<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
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 Employer Identification
incorporation or organization) No.)
The Boott Mill, 100 Foot of John Street, Lowell, Massachusetts 01852
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(978) 275-6100
- --------------------------------------------------------------------------------
(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 the issuer's Common Stock as of
Class Outstanding at September 30, 1997
----- ---------------------------------
Common Stock, $.01 par value 7,185,506
<PAGE>
Spacetec IMC Corporation
Table of Contents
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets as of
September 30, 1997 and March 31, 1997.............................. 3
Condensed consolidated statements of operations
months ended September 30, 1997 and 1996........................... 4
Condensed consolidated statements of cash flows
for the six months ended September 30, 1997 and 1996............... 5
Notes to condensed consolidated
financial statements....................................... ....... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................... 8
Part II. Other Information
Item 1. Legal Proceedings-None
Item 2. Changes in Securities and use of Proceeds......................... 13
Item 3. Defaults upon Senior Securities-None
Item 4. Submission of Matters to a Vote of Security Holders............... 13
Item 5. Other Information-None
Item 6. Exhibits and Reports on Form 8-K.................................. 13
Signatures................................................................. 14
<PAGE>
Item I. Financial Statements
Spacetec IMC Corporation
Condensed Consolidated Balance Sheets
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
September 30 March 31
1997 1997
---------------- ------------
(Unaudited) (Note)
Assets
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 315 $ 170
Securities available-for-sale 8,800 10,059
Accounts receivable, net 1,813 2,285
Inventories 1,305 1,718
Prepaid expenses 180 275
Due from employees and officer 4 19
Income taxes receivable 317 438
------------ ------------
Total current assets 12,734 14,964
Furniture and equipment, net 993 964
Intangible assets, net 306 382
Software development costs, net 169 265
Other assets 28 27
------------ ------------
1,496 1,638
------------ ------------
Total assets $ 14,230 $ 16,602
============ ============
Liabilities and shareholders' equity
Current liabilities:
Accounts payable and accrued expenses $ 835 $ 1,267
Deferred revenue 65 75
------------ ------------
Total current liabilities 900 1,342
Shareholders' equity:
Preferred stock, $.01 par value; 1,000,000 shares authorized;
no shares issued or outstanding
Common stock, $.01 par value; 20,000,000 shares authorized;
7,185,506 and 7,366,508 shares issued and outstanding at
September 30, 1997 and March 31, 1997, respectively 72 74
Additional paid-in capital 16,902 17,969
Deferred compensation (36) (40)
Unrealized gain on available-for-sale securities 12 46
Accumulated deficit (3,620) (2,033)
Treasury stock, at cost; 100,000 shares at March 31, 1997 -- (756)
------------ ------------
Total shareholders' equity 13,330 15,260
------------ ------------
Total liabilities and shareholders' equity $ 14,230 $ 16,602
============ ============
</TABLE>
Note: The balance sheet at March 31, 1997 has been derived from the audited
financial statements at that date, but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
Spacetec IMC Corporation
Condensed Consolidated Statements of Operations
Unaudited
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30 September 30
1997 1996 1997 1996
---------- --------- --------- ----------
<S> <C> <C> <C> <C>
Revenues $ 1,816 $ 2,514 $ 3,899 $ 4,366
Cost of revenues 487 1,111 1,149 1,672
--------- --------- --------- ---------
1,329 1,403 2,750 2,694
Operating expenses:
Selling and marketing 1,019 1,059 2,073 1,794
Research and development 873 623 1,735 1,153
General and administrative 442 311 810 676
--------- --------- --------- ---------
Total operating expenses 2,334 1,993 4,618 3,623
--------- --------- --------- ---------
Loss from operations (1,005) (590) (1,868) (929)
Interest income (142) (172) (281) (368)
--------- --------- --------- ---------
Loss before income taxes (863) (418) (1,587) (561)
Income tax benefit - (149) - (199)
--------- --------- --------- ---------
Net loss $ (863) $ (269) $ (1,587) $ (362)
========= ========= ========= =========
Net loss per share $ (0.12) $ (0.04) $ (0.22) $ (0.05)
========= ========= ========= =========
Weighted average common shares outstanding 7,191 7,319 7,214 7,319
