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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[ x ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________ TO _____________
Commission File Number 1-12909
INTERNATIONAL COMPUTEX, INC.
(Exact name of small business issuer as specified in its charter)
GEORGIA 58-1938206
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5500 INTERSTATE NORTH PARKWAY, SUITE 507
ATLANTA, GA 30328
(Address of principal executive offices)
(770) 953-1464
(Issuer's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 [ ]
As of November 10, 1998, there were 3,577,380 shares of common stock, $0.001 par
value, outstanding.
Transitional Small Business Disclosure Format
(Check one):
Yes [ ] No [ x ]
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INTERNATIONAL COMPUTEX, INC.
FORM 10-QSB
INDEX
PART I. Financial Information
Item 1. Financial Statements (Unaudited)
Balance Sheets
December 31, 1997 and September 30, 1998
Statements of Operations
Three Months and Nine Months Ended September 30, 1997
and September 30, 1998
Statements of Cash Flows
Nine Months Ended September 30, 1997 and September 30, 1998
Notes to Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition
And Results of Operations
PART II. Other Information
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
INTERNATIONAL COMPUTEX, INC.
BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
December 31, September 30,
1997 1998
------------ -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 6,943,351 $ 6,661,529
Accounts receivable, net 1,146,483 806,548
Investments available for sale 1,046,562 2,093,677
Prepaid expenses 197,956 198,380
----------- -----------
Total current assets 9,334,352 9,760,134
Property and equipment, net 548,209 766,344
Software development costs, net 422,333 288,935
Other assets 10,305 9,055
----------- -----------
$10,315,199 $10,824,468
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 76,077 $ 77,847
Deferred revenue 117,187 67,668
S Corporation distribution payable 123,003 0
Current portion of long-term debt 3,775 3,200
----------- -----------
Total current liabilities 320,042 148,715
Long-term liabilities:
Long-term debt, net of current portion 14,834 12,817
Deferred income taxes 45,202 45,202
----------- -----------
60,036 58,019
Total liabilities 380,078 206,734
----------- -----------
Stockholders' equity:
Common stock, $.001 par value,
20,000,000 shares authorized;
3,250,690 and 3,577,380 shares issued and
outstanding at December 31, 1997 and
September 30, 1998, respectively 3,251 3,577
Additional paid in capital 9,530,283 11,222,140
Retained earnings (accumulated deficit) 401,587 (607,983)
----------- -----------
Total stockholders' equity 9,935,121 10,617,734
----------- -----------
$10,315,199 $10,824,468
=========== ===========
</TABLE>
See accompanying notes to financial statements.
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INTERNATIONAL COMPUTEX, INC.
STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months ended September 30, Nine Months ended September 30,
1997 1998 1997 1998
<S> <C> <C> <C> <C>
Revenues
Services and other [Note 6] $1,309,454 $ 688,484 $ 3,956,645 $3,376,229
Software 0 16,250 223,000 493,201
---------- ---------- ---------- ----------
Total revenues 1,309,454 704,734 4,179,645 3,869,430
---------- ---------- ---------- ----------
Operating expenses
Direct costs services 365,720 411,865 1,049,078 1,530,349
Direct costs - software 35,600 44,466 62,000 133,398
Selling and marketing 152,600 595,463 393,424 1,459,982
General and administrative 266,346 513,720 597,274 1,329,717
Depreciation 25,500 43,964 58,800 122,184
Research and development 172,673 353,639 172,673 651,287
Non-cash charge for compensation 0 0 442,382 0
---------- ---------- ---------- ----------
Total operating expenses 1,018,439 1,963,117 2,775,631 5,226,917
---------- ---------- ---------- ----------
Income (loss) from operations 291,015 (1,258,383) 1,404,014 (1,357,487)
---------- ---------- ---------- ----------
Other income (expense)
Investment income 89,229 92,850 157,588 349,384
Interest expense (935) (1,467) (473,260) (1,467)
---------- ---------- ---------- ----------
Total other income (expense) 88,294 91,383 (315,672) 347,917
---------- ---------- ---------- ----------
Income (loss) before income taxes 379,309 (1,167,000) 1,088,342 (1,009,570)
Provision for income taxes [Note 2] 136,213 (59,352) 181,213 0
---------- ---------- ---------- ----------
Net income (loss) 243,096 (1,107,648) 907,129 (1,009,570)
========== ========== ========== ==========
Pro forma provision
for income taxes [Note 2] 0 0 222,306 0
---------- ---------- ---------- ----------
Pro forma net income (loss) $ 243,096 $(1,107,648) $ 684,823 $(1,009,570)
========== =========== ========== ===========
Earnings (loss) per share
(Pro forma for nine months
ended September 30, 1997):
Basic $ .07 $ (.31) $ .25 $ (.29)
Diluted * $ .07 $ (.31) $ .23 $ (.29)
========== =========== ========== ===========
Weighted average common and
common equivalent shares outstanding:
Basic: 3,250,000 3,577,380 2,750,000 3,532,064
Diluted: * 3,480,245 3,577,380 2,980,245 3,532,064
========== =========== ========== ===========
</TABLE>
* Diluted weighted average common shares outstanding are not included in 1998
calculations due to the anti-dilution of the net losses for the three and
nine month periods.
