<PAGE>
FORM 10-Q
---------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
or the transition period from ______ to _______
Commission file number 0-27302
--------------------------------------------------------
SPACETEC IMC CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Massachusetts 04-3116697
- -------------------------------------------------------------------------------
(State or other jurisdiction of (IRS EmployerIdentification
incorporation or organization) No.)
The Boott Mill, 100 Foot of John Street, Lowell, Massachusetts 01852
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(508) 970-0330
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
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
----- -----
The number of shares outstanding of each of the issuer's classes of common stock
as of
Class Outstanding at September 30, 1996
------- ---------------------------------
Common Stock, $.01 par value 7,275,708
<PAGE>
SPACETEC IMC CORPORATION
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated condensed balance sheets as of September 30, 1996
and March 31,1996.............................................. 3
Consolidated condensed income statements for the three and six
months ended September 30, 1996 and 1995...................... 4
Consolidated condensed statements of cash flows for the three
and six months ended September 30, 1996 and 1995............... 5
Notes to consolidated condensed financial statements as of
September 30, 1996............................................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................... 7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings-None
Item 2. Changes in Securities-None
Item 3. Defaults upon Senior Securities-None
Item 4. Submission of Matters to a Vote of Security Holders............ 12
Item 5. Other Information-None
Item 6. Exhibits and Reports on Form 8-K............................... 12
SIGNATURES............................................................. 14
2
<PAGE>
Item I. Financial Statements (unaudited)
Spacetec IMC Corporation
Consolidated Condensed Balance Sheets
Unaudited
(in thousands, except per share data)
<TABLE>
<CAPTION>
September 30, March 31,
1996 1996
------------------- -------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 383 $ 417
Securities available-for-sale 12,527 15,620
Accounts receivable, net 2,718 2,112
Inventories 672 409
Prepaid expenses 1,359 332
Deferred income taxes 100 100
------------- -------------
Total current assets 17,759 18,990
Furniture and equipment, net 1,166 870
Intangible assets, net 563 516
Software development costs, net 772 695
Other assets 27 37
------------- -------------
2,528 2,118
------------- -------------
Total assets $ 20,287 $ 21,108
============= =============
Liabilities and shareholders' equity
Current liabilities:
Accounts payable and accrued expenses $ 1,268 $ 1,475
Deferred revenue 52 12
------------- -------------
Total current liabilities 1,320 1,487
Deferred income taxes 320 320
Shareholders' equity:
Preferred stock, $.01 par value; 1,000,000 shares authorized
at September 30, and March 31, 1996 - -
Common stock, voting, $.01 par value; 20,000,000 authorized shares;
7,350,708 and 7,240,908 shares issued and outstanding at
September 30, and March 31, 1996, respectively 74 72
Additional paid-in capital 17,246 17,540
Retained earnings 1,327 1,689
------------- -------------
Total shareholders' equity 18,647 19,301
------------- -------------
Total liabilities and shareholders' equity $ 20,287 $ 21,108
============= =============
</TABLE>
See accompanying notes
3
<PAGE>
Spacetec IMC Corporation
Consolidated Condensed Statements of Operations
Unaudited
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended Six months ended
September 30, September 30,
1996 1995 1996 1995
-------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues $ 2,514 $ 2,030 $ 4,366 $ 3,816
Cost of revenues 1,111 601 1,672 996
-------- --------- --------- ---------
1,403 1,429 2,694 2,820
Operating expenses:
Selling and marketing 1,059 587 1,794 1,185
Research and development 623 462 1,153 837
General and administrative 311 185 676 378
-------- --------- --------- ---------
Total operating expenses 1,993 1,234 3,623 2,400
-------- --------- --------- ---------
Income (loss) from operations (590) 195 (929) 420
Interest income (172) (11) (368) (18)
-------- --------- --------- ---------
Income (loss) before income taxes (418) 206 (561) 438
Income tax provision (benefit) (149) 72 (199) 153
-------- --------- --------- ---------
Net income (loss) $ (269) $ 134 $ (362) $ 285
======== ========= ========= =========
Net income (loss) per share $ (0.04) $ 0.02 $ (0.05) $ 0.05
======== ========= ========= =========
Weighted average common shares outstanding 7,319 6,018 7,319 6,018
======== ========= ========= =========
</TABLE>