========= ========= ========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
Spacetec IMC Corporation
Condensed Consolidated Statements of Cash Flows
Unaudited
(in thousands)
<TABLE>
<CAPTION>
Six months ended
September 30
1997 1996
---------- ----------
<S> <C> <C>
Operating activities
Net loss $ (1,587) $ (362)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 412 437
Changes in operating assets and liabilities:
Accounts receivable, net 472 (606)
Inventories 413 (263)
Prepaid expenses and other assets 95 (1,017)
Due from employees and officer 15 -
Income taxes receivable 121 -
Accounts payable and accrued expenses (432) (207)
Deferred revenue (10) 40
--------- ----------
Net cash used in operating activities (501) (1,978)
Investing activities
Net sales of securities available-for-sale 1,225 3,093
Purchase of furniture and equipment (263) (495)
Purchase of intangible assets (3) (138)
Software development costs - (224)
--------- ----------
Net cash provided by investing activities 959 2,236
Financing activities
Proceeds from exercise of stock options 10 341
Stock repurchase (323) (628)
Additional offering costs - (5)
--------- ---------
Net cash used in financing activities (313) (292)
--------- ---------
Net increase in cash and cash equivalents 145 (34)
Cash and cash equivalents at beginning of period 170 417
--------- ---------
Cash and cash equivalents at end of period $ 315 $ 383
========= =========
Supplemental disclosure of cash flow information:
Income taxes paid $ 5 $ 274
========= ==================
Non-cash investing and financing activities:
Unrealized gain on available-for-sale securities $ 12 $ -
========= ==================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
Notes to Condensed Consolidated Financial Statements
Unaudited
(in thousands)
1. Basis of presentation
The accompanying unaudited condensed consolidated 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 adjustments necessary for a fair presentation of the
financial condition, results of operations, and cash flows for the periods
presented have been included. Operating results for the three and six month
periods ended September 30, 1997 are not necessarily indicative of the results
that may be expected for the year ended March 31, 1998. 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, 1997.
2. Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
September 30 March 31
1997 1997
------------------------
<S> <C> <C>
Materials $ 842 $1,133
Work-in-process 52 31
Finished goods 411 554
---------- ----------
$1,305 $1,718
========== ==========
</TABLE>
3. Loss per Common Share
Net loss per common share is based on the weighted-average number of common
shares outstanding during each of the periods. Common equivalent shares from
stock options are excluded as their effect is antidilutive.
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, Earnings Per Share (FAS 128), which will be adopted on December 31, 1997.
FAS 128 requires companies to change the method currently used to compute
earnings per share and to restate all prior periods for comparability. The
adoption of FAS 128 is not expected to have any impact on the Company's earnings
per share.
6
<PAGE>
Notes to Condensed Consolidated Financial Statements - Continued
4. Acquisition of Spatial Systems Ltd.
On April 19, 1997, the Company initiated a tender offer to purchase all of the
outstanding shares of Spatial Systems Ltd. ("SSL") from SSL's stockholders in
exchange for 1,133,334 shares of Common Stock of the Company. The tender offer
ended on July 18, 1997. In connection with the tender offer, the License
Agreement entered into in May 1991 between SSL and the Company was canceled.
Additionally, 1,133,334 shares of Common Stock of the Company owned by SSL prior
to the offer, were canceled. The tender offer, together with the cancellation of
the shares of the Company's Common Stock owned by SSL, did not affect the number
of shares outstanding of the Company.
7
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Results of Operations
Three and Six Months Ended September 30, 1997 and 1996
Revenues:
Revenues decreased 27.8% to $1,816,000 for the three months ended September 30,
1997 ("current quarter") from $2,514,000 for the three months ended September
30, 1996 ("prior quarter"). For the six months ended September 30, 1997
("current year"), revenues decreased 10.7% to $3,899,000 from $4,366,000 for the
six months ended September 30, 1996 ("prior year"). Export sales, most of which
are denominated in U.S. dollars, increased 1.7% and 1.6% to $649,000 and
$1,171,000 in the current quarter and current year from $638,000 and $1,152,000
in the prior quarter and prior year, respectively.
