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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
Commission File Number 0-25520
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CENTERSPAN COMMUNICATIONS CORPORATION
(Exact name of registrant as specified in its charter)
OREGON 93-1040330
(State or jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
7175 N.W. EVERGREEN PARKWAY #400
HILLSBORO, OREGON, 97124-5839
(Address of principal executive offices)
(Zip Code)
(503) 615-3200
(Registrant's telephone number)
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common stock, no par value 5,360,320 shares
(Class) (Outstanding at November 10, 1999)
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CENTERSPAN COMMUNICATIONS CORPORATION
Index to Form 10-Q
PART I - FINANCIAL INFORMATION Page No.
--------
Item 1. Financial Statements
Consolidated Balance Sheets ....................................... 2
Consolidated Statements of Operations ............................ 3
Consolidated Statements of Cash Flows ............................. 4
Consolidated Statements of Changes in
Shareholders' Equity .......................................... 5
Notes to Consolidated Financial Statements ........................ 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ......................................... 8
Item 3. Quantitative and Qualitative Disclosure About Market Risk ......... 14
PART II -- OTHER INFORMATION
Item 2. Changes in Securities and Use Proceeds............................. 15
Item 4. Submission of Matters to a Vote of Securityholders................. 16
Item 6. Exhibits and Reports on Form 8-K................................... 16
SIGNATURES. ................................................................ 16
CENTERSPAN COMMUNICATIONS CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
September 30, December 31,
1999 1998
------------- ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 4,786 $ 460
Accounts receivable, net 108 -
Inventories 295 -
Prepaid and other expenses 370 134
Net assets from discontinued operations 11,300 17,737
Income taxes receivable - 2,078
Deferred income taxes - 4,677
-------- --------
Total current assets 16,859 25,086
Plant and equipment, net 513 843
Other 25 25
-------- --------
Total assets $ 17,397 $ 25,954
-------- --------
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Operating line of credit $ - $ 5,821
Accounts payable 1,357 7,202
Accrued liabilities 165 1,378
-------- --------
Total current liabilities 1,522 14,401
-------- --------
Long-term debt 6,000 -
Shareholders' equity:
Preferred stock - -
Common stock 25,644 14,846
Accumulated deficit (15,711) (3,262)
Accumulated comprehensive loss (58) (31)
-------- --------
Total shareholders' equity 9,875 11,553
-------- --------
Total liabilities and shareholders' equity $ 17,397 $ 25,954
-------- --------
-------- --------
The accompanying notes are an integral part of these consolidated
financial statements.
2
CENTERSPAN COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------------- ----------------------------
1999 1998 1999 1998
--------------- ----------------- ------------- ----------
Revenues $ 85 $ - $ 806 $ -
Cost of goods sold 14 - 254 -
-------- -------- -------- --------
Gross profit 71 - 552 -
-------- -------- -------- --------
Operating expenses:
Research and engineering 148 - 278 -
Selling, general and administrative 916 244 1,820 714
-------- -------- -------- --------
Total operating expenses 1,064 244 2,098 714
-------- -------- -------- --------
Loss from operations (993) (244) (1,546) (714)
Expense related to beneficial conversion feature 757 - 987 -
Interest Income (26) (26) (64)
-------- -------- -------- --------
Loss before taxes (1,724) (244) (2,507) (650)
Provison for income taxes - - 4,532 -
-------- -------- -------- --------
Loss from continuing operations (1,724) (244) (7,039) (650)
Loss from discontinued operations - (3,038) (5,207) (6,702)
-------- -------- -------- --------
Net loss $ (1,724) $ (3,282) $(12,246) $ (7,352)
-------- -------- -------- --------
-------- -------- -------- --------
Loss per share from continuing operations:
Basic $ (0.34) $ (0.06) $ (1.44) $ (0.15)
-------- -------- -------- --------
-------- -------- -------- --------
Diluted $ (0.34) $ (0.06) $ (1.44) $ (0.15)
-------- -------- -------- --------
-------- -------- -------- --------
Loss per share from discontinued operations:
Basic $ - $ (0.69) $ (1.07) $ (1.54)
-------- -------- -------- --------
-------- -------- -------- --------
Diluted $ - $ (0.69) $ (1.07) $ (1.54)
-------- -------- -------- --------
-------- -------- -------- --------
Weighted average shares outstanding:
Basic 5,004 4,385 4,887 4,353
-------- -------- -------- --------
-------- -------- -------- --------
Diluted 5,004 4,385 4,887 4,353
-------- -------- -------- --------
-------- -------- -------- --------
The accompanying notes are an integral part of these financial statements.
