throttle), the Frag Master, the X-Fighter, and the Millennium 3D Inceptor.
GAMEPADS.
In October 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 October 1998, the Company introduced three controllers for the
video console market: the Shockhammer for the Sony Play Station, the Sting
Ray 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.
TALK N' PLAY
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The Company has combined technology licensed from Intel and People
proprietary software technology first 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 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 and Sierra On-Line, Inc. 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.
4
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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, Advanced Gravis Computer Technology Ltd., CH
Products, Logitech International S.A. and InterAct Accessories, many of which
have substantially greater financial, technical and marketing resources than
the Company.
5
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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
6
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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.
7
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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) for 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 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)%
--------- --------- ---------
--------- --------- ---------
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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
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<PAGE>
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.
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.
15
<PAGE>
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 the Company's 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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<PAGE>
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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<PAGE>
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.
PRICES FOR PRODUCTS IN THE COMPANY'S MARKETS ARE DECLINING
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<PAGE>
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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<PAGE>
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.
20
<PAGE>
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 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 (3,293)
---------- ---------
Total shareholders' equity............................. 19,280 11,553
---------- ---------
Total liabilities and shareholders' equity............. $ 26,877 $ 27,209
---------- ---------
---------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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
-------- -------- --------
-------- -------- --------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
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
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
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)
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 --
Net income..................................... -- -- 3,197 -- 3,197
-------- -------- ---------- ----------- -----------
Balance, December 31, 1997.................. 4,294 13,486 5,794 --
Comprehensive Income, 1997 5,794
-----------
-----------
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 $ (3,293) $(31)
-------- -------- -----------
-------- -------- -----------
Comprehensive Income, 1998 $(3,293)
-----------
-----------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
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 comparative advertising and
working 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 beographic 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,
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
</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>
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 (340,730)
Exercised ($0.25 to $0.75 per share)............... (169,035) --
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 $ 0.34 128,488 $ 0.36
$2.43--$3.00 292,400 8.2 2.77 82,400 2.52
$4.40--$5.34 475,728 8.2 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 ($9,270)
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 ($2.12)
Diluted................................. 0.49 0.64 ($2.12)
</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 exprie
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 $16.000 per share. The exercise
price applicable to 50% of the shares issuable upon exercise of the warrants
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
The information called for by this item is hereby incorporated
herein by reference to the Registrant's definitive Proxy Statement for the
Registrant's 1999 Annual Meeting of Shareholders, which Proxy Statement will
be filed with the Securities and Exchange Commission no later than 120 days
after the end of the fiscal year covered by this report.
ITEM 11. EXECUTIVE COMPENSATION
The information called for by this item is hereby incorporated
herein by reference from the Registrant's definitive Proxy Statement for the
Registrant's 1999 Annual Meeting of Shareholders, which Proxy Statement will
be filed with the Securities and Exchange Commission no later than 120 days
after the end of the fiscal year covered by this report.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by this item is hereby incorporated
herein by reference from the Registrant's definitive Proxy Statement for the
Registrant's 1999 Annual Meeting of Shareholders, which Proxy Statement will
be filed with the Securities and Exchange Commission no later than 120 days
after the end of the fiscal year covered by this report.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by this item is hereby incorporated
herein by reference from the Registrant's definitive Proxy Statement for the
Registrant's 1999 Annual Meeting of Shareholders, which Proxy Statement will
be filed with the Securities and Exchange Commission no later than 120 days
after the end of the fiscal year covered by this report.
39
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) List of documents filed as part of this Report:
(1) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE:
See index on page 24.
(2) EXHIBITS
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ -----------
<S> <C>
*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)
*4.3 Form of Certificate for Shares of Common Stock
*4.4 Form of Representatives' Warrant Agreement among the
Company, Cruttenden Roth and Black & Company, Inc.
****4.5 Securities Purchase Agreement dated as of January 28,
1999 among the Company and the Purchasers party
thereto.
****4.6 Form of Callable Warrant
****4.7 Registration Rights Agreement dated as of January 28,
1999 among the Company and the Purchasers party
thereto.
</TABLE>
- -----------------------
* 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 filed on March 25, 1997.
**** Incorporated by reference to the same exhibit number from the Company's
Current Report on Form 6-K filed on February 16, 1999.
40
<PAGE>
<TABLE>
<S> <C>
10.1 1998 Stock Option Plan (incorporated by reference to
Exhibit A to the Company's definitive proxy statement for
the 1998 Annual Meeting of Shareholders)
*10.2 1994 Incentive Compensation Plan, dated December 21, 1993
***10.3 Directors' Nonqualified Stock Option Plan, dated July
19, 1994, as amended
***10.4 1994 Stock Option Plan, dated July 19, 1994, as amended
10.5 Financing agreement, dated October 12, 1998 from U.S.
Bancorp Republic Commercial Finance, Inc. to the Company
regarding a revolving line of credit
*10.6 Voicecom Development Agreement, dated November 4, 1994,
between the Company and Advanced Protocol Systems, Inc.
10.7 1990 Stock Option Plan (incorporated by reference to
Exhibit 4.3 to the Registration Statement on Form S-8
filed on June 5, 1995 (File No. 33-93082))
**10.8 Leases, dated March 13, 1996, between Pacific Realty
Associates, L.P. and the Company, as amended
**10.9 Summary of 1997 Bonus Program (Bonus Program Extended for
1998)
@10.10 Lease dated January 7, 1998 between Stargas Nominees
Limited and the Company
21 List of Subsidiaries
23 Consent of Independent Accountants
27 Financial Data Schedule as of December 31, 1998
</TABLE>
- -------------------------
* 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.
*** Underlying document 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. 33-88757-1-A),
the amendment to the underlying document is incorporated by reference to the
same exhibit number from the Company's Report of Form 10-K for the year ended
December 31, 1997
* Incorporated by reference to the same exhibit number from the Company's
Report on Form 10-Q for the quarter ended March 31, 1998.
(b) Reports on Form 8-K:
On February 16, 1999, the Registrant filed a Current Report on Form
8-K with respect to its entering into an equity line financing arrangement and
the issuance of its securities and its contingent agreement to issue
additional securities in connection with the equity line financing.
41
<PAGE>
Schedule II
THRUSTMASTER, INC.
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
<TABLE>
<CAPTION>
BEGINNING CHARGES TO DEDUCTIONS ENDING
YEAR BALANCE EXPENSE WRITE-OFFS BALANCE
-------- ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful
accounts:
1998 $ 51 $ 246 $ (27) $ 270
1997 14 87 (50) 51
1996 7 122 (115) 14
Reserve for warranty
expense and sales returns:
1998 785 469 -- 1,254
1997 365 420 -- 785
1996 192 173 -- 365
</TABLE>
42
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
THRUSTMASTER, INC.
Date: March 30, 1999
By /S/ FRANK G. HAUSMANN
-----------------------------------------
Frank G. Hausmann
President and Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below consitutes and appoints C.