Sales to the industrial market grew by 13.3% to $1,700,000 in the current
quarter from $1,500,000 in the prior quarter. The increase reflects the refocus
of the sales force on the industrial business.
Software and licensing revenues were negligible for the current quarter,
compared to the prior quarter revenues of $350,000. These revenues are discrete
in nature, and can vary from quarter to quarter.
Consumer market revenues of the SpaceOrb 360 Real Life 3D ("SpaceOrb") game
controller and other consumer related revenue decreased 86.4% to $85,000 in the
current quarter from $625,000 in the prior quarter, when the initial program was
launched. The decrease reflects the shift in sales focus from direct retail
channels to establishing Original Equipment Manufacturer ("OEM") and strategic
alliance partnerships.
As part of the corporate strategy, emphasis on the industrial business will
continue, and strategic alliance partnerships and OEM relationships with a
number of companies will be aggressively pursued. During the current quarter,
the Company announced a promotional sales bundling arrangement with Packard Bell
NEC, and in the coming quarters, the Company will continue discussions with
other potential partners to assist in capitalizing on its technology. However,
there is no assurance that these relationships will be able to generate
substantial revenue, if at all.
Gross Profit:
Gross profit, decreased 5.3% to $1,329,000 in the current quarter from
$1,403,000 in the prior quarter, and represented 73.2% of current quarter
revenues versus 55.8% of prior quarter revenues. Gross profit for the current
year increased 2.1% to $2,750,000 from $2,694,000 in the prior year, and
represented 70.5% of current year revenues compared with 61.7% of prior year
revenues.
8
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
The increase in gross profit as a percentage of revenues in the current quarter
and current year, reflects the proportionately higher margins available from the
industrial market, which is the area focused upon by the Company at the present
time. As the Company continues to shift its sales mix from direct to OEM
channels for industrial and consumer products, it is expected that the gross
profit percentage currently experienced by the Company will not be able to be
sustained. The Company's expectations regarding the decline in gross profit
percentage is a forward looking statement. There can be no assurance that such
decreases in gross profit will not be greater than anticipated.
Selling and Marketing Expenses:
Selling and marketing expenses, which include personnel costs, advertising and
marketing costs, sales commissions and trade show expenses, decreased 3.8% to
$1,019,000 in the current quarter from $1,059,000 in the prior quarter, and
represented 56.1% of current quarter revenues, up from 42.1% of prior quarter
revenues. The reduction in total expense reflects general expense controls and
the elimination of broad based advertising and public relations activity in
favor of focused marketing events. These reductions were partially offset by a
one-time consumer promotion. Going forward, the Company expects selling and
marketing expenses to reduce as a percent of revenues.
Selling and marketing expenses increased 15.6% to $2,073,000 in the current year
from $1,794,000 in the prior year, representing 53.2% of current year revenues
versus 41.1% of prior year revenues. The increase in expenses reflects the
Company's initiative to expand its worldwide salesforce and pursue alternative
distribution channels, as well as to invest in lead-generating marketing
programs and alliances with other marketing partners.
9
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
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 40.1% and 50.5% to $873,000 and
$1,735,000 for the current quarter and current year from $623,000 and $1,153,000
in the prior quarter and prior year, and represented 48.1% and 44.5% of current
quarter and current year revenues and 24.8% and 26.4% of prior quarter and prior
year revenues, respectively. The overall increase in absolute dollars is the
result of hiring engineering research personnel at higher skill levels. This
investment was necessary to expand the Company's software product development
efforts, particularly in developing software for stand-alone revenue generation.
The Company expects a stabilization in research and development expense at
current levels, over the upcoming quarters. However, there can be no assurance
that these expenses will not be greater than anticipated.