3
CENTERSPAN COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Nine Months Ended
September 30,
------------------------------
1999 1998
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Cash flows from operations:
Loss from continuing operations $ (7,039) $ (650)
Loss from discontinued operations (5,207) (6,702)
-------- --------
Net loss $(12,246) $ (7,352)
Adjustments to reconcile net loss to cash provided by (used in) operating
activities:
Depreciation 165 1,122
Deferred income taxes and taxes receivable 6,755 (4,272)
Beneficial conversion feature on debt 987 -
Changes in operating assets and liabilities:
Accounts receivable (108) -
Inventories (295) -
Prepaid expenses and other assets (236) (65)
Payables and accrued liabilities (7,085) (1,254)
Net assets from discontinued operations 6,437 12,433
-------- --------
Net cash provided by (used in) operating activities (5,626) 612
-------- --------
Cash flows used in investing activities:
Proceeds from (Purchase of) plant and equipment, net 165 (1,443)
Cash flows from financing activities:
Payments on line of credit (5,821) (55)
Proceeds from issuance of debt 6,000 -
Proceeds from issuance of common stock 9,608 498
-------- --------
Net cash provided by financing activities 9,787 443
-------- --------
Net increase (decrease) in cash
and cash equivalents 4,326 (388)
Cash and cash equivalents, beginning of period 460 449
-------- --------
Cash and cash equivalents, end of period $ 4,786 $ 61
-------- --------
-------- --------
The accompanying notes are an integral part of these consolidated
financial statements.
4
CENTERSPAN COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS
OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands)
(Unaudited)
Accumulated
Common Stock Other Accumulated
------------------- Accumulated Comprehensive Comprehensive
Shares Amount Deficit Loss Loss
------- -------- ----------- ------------- -------------
Balance, January 1, 1999 4,597 $ 14,846 $ (3,262) $ (31)
Issuance of common stock 524 8,956
Beneficial conversion feature on convertible debt - 987
Warrants provided to common shareholders - 203 (203)
Stock options exercised 113 652 -
Translation adjustment - - - (27) $ (27)
Net loss - - (12,246) (12,246)
----- -------- -------- -------- --------
Balance, September 30, 1999 5,234 $ 25,644 $(15,711) $ (58)
----- -------- -------- --------
----- -------- -------- --------
Comprehensive loss, September 30, 1999 $(12,273)
--------
--------
The accompanying notes are an integral part of these consolidated
financial statements.
5
CENTERSPAN COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
NOTE 1 - BASIS OF PRESENTATION
The accompanying consolidated financial statements include the
accounts of Centerspan Communications Corporation, (the "Company" formerly
ThrustMaster, Inc.), an Oregon corporation, and its wholly-owned
subsidiaries, Thrustmaster (Europe) Limited and its wholly-owned subsidiary
Thrustmaster (Deutschland) GmbH, and have been prepared by the Company
without audit and in conformity with generally accepted accounting principles
for interim financial information pursuant to rules and regulations of the
Securities and Exchange Commission. In the opinion of management, the
unaudited consolidated financial statements include all necessary adjustments
(which are of a normal and recurring nature) for the fair presentation of the
results of the interim periods presented. These consolidated financial
statements should be read in conjunction with the Company's audited financial
statements and notes thereto included in the Company's annual report on Form
10-K for the year ended December 31, 1998. The results of operations for the
periods presented are not necessarily indicative of the results that may be
expected for the entire fiscal year.