Norman Winningstad and Frank G. Hausmann, Jr., either of whom may act without
the joinder of the other, as his true and lawful attorneys-in-fact and agents
with full power of substitution and resubstitution, for him, and in his name,
place and stead, in any and all capacities to sign any and all amendments to
this Report on Form 10-K, and to file the same, with all exhibits thereto,
and all other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents full
power and authority to do and perform each and every act and thing requisite
and necessary to be done, as fully to all intents and purposes as he might or
could do in person, hereby rectifying and confirming all that said
attorneys-in-fact and agents or their substitute or substitutes may lawfully
do or cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934,
THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<S> <C> <C>
/S/ C. NORMAN WINNINGSTAD Chairman of the Board March 30, 1999
- --------------------------------------------
C. Norman Winningstad
/S/ FRANK G. HAUSMANN Director, President, Chief March 30, 1999
- -------------------------------------------- Executive Officer and Chief
Frank G. Hausmann Financial Officer (principal
executive and financial
officer)
/S/ ALLEN K. ROBISON Controller (principal March 30, 1999
- -------------------------------------------- accounting officer)
Allen K. Robison
/S/ ROBERT L. CARTER Director March 30, 1999
- --------------------------------------------
Robert L. Carter
/S/ GRAHAM DORLAND Director March 30, 1999
- --------------------------------------------
Graham Dorland
/S/ MERRILL A. MCPEAK Director March 30, 1999
- --------------------------------------------
Merrill A. McPeak
/S/ G. GERALD PRATT Director March 30, 1999
- --------------------------------------------
G. Gerald Pratt
/S/ MILTON R. SMITH Director March 30, 1999
- --------------------------------------------
Milton R. Smith
/S/ FREDERICK M. STEVENS Director March 30, 1999
- --------------------------------------------
Frederick M. Stevens
</TABLE>
43
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANT
We consent to the Incorporation by reference in the registration statements
of ThrustMaster, Inc. and its subsidiaries on Form S-8 (File No. 333-40323)
and Form S-3 (File No. 333-73333) of our report dated January 25, 1999,
except as to Note 13, which is as of January 28, 1999 on our audits of the
consolidated financial statements of ThrustMaster, Inc. and its subsidiaries
as of December 31, 1998 and 1997 and for each of the three years in the
period ended December 31, 1998, which report is included in this Annual
Report on Form 10-K.
/s/ PRICEWATERHOUSECOOPERS LLP
Portland, Oregon
March 31, 1999
<PAGE>
FINANCING AGREEMENT
THIS FINANCING AGREEMENT, dated as of October 12, 1998, is by
and between THRUSTMASTER, INC., an Oregon corporation ("Borrower"), and U.S.
BANCORP REPUBLIC COMMERCIAL FINANCE, INC., a Minnesota corporation (the
"Lender").
ARTICLE I
DEFINITIONS AND ACCOUNTING TERMS
Section 1.1 DEFINED TERMS. As used in this Agreement the following
terms shall have the following respective meanings:
"ACCOUNTS": Each and every right to payment of Borrower, whether
such right to payment arises out of a sale or lease of goods by Borrower, or
other disposition of goods or other property of Borrower, out of a rendering
of services by Borrower, out of a loan by Borrower, out of an assignment to
Borrower by Guarantor, out of damage to or loss of goods in the possession of
a railroad or other carrier or any other bailee, out of overpayment of taxes
or other liabilities of Borrower, or which otherwise arises under any contract
or agreement, or from any other cause, whether such right to payment now
exists or hereafter arises and whether such right to payment is or is not yet
earned by performance and howsoever such right to payment may be evidenced,
together with all other rights and interest (including all liens and security
interests) which Borrower may at any time have by law or agreement against any
account debtor (as defined in the Uniform Commercial Code in effect in the
State of Minnesota) or other obligor obligated to make any such payment or
against any of the property of such account debtor or other obligor;
specifically (but without limitation), the term includes all present and
future instruments, documents, chattel papers, accounts and contract rights of
Borrower.
"ACCOUNTS ADVANCE": As defined in Section 2.1(a).
"ADVANCE": An Accounts Advance, and/or an Inventory Advance, as the
context may require.
"AFFILIATE": When used with reference to any Person, (a) each Person
that, directly or indirectly, controls, is controlled by or is under common
control with, the Person referred to, (b) each Person which beneficially owns
or holds, directly or indirectly, five percent or more of any class of voting
stock of the Person referred to (or if the Person referred to is not a
corporation, five percent or more of the equity interest), (c) each Person,
five percent or more of the voting stock (or if such Person is not a
corporation, five percent or more of the equity interest) of which is
beneficially owned or held, directly or indirectly, by the Person referred to,
and (d) each of such Person's officers, directors, joint venturers and
partners. The
<PAGE>
term control (including the terms "controlled by" and "under common control
with") means the possession, directly, of the power to direct or cause the
direction of the management and policies of the Person in question.
"BAILEE LETTERS": Those letters to be executed by Kamino
International Transport and Expeditors International/PDX.
"BANK": U.S. Bank National Association.
"BORROWING BASE CERTIFICATE": As defined in Section 2.2.
"BUSINESS DAY": Any day (other than a Saturday, Sunday or legal
holiday in the State of where the Lender is located).
"CLOSING DATE": The date of this Agreement; PROVIDED that all the
conditions precedent to the making of the initial Advance, as set forth in
Article III, have been, or, on such Closing Date, will be, satisfied. The
Borrower shall give the Lender not less than one Business Day's prior notice
of the day selected as the Closing Date.
"ELIGIBLE ACCOUNTS": Accounts owned by the Borrower which the
Lender, in its sole and absolute discretion, deems eligible for Advances, but
which, at a minimum, are subject to a first priority perfected security
interest in favor of the Lender and not subject to any assignment, claim or
Lien other than the Lien in favor of the Lender and other Liens consented to
by the Lender in writing, but specifically excluding (a) Accounts which are
not earned; (b) Accounts which are unpaid more than thirty (30) days after the
original due date; (c) Accounts owed by debtors 25% or more of whose Accounts
owed are otherwise ineligible; (d) Accounts owned by any debtor whose Accounts
owed to the Borrower constitute more than 25% of all Accounts owed to the
Borrower; (e) Accounts representing progress billings, or retainages, or for
work covered by any payment or performance bond; (f) Accounts owed by any of
the Borrower's Affiliates; (g) Accounts owed by debtors not located in the
United States, unless supported by a letter of credit issued by a U.S. bank in
favor of the Borrower which has been delivered to the Lender or are covered by
a credit insurance policy acceptable to Lender in its sole discretion; (h)
Accounts as to which any warranty or representation contained in any security
agreement or other agreement of the Borrower with or given to the Lender with
respect to any such Account is untrue in any material respect; (i) Accounts as
to which the account debtor has disputed liability, or made any claim with
respect to any other Account due from such account debtor to the Borrower,
other than cross credits and cross debits in the ordinary course of business;
(j) Accounts with respect to which the account debtor is also a creditor of
Borrower, but only to the extent of the amount owed by Borrower to such
account debtor if such amount is less than the amount of all Accounts with
respect to such account debtor if such amount is less than the amount of all
Accounts with respect to such account debtor that
-2-
<PAGE>
otherwise would be Eligible Accounts; (k) Accounts as to which the account
debtor has filed a petition for bankruptcy or any other petition for relief
under the Bankruptcy Code, assigned any assets for the benefit of creditors,
or if any petition or other application for relief under the Bankruptcy Code
has been filed against the account debtor, or if the account debtor has
failed, suspended business, become insolvent, or has had or suffered a
receiver or a trustee to be appointed for all or a significant portion of its
assets or affairs; (l) Accounts owed by any federal government or government
agency; (m) Accounts evidenced by a promissory note or other instrument; and
(n) Accounts as to which the Lender believes that collection of any such
Account is insecure or that any such Account may not be paid by reason of the
account debtor's financial inability to pay.
