<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 December 31, 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
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Spacetec IMC Corporation
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Massachusetts 04-3116697
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
The Boott Mill, 100 Foot of John Street, Lowell, Massachusetts 01852
- --------------------------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
(978) 275-6100
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(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 December 31, 1997
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Common Stock, $.01 par value 7,192,742
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Spacetec IMC Corporation
TABLE OF CONTENTS
<TABLE>
<S> <C>
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets as of December 31, 1997 and March 31,
1997....................................................................................... 3
Condensed consolidated statements of operations for the three and nine months
ended December 31, 1997 and 1996........................................................... 4
Condensed consolidated statements of cash flows for the nine months ended
December 31, 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............................................... 15
Item 3. Defaults upon Senior Securities-None
Item 4. Submission of Matters to a Vote of Security Holders-None
Item 5. Other Information-None
Item 6. Exhibits and Reports on Form 8-K........................................................ 15
SIGNATURES...................................................................................... 16
</TABLE>
2
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Item I. Financial Statements
Spacetec IMC Corporation
Condensed Consolidated Balance Sheets
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
December 31 March 31
1997 1997
-------------- --------------
(Unaudited) (Note)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 230 $ 170
Securities available-for-sale 8,958 10,059
Accounts receivable, net 2,043 2,285
Inventories 719 1,718
Prepaid expenses 164 275
Due from employees and officer 6 19
Income taxes receivable 328 438
-------------- --------------
Total current assets 12,448 14,964
Furniture and equipment, net 883 964
Intangible assets, net 187 382
Software development costs, net - 265
Other assets 28 27
-------------- --------------
1,098 1,638
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Total assets $ 13,546 $ 16,602
============== ==============
Liabilities and Shareholders' equity
Current liabilities:
Accounts payable and accrued expenses $ 982 $ 1,267
Deferred revenue 12 75
-------------- --------------
Total current liabilities 994 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;
7,192,742 and 7,366,508 shares issued and outstanding at
December 31, 1997 and March 31, 1997, respectively 72 74
Additional paid-in capital 16,920 17,969
Deferred compensation (36) (40)
Unrealized gain on available-for-sale securities 29 46
Accumulated deficit (4,431) (2,033)
Cumulative translation adjustment (2) -
Treasury stock, at cost; 100,000 shares at March 31, 1997 (756)
-------------- --------------
Total shareholders' equity 12,552 15,260
-------------- --------------
Total liabilities and shareholders' equity $ 13,546 $ 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
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Spacetec IMC Corporation
Condensed Consolidated Statements of Operations
(Unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31 December 31
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues $ 2,488 $ 2,685 $ 6,387 $ 7,051
Cost of revenues 1,146 1,755 2,295 3,427
-------- -------- -------- --------
1,342 930 4,092 3,624
Operating expenses:
Selling and marketing 1,009 2,116 3,082 3,910
Research and development 747 938 2,482 2,091
General and administrative 543 377 1,353 1,053
-------- -------- -------- --------
Total operating expenses 2,299 3,431 6,917 7,054
-------- -------- -------- --------
Loss from operations (957) (2,501) (2,825) (3,430)
Interest income (146) (145) (427) (513)
-------- -------- -------- --------
Loss before income taxes (811) (2,356) (2,398) (2,917)
Income tax benefit - (264) - (463)
-------- -------- -------- --------
Net loss $ (811) $ (2,092) $ (2,398) $ (2,454)
======== ======== ======== ========
Basic and Diluted Loss Per Share: $ (0.11) $ (0.29) $ (0.33) $ (0.34)
======== ======== ======== ========
Weighted average common shares outstanding 7,199 7,276 7,209 7,268
======== ======== ======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
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Spacetec IMC Corporation
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Nine months ended
December 31
1997 1996
------------ ------------
<S> <C> <C>
Operating activities
Net loss $ (2,398) $ (2,454)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 615 736
Loss on disposal of assets 232 283
Changes in operating assets and liabilities:
Accounts receivable, net 242 (254)
Inventories 999 (1,537)
Prepaid expenses and other assets 110 (766)
Due from employees and officer 13 -
Income taxes receivable 110 -
Accounts payable and accrued expenses (285) 851
Deferred revenue (63) 72
------------ ------------
Net cash used in operating activities (425) (3,069)
Investing activities
Net sales of securities available-for-sale 1,084 4,766