General and Administrative Expenses:
General and administrative expenses, which include the costs of the Company's
finance, human resources and administrative functions increased 42.1% and 19.8%
to $442,000 and $810,000 in the current quarter and current year from $311,000
and $676,000 in the prior quarter and prior year, respectively. These expenses
represented 24.3% and 20.8% of current quarter and current year revenues and
12.4% and 15.5% of prior quarter and prior year revenues, respectively. The
increase in the current quarter is due to additional accounting, legal, and
administration fees incurred in the current quarter as a result of the takeover
of Spatial Systems Ltd. ("SSL"). (See Note 4). Management anticipates that these
costs will stabilize at levels similar to those reported for the quarter ended
June 30, 1997 in the future. However, there can be no assurance that these
expenses will not be greater than anticipated.
Provision for Income Taxes:
As the Company has recognized losses in the current fiscal year, it has not
recorded a provision for income taxes. The benefit attributable to carryback of
losses to prior years was fully utilized during the fiscal year ended March 31,
1997.
10
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Liquidity and Capital Resources
As of September 30, 1997, the Company had cash and cash equivalents and
securities available for sale of $9,115,000 and working capital of $11,834,000
versus $10,229,000 and $13,622,000, respectively, at March 31, 1997.
Operating activities of the Company absorbed $501,000 in cash in the current
year, as compared to using $1,978,000 in the prior year. The use of funds in
the current year was primarily due to the net loss of $1,587,000 which was
offset by a reduction in accounts receivable of $472,000, as well as a $413,000
reduction in inventories. Additionally, $121,000 of income tax refunds were
received in the current year.
Net cash provided to the Company in the current year from investing activities
totaled $959,000 versus $2,236,000 in the prior year. The primary reason for
the decrease was a reduction in proceeds from securities available for sale.
Additionally, expenditures for furniture and equipment were reduced ($263,000 in
the current year versus $495,000 in the prior year), and there were negligible
additions to intangible assets and capitalized software during the current year.
Financing activities used $313,000 of net cash in the current quarter primarily
as a result of the Company repurchasing its stock in a periodic, open market
purchase program. The amount paid for the repurchase of stock was partially
offset by the proceeds from the exercise of employee stock options.
The Company believes that its existing cash and investment securities together
with future 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, additional 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 in the
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.
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, and the levels of promotion and advertising required to launch
such products and attain a competitive position in the marketplace. Changes in
technology or growth in revenues beyond currently established capabilities will
also require 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
11
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
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 will 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. There can be no
assurance that the Company's cash flow from operations will be adequate to fund
its long-term working capital requirements, or that it will be able, if
necessary, to obtain equity financing on favorable terms (if at all).
Safe Harbor Statement
Statements which are not historical facts, including statements about the
Company's 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;
and other risks detailed in the Company's Securities and Exchange Commission
filings, including the Company's Annual Report on Form 10-K for the fiscal year
ended March 31, 1997.
12
<PAGE>
Part II. Other Information
Item 2: Changes in Securities and Use of Proceeds
There were no sales of unregistered securities. The Company's S-1 registration
(File No. 33-98064) became effective on December 5, 1995. The net proceeds
received from the offering totaled $14,726,721. The Company has filed the Form
SR disclosing the sale of securities and use of proceeds through September 5,
1996. No information has changed, except for the use of proceeds.
The following table lists the use of proceeds (in thousands) from the effective
date of the registration (December 5, 1995) through September 30, 1997.
Cash and available-for-sale securities: $ 9,115
Purchases of machinery and equipment: 1,320
Repurchase of the Company's Common Stock: 1,079
Estimated expenses incurred in connection with
the acquisition of Spatial Systems Ltd: 150
Working Capital: 3,063
-------
Total: $14,727
=======
None of these payments were made to directors or officers of the Company or
their associates, or to persons owning more than ten percent of any class of
equity securities of the Company, and to the affiliates of the Company.