"ELIGIBLE FOREIGN ACCOUNTS": Accounts owned by the Borrower or which
have been assigned to the Borrower by the Guarantor, which the Lender, in its
sole and absolute discretion, deems eligible for Advances, but which, at a
minimum, are subject to a first priority perfected security interest in favor
of the Lender (by virtue of the filing of a Form 395, or otherwise) and not
subject to any assignment, claim or Lien other than the Lien in favor of the
Lender and other Liens consented to by the Lender in writing, but specifically
excluding (a) Accounts which are not earned; (b) Accounts which are unpaid
more than thirty (30) days after the original due date; (c) Accounts owed by
debtors 25% or more of whose Accounts owed are otherwise ineligible; (d)
Accounts owned by any debtor whose Accounts owed to the Borrower constitute
more than 25% of all Accounts owed to the Borrower; (e) Accounts representing
progress billings, or retainages, or for work covered by any payment or
performance bond; (f) Accounts owed by any of the Borrower's Affiliates; (g)
Accounts not supported by a letter of credit issued by a U.S. bank in favor of
the Borrower which has been delivered to the Lender or are covered by a credit
insurance policy acceptable to Lender in its sole discretion; (h) Accounts as
to which any warranty or representation contained in any security agreement,
debenture or other agreement of the Borrower with or given to the Lender with
respect to any such Account is untrue in any material respect; (i) Accounts
with respect to which the account debtor is also a creditor of Borrower, but
only to the extent of the amount owed by Borrower to such account debtor if
such amount is less than the amount of all Accounts with respect to such
account debtor if such amount is less than the amount of all Accounts with
respect to such account debtor that otherwise would be Eligible Foreign
Accounts; (j) Accounts as to which the account debtor has filed a petition for
bankruptcy or any other petition for relief under the Bankruptcy Code,
assigned any assets for the benefit of creditors, or if any petition or other
application for relief under the Bankruptcy Code has been filed against the
account debtor, or if the account debtor has failed, suspended business,
become insolvent, or has had or suffered a receiver or a trustee to be
appointed for all or a significant portion of its assets or affairs; (k)
Accounts owed by any federal government or government agency; (l) Accounts
evidenced by a promissory note or other instrument; and (m) Accounts as to
which the Lender believes that collection
-3-
<PAGE>
of any such Account is insecure or that any such Account may not be paid by
reason of the account debtor's financial inability to pay.
"ELIGIBLE INVENTORY": Inventory of the Borrower which the Lender, in
its sole and absolute discretion, deems eligible for Advances, but which meets
the following minimum requirements: (a) it is owned by the Borrower, is
subject to a first priority perfected security interest in favor of the
Lender, and is not subject to any assignment, claim or Lien other than (i) a
Lien in favor of the Lender and (ii) Liens consented to by the Lender in
writing; (b) it consists of finished product (not including work in process
and supplies); (c) if held for sale or lease or furnishing under contracts of
service, it is (except as the Lender may otherwise consent in writing) new and
unused; (d) except as the Lender may otherwise consent, it is not stored with
a bailee, warehouseman or similar party; if so stored with the Lender's
consent, such bailee, warehouseman or similar party has issued and delivered
to the Lender, in form and substance acceptable to the Lender, such documents
and agreements as the Lender may require, including, without limitation,
warehouse receipts therefor in the Lender's name; (e) it is not goods in
transit, except for goods in transit shipped ocean freight by a United States
based freight forwarding company for which Lender has received bills of
lading; (f) the Lender has determined, in its sole and absolute discretion,
that it is not unacceptable due to age, type, category, quality and/or
quantity; (g) it is not held by the Borrower on consignment and is not subject
to any other repurchase or return agreement; (h) it is not held by a customer
of the Borrower or any other Person on consignment; (i) it complies with all
standards imposed by any governmental agency having regulatory authority over
such goods and/or their use, manufacture or sale; and (j) the warranties,
representations and covenants contained in any security agreement or other
agreement of the Borrower with or given to the Lender relating directly or
indirectly to the Borrower's Inventory are applicable to it without exception.
"FACILITY AMOUNT": As defined in Section 2.1
"GAAP": Generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as may be approved by a significant segment of the accounting
profession, which are applicable to the circumstances as of any date of
determination.
"GUARANTOR": ThrustMaster (Europe) Limited, a United Kingdom
corporation.
"GUARANTY": That Guaranty to be executed by the Guarantor in form
and substance satisfactory to the Lender.
-4-
<PAGE>
"INVENTORY": Any and all of the Borrower's goods, including, without
limitation, goods in transit, wherever located which are or may at any time be
leased by the Borrower to a lessee, held for sale or lease, furnished under
any contract of service or held as raw materials, work in process, or supplies
or materials used or consumed in the Borrower's business, or which are held
for use in connection with the manufacture, packing, shipping, advertising,
selling or finishing of such goods, and all goods, the sale or other
disposition of which has given rise to a Receivable, which are returned to
and/or repossessed and/or stopped in transit by the Borrower or the Lender, or
at any time hereafter in the possession or under the control of the Borrower
or the Lender, or any agent or bailee of either thereof, and all documents of
title or other documents representing the same.
"INVENTORY ADVANCE": As defined in Section 2.1(b).
"LANDLORD'S WAIVERS": Those Waivers to be executed by Evergreen
Business and Stewart Stiles Warehouse in form and substance satisfactory to
the Lender.
"LOAN DOCUMENTS": This Agreement, the Security Agreement, the
Guaranty and any documents described in Section 3.1(a).
"LIEN": With respect to any Person, any security interest, mortgage,
pledge, lien, charge, encumbrance, title retention agreement or analogous
instrument or device (including the interest of each lessor under any
capitalized lease), in, of or on any assets or properties of such Person, now
owned or hereafter acquired, whether arising by agreement or operation of law.
"PERSON": Any natural person, corporation, partnership, limited
partnership, joint venture, firm, association, trust, unincorporated
organization, government or governmental agency or political subdivision or
any other entity, whether acting in an individual, fiduciary or other capacity.
"REFERENCE RATE": The rate of interest from time to time publicly
announced by U.S. Bank National Association as its "reference rate"; U.S. Bank
National Association may lend to its customers at rates that are at, above or
below the Reference Rate. For purposes of determining any interest rate
hereunder which is based on the Reference Rate, such interest rate shall
change as and when the Reference Rate changes.
"SECURITY AGREEMENT": That Security Agreement to be executed by the
Borrower in form and substance satisfactory to the Lender.
Section 1.2 ACCOUNTING TERMS AND CALCULATIONS. Except as may be
expressly provided to the contrary herein, all accounting terms used herein
shall be
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interpreted and all accounting determinations hereunder shall be made in
accordance with GAAP.
Section 1.3 OTHER DEFINITIONAL TERMS,TERMS OF CONSTRUCTION. The
words "hereof", "herein" and "hereunder" and words of similar import when used
in this Agreement shall refer to this Agreement as a whole and not to any
particular provision of this Agreement. The words "include", "includes" and
"including" shall be deemed to be followed by the phrase "without limitation".
Unless the context in which used herein otherwise clearly requires, "or" has
the inclusive meaning represented by the phrase "and/or". All incorporations
by reference of covenants, terms, definitions or other provisions from other
agreements are incorporated into this Agreement as if such provisions were
fully set forth herein, and include all necessary definitions and related
provisions from such other agreements. All covenants, terms, definitions and
other provisions from other agreements incorporated into this Agreement by
reference shall survive any termination of such other agreements until the
obligations of the Borrower under this Agreement are irrevocably paid in full.