Purchase of furniture and equipment (274) (582)
Purchase of intangible assets (30) (169)
Software development costs - (224)
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Net cash provided by investing activities 780 3,791
Financing activities
Proceeds from exercise of stock options 77 386
Stock repurchase (372) (756)
Additional offering costs - (5)
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Net cash used in financing activities (295) (375)
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Net increase in cash and cash equivalents 60 347
Cash and cash equivalents at beginning of period 170 417
------------ ------------
Cash and cash equivalents at end of period $ 230 $ 764
============ ============
Supplemental disclosure of cash flow information:
Income taxes paid $ 15 $ 278
============ ============
Non-cash investing and financing activities:
Unrealized gain on available-for-sale securities $ 29 $ -
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
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Spacetec IMC Corporation
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 nine-month
periods ended December 31, 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>
December 31 March 31
1997 1997
----------------------------------
<S> <C> <C>
Materials $ 481 $1,133
Work-in-process 80 31
Finished goods 158 554
----------------------------------
$ 719 $1,718
==================================
</TABLE>
3. Loss per Common Share
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" (FAS 128). FAS 128
replaced the previously reported primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary earnings per share,
basic earnings per share excludes any dilutive effects of options, warrants, and
convertible securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. All earnings per share
amounts for all periods have been presented, and where necessary, restated to
conform to the Statement 128 requirements.
6
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SPACETEC IMC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
3. LOSS PER COMMON SHARE - (CONTINUED)
The following table sets forth the computation of basic and diluted loss per
share:
<TABLE>
<CAPTION>
Three months ended December 31 Nine months ended December 31
------------------------------- -------------------------------
1997 1996 1997 1996
------------------------------- -------------------------------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Numerator:
Net (loss) $ (811) $(2,092) $(2,398) $(2,454)
=============================== ===============================
Denominator:
Denominator for basic and diluted loss
per share - weighted average shares
outstanding 7,199 7,276 7,209 7,268
=============================== ===============================
Basic and diluted loss per share $(0.11) $ (0.29) $ (0.33) $ (0.34)
=============================== ===============================
</TABLE>
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 of Common Stock outstanding of the Company.
7
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SPACETEC IMC CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED DECEMBER 31, 1997 AND 1996
Revenues:
Revenues decreased 7.3% to $2,488,000 for the three months ended December 31,
1997 ("current quarter") from $2,685,000 for the three months ended December 31,
1996 ("prior quarter"). For the nine months ended December 31, 1997 ("current
year"), revenues decreased 9.4% to $6,387,000 from $7,051,000 for the nine
months ended December 31, 1996 ("prior year"). The decrease in revenues is
mainly attributable to a considerable reduction in the sales to the consumer
retail channel.
Export sales, most of which are denominated in U.S. dollars, increased 1.1% and
1.4% to $726,000 and $1,897,000 in the current quarter and current year from
$718,000 and $1,870,000 in the prior quarter and prior year, respectively.
Sales to the industrial market grew by 21.1% to $2,300,000 in the current
quarter from $1,900,000 in the prior quarter. The increase reflects the refocus
of the sales force on the industrial business.
Other revenues, which include discrete consumer sales and software licensing
were $172,000 in the current quarter, compared to the prior quarter revenues of
$800,000. This decrease reflects the shift in sales focus from direct retail
channels to establishing Original Equipment Manufacturer ("OEM") and strategic
alliance partnerships in the consumer business.
As part of the corporate strategy, it is expected that emphasis on the
industrial business should continue, and strategic alliance partnerships and OEM
relationships with a number of companies will be pursued. During the current
quarter, the Company established an OEM relationship with Compaq Computer
Corporation and expanded OEM sales and marketing programs with NeTpower. In the
coming quarters, the Company expects to 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:
The Company's gross profit is arrived at after the costs of materials,
manufacturing overhead, royalties, and amortization of capitalized software are
subtracted from revenues. Gross profit increased 44.3% to $1,342,000 in the
current quarter from $930,000 in the prior quarter, and represented 53.9% of
current quarter revenues versus 34.6% of prior quarter revenues. Gross profit
for the current year increased 12.9% to $4,092,000 from $3,624,000 in the prior
year, and represented 64.1% of current year revenues compared with 51.4% of
prior year revenues.