See accompanying notes
4
<PAGE>
Spacetec IMC Corporation
Consolidated Condensed Statements of Cash Flows
Unaudited
(in thousands)
<TABLE>
<CAPTION>
Six months ended
September 30, 1996
1996 1995
----------------- -----------------
<S> <C> <C>
Operating activities
Net income (loss) $ (362) $ 285
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization 437 212
Changes in operating assets and liabilities:
Accounts receivable, net (606) (52)
Inventories (263) (18)
Prepaid expenses and other assets (1,017) (62)
Accounts payable and accrued expenses (207) (77)
Deferred revenue 40 (29)
---------------- -----------------
Net cash provided by (used in) operating activities (1,978) 259
Investing activities
Net sales of securities available-for-sale 3,093 700
Purchase of furniture and equipment (495) (180)
Purchase of intangible assets (138) (16)
Software development costs (224) (113)
----------------- -----------------
Net cash provided by investing activities 2,236 391
Financing activities
Proceeds from exercise of stock options 341 -
Stock repurchase (628) -
Additional offering costs (5) -
Repayment of line of credit - (65)
Repayment of capital lease obligation - (2)
---------------- -----------------
Net cash used in financing activities (292) (67)
---------------- -----------------
Net increase (decrease) in cash and cash equivalents (34) 583
Cash and cash equivalents at beginning of period 417 7
---------------- -----------------
Cash and cash equivalents at end of period $ 383 $ 590
================ =================
Supplemental disclosure of cash flow information:
Income taxes paid $ 274 $ 159
================ =================
Interest paid $ - $ 3
================ =================
</TABLE>
See accompanying notes
5
<PAGE>
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
UNAUDITED
(IN THOUSANDS)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions for Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and six month periods ended
September 30, 1996 are not necessarily indicative of the results that may be
expected for the year ended March 31, 1997. The Company suggests that these
interim condensed consolidated financial statements be read in conjunction with
the consolidated financial statements and footnotes thereto included in the
Company's annual report on Form 10-K for the year ended March 31, 1996.
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
1996 1996
--------------------------
<S> <C> <C>
MATERIALS $ 256 $ 190
WORK-IN-PROCESS 305 116
FINISHED GOODS 111 103
--------------------------
$ 672 $ 409
==========================
</TABLE>
3. COMMITMENTS
In order to meet the seasonal demand of certain of the Company's products, the
Company had various non cancelable purchase commitments for inventory at
September 30, 1996 totaling approximately $1,500. Such commitments expire in
less than twelve months.
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE AND SIX MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
REVENUES:
Revenues increased 23.8% to $2,514,000 for the three months ended September 30,
1996 ("current quarter") from $2,030,000 for the three months ended September
30, 1995 ("prior quarter"). For the six months ended September 30, 1996
("current year"), revenues increased 14.4% to $4,366,000 from $3,816,000 for the
six months ended September 30, 1995 ("prior year"). International sales, all of
which are denominated in U.S. dollars, decreased 6.0% and 9.4% to $638,000 and
$1,152,000 in the current quarter and current year from $680,000 and $1,271,000
in the prior quarter and prior year, respectively.
Sales to the Industrial market for the current quarter and for the current year
were negatively impacted by slower than expected sales to both domestic and
international CAD customers. As previously reported, the Spaceball 3003
("3003"), a new, lower priced input device for workstation-based 3D CAD
applications, affected the sales of the higher priced Spaceball 2003 ("2003").
The Company had expected that the lower cost 3003 would encourage bundling by
the Company's OEM customers and increase unit sales enough to offset the
negative price impact. However, marketing programs designed for this purpose
have not been fully implemented and unit sales of this product through OEM and
VAR channels continue to be less than anticipated.
During September 1996, the Company commenced shipments of the new SpaceOrb 360
RealLife 3D game controller to the Consumer market. Sales to the Consumer market
for the current quarter and current year represented primarily initial stocking
orders of the SpaceOrb 360 through the retail channel. The Company expects to
continue to expand the distribution channels domestically and internationally
for its Consumer products, but anticipates that a significant portion of future
revenues will be the result of re-orders from current and new customers.