On July 26, 1999, the Company entered into an agreement to sell
substantially all of the assets of the hardware business including sales and
return warranty reserves. This transaction closed on October 1, 1999 for $15
million in cash, $2.250 million of which remains in an escrow account to
provide for purchase price adjustments in specified circumstances. The gain
on the sale of the hardware business on October 1, 1999, net of estimated
adjustments and expenditures to close out the discontinued operations, was
approximately $1.750 million. The continuing operations of the Company
consist of its software business which was started in mid-1998 and generated
minor revenues in 1999. The following Proforma Consolidated Balance Sheet
reflects the financial effect of the closing of the sale of the hardware
business if the closing had been consummated at September 30, 1999.
Proforma
Consolidated Balance Sheet September 30,
(Dollars in thousands) 1999
- -------------------------- -------------
Cash and cash equivalents $17,655
Restricted cash 2,250
Accounts receivable, net 108
Inventories 295
Prepaid and other expenses 370
Other assets 538
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Total assets 21,216
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Accounts payable $ 2,926
Accrued liabilities 665
Long-term debt 6,000
Shareholders' equity 11,625
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Total liabilities and shareholders' equity $21,216
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6
The hardware business has been accounted for as discontinued operations
and, accordingly, its operations are segregated in the accompanying statements
of operations. Revenues from these operations were $11,205 for the first nine
months of 1999, and $25,905, $45,494 and $30,821 for the years ended December
31, 1998, 1997 and 1996, respectively. Certain expenses have been allocated to
continued operations, based on the number of employees remaining with the
software business, their related employee costs and overhead for facilities and
other related costs and corporate overhead expenses that were expected to
represent continuing expenses. All income tax provisions and benefits have been
allocated to continued operations. The components of net assets of discontinued
operations included in the Company's Consolidated Balance Sheets at
September 30, 1999 and December 31, 1998, follow:
(Dollars in thousands) September 30, December 31,
1999 1998
------------- ------------
Accounts receivable, net....................................... $ 4,618 $ 10,581
Inventories, net............................................... 6,477 6,786
Prepaid and other expenses..................................... 237 117
Tooling, net................................................... 1,300 1,506
Warranty accrual............................................... (334) (1,253)
Loss from July 1 through July 26 on discontinued operations.... (998) -
-------- --------
Total assets.............................................. $ 11,300 $ 17,737
-------- --------
-------- --------
On June 9, 1999, the Company issued and sold to two investors $6,000
aggregate principal amount of the Company's zero coupon Convertible
Debentures due June 9, 2002 for $6,000 cash. The Convertible Debentures have
been recorded as debt. The beneficial conversion feature has been recorded as
additional paid in capital and as a discount against long term debt. The
beneficial conversion feature of $987 was recognized over 90 days using the
interest method, resulting in a charge of $230 and $757 to continuing
operations in the quarters ended June 30 and September 30, 1999, respectively.
NOTE 2 - INVENTORIES FOR CONTINUING OPERATIONS
Inventories for continuing operations are stated at the lower of cost
or market on a first-in, first-out basis. These inventories are as follows:
September 30, December 31,
1999 1998
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Raw materials $ 80 $ -
Finished goods 215 -
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$295 $ -
--------- --------
--------- --------
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD LOOKING INFORMATION
The discussion and analysis below contains "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. The
Act provides a "safe harbor" for forward-looking statements to encourage
companies to provide prospective information about themselves so long as they
identify these statements as forward-looking and provide meaningful cautionary
statements identifying important factors that could cause actual results to
differ from the projected results. All statements other than statements of
historical fact that the Company makes in this Report on Form 10-Q are
forward-looking. In particular, statements regarding year 2000 compliance and
compliance costs; the adequacy of funds to meet the Company's current or future
cash needs; the development of the Company's software products; the Internet
community, collaboration and communications market; and the Company's future
results of operations or financial position are forward-looking statements.