ARTICLE II
TERMS OF LENDING
Section 2.1 THE ADVANCES. On the terms and subject to the conditions
hereof, at the Borrower's request, the Lender, in its absolute and sole
discretion and without any commitment to do so, may make the following
Advances available to the Borrower:
2.1(a) up to sixty-five percent (65%) of the net amount of
Eligible Accounts and Eligible Foreign Accounts which are listed in the
Borrower's most current Borrowing Base Certificate and which are deemed
eligible for advances by the Lender, or such greater or lesser percentage at
the Lender's sole and absolute discretion, not to exceed a maximum amount of
$16,000,000 (the "Accounts Advances");
In addition, at Borrower's request, and subject to Lender's
authorization in its sole discretion, U.S. Bank National Association (the
"Bank") may issue letters of credit for Borrower's account ("Letter of
Credit") in an aggregate amount not to exceed $1,500,000 ("Letter of Credit
Amount"). Upon the occurrence of any draw under any Letter of Credit that the
Lender has in writing guaranteed, the Lender will pay to the Bank 100% of such
draw and treat such payment as an advance against Eligible Accounts and/or
Eligible Foreign Accounts by Lender to Borrower hereunder and a reimbursement
by Borrower in full of such draw, whether or not Lender has determined for all
other purposes to cease making loans to Borrower hereunder. The amount of any
unreimbursed draw and the amount available to be drawn under any Letter of
Credit shall both be treated as an
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outstanding advance against Eligible Accounts and/or Eligible Foreign Accounts
hereunder for the purpose of determining the amount which may be advanced
under this Section 2.1 against Eligible Accounts and/or Eligible Foreign
Accounts.
In the event that the Lender exercises its discretion to make
demand for payment of the amounts advanced hereunder, or this Agreement is
terminated in accordance with the provisions of Article VII, while there
remains any amount available to be drawn under any Letter of Credit, Borrower
will pay to Lender the amount available to be drawn under the Letter of
Credit, which amount shall be held by Lender as security for Borrower's
obligation to reimburse Lender for any draw on any Letter of Credit for which
Lender reimburses the Bank. Said amount shall be applied as reimbursement of
any draw under any Letter of Credit for which Lender reimburses the Bank with
any balance, if any, to be returned to Borrower upon the expiration of all
Letters of Credit and at such time that no amount is available to be drawn
under any Letter of Credit.
2.1(b) up to fifty percent (50%) of the net amount of Eligible
Inventory which is listed in the Borrower's most current Borrowing Base
Certificate and which is deemed eligible for advances by the Lender, or such
greater or lesser percentage at the Lender's sole and absolute discretion, not
to exceed a maximum amount of (i) $2,500,000 from August 1 through January 30
of each year and (ii) $1,500,000 from January 31 through July 31 of each year
(the "Inventory Advances");
The total amounts advanced under sections 2.1 (a) through (b) hereof is the
"Facility Amount."
Loans for additional sums requested by the Borrower may be made at the
Lender's sole discretion based upon the Lender's valuation of the Borrower's
collateral or other factors. The Borrower acknowledges and agrees that the
Lender may from time to time, for the Lender's convenience, segregate or
apportion the Borrower's collateral for purposes of determining the amounts
and maximum amounts of Advances which may be made hereunder. Nevertheless, the
Lender's security interest in all such collateral, and any other collateral
rights, interests and properties which may now or hereafter be available to
the Lender, shall secure and may be applied to the payment of any and all
Advances and other indebtedness secured by the Lender's security interest, in
any order or manner of application and without regard to the method by which
the Lender determines to make Advances hereunder.
Section 2.2 PROCEDURE FOR ADVANCES; WIRE TRANSFER FEES. Any request
by the Borrower for an Advance shall be in writing and must be given so as to
be received by the Lender not later than 10:30 a.m. Pacific time on the
requested Advance date, or such later time as may be acceptable to the Lender
in its sole discretion. Each request for an Advance shall be irrevocable and
shall be deemed a
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representation by the Borrower that on the requested Advance date and after
giving effect to such Advance the applicable conditions specified in Article
III have been and will continue to be satisfied and the representations and
warranties set forth in Article IV will continue to be true. Each request for
an Advance shall specify the requested Advance date (which must be a Business
Day) and the amount of such Advance. Each request for an Advance shall be
accompanied by a Borrowing Base Certificate signed by a duly authorized
officer of the Borrower in form and substance satisfactory to the Lender (the
"Borrowing Base Certificate"). If the Lender determines, in its absolute and
sole discretion, to make the requested Advance, the Lender will wire transfer
to the Borrower's Account on the requested Advance date the amount of the
requested Advance. The Borrower will pay to the Lender a wire transfer fee of
$20 per wire transfer of any Advance to the Borrower's account if the request
for an Advance.
Section 2.3 INTEREST RATES AND INTEREST PAYMENTS. Interest shall
accrue on the unpaid balance of the Advances at a floating rate per annum
equal to the sum of the Reference Rate plus 2.0% (the "Blended Rate"), which
Blended Rate Borrower acknowledges to be a combination of the interest rates
charged by Lender (equal to the sum of the Reference Rate plus 2.5%) and the
Bank (equal to the sum of the Reference Rate plus 1.5%) with both Lender and
the Bank participating equally in the Advances, and shall be due and payable
monthly in arrears on the last day of each calendar month; PROVIDED, HOWEVER,
that (i) upon the occurrence and during the continuance of any failure by the
Borrower to comply with any agreement or covenant of the Borrower under any
Loan Document or (ii) the inability or unwillingness of the Bank to continue
providing funding for fifty percent (50%) of the Advances due to the Bank's
determination, in its sole and absolute discretion of an increased credit risk
or a materially adverse change in the Borrower's business, the unpaid balance
of the Advances shall thereafter bear interest at a floating rate equal to the
sum of (a) the Blended Rate, plus (b) 2% and shall be due and payable on
demand; AND PROVIDED FURTHER that the minimum amount of interest due and
payable in any calendar year shall not be less than $250,000 prorated monthly.
For example the minimum interest for calendar year 1998 due and payable on
January 2, 1999 shall be $62,500. For example the minimum interest for
calendar year 1999, assuming this Agreement is terminated as of September 30,
1999 shall be $187,500 due and payable on October 1, 1999.
Section 2.4 REPAYMENT AND PREPAYMENT.
ALL ADVANCES SHALL BE DUE AND PAYABLE ON DEMAND; NOTHING SET FORTH IN
THIS AGREEMENT, THE SECURITY AGREEMENT OR ANY OTHER AGREEMENT BETWEEN THE
BORROWER AND THE LENDER SHALL IN ANY WAY LIMIT THE LENDER'S RIGHT TO DEMAND
PAYMENT OF THE ADVANCES IN WHOLE OR IN PART.
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Section 2.5 COMPUTATION. Interest on the Advances shall be
computed on the basis of actual days elapsed and a year of 360 days.
Section 2.6 ANNUAL FEE. The Borrower shall pay to the Lender an
annual fee in an amount equal to one-half percent (.50%) of the Facility
Amount (the "Annual Fee"). The Annual Fee shall be payable in advance on the
Closing Date and on each anniversary of the date of this Agreement.