8
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SPACETEC IMC CORPORATION
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. However, gross profit in the current quarter was negatively impacted by a
$340,000 charge for the write-down of inventory related to the SpaceOrb 360 and
an additional charge of $130,000 for the write down of capitalized software
associated with the SpaceOrb 360. The write down of inventories and capitalized
software resulted from the mutually agreed cessation of a retail marketing
program and is consistent with the Company's efforts to redirect its focus in
the consumer market away from direct retail channels to pursue OEM partners and
licensing arrangements.
Gross profit as a percentage of revenues was lower in the prior quarter and
prior year compared with the current quarter and current year as there were
proportionately more sales into the retail channel in these periods. In
addition to lower margins realized from the retail market, gross profit in the
prior quarter was impacted by a $203,000 charge for the write down of
capitalized software and a $400,000 charge for the write down of inventory
components related to the SpaceOrb 360.
As the Company continues to shift its sales mix from direct to OEM channels for
its industrial and consumer products, it is expected that the gross profit
percentage 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 52.3% to
$1,009,000 in the current quarter from $2,116,000 in the prior quarter, and
represented 40.6% of current quarter revenues, down from 78.8% of prior quarter
revenues. In addition to the Company no longer incurring significant marketing
expenditure associated with a direct presence in the retail channel, 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. Going forward, the Company expects selling and marketing
expenses to reduce as a percent of revenues.
Selling and marketing expenses decreased 21.2% to $3,082,000 in the current year
from $3,910,000 in the prior year, representing 48.3% of current year revenues
versus 55.5% of prior year revenues. The reduction in expense is mainly the
result of the Company no longer incurring significant marketing expenditure
associated with a direct presence in the retail channel as well as general
expense controls. These reductions are partially offset by the Company's
initiative to expand its worldwide sales force and pursue alternative
distribution channels, as well as to invest in lead-generating marketing
programs and alliances with other marketing partners.
9
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SPACETEC IMC CORPORATION
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, decreased 20.4% to $747,000 in the current
quarter versus $938,000 in the prior quarter. These expenses represent 30.0% of
current quarter revenues and 34.9% of prior quarter revenues. Overall, research
and development expenses increased 18.7% in the current year to $2,482,000 from
$2,091,000 in the prior year and represented 38.9% of current year revenues
versus 29.7% of prior year revenues. The decrease in the current quarter
expense reflects lower recruitment costs and a reduction in expenditure relating
to hardware design, which was originally undertaken to cost-reduce the Company's
products.
The increase in current year expense is the result of hiring additional
engineering research personnel at higher skill levels and therefore at higher
average salaries. 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 increases in research and
development expense 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 44.0% to
$543,000 in the current quarter versus $377,000 in the prior quarter. These
expenses represented 21.8% of current quarter revenues compared with 14.0% of
prior quarter revenues. Current year general and administrative expenses
increased 28.5% to $1,353,000 in the current year from $1,053,000 in the prior
year and represented 21.2% of current year revenues and 14.9% of prior year
revenues, respectively.
The increase in expense in the current quarter and current year is mainly the
result of increases in accounting, legal, and administration fees related to the
establishment of wholly-owned subsidiary corporations in Germany and France, and
to the takeover of Spatial Systems Ltd. ("SSL"). In addition, the Company
incurred $154,000 in charges for the write down of intangible assets associated
with its Panacea graphics acceleration software business, and for a significant
customer account that was deemed uncollectible. 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
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SPACETEC IMC CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Liquidity and Capital Resources
As of December 31, 1997, the Company had cash and cash equivalents and
securities available for sale of $9,188,000 and working capital of $11,454,000
versus $10,229,000 and $13,622,000, respectively, at March 31, 1997.