Sales for the current quarter and the current year of software and licensing
agreements represent licenses for the Company's Panacea software, as well as
licensing of core hardware and software technology. In the current year, the
Company entered into a binding agreement as to terms regarding an exclusive
licensing and manufacturing agreement with ASCII Entertainment Software, Inc.
("ASCII"), under which ASCII has licensed the Company's proprietary and patented
Spaceball PowerSensor and Eclipse-1 ASIC technologies for use in the development
and manufacture of an advanced 3D game controller for the Sony PlayStation. A
significiant portion of the licensing revenues for the current year includes a
one time licensing payment under this agreement.
Gross Profit:
Gross profit, representing revenues less cost of revenues (including costs of
materials, costs of manufacturing overhead, royalties, and amortization of
capitalized software) decreased 1.8% and
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
4.5% to $1,403,000 and $2,694,000 in the current quarter and current year from
$1,429,000 and $2,820,000 in the prior quarter and prior year, and represented
55.8% and 61.7% of current quarter and current year revenues versus 70.4% and
73.9% of prior quarter and prior year revenues, respectively. The decline in
gross profit in the current quarter as a percentage of revenues, is attributable
to the introduction of the SpaceOrb 360, which has lower gross margins than the
Industrial Sector products, and increased amortization of capitalized software
costs amounting to $80,000 and $147,000 in the current quarter and current year
versus $30,000 and $60,000 in the prior quarter and prior year, respectively.
Also, in the prior year, the Company recaptured approximately $45,000 in royalty
expenses pursuant to a revised royalty agreement related to Panacea, Inc., which
was then a wholly owned subsidiary of the Company.
As the Company shifts its sales mix from direct to OEM channels for industrial
products, and increases the percentage of sales derived from consumer products
it is expected that the gross profit percentage will continue to decline. The
decline is expected to be partially offset by the integration of a new
PowerSensor technology which is anticipated to lower the cost of manufacturing
under volume production. The Company's expectations regarding the decline in
gross profit percentage and decreases in production costs are forward looking
statements. There can be no assurance that such decreases in profit will not be
greater than anticipated or that cost savings will not be less than anticipated
due to numerous factors, including unanticipated development issues arising with
respect to this new technology as the Company initiates volume production.
Selling and Marketing Expenses:
Selling and marketing expenses, which includes personnel costs, advertising
costs, sales commissions and trade show expenses, increased 80.4% and 51.4% to
$1,059,000 and $1,794,000 in the current quarter and current year from $587,000
and $1,185,000 in the prior quarter and prior year, and represented 42.1% and
41.1% of current quarter and current year revenues and 28.9% and 31.1% of prior
quarter and prior year revenues, respectively. The increase is primarily due to
the costs in the current quarter and current year incurred in connection with
the launch program for the SpaceOrb 360, increased advertising and promotion in
the Industrial marketplace, and additional personnel and recruiting costs
associated with an expansion of the sales and marketing infrastructure.
The Company expects selling and marketing expenses to continue to exceed 40% of
revenues during the fiscal year ending March 31, 1997 due to the increased
selling and marketing activity in existing markets, and investments in market
development and sales and marketing infrastructure necessary to penetrate new
markets, particularly the PC CAD, Multimedia and Consumer markets. The Company's
expectations regarding the level of sales and marketing expenses is a forward-
looking statment. Such expenses may vary from expectations due to timing of
implementation of marketing programs and other factors.
General and Administrative Expenses:
General and administrative expenses, which include the costs of the Company's
finance, human resources and administrative functions increased 68.1% and 78.8%
to $311,000 and $676,000 in the current quarter and current year from $185,000
and $378,000 in the prior quarter and prior year, and represented 12.4% and
15.5% of current quarter and current year revenues and 9.1% and 9.9% of prior
quarter and prior year revenues, respectively. The increase is associated with
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
increased personnel costs in order to expand the administrative infrastructure
as well as an increase in professional fees, filing fees, and additional
reporting requirements resulting from becoming a public company.