Section 2.7 LETTER OF CREDIT FEE. The Borrower shall pay to the
Lender an annual fee in an amount equal to one and one-fourth percent (1.25%)
of the amount of any Letters of Credit issued pursuant to Section 2.1 (the
"Letter of Credit Fee"). The Letter of Credit Fee shall be payable upon the
issuance of any Letter of Credit and on each anniversary date of the issuance
of any Letter of Credit so long as the Letter of Credit remains outstanding.
The Letter of Credit Fee is in addition to any usual and customary charges of
the Bank relating to the issuance of Letters of Credit, which charges shall be
borne solely by the Borrower.
ARTICLE III
CONDITIONS PRECEDENT
Section 3.1 CONDITIONS PRECEDENT. No Advances shall be made
hereunder except upon the prior or simultaneous fulfillment of each of the
following conditions:
3.1(a) DOCUMENTS. The Lender shall have received the following:
(i) This Agreement executed by a duly authorized
officer (or officers) of the Borrower and dated the Closing
Date.
(ii) A copy of the corporate resolutions of
Borrower authorizing the execution, delivery and performance
of this Agreement and containing an incumbency certificate
showing the names and titles, and bearing the signatures of,
the officers of the Borrower authorized to execute this
Agreement, certified as of the Closing Date by the Secretary
or an Assistant Secretary of Borrower.
(iii) A copy of the Articles of Incorporation of
Borrower with all amendments thereto, certified by the
appropriate governmental official of the jurisdiction of its
incorporation as of a recent date acceptable to Lender and its
counsel.
(iv) A certificate of good standing for Borrower in
the jurisdiction of its incorporation, certified by the
appropriate
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governmental officials of a recent date acceptable to Lender
and its counsel.
(v) A copy of the bylaws of Borrower, certified as of
the Closing Date by the Secretary or an Assistant Secretary of
the Borrower.
(vi) A copy of the articles of organization or other
organizational documents and bylaws, if any, of Guarantor,
including all amendments thereto, certified as of the Closing
Date by the Secretary or an Assistant Secretary of Guarantor.
(vii) A copy of the resolutions of the governing
board of the Guarantor authorizing the execution, delivery and
performance of the Agreement and Loan Documents and containing
an incumbency certificate showing the names and titles, and
bearing the signatures of, the officers of Guarantor
authorized to execute the Agreement and Loan Documents,
certified as of the Closing Date by the Secretary or an
Assistant Secretary of Guarantor.
(viii) The Security Agreement, duly executed by
Borrower.
(ix) An initial Borrowing Base Certificate.
(x) An Opinion of Counsel acceptable to Lender
and its counsel.
(xi) The Guaranty duly executed by the Guarantor.
(xii) Evidence of insurance required to be
maintained under Section 5.3, naming the Lender as loss payee
in form and substance satisfactory to the Lender.
(xiii) The Landlord Waivers, duly executed.
(xiv) Collateral Assignment of Trademarks.
(xv) Assignment of Trademarks executed in blank.
(xvi) Collateral Assignment of Patents.
(xvii) Assignment of Patents executed in blank.
(xviii) A Debenture executed by Guarantor.
(xix) The Bailee's Letters.
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(xx) An Assignment of Accounts Agreement in form and
substance satisfactory to Lender.
(xxi) Such other documents as Lender may require.
3.1(b) OTHER MATTERS. All organizational and legal
proceedings relating to the Borrower and all instruments and agreements in
connection with the transactions contemplated by this Agreement shall be
satisfactory in scope, form and substance to the Lender and its counsel, and
the Lender shall have received all information and copies of all documents,
including records of corporate proceedings, which it may reasonably have
requested in connection therewith, such documents where appropriate to be
certified by proper Borrower or governmental authorities.
3.1(c) FEES AND EXPENSES. The Lender shall have received all
fees and other amounts due and payable by the Borrower on or prior to the
Closing Date, including the reasonable fees and expenses of counsel to the
Lender payable pursuant to Section 8.2.
3.1(d) PERFECTION. The Security Agreement and/or any and all
financing statements with respect thereto shall have been appropriately filed
to the satisfaction of the Lender; the Lender shall have received UCC searches
and/or other Lien searches satisfactory to the Lender; and the priority and
perfection of the Lien created thereby shall have been established to the
satisfaction of the Lender.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
The Borrower represents and warrants to the Lender:
Section 4.1 ORGANIZATION, STANDING, ETC. The Borrower is a
corporation duly incorporated and validly existing and in good standing under
the laws of the jurisdiction of its incorporation and has all requisite
corporate power and authority to carry on its business as now conducted, to
enter into this Agreement and to perform its obligations hereunder and
thereunder. This Agreement has been duly authorized by all necessary corporate
action and when executed and delivered will be the legal and binding
obligations of the Borrower. The execution and delivery of this Agreement will
not violate the Borrower's Articles of Incorporation or bylaws or any law
applicable to the Borrower. No governmental consent or exemption is required
in connection with the Borrower's execution and delivery of this Agreement.
Section 4.2 FINANCIAL STATEMENTS AND NO MATERIAL ADVERSE CHANGE. The
Borrower's audited financial statements as at December 31, 1997 and its
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unaudited financial statements as at August 31, 1998, as heretofore furnished
to the Lender, have been prepared in accordance with GAAP. The Borrower has no
material obligation or liability not disclosed in such financial statements,
and there has been no material adverse change in the condition of the Borrower
since the dates of such financial statements.
Section 4.3 LITIGATION. There are no actions, suits or proceedings
pending or, to the knowledge of the Borrower, threatened against or affecting
the Borrower which, if determined adversely to the Borrower, would have, a
material adverse effect on the condition of the Borrower. The Borrower is not
in violation of any law or regulation (including environmental laws and
regulations and laws relating to employee benefit plans) where such violation
could reasonably be expected to impose a material liability on the Borrower.
Section 4.4 TAXES. The Borrower has filed all federal, state and
local tax returns required to be filed and has paid or made provision for the
payment of all taxes due and payable pursuant to such returns and pursuant to
any assessments made against it or any of its property (other than taxes, fees
or charges the amount or validity of which is currently being contested in
good faith by appropriate proceedings and with respect to which reserves in
accordance with GAAP have been provided on the books of the Borrower).
Section 4.5 SUBSIDIARIES. The Borrower has no subsidiaries except
Guarantor and ThrustMaster GmbH.
ARTICLE V
AFFIRMATIVE COVENANTS
Until this Agreement shall have expired or been terminated and all
of the Borrower's other obligations to the Lender under this Agreement shall
have been paid in full, unless the Lender shall otherwise consent in writing:
Section 5.1 FINANCIAL STATEMENTS AND REPORTS. The Borrower will
furnish to the Lender:
5.1(a) As soon as available and in any event within 120 days
after the end of each fiscal year of the Borrower, financial statements of the
Borrower consisting of at least statements of income, cash flow and changes in
stockholders' equity, and a balance sheet as at the end of such year, setting
forth in each case in comparative form corresponding figures from the previous
annual audit, certified without qualification by independent certified public
accountants selected by the Borrower and acceptable to the Lender.
5.1(b) As soon as available and in any event within 30 days
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after the end of each fiscal month, unaudited financial statements for the
Borrower for such month and for the period from the beginning of such fiscal
year to the end of such month, substantially similar to the annual audited
statements.
5.1(c) Concurrently with each request for an Advance, and in
any event not less than weekly, a Borrowing Base Certificate.