Operating activities of the Company absorbed $425,000 of cash in the current
year, as compared to using $3,069,000 in the prior year. The use of funds in
the current year was primarily due to the net loss of $2,398,000 which was
offset by a reduction in accounts receivable of $242,000, as well as a $999,000
reduction in inventories. The change in accounts receivable from using cash of
$254,000 in the prior year to providing cash of $242,000 in the current year is
the result of enhanced collection efforts over the course of the year.
Inventory levels were high in the prior year as the Company had made a
significant investment in inventory related to the SpaceOrb 360 in order to have
the necessary anticipated quantities on hand for sale during the peak retail
Christmas season. In the current year, the Company has made an effort to reduce
its overall inventories related to the SpaceOrb 360, but as it has been unable
to sell the quantities of the product on hand, and the systems configurations
have changed, management has determined that the value of the inventory is
impaired. Therefore, a write-down of $340,000 related to the SpaceOrb 360
inventory was taken in the current year.
Net cash provided to the Company in the current year from investing activities
totaled $780,000 versus $3,791,000 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 ($274,000 in
the current year versus $582,000 in the prior year), and additions to intangible
assets and capitalized software were $30,000 during the current year compared
with additions of $393,000 in the prior year. These decreases represent general
cost containment measures.
Financing activities used $295,000 of net cash in the current year 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 of the
Company's products. 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.
11
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SPACETEC IMC CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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
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 contained in this Quarterly Report on Form 10-Q which are not
historical facts, including statements regarding 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 and are made under the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. The
Company's actual results of operations and financial condition may in the future
vary significantly from those stated in any forward-looking statements. Factors
that may cause such differences include, but are not limited to, the risks
identified in the Company's Securities and Exchange Commission filings,
including those risks identified in the Company's Annual Report on Form 10-K for
the fiscal year ended March 31, 1997.
The following discussion of the Company's risk factors should be read in
conjunction with the financial statements and related notes thereto set forth
elsewhere in this report and in the Company's Annual Report on Form 10-K for the
fiscal year ended March 31, 1997. The following factors, among others, could
cause actual results to differ materially from those set forth in forward-
looking statements contained or incorporated by reference in this report and
presented by management from time to time. Such factors, among others, may have
a material adverse effect upon the Company's business, results of operations and
financial condition:
12
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SPACETEC IMC CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Fluctuations in Results of Operations. The Company's results of operations have
varied significantly in the past and may vary significantly in the future, on a
quarterly and annual basis as a result of a variety of factors, many of which
are outside the Company's control. These factors include, without limitation:
(i) the timing and size of orders which are received and can be shipped in any
particular period; (ii) the commercial success of the Company's products; (iii)
delays in the introduction of products or product enhancements by the Company
and the Company's ability to introduce new products and technologies on a timely
basis; (iv) the financial stability of the Company's major customers; (v) the
timing of new product introductions or announcements by the Company or its
competitors; (vi) the availability of adequate supplies of key components and
assemblies and the adequacy of third-party manufacturing capabilities; (vii) the
seasonality of the placement of customer orders; (viii) the timing and nature of
selling and marketing expenses such as tradeshows and advertising campaigns;
(ix) the timing of development expenditures and personnel changes; (x) customer
order deferrals in anticipation of product enhancements or new product offerings
by the Company or its competitors; and (xi) customer cancellation of orders and
the gain or loss of significant customers. The Company has historically
operated with little backlog because its products are generally shipped
immediately upon receipt of an order by the Company. As a result, revenues in
any quarter are substantially dependent on orders booked and shipped in that
quarter and on sales by the Company's customers to end users.
The Company has historically recognized a large portion of its revenues from
sales booked and shipped in the last month of a quarter such that the magnitude
of quarterly fluctuations may not become evident until late in, or at the end
of, a particular quarter. Because a number of the Company's individual orders
are for significant amounts, the failure to ship a significant order in a
particular quarter could materially adversely affect revenues and results of
operations for such quarter. To the extent that significant sales occur earlier
than expected, results of operations for subsequent quarters may be materially
adversely affected. Due to these and other factors, the Company's quarterly
revenues, expenses and results of operations could vary significantly in the
future, and period-to-period comparisons should not be relied upon as
indications of future performance. There can be no assurance that the Company
will be able to increase its revenues in future periods or be able to sustain
its level of revenues or its rate of growth on a quarterly or annual basis.