Words such as "anticipates," "expects," "intends," "plans," "believes," "seeks,"
"estimates," and similar expressions identify forward-looking statements. But
the absence of these words does not mean the statement is not forward-looking.
The Company cannot guarantee any of the forward-looking statements, which are
subject to risks, uncertainties and assumptions that are difficult to predict.
Actual results may differ materially from those the Company forecasts in
forward-looking statements due to a variety of factors, including those set
forth in the Company's annual report on Form 10-K under the heading "Additional
Risk Factors that Could Affect Operating Results and Market Price of Stock" and
those set forth in Exhibit 99.1 to this report. The Company does not intend to
update any forward-looking statements due to new information, future events or
otherwise.
SALE OF THE HARDWARE BUSINESS (DISCONTINUED OPERATIONS)
On July 26, 1999, the Company entered into an agreement to sell
substantially all of the assets of the hardware business including sales and
return warranty reserves. This transaction closed on October 1, 1999 for $15
million in cash, $2.250 million of which remains in an escrow account to
provide for purchase price adjustments in specified circumstances. The
hardware business has historically comprised the bulk of the Company's assets,
liabilities, revenues and expenses. From its founding in 1990 through 1997,
the Company was a leader in designing and marketing innovative PC game
controller products. However, commencing in 1997, many larger competitors with
greater economies of scale entered the game controller market creating an
extremely competitive environment characterized by declining prices and
increased marketing costs. The Company's Board of Directors determined that
the Company could not achieve the economies of scale necessary to be
profitable in the game controller market in the foreseeable future, and
concluded that the Company should sell the hardware business and invest the
proceeds in the Company's new Internet communications and collaboration
software business.
INTERNET COMMUNICATIONS SOFTWARE BUSINESS (CONTINUING OPERATIONS)
On May 31, 1998 the Company entered into a license agreement with Intel
Corporation that licensed to the Company certain software source code technology
related to voice communications over the Internet. The scope of the license was
limited primarily to the PC gaming and entertainment market where the bulk of
the Company's historical business activity was conducted. In December 1998, the
Company re-negotiated the license agreement and secured additional rights
allowing it to use the technology in additional market segments outside of PC
gaming and entertainment.
8
In January 1999, the Company shipped its first Internet communications
software product into the distribution and retail channels. The product, called
Talk n' Play, incorporates the Intel technology and allows up to four people in
separate locations to conduct a four-way voice conference over the Internet
while they play on-line games. The product also allows the user to participate
in certain Internet communities provided by PeopleLink Inc., a provider of
outsourced Internet community communications. In June 1999, the Company shipped
its second Internet communications product, iConference, into the distribution
and retail channels, targeting the small-office/home-office market. iConference
provides the same four-way Internet voice conferencing capability as Talk n'
Play and adds the ability for up to four people to transfer files, share files
or share a white board while they are engaged in their voice conference.
In August 1999, the Company entered into a second license agreement
with Intel Corporation that licensed to the Company additional software source
code that the Company believes will enable it to accelerate the development of
its next generation Internet communications and collaboration products. The
Company intends to target these new products at the strategic Internet OEM and
PC-OEM channels. Most of the Company's year-to-date revenue from its new
Internet software business has been generated in the computer retail channel.
The Company believes that Internet communications and collaboration by
the mass market is in an early stage of development and that increasing demand
for these services will drive the convergence of real-time data, voice and video
multimedia interactivity over the Internet. Currently, most of this technology
is "server based." This requires a provider of these services to buy additional
computer equipment in order to constantly "scale-up" to meet the increased
demands of its subscribers or visitors. The audio technology the Company
licensed from Intel Corporation provides a "client-to-client" solution. This
technology allows a provider to offer a desktop client software solution that
will allow its subscribers or visitors to engage in real-time multimedia
communications without being "tied" to the provider's server. The Company
believes that a significant trend in the future of Internet community,
collaboration and communications will be driven by open, standards-based,
"client-to-client" technology and solutions.