5.1(d) As soon as practicable and in any event within fifteen
days of the end of each month, (i) a listing of all accounts, together with an
aging of all accounts and a reconciliation of such accounts against the
listing submitted pursuant hereto for the immediately preceding month
(including addresses and phone numbers of each account debtor submitted on a
quarterly bassi), (ii) a list of all inventory, setting forth the cost of such
inventory and all sales, returns and allowances and miscellaneous charges, and
(iii) a listing of all accounts payable, together with an aging of all
accounts payable all in form and substance satisfactory to the Lender.
5.1(e) Projected quarterly market development funds credit
report with respect to the succeeding quarter to be received by March 31, June
30, September 30 and December 31 of each year and actual quarterly market
development funds credit report with respect to the preceding quarter to be
received by January 31, April 30, July 31 and October 30 of each year.
5.1(f) Subject to customer imposed limitations, retailer
stock status reports and retailer sell through reports upon request by Lender,
and in any event not less than bi-monthly.
5.1(g) Within five days after the due date, proof of payment or
deposit, when due, of all withholding and F.I.C.A. taxes owing by the Borrower
from time to time, in form and substance satisfactory to the Lender by a
payroll service satisfactory to the Lender and whose services the Borrower
shall at all times retain.
5.1(h) From time to time, such other information regarding the
business, operation and financial condition of the Borrower as the Lender may
reasonably request.
Section 5.2 CORPORATE EXISTENCE. The Borrower will maintain its
corporate existence in good standing under the laws of its jurisdiction of
incorporation and its qualification to transact business in each jurisdiction
where failure to qualify would permanently preclude the Borrower from
enforcing its rights with respect to any material asset or would expose the
Borrower to any material liability.
Section 5.3 INSURANCE. The Borrower will maintain with financially
sound and reputable insurance companies such insurance as may be required by
law
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and such other insurance in such amounts and against such hazards as is
customary in the case of reputable corporations engaged in the same or similar
business and similarly situated, including without limitation such insurance
as may be required under the Security Agreement.
Section 5.4 PAYMENT OF TAXES AND CLAIMS. The Borrower will file all
tax returns and reports which are required by law to be filed by it and will
pay before they become delinquent, all taxes, assessments and governmental
charges and levies imposed upon it or its property and all claims or demands
of any kind (including those of suppliers, mechanics, carriers, warehousemen,
landlords and other like Persons) which, if unpaid, might result in the
creation of a Lien upon its property; provided that the foregoing items need
not be paid if they are being contested in good faith by appropriate
proceedings, and as long as the Borrower's title to its property is not
materially adversely affected, its use of such property in the ordinary course
of its business is not materially interfered with and adequate reserves with
respect thereto have been set aside on the Borrower's books in accordance with
GAAP.
Section 5.5 INSPECTION. The Borrower will permit any Person
designated by the Lender to visit and inspect any of the properties, books and
financial records of the Borrower, to examine and to make copies of the books
of accounts and other financial records of the Borrower, and to discuss the
affairs, finances and accounts of the Borrower with its officers at such
reasonable times and intervals as the Lender may designate. The Borrower shall
also allow the Lender and its agents to conduct periodic collateral audits of
the Borrower's assets at such intervals as the Lender may choose, and the
Borrower shall pay to Lender a fee in the amount of $750 per day per
collateral audit, plus out-of-pocket costs and expenses incurred in connection
with such collateral audits, (provided that so long as no Event of Default (as
that term is defined in the Security Agreement) has occurred under the
Security Agreement and is continuing, the Borrower shall not be require to pay
for more than four (4) collateral audits in any calendar year).
Section 5.6 MAINTENANCE OF PROPERTIES. The Borrower will maintain
its properties in good condition, repair and working order, and supplied with
all necessary equipment, and make all necessary repairs, renewals,
replacements, betterments and improvements thereto, all as may be necessary so
that the business carried on in connection therewith may be properly and
advantageously conducted at all times.
Section 5.7 BOOKS AND RECORDS. The Borrower will keep adequate and
proper records and books of account in which full and correct entries will be
made of its dealings, business and affairs.
Section 5.8 COMPLIANCE. The Borrower will comply in all material
respects with all laws, rules and regulations to which it may be subject.
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Section 5.9 NOTICE OF LITIGATION. The Borrower will give prompt
written notice to the Lender of the commencement of any action, suit or
proceeding that could have a material adverse effect on the Borrower.
Section 5.10 PLANS. The Borrower will maintain any employee benefit
plans in compliance with all material requirements of applicable laws and
regulations.
Section 5.11 SPECIAL AGREEMENTS REGARDING ACCOUNTS.
5.11(a) Collection of Accounts and all other amounts due to
the Borrower shall be subject to the provisions of paragraphs 5 and 6 of the
Security Agreement concerning the Lockbox and Collateral Account (as those
terms are defined in the Security Agreement). The Borrower shall provide to
the Lender a daily Collection Report of all Accounts collected. All
collections received in the Collateral Account and reported to Lender on a
Collection Report on a form furnished by Lender before 8:00 a.m. (Pacific
Time) on any Business Day that is a Monday through Thursday and 12:00 p.m.
Fridays (Pacific Time), shall be applied to the payment of the Advances (in
such order of application as the Lender may determine) on the day so received;
PROVIDED HOWEVER, that for purposes of determining the interest due and
payable on the unpaid balance of the Advances under Section 2.3, all
collections received in the Collateral Account shall be applied to the unpaid
balance of the Advances upon receipt of the daily Collection Report from
Borrower evidencing deposits actually made and after allowing two (2) Business
Days for collection.
5.11(b) Subject to the rights granted to the Lender in
paragraph 5 of the Security Agreement, all ledger sheets or cards, invoices,
shipping records, correspondence, and other writings relating to accounts
shall, until delivered to the Lender or removed by the Lender from the
Borrower's premises, be kept on the Borrower's premises without cost to the
Lender in appropriate containers in safe places.
5.11(c) Upon the Lender's demand for payment, the Lender may
remove from the Borrower's premises all books and records, correspondence,
documents and files relating to accounts; and the Lender may without cost or
expense to the Lender use such of the Borrower's personnel, supplies, space
and equipment at the Borrower's place of business as the Lender may desire for
the handling of collections. The Borrower will pay any and all out of pocket
expenses and cost of collection (including reasonable attorney fees) incurred
by the Lender in the Lender's handling of or effort to enforce collections.
5.11(d) The Borrower warrants that, except as may be disclosed
in the lists of Accounts furnished to the Lender: each customer billing
statement
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correctly states the subject matter and terms of sale; the merchandise
conforms thereto and is in all respects acceptable to the customer; the date
of the billing statement is not prior to the date of shipment; the Account is
not subject to any dispute, defense, offset or counterclaim; the account
debtor is not a subsidiary or affiliated company; and the Borrower has no
reason to believe the Account will not be paid in the regular course of
business. The Borrower will notify the Lender promptly of any event,
circumstance or communication with respect to any Account that is inconsistent
with the foregoing representation.
Section 5.12 REAFFIRMATION OF GUARANTIES. When so requested by the
Lender from time to time, the Borrower will promptly cause the Guarantor or
any other Persons who have guaranteed the obligations of the Borrower
hereunder or any part thereof to execute and deliver to the Lender
reaffirmations of their respective guaranties in such form as the Lender may
require.