Research and Development Expenses:
Research and development expenses, which consist primarily of personnel and
equipment costs required to conduct the Company's software and hardware
development and engineering efforts, increased 34.8% and 37.8% to $623,000 and
$1,153,000 for the current quarter and current year from $462,000 and $837,000
in the prior quarter and prior year, and represented 24.8% and 26.4% of current
quarter and current year revenues and 22.8% and 21.9% of prior quarter and prior
year revenues, respectively. The increase reflects significant investments in
personnel and consultants necessary to expand the software product development
efforts, particularly in the Consumer, Multimedia and PC CAD market, engineering
efforts designed to lower the cost of manufacturing the Company's hardware
components, and additional rent and depreciation expense allocated to research
and development. The Company capitalized software development expenditures of
$110,000 and $224,000 for the current quarter and current year versus $60,000
and $113,000 in the prior quarter and prior year, respectively.
Provision for Income Taxes:
The Company's effective tax rate is estimated at 35.7% and 35.6% for the
current quarter and current year and 35.0% and 34.9% in the prior quarter and
prior year, respectively.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1996, the Company had cash and cash equivalents and
securities available for sale of $12,910,000 and working capital of $16,439,000
versus $16,037,000 and $17,503,000, respectively at March 31, 1996.
The Company used $1,978,000 to fund operating activities in the current year
versus $259,000 provided by operations in the prior year. The use of funds is
primarily attributable to the net loss of $362,000, the increase in accounts
receivable, totaling $606,000, as a result of the initial shipments of the
SpaceOrb 360 in September 1996 and an increase in prepaid expense and other
assets, totaling $1,015,000 primarily related to prepaid marketing expenses for
the third quarter SpaceOrb 360 advertising campaign and deposits on SpaceOrb 360
inventory. The Company expects that inventory levels will continue to increase
substantially in order to meet the seasonal requirements of the Consumer market.
As a consequence, the Company has committed to purchase material amounts of
inventories to meet anticipated sales demand. The Company's expectations
regarding the requirements of the seasonal market for the SpaceOrb 360 is a
forward looking statement. Various factors, including the market acceptance of
this new product, will affect market demand and the Company's product
requirements.
Net cash provided to the Company in the current year from investing activities
totaled $2,236,000 versus $700,000 in the prior year. The primary reasons for
the increase was an increase in proceeds from securities available for sale.
The increase was offset by increased expenditures for furniture and equipment
(primarily computer equipment and additional investments in tools and dies for
high volume, low cost manufacturing of the Company's hardware components) and
increased expenditures for intangible assets (primarily patents) and increased
software development costs.
Financing activities used $294,000 of net cash in the current year primarily as
a result of the Company repurchasing its stock which was offset by the proceeds
from the exercise of employee stock options.
The Company believes that the proceeds from the sale of its Common Stock,
together with existing sources of liquidity and anticipated funds from
operations, will satisfy its projected working capital and other cash
requirements through the end of its fiscal year ending March 31, 1998.
Substantial funds will be required to continue software and hardware
development, as well as to develop the sales and marketing infrastructure,
distribution channels and market awareness to enter the PC Multimedia and
Consumer marketplaces. The Company believes the level of financial resources
available to it is an important competitive factor in its industry and may seek
additional capital prior to the end of that period. In addition, the Company
may consider potential acquisitions of technologies and businesses complementary
to the Company's business. There are not present agreements or commitments with
respect to any such acquisition; however, any such transaction may affect the
Company's future capital needs.
The Company's capital requirements will depend on many factors, including the
rate at which the Company can develop its products, the market acceptance of
such products, the levels of promotion and advertising required to launch such
products and attain a competitive position in the marketplace, and the amount of
capital necessary for potential acquisitions. Changes in technology or growth
in revenues beyond currently established capabilities will also require
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
further investment. To the extent that the Company's current financial resources
are insufficient to fund the Company's operating requirements, it may be
necessary for the Company to seek additional funding through public or private
financing. There can be no assurance that additional financing will be available
on acceptable terms or at all. If additional funds are raised by issuing equity
securities, further dilution to the existing stockholders may result. If
adequate funds are not available, the Company's business would be materially
adversely affected, and, as a result, the Company may be required to curtail its
operations significantly.
SAFE HARBOR STATEMENT
Statements which are not historical facts, including statements about our
confidence and strategies and our expectations about new and existing products,
technologies and opportunities, market and industry segment growth, demand and
acceptance of new and existing products, and return on investments in products
and markets are forward looking statements that involve risks and uncertainties.