The following discussion should be read in conjunction with the
Company's consolidated financial statements and the notes thereto included
elsewhere in this report.
9
RESULTS OF OPERATIONS
On July 26, 1999, the Company entered into an agreement to sell
substantially all of the assets of the hardware business including sales and
return warranty reserves. This transaction closed on October 1, 1999 for $15
million in cash, $2.250 million of which remains in an escrow account to
provide for purchase price adjustments in specified circumstances.
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:
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- ----------------------------
1999 1998 1999 1998
-------------------------- ----------------------------
Revenues 100.0% -% 100.0% -%
Cost of goods sold 16.0 - 32.0 -
-------- ---- -------- -----
Gross profit 84.0 - 68.0 -
Operating expenses:
Research and engineering 174.0 - 34.0 -
Selling, general and administrative 1,078.0 - 226.0 -
-------- ---- -------- -----
Total operating expenses 1,252.0 - 260.0 -
-------- ---- -------- -----
Loss from operations (1,168.0) - (192.0) -
Expenses related to beneficial conversion feature 891.0 - 122.0
Interest Income (31.0) (3.0)
-------- ---- -------- -----
Loss before taxes (2,028.0) - (311.0) -
Provison for income taxes - - 562.0 -
-------- ---- -------- -----
Loss from continuing operations (2,028.0) - (873.0) -
Loss from discontinued operations - - (646.0) -
-------- ---- -------- -----
Net loss (2,028.0)% -% (1,519.0)% -%
-------- ---- -------- -----
-------- ---- -------- -----
The continuing operations of the Company consist of its software business which
began in mid-1998 and has generated minor revenues in 1999. The results of the
Company's continuing operations for the three and nine months ended September
30, 1999 are discussed below.
REVENUES
Revenues for the three and nine months ended September 30, 1999 were
$85,000 and $806,000, respectively.
GROSS PROFIT
Gross profit for the three and nine months ended September 30, 1999
was $71,000 and $522,000, respectively. As a percentage of revenues, gross
profit was 84.0% and 68.0% for the three and nine months ended September 30,
1999.
10
RESEARCH AND ENGINEERING
Research and engineering expenses were $148,000 and $278,000 for the
three and nine months ended September 30, 1999, respectively, which represents
salaries for software engineers and related costs.
SELLING, GENERAL, AND ADMINISTRATIVE
Selling, general and administrative expenses were $916,000 and
$1,820,000 for the three and nine months ended September 30,1999,
respectively. Selling, general and administrative expenses increased $423,000
or 86% in the third over the second quarter of 1999 as a result of continued
increases in staffing for the internet software business and additional
marketing cost related to the new products. The hardware business has been
accounted for as discontinued operations; however certain expenses have been
allocated to continuing operations, based on the number of employees
remaining with the software business, their related employee costs and
overhead for facilities and other related costs and corporate overhead
expenses that are expected to represent continuing expenses.
EXPENSE RELATED TO BENEFICIAL CONVERSION FEATURE
Expense related to beneficial conversion feature of $757,000 and
$987,000 for the three and nine months ended September 30, 1999,
respectively, relate to the issuance of $6,000,000 of zero coupon convertible
debentures. This expense represents the charge for the beneficial conversion
feature of the convertible debt.
PROVISION FOR INCOME TAXES
Amounts in the year-to-date September 30, 1999 results represent the
establishment of a full valuation allowance on the Company's deferred tax asset
due to the change in the Company's business as described in Note 1.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its activities to date with a combination of
cash flow from operations, borrowed funds, and proceeds from the sale of equity
securities.
In late 1998, the Company entered into a demand discretionary
$16,000,000 line of credit. The Company did not utilize the line as expected. On
July 30, 1999, the Company paid off the balance of the line of credit and the
Company and the lender terminated the line of credit.