Section 5.13 YEAR 2000. The Borrower will (a) review and assess its
business operations and computer systems and applications to address any "year
2000 problem" (that is, that computer applications and equipment used by the
Borrower, directly or indirectly through third parties, may be unable to
perform properly date-sensitive functions before, during and after January 1,
2000); (b) develop a plan which will include expense estimates to address any
year 2000 problem and to remediate any such problem by December 31, 1999.
ARTICLE VI
NEGATIVE COVENANTS
Until this Agreement shall have expired or been terminated and all
of the Borrower's other obligations to the Lender under this Agreement shall
have been paid in full, unless the Lender shall otherwise consent in writing:
Section 6.1 MERGER. The Borrower will not liquidate, wind up or
dissolve itself (or suffer any liquidation or dissolution).
Section 6.2 SALE OF ASSETS. The Borrower will not sell, transfer,
lease or otherwise convey all or any substantial part of its assets except for
sales and leases of Inventory in the ordinary course of business.
Section 6.3 DIVIDENDS. The Borrower will not pay any dividends or
otherwise make any distributions on, or redemptions of, any of its outstanding
stock.
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Section 6.4 INVESTMENTS. The Borrower will not make any loans,
advances or extensions of credit to any other Person (except for trade and
customer accounts receivable for inventory sold or services rendered in the
ordinary course of business and payable in accordance with customary trade
terms) or purchase or acquire any stock or other debt or equity securities of
or any interest in any other Person or any integral part of any business or
the assets comprising such business or part thereof, except for:
6.4(a) Readily marketable investments in debt securities
which are reasonably acceptable to the Lender.
6.4(b) Travel advances to officers and employees in the
ordinary course of business.
Section 6.5 INDEBTEDNESS. The Borrower will not borrow any money or
issue any bonds, debentures or other debt securities or otherwise become
obligated on any interest-bearing indebtedness except for (i) the Advances
under this Agreement (ii) existing indebtedness as disclosed on the most
recent financial statement of the Borrower referred to in Section 4.1, and
(iii) purchase money Liens as set forth in Section 6.6(h).
Section 6.6 LIENS. The Borrower will not create, incur, assume or
suffer to exist any Lien, or enter into any arrangement for the acquisition of
any property through conditional sale, lease-purchase or other title retention
agreements except:
6.6(a) Liens granted to the Lender.
6.6(b) Liens existing on the date of this Agreement and
disclosed in those UCC or other Lien searches referred to in Section 3.1(d).
6.6(c) Deposits or pledges to secure payment of workers'
compensation, unemployment insurance, old age pensions or other social
security obligations arising in the ordinary course of business of the
Borrower.
6.6(d) Liens for taxes, fees, assessments and governmental
charges not delinquent.
6.6(e) Liens of carriers, warehousemen, mechanics and
materialmen, and other like Liens arising in the ordinary course of business,
for sums not due.
6.6(f) Liens incurred or deposits or pledges made or given in
connection with, or to secure payment of, indemnity, performance or other
similar bonds.
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6.6(g) Encumbrances in the nature of zoning restrictions,
easements and rights or restrictions of record on the use of real property and
landlord's Liens under leases on the premises rented, which do not materially
detract from the value of such property or impair the use thereof in the
business of the Borrower.
6.6(h) Purchase money Liens on property acquired after the
Closing Date, provided that, (i) the indebtedness secured thereby is permitted
by Section 6.7 and (ii) such liens are limited to the property acquired and do
not secure indebtedness other than the purchase price of such property.
Section 6.7 CAPITAL EXPENDITURES. Borrower will not make Capital
Expenditures in an amount exceeding $750,000 in any fiscal year.
Section 6.8 CONTINGENT OBLIGATIONS. The Borrower will not guarantee
or otherwise become liable on the indebtedness of any other Person in an
amount in excess of $250,000 in the aggregate.
ARTICLE VII
TERMINATION BY BORROWER
This agreement shall continue in effect until terminated upon
written notice delivered by the Borrower to Lender by certified mail.
Termination shall not impair or affect, the Lender's rights existing as of the
time notice of Termination is given.
In the event that the Borrower gives notice to the Lender of the
termination of this Agreement under Article VII hereof at any time prior to
the first anniversary of the date of this Agreement, the Borrower will pay to
the Lender a prepayment charge, as additional compensation for the Lender's
costs of entering into this Agreement, in the amount of one percent (1%) of
the Facility Amount unless the outstanding amount of the Borrower's
obligations hereunder are (i) refinanced in full by an affiliate of U.S.
Bancorp or (ii) if paid from public or private capital markets.
ARTICLE VIII
MISCELLANEOUS
Section 8.1 MODIFICATIONS. Notwithstanding any provisions to the
contrary herein, any term of this Agreement may be amended with the written
consent of the Borrower; PROVIDED that no amendment, modification or waiver of
any provision of this Agreement or consent to any departure by the Borrower
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<PAGE>
therefrom shall in any event be effective unless the same shall be in writing
and signed by the Lender, and then such amendment, modifications, waiver or
consent shall be effective only in the specific instance and for the purpose
for which given.
Section 8.2 COSTS AND EXPENSES. Whether or not the transactions
contemplated hereby are consummated, the Borrower agrees to reimburse the
Lender upon demand for all reasonable out-of-pocket expenses paid or incurred
by the Lender (including filing and recording costs and reasonable fees and
expenses of Dorsey & Whitney LLP, counsel to the Lender) in connection with
the negotiation, preparation, approval, review, execution, delivery,
amendment, modification, interpretation, collection and enforcement of this
Agreement, including all fees due Lender incurred pursuant to this Agreement.
The obligations of the Borrower under this Section shall survive any
termination of this Agreement. In the event such costs, fees or expenses are
not promptly paid by Borrower on demand, Lender may set off the amount of any
such costs, fees or expenses from funds available to Borrower. If the Borrower
elects, the Borrower may treat the amount of any such costs, fees or expenses
as an Advance hereunder.
Section 8.3 WAIVERS, ETC. No failure on the part of the Lender to
exercise and no delay in exercising any power or right hereunder shall operate
as a waiver thereof; nor shall any single or partial exercise of any power or
right preclude any other or further exercise thereof or the exercise of any
other power or right. The rights and remedies of the Lender hereunder are
cumulative and not exclusive of any right or remedy the Lender otherwise has.
Section 8.4 NOTICES. Except when telephonic notice is expressly
authorized by this Agreement, any notice or other communication to any party
in connection with this Agreement shall be in writing and shall be sent by
manual delivery, telegram, telex, facsimile transmission, overnight courier or
United States mail (postage prepaid) addressed to such party at the address
specified on the signature page hereof, or at such other address as such party
shall have specified to the other party hereto in writing. All periods of
notice shall be measured from the date of delivery thereof if manually
delivered, from the date of sending thereof if sent by telegram, telex or
facsimile transmission, from the first Business Day after the date of sending
if sent by overnight courier, or from four days after the date of mailing if
mailed; PROVIDED, HOWEVER, that any notice to the Lender under Article II
hereof shall be deemed to have been given only when received by the Lender.
Section 8.5 SUCCESSORS AND ASSIGNS; DISPOSITION OF LOANS. This
Agreement shall be binding upon and inure to the benefit of the parties hereto
and their respective successors and assigns, except that the Borrower may not
assign its rights or delegate its obligations hereunder without the prior
written consent of the Lender. The Lender may at any time sell, assign,
transfer, grant participations in, or otherwise dispose of any portion of the
Advances to banks or other financial institutions. The Lender may disclose any
information regarding the Borrower in
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<PAGE>
the Lender's possession to any prospective buyer or participant provided the
prospective buyer or participant executes a non-disclosure agreement.
