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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 March 31, 1998
Commission File Number 0-25520
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THRUSTMASTER, INC.
(Exact name of registrant as specified in its charter)
OREGON 93-1040330
(State or jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
7175 N.W. EVERGREEN PARKWAY #400
HILLSBORO, OREGON, 97124-5839
(Address of principal executive offices)
(Zip Code)
(503) 615-3200
(Registrant's telephone number)
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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
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common stock, no par value 4,371,449 shares
(Class) (Outstanding at April 30, 1998)
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THRUSTMASTER, INC.
Index to Form 10-Q
PART I -- FINANCIAL INFORMATION PAGE NO.
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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. . . . . . . . . 7
PART II -- OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . 10
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
THRUSTMASTERS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
March 31, December 31,
1998 1997
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(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 2,586 $ 449
Accounts receivable, net 7,578 16,604
Inventories 5,988 6,974
Prepaid expenses and other 461 294
Prepaid income taxes 892 -
Deferred income taxes 516 409
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Total current assets 18,021 24,730
Plant and equipment, net 2,180 2,119
Other 27 28
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Total assets $20,228 $26,877
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Note payable $ - $ 1,110
Accounts payable 986 2,919
Accrued liabilities 753 3,504
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Total current liabilities 1,739 7,533
Deferred income taxes 83 64
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Total liabilities 1,822 7,597
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Shareholders' equity:
Preferred stock - -
Common stock 13,853 13,486
Retained earnings 4,553 5,794
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Total shareholders' equity 18,406 19,280
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Total liabilities and shareholders' equity $20,228 $26,877
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2
The accompanying notes are an integral part of these
consolidated financial statements.
THRUSTMASTER, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three Months Ended
March 31,
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1998 1997
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Revenues $ 6,282 $6,272
Cost of goods sold 4,792 3,786
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Gross profit 1,490 2,486
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Operating expenses:
Research and engineering 722 673
Selling, general and administrative 2,708 1,435
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Total operating expenses 3,430 2,108
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Income (loss) from operations (1,940) 378
Interest income 30 80
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Income (loss) before income taxes (1,910) 458
Income tax provision (benefit) (669) 169
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Net income (loss) $(1,241) $ 289
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Net income (loss) per share
Basic $ (0.29) $ 0.07
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Diluted $ (0.29) $ 0.06
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Weighted average shares outstanding
Basic 4,303 4,245
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Diluted 4,303 4,555
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The accompanying notes are an integral part of these
consolidated financial statements.
3
THRUSTMASTER, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three Months Ended
March 31,
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1998 1997
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Cash flows from operating activities:
Net income (loss) $(1,241) $ 289
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation 230 124
Deferred income taxes (88) (5)
Changes in assets and liabilities:
Accounts receivable 9,026 5,248
Inventories 986 (833)
Prepaid expenses and other assets (1,058) (202)
Payables and accrued liabilities (4,358) (3,388)
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Net cash provided by operating activities 3,497 1,233
Cash flows from investing activities:
Purchase of plant and equipment (291) (282)
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Cash flows from financing activities:
Payments on note payable (1,110) -
Payment on long-term debt - (3)
Proceeds from issuance of common stock 41 5
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Net cash provided by (used in) financing activities (1,069) 2
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Net increase in cash and cash equivalents 2,137 953
Cash and cash equivalents, beginning of period 449 6,420
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Cash and cash equivalents, end of period $ 2,586 $7,373
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The accompanying notes are an integral part of these
consolidated financial statements.
4
THRUSTMASTER, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands)
(Unaudited)
Common Stock
------------------- Retained
Shares Amount Earnings
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Balance, January 1, 1998 4,294 $13,486 $ 5,794
Stock options exercised 77 41 -
Tax benefits from stock options exercised - 326 -
Net loss - - (1,241)
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Balance, March 31, 1998 4,371 $13,853 $ 4,553
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The accompanying notes are an integral part of these
consolidated financial statements.
5
THRUSTMASTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
NOTE 1 -- Basis of Presentation
The accompanying consolidated financial statements include the accounts
of ThrustMaster, Inc., and its wholly-owned subsidiaries, and have been
prepared by the Company without audit and in conformity with generally
accepted accounting principles for interim financial information.
Accordingly, certain financial information and footnotes have been omitted or
condensed. In the opinion of management, the unaudited condensed
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 financial statements should
be read in conjunction with the Company's audited consolidated financial
statements for the year ended December 31, 1997. The results of operations
for the periods presented are not necessarily indicative of the results that
may be expected for the entire fiscal year.
NOTE 2 -- Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market. Inventories are as follows (in thousands):
March 31, December 31,
1998 1997
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Raw materials $881 $1,062
Work in progress 48 49
Finished goods 5,059 5,863
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$5,988 $6,974
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NOTE 3 -- Impact of Recently Issued Accounting Standards
During 1997, the Financial Accounting Standards Board issued SFAS No.
130 and SFAS No. 131, "Disclosures About Segments of an Enterprise and
Related Information." These standards will become effective for the
Company's 1998 fiscal year. SFAS No. 130 establishes standards for reporting
and display of comprehensive income and its components in a full set of
general-purpose financial statements. SFAS No. 131 changes current practice
by establishing a new framework on which to base segment reporting (referred
to as the "management" approach) and also requires interim reporting of
segment information. Management has studied the implications of the
implementation of these standards, and based upon the initial evaluation,
expects the adoption to have no impact on the Company's financial condition
or results of operations, but will require revised disclosures when adopted.