On January 28, 1999, the Company issued to three investors for an
aggregate of $4,000,000, an aggregate of 250,000 shares of the Company's
Common Stock (subject to adjustment as described below) and warrants
exercisable for an aggregate of 70,754 shares of Common Stock. The exercise
price applicable to 50% of the shares issuable upon exercise of the warrants
is $20.00 per share; the exercise price for the remaining warrant shares is
$22.40 per share. The Company also agreed to issue to the investors
"adjustment" shares of its Common Stock for no additional consideration
depending upon the market price of the Company's Common Stock during
specified periods following the investment. The adjustment periods lapsed in
July 1999 and the Company was not required to issue any additional shares.
The Company may elect, subject to the satisfaction of certain conditions, to
sell one additional tranche of equity investment to the investors. The amount
of the additional tranche would range from $1,000,000
11
to $6,000,000, depending on the price of the Common Stock at the time of the
investment. The Company could be required to issue additional shares of its
Common Stock in connection with any additional tranche of investment to
ensure at least a 12.5% return to the investors.
On June 9, 1999 (the "Closing Date"), the Company issued and sold to
two investors $6,000,000 aggregate principal amount of the Company's zero
coupon Convertible Debentures due June 9, 2002 (the "Debentures"). The
Debentures may be converted into shares of the Company's Common Stock at any
time prior to June 9, 2002. The number of shares into which each Debenture is
convertible is equal to the outstanding principal amount of the Debenture
divided by the conversion price, which may fluctuate from time to time. The
Company has registered under the Securities Act of 1933, as amended, the
shares of Common Stock issuable upon exercise of the Debentures.
On August 6, 1999, the Company entered into a binding letter of
intent with an individual investor for the sale of 273,853 shares of the
Company's Common Stock (the "Shares") for $18.258, which represented a
fifteen percent discount from the average closing price of the Company's
Common Stock for the twenty trading days preceding the date of the letter of
intent. On August 30, 1999, the Company entered into a definitive purchase
agreement with the investor and received $5,000,008 in proceeds for the sale
of the Shares. In connection with the sale, the Company issued a warrant for
30,000 shares of the Company's Common Stock to the investor's financial
consultant as a finder's fee (the "Warrant"). The exercise price for the
Warrant is $18.258 per share. The Warrant is exercisable at any time before
August 30, 2004.
The Shares and the Warrant were issued without registration under the
Securities Act of 1933, as amended, in reliance on Section 4(2) thereof. The
Company agreed to register the Shares and the shares of Common Stock issuable
upon the exercise of the Warrant within 180 days of August 30, 1999.
Net cash used in operating activities was $6,613,000 for the nine
months ended September 30, 1999. The primary uses of cash were a net loss of
$12,246,000, an increase in accounts receivable of $108,000, an increase in
inventories of $295,000, and a decrease in payables and accrued liabilities of
$7,085,000. These uses were offset by decreases in deferred income taxes and
taxes receivable and net assets from discontinued operations of $6,755,000 and
$6,437,000, respectively. This compares to net cash provided by operating
activities of $612,000 for the nine months ended September 30, 1998.
Proceeds from the sale of capital equipment for the nine months ended
September 30, 1999 were $165,000, compared to capital expenditures of $1,443,000
for the same period in the prior year. These expenditures were primarily for new
computer equipment.
The Company believes that available funds generated by the sale of
the hardware business on October 1, 1999 in the amount of $15,000,000 and the
receipt of cash in August of 1999 in the amount of $5,000,000 from the
issuance of additional common stock will be adequate to meet the Company's
cash needs during the next twelve months. The Company may require additional
capital beyond the amounts currently forecasted by the Company. Any such
required additional capital may not be available on reasonable terms, if at
all, at such time or times as required by the Company.