See accompanying notes to financial statements.
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INTERNATIONAL COMPUTEX, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine months ended September 30,
1997 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities
Net Income (loss) $ 907,129 $(1,009,570)
----------- -----------
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities
Depreciation and amortization 120,800 255,582
Provision for bad debt 0 60,000
Non-cash charge: options 442,382 0
Non-cash charge: warrants 319,241 0
Changes in assets and liabilities
[Increase] decrease in accounts receivable (719,260) 279,935
Increase in prepaid expenses (69,690) (424)
[Increase] decrease in other assets (189) 1,250
Increase in accounts payable 182,502 1,195
Increase [decrease] in deferred revenue 17,188 (49,519)
----------- -----------
Total adjustments 292,974 548,019
----------- -----------
Net cash provided by [used in] operating activities 1,200,103 (461,551)
----------- -----------
Cash flows from investing activities
Acquisition of property and equipment (420,904) (340,319)
Software development costs capitalized (280,615) 0
Increase in investments 0 (1,047,115)
----------- -----------
Net cash used in investing activities (701,519) (1,387,434)
----------- -----------
Cash flows from financing activities
Principal payments on long-term debt (2,993) (2,017)
Stockholder distributions paid (2,316,124) (123,003)
Initial public offering proceeds, net 9,287,063 0
Proceeds from private placement, net 0 1,674,498
Proceeds from exercise of options 0 17,685
----------- -----------
Net cash provided by financing activities 6,967,946 1,567,163
----------- -----------
Net increase [decrease] in cash 7,466,530 (281,822)
Cash and cash equivalents, beginning of period 119,750 6,943,351
----------- -----------
Cash and cash equivalents, end of period $ 7,586,280 $ 6,661,529
=========== ===========
</TABLE>
See accompanying notes to financial statements.
5
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INTERNATIONAL COMPUTEX, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared by
International CompuTex, Inc. (the "Company") in accordance with generally
accepted accounting principles for interim financial information and with the
instructions to Form 10-QSB. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements and should be read in conjunction with the
financial statements and notes thereto for the year ended December 31, 1997
included in the Company's Annual Report on Form 10-KSB. The financial
information included herein is unaudited; however, the information reflects all
adjustments that are, in the opinion of management, necessary to a fair
presentation of the financial position, results of operations, and cash flows
for the interim periods. Operating results for the nine months ended September
30, 1998 are not necessarily indicative of the results that may be expected for
the year ending December 31, 1998.
2. INCOME TAXES
During part of the prior period, the Company had elected to be treated as an S
Corporation pursuant to the Internal Revenue Code for federal and state income
tax purposes, with income taxable and distributable to the individual
stockholders without any further tax consequences to the Company. The
stockholders revoked the S Corporation status on April 30, 1997, immediately
prior to the closing of the Company's initial public offering (see Note 4,
Termination of S Corporation Status, and Note 5, Initial Public Offering), and
the Company became taxable as a C Corporation from that date forward. A pro
forma provision for income taxes has been presented for January 1 through April
30, 1997 that represents income taxes that would have been provided had the
Company operated as a C Corporation during that period.