Due to the foregoing factors, it is possible that in some future quarter, the
Company's results of operations will be below the expectations of public market
analysts and investors. In such an event, the market price of the Company's
Common Stock would likely be materially adversely affected.
Entry into Consumer Marketplace. During the fiscal year 1997, the Company began
to market its products designed for the consumer marketplace. The Company has
had little experience in marketing its products to consumers. The entry into the
consumer market had created considerable risks for the Company, some of which
are outside of the Company's control. Delays and difficulties associated with
new product introductions have had material adverse effects on the Company's
business, operating results and financial condition. The Company's products
represent new technology to the consumer marketplace, and there continues to be
substantial risks that the marketplace may not accept the Company's products.
Market acceptance of the Company's products depends to a certain extent upon the
ability of the Company to demonstrate the advantages of its products over other
types of products. There can be no assurance that either existing or new
competitors will not develop products that are superior to the Company's
products or may achieve greater market acceptance or that the Company will be
able to identify, develop, manufacture, market or support new products and
services that will respond to evolving consumer requirements and maintain market
acceptance. Failure by the Company to anticipate or respond adequately to
technological developments and customer requirements or any significant delays
in product development or introductions could result in a material loss of
market share or revenues. In addition, new products, when released by the
Company, may contain unexpected errors or "bugs" that, despite testing by the
Company, are discovered only after a product has been installed and used by
customers. Although the Company has not experienced material adverse effects
from any such errors to date, there can be no assurance that errors will not be
discovered in the future, causing delays in product introduction and shipments
or requiring design modifications that could materially adversely affect the
Company's competitive position and operating results. There can be no assurance
that announcements of competing new product offerings by others will not cause
customers to defer purchasing the Company's products or to not purchase them at
all.
Expansion into Retail Distribution Channels. The Company commenced retail
shipments of its SpaceOrb 360 during fiscal 1997. Retail distribution channel
sales have required significantly greater marketing and sales expenditures and
post-sale support costs than the Company's industrial sector products.
Penetration of this market has depended upon building relationships with
distributors and retailers. An increasing number of vendors compete for access
to these distributors and retailers, which generally offer products of several
different companies, including products competitive with the Company's products.
The Company has committed substantial resources to the penetration of this
distribution channel to date. The Company's efforts to commence sales through
retail distribution sales channels have not been as successful as anticipated,
and the inability of the Company to penetrate this sales channel effectively
has had a material adverse effect on its operating results.
13
<PAGE>
SPACETEC IMC CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
As a result of the Company's efforts in penetrating this sales channel, the
gross margins has decreased as the Company has had to price its products at low
levels to penetrate this market. The Company has noted that its sales to retail
have been significantly affected by seasonality primarily due to the increased
demand for 3D game and entertainment applications and related products during
the year-end holiday buying season. Retail distributors have been permitted to
return inventory to the Company for credit against other purchases on negotiated
terms. In addition, the Company has granted retail distributors price protection
clauses in agreements with the Company pursuant to which the Company has been
obligated to grant credits when the Company has reduced selling prices on
products previously purchased by the distributor. Moreover, to the extent the
Company generates significant sales to retail distribution channels relative to
its sales to OEMs, there is a greater risk of increased product returns and
warranty claims. The Company has established reserves for product returns and
warranty claims based on its previous experiences and future expectations. There
can be no assurance that these reserves will be adequate or that product returns
and warranty claims and price protection adjustments will not have a material
adverse effect on future operating results.
Reliance on Third-Party Distribution Channels. The Company expects to increase
its product sales through third-party distribution channels, including original
equipment manufacturers ("OEMs"), value added resellers ("VARs"), system
integrators and distributors. Such OEMs and VARs are not under the control of
the Company. Although these customers in turn sell to a wide variety of
end-users, the Company is subject not only to the risk that its customers will
discontinue selling and marketing its products, but also to the risk that the
end-users supplied by the Company's customers will alter their preferences in a
manner that has a material adverse effect on the Company's operations. There can
be no assurance that the Company will be able to retain its current resellers or
expand its distribution channels by entering into arrangements with new
resellers.