12
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 completed upgrading or replacing the software packages
underlying its financial, production, communication, networking, desktop and
other systems, as appropriate, to address the Year 2000 issue. The Company has
identified that the voice mail system is not Year 2000 complaint and is actively
working to remedy the problem. The Company expects to have the upgrade to the
voice mail system completed by December 15, 1999. It has also performed an
in-depth analysis of its products and determined that all current products are
Year 2000 compliant. Moreover, the Company has begun to contact all major
external third parties that provide products and services to the Company to
assess their readiness for the Year 2000.
Management believes it has completed the review, assessment and
correction 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, that those systems have been adequately protected against Year 2000
issues, and that the Company may be negatively impacted by non-compliance of
related third parties.
The Company has completed the remediation phase of the Company's
internal information technology systems and has set December 1999 as the target
for Year 2000 compliance of the Company's voice mail system which has been
identified as not Year 2000 ready. The Company's internal information technology
systems include it's finance systems and those systems used in the research and
development of the Company's products.
The Company has queried its important suppliers and service providers
and has obtained assurances from those third parties that they are or will be
Year 2000 compliant. The inability of those parties to become Year 2000
compliant could have a material adverse effect on the Company. The effects of
non-compliance by third parties where no system interface exists is not
determinable.
The Company has made and will continue to make investments in
systems and applications to address Year 2000 issues as required. The Company
has not tracked all internal resources dedicated to the resolution of the
Year 2000 issue and, therefore, is unable to quantify precisely internal
costs incurred to date that are associated with the Year 2000 issue.
Identifiable expenditures for these investments were approximately $76,000
through September 30, 1999. Management estimates that additional expenditures
in 1999 will total approximately $18,000.
13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
As of September 30, 1999, the Company had cash and cash equivalents of
$4,786,000 compared to $460,000 as of December 31, 1998. The Company invests its
cash in highly liquid marketable securities with maturities of three months or
less at date of purchase. The Company does not invest in derivative securities.
14
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
On August 6, 1999, the Company entered into a binding letter of
intent with an individual investor for the sale of 273,853 shares of the
Company's Common Stock (the "Shares") for $18.258, which represented a
fifteen percent discount from the average closing price of the Company's
Common Stock for the twenty trading days preceding the date of the letter of
intent. On August 30, 1999, the Company entered into a definitive purchase
agreement with the investor and received $5,000,008 in proceeds for the sale
of the Shares. In connection with the sale, the Company issued a warrant for
30,000 shares of the Company's Common Stock to the investor's financial
consultant as a finder's fee (the "Warrant"). The exercise price for the
Warrant is $18.258 per share. The Warrant is exercisable at any time before
August 30, 2004.
The Shares and the Warrant were issued without registration under the
Securities Act of 1933, as amended, in reliance on Section 4(2) thereof. The
Company agreed to register the Shares and the shares of Common Stock issuable
upon the exercise of the Warrant within 180 days of August 30, 1999.
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Item 4. Submission of Matters to a vote of Security Holders
On September 27, 1999, the Company held a special meeting of its
shareholders to approve the sale of the Company's hardware business and the
change of the Company's name from "ThrustMaster, Inc." to "CenterSpan
Communications Corporation." The Company filed a definitive Proxy Statement
for the special meeting on September 13, 1999. The number of shares
represented at the meeting was 3,470,516, which represented approximately 70.9%
of the Company's outstanding shares on the record date for the special meeting.
Of the shares represented, 3,466,456 shares voted in favor of the sale and
related name change, and 4,060 shares voted against the sale and related name
change.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Number Description
------ -----------
4.8 Common Stock Purchase Agreement, dated as of August 6,
1999, between the Company and Peter R. Kellogg.
4.9 Form of Warrant issued to Lucas Capital Management.
11.1 Statements Regarding Computation of Per Share Earnings.
27 Financial Data Schedule as of September 30, 1999.
99.1 Additional Risk Factors.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed by the Company in the quarter ended
September 30, 1999.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CenterSpan Communications Corporation
Date: November 15, 1999 By /s/ Mark B. Conan
Mark B. Conan ----------------------------------
Mark B. Conan
Vice President of Finance, Administration and CFO
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