Section 8.6 OFFSET. The Borrower hereby irrevocably authorizes the
Lender to set off all sums owing by the Borrower to the Lender against all
deposits and credits of the Borrower with, and any and all claims of the
Borrower against, the Lender. The Borrower further agrees that any bank
participating with the Lender in Advances hereunder may exercise any and all
rights of setoff with respect to such participation as fully as if such
participant had lent directly to the Borrower the amount of such participation.
SECTION 8.7 GOVERNING LAW AND CONSTRUCTION. THE VALIDITY,
CONSTRUCTION AND ENFORCEABILITY OF THIS AGREEMENT SHALL BE GOVERNED BY THE
INTERNAL LAWS OF THE STATE OF MINNESOTA, WITHOUT GIVING EFFECT TO CONFLICT OF
LAWS PRINCIPLES THEREOF.
SECTION 8.8 CONSENT TO JURISDICTION. AT THE OPTION OF THE LENDER,
THIS AGREEMENT MAY BE ENFORCED IN ANY FEDERAL COURT OR MINNESOTA STATE COURT
SITTING IN HENNEPIN COUNTY, MINNESOTA; AND THE BORROWER CONSENTS TO THE
JURISDICTION AND VENUE OF ANY SUCH COURT AND WAIVES ANY ARGUMENT THAT VENUE IN
SUCH FORUMS IS NOT CONVENIENT. IN THE EVENT THE BORROWER COMMENCES ANY ACTION
IN ANOTHER JURISDICTION OR VENUE UNDER ANY TORT OR CONTRACT THEORY ARISING
DIRECTLY OR INDIRECTLY FROM THE RELATIONSHIP CREATED BY THIS AGREEMENT, THE
LENDER AT ITS OPTION SHALL BE ENTITLED TO HAVE THE CASE TRANSFERRED TO ONE OF
THE JURISDICTIONS AND VENUES ABOVE-DESCRIBED, OR IF SUCH TRANSFER CANNOT BE
ACCOMPLISHED UNDER APPLICABLE LAW, TO HAVE SUCH CASE DISMISSED WITHOUT
PREJUDICE.
SECTION 8.9 WAIVER OF JURY TRIAL. EACH OF THE BORROWER AND THE
LENDER IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL
PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT, THE ADVANCES AND ANY
OTHER LOAN DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY.
Section 8.10 INDEMNIFICATION. The Borrower hereby agrees to defend,
protect, indemnify and hold harmless the Lender and its affiliates and the
directors, officers, employees, attorneys and agents of the Lender and its
affiliates (each of the foregoing being an "Indemnitee" and all of the
foregoing being collectively the "Indemnitees") from and against any and all
claims, actions, damages, liabilities, judgments, costs and expenses
(including all reasonable fees and disbursements of counsel which may be
incurred in the investigation or defense of any matter) imposed upon, incurred
by or asserted against any Indemnitee, whether direct, indirect or
consequential and whether based on any federal, state, local or foreign
-20-
<PAGE>
laws or regulations (including securities laws, environmental laws, commercial
laws and regulations), under common law or on equitable cause, or on contract
or otherwise: (a) by reason of, relating to or in connection with the
execution, delivery, performance or enforcement of any Loan Document, any
commitments relating thereto, or any transaction contemplated by any Loan
Document; or (b) by reason of, relating to or in connection with any credit
extended or used under the Loan Documents or any act done or omitted by any
Person, or the exercise of any rights or remedies thereunder, including the
acquisition of any collateral by the Lender by way of foreclosure of the Lien
thereon, deed or bill of sale in lieu of such foreclosure or otherwise;
provided, however, that the Borrower shall not be liable to any Indemnitee for
any portion of such claims, damages, liabilities and expenses resulting from
such Indemnitee's negligence or willful misconduct. In the event this
indemnity is unenforceable as a matter of law as to a particular matter or
consequence referred to herein, it shall be enforceable to the full extent
permitted by law.
Section 8.11 CAPTIONS. The captions or headings herein and any table
of contents hereto are for convenience only and in no way define, limit or
describe the scope or intent of any provision of this Agreement.
Section 8.12 ENTIRE AGREEMENT. This Agreement and the other Loan
Documents embody the entire agreement and understanding between the Borrower
and the Lender with respect to the subject matter hereof and thereof. This
Agreement supersedes all prior agreements and understandings relating to the
subject matter hereof.
Section 8.13 COUNTERPARTS. This Agreement may be executed in any
number of counterparts, all of which taken together shall constitute one and
the same instrument, and either of the parties hereto may execute this
Agreement by signing any such counterpart.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed as of the date first above written.
THRUSTMASTER, INC.
By /s/ F. G. Hausmann Jr.
-----------------------------------
Print Name F. G. Hausmann Jr.
---------------------------
Title President and CEO
--------------------------------
Address:
7175 NW Evergreen Parkway
Suite 400
Hillsboro, Oregon 97124
U.S. BANCORP REPUBLIC COMMERCIAL
FINANCE, INC.
By
---------------------------------
Print Name
-------------------------
Title
------------------------------
Lender's Address:
2338 Central Avenue NE, Suite 200
Minneapolis, MN 55418
Fax: (612) 782-1801
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<PAGE>
EXHIBIT 21 -- LIST OF SUBSIDIARIES
THRUSTMASTER (EUROPE) LIMITED, A UNITED KINGDOM CORPORATION.
THRUSTMASTER (DEUTSCHLAND) GMBH, A GERMAN CORPORATION.
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANT
We consent to the Incorporation by reference in the registration statements of
ThrustMaster, Incl. and its subsidiaries on Form S-8 (File No. 333-40323 and
File No. 333-93082) and Form S-3 (File No. 333-73333) of our report dated
January 25, 19999, except as to Note 13, which is as of January 28m, 19999 on
our audits of the consolidated financial statements of ThrustMaster, Inc and
its subsidiaries as of December 31, 1998 and 1997 and for each of the three
years in the period ended December 31, 1998, which report is included in this
Annual Report on form 10-K.
/s/ PRICEWATERHOUSECOOPERS LLP
Portland, Oregon
March 31, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1998 AND THE RELATED STATEMENT OF
INCOME FOR THE TWELVE MONTH PERIOD THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 460
<SECURITIES> 0
<RECEIVABLES> 10,851
<ALLOWANCES> 270
<INVENTORY> 6,786
<CURRENT-ASSETS> 24,834
<PP&E> 5,764
<DEPRECIATION> 3,414
<TOTAL-ASSETS> 27,209
<CURRENT-LIABILITIES> 15,656
<BONDS> 0
0
0
<COMMON> 14,846
<OTHER-SE> (3,293)
<TOTAL-LIABILITY-AND-EQUITY> 27,209
<SALES> 25,905
<TOTAL-REVENUES> 25,905
<CGS> 24,914
<TOTAL-COSTS> 24,914
<OTHER-EXPENSES> 15,567
<LOSS-PROVISION> 247
<INTEREST-EXPENSE> 183
<INCOME-PRETAX> (14,848)
<INCOME-TAX> (5,792)
<INCOME-CONTINUING> (9,056)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,056)
<EPS-PRIMARY> (2.07)
<EPS-DILUTED> (2.07)
</TABLE>