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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:
Three Months Ended
March 31,
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1998 1997
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Revenues 100.0% 100.0%
Cost of goods sold 76.3 60.4
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Gross profit 23.7 39.6
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Operating expenses:
Research and engineering 11.5 10.7
Selling, general and administrative 43.1 22.9
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Total operating expenses 54.6 33.6
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Income (loss) from operations (30.9) 6.0
Interest income 0.5 1.3
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Income (loss) before income taxes (30.4) 7.3
Income tax provision (benefit) (10.6) 2.7
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Net income (loss) (19.8)% 4.6%
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COMPARISON OF THREE MONTHS ENDED MARCH 31, 1998 TO THE THREE MONTHS ENDED
MARCH 31, 1997
Revenues for the three months ended March 31, 1998 were $6,282,000,
essentially the same as the $6,272,000 for the three months ended March 31,
1997.
Gross profit for the three months ended March 31, 1998 was $1,490,000, a
decrease of $996,000, or 40.1%, compared to $2,486,000 for the three months
ended March 31, 1997. As a percentage of revenues, the gross profit margin
percentage was 23.7% for the three months ended March 31, 1998 and 39.6% for
the three months ended March 31, 1997. Gross profit declined primarily due
to the increases in product returns during the quarter from: (1) retail
channels developed during 1997 whose customers return products at higher
rates than historically experienced, (2) higher than average rates of return
on a new joystick product introduced during the fourth quarter of 1997, and
(3) design and manufacturing problems encountered in a racing wheel product
in Europe introduced during the fourth quarter and, which the company
believes has been corrected.
7
Research and engineering expenses were $722,000 for the quarter ended
March 31, 1998, compared to $673,000 for the quarter ended March 31, 1997.
The increase resulted primarily from additional expenses incurred in
development of the Company's new products.
Selling, general and administrative expenses were $2,708,000 for the
three months ended March 31, 1998, compared to $1,435,000 for the quarter
ended March 31, 1997. The increase was primarily due to higher selling
expenses associated with increased merchandising and marketing activities,
and the funding of the Company's continued expansion into Europe.
The income tax benefit for the three-month period ended March 31, 1998
reflects an effective tax rate of 35.0%, compared to a provision at an
effective tax rate of 36.9% for the three-month period ended March 31, 1997.
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 line of credit pursuant to which it may borrow up to
the lesser of $1.0 million or 75% of eligible receivables. The line of
credit is scheduled for review in July 1998 and is collateralized by
substantially all the Company's assets. The line of credit requires the
Company to maintain certain working capital and debt-to-equity ratios. At
March 31, 1998 there were no borrowings outstanding under the facility and
the Company was in compliance with all loan covenants. The Company is
discussing with its bank an increase in the amount available but has no firm
commitment.
Net cash provided by operating activities was $3,497,000 for the three
months ended March 31, 1998, resulting primarily from a reduction in accounts
receivable of $9,026,000, a decrease in inventories of $986,000, offset by
increases in prepaid expenses and other assets of $1,058,000, and by
decreases in payables and accrued liabilities of $4,358,000.
At March 31, 1998, the Company had cash and cash equivalents of
$2,586,000 and working capital of $16,282,000.
Capital expenditures for the three month period ended March 31, 1998
were $291,000, compared to $282,000 for the same period in the prior year.
These expenditures were primarily for new product tooling and manufacturing
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.
8
The Company, from time to time, considers and may in the future enter
into joint ventures or make acquisitions in connection with the development
and marketing of its products, and may require additional funds in connection
therewith, depending upon the circumstances.
The Company believes that available funds, expected increased
availability under its credit facility, and expected cash flow to be
generated from operations will be adequate to meet the Company's anticipated
cash needs for its present operations through 1998.
This report on Form 10-Q may include forward-looking statements.
Investors are cautioned that forward-looking statements involve risks and
uncertainties and various factors could cause actual results to differ
materially from those in the forward-looking statements. Forward-looking
statements relate to anticipated revenues, gross margins, earnings, product
return rates, availability of products manufactured for the Company and new
product introductions. The following factors, among others, could cause
actual results to differ from those indicated in the forward-looking
statements: uncertainties associated with market acceptance of and demand
for the Company's products, impact of competitive products and pricing,
dependence on third party suppliers, uncertainties associated with the
development of products and manufacturing and differing characteristics of
different distribution channels. Investors are directed to the Company's
filings with the Securities and Exchange Commission, including the Company's
1997 Form 10-K, which are available from the Company without charge, for a
further description of the risks and uncertainties relating to
forward-looking statements made by the Company as well as to other aspects of
the Company's business.
9
PART II -- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
NUMBER DESCRIPTION
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*3.1 Articles of Incorporation, dated July 23, 1990; Articles of
Amendment, dated December 15, 1990; Articles of Amendment, dated
July 7, 1992; Articles of Amendment, dated July 7, 1993; Articles
of Amendment , dated December 14, 1994
**3.2 Amended and Restated Bylaws
*4.1 Description of Capital Stock contained in the Articles of
Incorporation and Amendments thereto (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.
*10.1 Consulting Agreement, dated December 1, 1993, between the Company
and BOCAR, Inc.
**10.3 Directors' Nonqualified Stock Option Plan, dated July 19, 1994
**10.4 1994 Stock Option Plan, dated July 19, 1994
**10.5 Letter agreement, dated May 16, 1996 from United States National
Bank of Oregon 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 September 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
10
11.1 Statement re Computation of Per Share Earnings
27 Financial Data Schedule
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*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 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1997.
***Incorporated by reference to the same exhibit number to the Company's
Annual Report on Form 10-K for the year ended December 31, 1996.
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the period for which this
report is filed.
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.
THRUSTMASTER, INC.
Date: May 8, 1998 By /s/ Kent E. Koski
Kent E. Koski ------------------------------
Vice President of Finance and
Administration, Chief Financial
Officer
11