Dependence on Relationships with Significant Customers. The Company sells
substantially all of its products to and maintains strategic relationships with
original equipment manufacturers ("OEMs"), value added resellers ("VARs"). As a
result, sales of the Company's products are dependent upon the continued market
acceptance of the service and product offerings of the Company's customers.
Although the Company maintains contractual relationships with a substantial
number of its customers, such contracts do not provide for minimum purchase
requirements, nor do they contain provisions requiring the exclusive purchase of
the Company's products.
Rapid Technological Change; Dependence on New Product Development. The
electronics industry in general, and the markets for the Company's products in
particular, are characterized by rapidly changing technology, evolving industry
standards, frequent new product introductions, short product life cycles and
significant competition. The introduction of products embodying new technologies
and the emergence of new industry standards present opportunities for current
and potential competitors of the Company to gain market share and can quickly
render the Company's products less attractive or obsolete and unmarketable. In
order to keep pace with this rapidly changing market environment, the Company
must continually develop and incorporate into its products new technological
advances and features desired by the marketplace at acceptable prices. The
successful development and commercialization of new products involves many
risks, including the identification of new product opportunities, the timely
completion of the development process, the control and recoupment of development
and production costs and acceptance by customers of the Company's products.
There can be no assurance that the Company will be successful in identifying,
developing, manufacturing and marketing new products in timely and cost
effective manner, that the Company's products will be accepted in the
marketplace, or that products or technologies developed by others will not
render the Company's products or technologies uncompetitive.
14
<PAGE>
SPACETEC IMC CORPORATION
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 December 31, 1997.
<TABLE>
<S> <C>
Cash and available-for-sale securities: $ 9,188
Purchases of machinery and equipment: 1,332
Repurchase of the Company's Common Stock: 1,128
Estimated expenses incurred in connection with
the acquisition of Spatial Systems, Ltd: 150
Working capital: 2,929
--------------
Total $14,727
==============
</TABLE>
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 6. Exhibits and Reports on Form 8-K
The Company did not file any reports on Form 8-K during the three months ended
December 31, 1997.
The following exhibits are included herein:
(11) Statement re: computation of earnings per share
(27) Financial Data Schedule
15
<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 February 23, 1998
------------------------------------- -------------------------------
Neil Rossen, Chief Financial Officer, Date
Vice President of Finance
(Principal Accounting Officer)
16
<PAGE>
Exhibit (11)-Statement Re: Computation of Loss Per Share
<TABLE>
<CAPTION>
Three months ended Nine months ended
December 31 December 31
1997 1996 1997 1996
------------ ------------ ------------ -----------
(in thousands, except per share data) (in thousands, except per share data)
<S> <C> <C> <C> <C>
Basic and Diluted Loss Per Share:
Average shares outstanding 7,203 7,356 7,275 7,307
Average treasury shares outstanding (4) (80) (66) (39)
Net effect of dilutive stock options-based on
the treasury stock method using average
market price - - - -
--------- ----------- ----------- ----------
Totals 7,199 7,276 7,209 7,268
========= =========== =========== ==========
Net loss $ (811) $ (2,092) $ (2,398) $ (2,454)
========= =========== =========== ==========
Per share amount $ (0.11) $ (0.29) $ (0.33) $ (0.34)
========= =========== =========== ==========
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 230
<SECURITIES> 8,958
<RECEIVABLES> 2,267
<ALLOWANCES> 224
<INVENTORY> 719
<CURRENT-ASSETS> 12,448
<PP&E> 1,807
<DEPRECIATION> 924
<TOTAL-ASSETS> 13,546
<CURRENT-LIABILITIES> 994
<BONDS> 0
0
0
<COMMON> 72
<OTHER-SE> 12,480
<TOTAL-LIABILITY-AND-EQUITY> 13,546
<SALES> 2,488
<TOTAL-REVENUES> 2,488
<CGS> 1,146
<TOTAL-COSTS> 1,146
<OTHER-EXPENSES> 2,299
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (811)
<INCOME-TAX> 0
<INCOME-CONTINUING> (811)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (811)
<EPS-PRIMARY> (0.11)
<EPS-DILUTED> (0.11)
</TABLE>