These uncertainties include, but are not limited to, product demand and market
acceptance risks; the impact of competitive products and pricing; product
development, commercialization and technological delays or difficulties,
including delays or difficulties in developing, producing, testing and selling
new products and technologies; capacity and supply constraints or difficulties;
trade, legal, social, and economic risks, such as import, licensing, and trade
restrictions, including those affecting international trade; and other risks
detailed in the Company's Securities and Exchange Commission filings, including
Form 10-K for the fiscal year ended March 31, 1996.
11
<PAGE>
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its annual meeting of stockholders on Wednesday, September 11,
1996. The only proposal submitted to a vote of the stockholders at such meeting
was a proposal to elect a director. J. Grant Jagelman, by a vote of 6,017,163
votes in favor and 21,429 votes withheld, was re-elected as a director of the
Company to a three year term ending in 1999. There were no abstentions or broker
non-votes. In addition to Mr. Jagelman, the terms of office of the following
directors continued after the meeting: Dennis T. Gain, Linda S. Linsalata,
Morton E. Goulder, and Jerry H. Loyd.
Item 6. Exhibits and Reports on Form 8-K
During the quarter ended September 30, 1996, the Company filed with Commission
on July 11, 1996 a report on form 8-K which reported that the Company's Board of
Directors authorized the repurchase of up to 100,000 shares of the Company's
stock on the open market or in negotiated transactions, depending upon market
conditions and other factors.
The following exhibits are included herein:
(11) Statement re: computation of earnings per share
(27) Financial Data Schedule
12
<PAGE>
EXHIBIT (11)-STATEMENT RE:COMPUTATION OF EARNINGS (LOSS) PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1996 1995 1996 1995
--------- ---------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE) (IN THOUSANDS, EXCEPT PER SHARE)
<S> <C> <C> <C> <C>
PRIMARY:
Average shares outstanding 7,351 1,364 7,351 1,364
Average treasury shares outstanding (32) - (32) -
Net effect of dilutive stock options-
based on the treasury stock method
using average market price - 502 - 502
Assumed conversion of Series A and B
preferred stock 4,152 4,152
------- -------- -------- ---------
Totals 7,319 6,108 7,319 6,018
======= ======== ========= =========
Net income (loss) $ (269) $ 134 $ (362) $ 285
======= ======== ========= =========
Per share amount $ (0.04) $ 0.02 $ (0.05) $ 0.05
======= ======== ========= =========
FULLY DILUTED:
Average shares outstanding 7,351 1,364 7,351 1,364
Average treasury shares outstanding (32) - (32) -
Net effect of dilutive stock options-
based on the treasury stock method
using average market price which is
greater than quarter-end market
price - 502 - 502
Assumed conversion of Series A and B
preferred stock - 4,152 - 4,152
------- -------- -------- ---------
Totals 7,319 6,018 7,319 6,018
======= ======== ========= =========
Net income (loss) $ (269) $ 134 $ (362) $ 285
======= ======== ========= =========
Per share amount $ (0.04) $ 0.02 $ (0.05) $ 0.05
======= ======== ========= =========
</TABLE>
<PAGE>
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.
Spacetec IMC Corporation
__________________________________
(Registrant)
By /s/ Linda S. Linsalata September 14, 1996
_____________________________________ _____________________
Linda S. Linsalata-Chief Financial Officer, Date
Senior Vice President of Finance and Director
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 383
<SECURITIES> 12,527
<RECEIVABLES> 2,896
<ALLOWANCES> 178
<INVENTORY> 672
<CURRENT-ASSETS> 17,759
<PP&E> 1,738
<DEPRECIATION> 572
<TOTAL-ASSETS> 20,287
<CURRENT-LIABILITIES> 1,320
<BONDS> 0
0
0
<COMMON> 74
<OTHER-SE> 18,573
<TOTAL-LIABILITY-AND-EQUITY> 20,287
<SALES> 2,514
<TOTAL-REVENUES> 2,514
<CGS> 1,111
<TOTAL-COSTS> 1,111
<OTHER-EXPENSES> 1,993
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (418)
<INCOME-TAX> (149)
<INCOME-CONTINUING> (269)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (269)
<EPS-PRIMARY> (0.04)
<EPS-DILUTED> (0.04)
</TABLE>
