TMSR files SEC Form 10K405 for year ending 31 December 1997.
"...PRODUCT DEVELOPMENT
The Company currently employs 24 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 1995, 1996, and 1997, the Company's research and
engineering expenses were $1,845,000, $2,105,000 and $2,697,000, 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. The 1998 update of Microsoft's Windows operating system is expected to provide general access to the benefits of USB technology. ThrustMaster initially began shipping USB-enabled controllers to hardware developers in 1996 and shipped a small
volume of such controllers to its OEM customers in 1997.
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 could become less reactive when a player's car drives over ice, or vibrate 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 products are available in over 5,000 retail outlets in North America and Europe.
ThrustMaster products are distributed in over 50 countries through
international distributors and through the Company's direct sales efforts in the United States, the United Kingdom and Germany.
In addition to retail outlets, the Company actively pursues business through OEM arrangements. The Company has sold its products on an OEM basis to Compaq Computer Corp., NEC, Micron Electronics, Inc. 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.
Working with leading software publishers, such as Electronic Arts, Inc., Activision, Inc., Sierra On-Line, Inc (NYSE:CD) ., 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 1997, Sam's Club and Best Buy Co., Inc. accounted for an aggregate of approximately 22.5% of the Company's revenue. The loss of one or more of its key customers or any significant reduction in orders by such customers could have a material adverse effect on the Company's business, financial condition and results of operations.
MANUFACTURING
Over the past three years, 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 1997, approximately 90% of the Company's products were manufactured through a single vendor
utilizing factories located in Taiwan and the Guangdong province of China. Manufacturing 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 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.
The Company believes that the principal competitive factors in the market for PC game controllers include price, quality, product features, ease of use, durability, reputation and compatibility with PC games. 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 games users.
INTELLECTUAL PROPERTY
The Company regards certain aspects of its products as proprietary and relies on a combination of copyright and trademark laws, patents, 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 product development and marketing capabilities are 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" and "FORMULA T1." 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..."
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