Item 4: Submission of Matters to a Vote of Security Holders
The Company held its annual meeting of stockholders on Thursday, September 11,
1997. Proposals were submitted to a vote of the stockholders to elect two
directors and to adopt the Company's Amended and Restated 1995 Director Stock
Option Plan. Patrick J. Sullivan was re-elected as a director of the Company by
a vote of 6,558,002 votes in favor and 62,356 withheld, and Jerry H. Loyd was
re-elected as a director of the Company by a vote of 6,571,868 votes in favor
and 48,490 votes withheld. Both directors will serve for three year terms
ending in 2000. There were no abstentions or broker non-votes. In addition to
Mr. Sullivan and Mr. Loyd, the following directors continued after the meeting:
Dennis T. Gain, Morton E. Goulder, and J. Grant Jagelman.
The Amended and Restated 1995 Director Stock Option Plan was adopted by a vote
of 6,295,101 votes in favor and 235,233 votes withheld. There were 24,050
abstentions and no broker non-votes. The Amended and Restated 1995 Director
Stock Option Plan increased by 150,000 shares, the aggregate number of shares of
the Company's Common Stock which may be granted to Directors as options.
Item 6. Exhibits and Reports on Form 8-K
During the quarter ended September 30, 1997, the Company filed with the
Commission on August 11, 1997 a report on Form 8-K. The Company reported the
issuance of 1,133,334 shares of its Common Stock as a consequence of the tender
offer it initiated on April 18, 1997 to purchase all of the outstanding stock of
Spatial Systems Ltd. ("SSL"). As a result of the tender offer, the Company
received back 1,133,334 shares of its Common Stock, which SSL owned prior to the
tender offer. These shares were subsequently canceled by the Company. In
addition, a License Agreement entered into in May 1991 between SSL and the
Company was canceled. The tender offer, together with the cancellation of the
shares of the Company's Common Stock previously owned by SSL, did not affect the
number of shares outstanding of the Company.
The following exhibits are included herein:
(11) Statement re: computation of earnings per share
(27) Financial Data Schedule
13
<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/ Neil Rossen November 14, 1997
------------------------------------- ----------------------------------
Neil Rossen, Chief Financial Officer, Date
Vice President of Finance
(Principal Accounting Officer)
14
<PAGE>
Exhibit (11)-Statement Re: Computation of Loss Per Share
<TABLE>
<CAPTION>
Three months ended Six months ended
September 30 September 30
1997 1996 1997 1996
---------------- --------------- ---------------- ---------------
(in thousands, except per share data) (in thousands, except per share data)
<S> <C> <C> <C> <C>
Primary and Fully Diluted:
Average shares outstanding 7,195 7,351 7,268 7,351
Average treasury shares outstanding (4) (32) (54) (32)
Net effect of dilutive stock options-based on
the treasury stock method using average
market price - - - -
---------------- --------------- ---------------- ---------------
Totals 7,191 7,319 7,214 7,319
================ =============== ================ ===============
Net loss $ (863) $ (269) $(1,587) $ (362)
================ =============== ================ ===============
Per share amount $ (0.12) $ (0.04) $ (0.22) $ (0.05)
================ =============== ================ ===============
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 315
<SECURITIES> 8,800
<RECEIVABLES> 1,985
<ALLOWANCES> 172
<INVENTORY> 1,305
<CURRENT-ASSETS> 12,734
<PP&E> 1,796
<DEPRECIATION> 803
<TOTAL-ASSETS> 14,230
<CURRENT-LIABILITIES> 900
<BONDS> 0
0
0
<COMMON> 72
<OTHER-SE> 13,258
<TOTAL-LIABILITY-AND-EQUITY> 14,230
<SALES> 1,816
<TOTAL-REVENUES> 1,816
<CGS> 487
<TOTAL-COSTS> 487
<OTHER-EXPENSES> 2,334
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (863)
<INCOME-TAX> 0
<INCOME-CONTINUING> (863)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (863)
<EPS-PRIMARY> (0.12)
<EPS-DILUTED> (0.12)
</TABLE>