3. 1997 SENIOR DEBENTURES
In January 1997, the Company received proceeds from the sale of Senior
Debentures in the amount of $1,115,000 at 6% interest per annum, payable semi-
annually, with the principal amount due in January 2000. Purchasers of the
Senior Debentures received Warrants from the stockholders of the Company to
purchase 117,368 shares of common stock held by these stockholders at 60% of the
initial public offering price. As a result of its initial public offering and
the terms of the Senior Debentures, the Company prepaid the Senior Debentures
principal with accrued interest of $19,795 in whole on May 5, 1997, and the
stockholders issued 117,368 Warrants at an exercise price of $5.70 per share, or
60% of the initial public offering price of $9.50 per share. The issuance of
the Warrants resulted in the Company taking a non-cash non-recurring charge to
interest expense of $319,241 in 1997. The prepayment of the Senior Debentures
resulted in the Company recognizing interest expense of $132,650 in 1997 related
to financing costs of the Senior Debentures, primarily sales commissions.
4. TERMINATION OF S CORPORATION STATUS
On April 30, 1997, the Company's shareholders, in accordance with the
Company's S Corporation Termination, Tax Allocation and Indemnification
Agreement (the "Agreement") dated March 24, 1997 and amended March 24, 1998,
elected to terminate the Company's status as an S Corporation, and the Company
became subject to federal and state income taxes. Under the Agreement,
$2,418,765 was distributed to the S Corporation stockholders by an assignment of
accounts receivable and cash equaling the Company's Stockholders' Equity as of
April 30, 1997.
5. INITIAL PUBLIC OFFERING
The Company completed its initial public offering of 1,125,000 shares of
Common Stock at $9.50 per share on May 5, 1997. Net proceeds to the Company
amounted to $9,287,063.
6. 1998 PRIVATE PLACEMENT
On February 2, 1998, the Company issued and sold to Thybo New Ventures Limited
(a Bermuda corporation), an affiliate of IHS Group, Inc. ("IHS") of Denver,
Colorado, 300,000 shares of common stock of the Company. No commissions or
finders fees were payable. The net proceeds from the transaction were
$2,823,498, of which $1,674,498 was allocated to the sale of common stock based
on a fair market valuation of the unregistered,
6
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non-voting stock on the date of issuance of $5.67 per share. The balance of the
proceeds was allocated to deferred services revenues under the terms and
conditions of the related Strategic Business Alliance entered into by the
Company with IHS on January 23, 1998, of which $574,500 was recognized under the
percentage of completion basis in the first quarter of 1998, and $574,500 was
recognized in the second quarter of 1998.
7. PENDING LITIGATION
The Company is a party in pending litigation between the Company and Aspect
Development and CADIS, Inc., discussed in Part II, Item 1 of the Company's
10-QSB for the quarter ended March 31, 1998. There can be no assurance that the
outcome of this case will be favorable to the Company, or that it will not have
a material adverse impact on the business, operations, and financial condition
of the Company.
8. RECENT ACCOUNTING PRONOUNCEMENTS
Revenue Recognition
On January 1, 1998, the Company adopted Statement of Position 97-2, Software
Revenue Recognition, issued by the Accounting Standards Executive Committee in
October 1997, effective for financial statements for fiscal years beginning
after December 15, 1997. The implementation of this statement has not had a
material impact on the Company's unaudited condensed financial statements.
Comprehensive Income
On January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, Reporting Comprehensive Income, issued by the Financial
Accounting Standards Board ("FASB") in June 1997, effective for the fiscal years
beginning after December 15, 1997. Comprehensive income includes all changes in
equity during a period except those resulting from investments by owners and
distributions to owners. The implementation of this statement has had no impact
on the Company's unaudited condensed financial statements.
Other
The Company continues to evaluate the requirements of Statement of Financial
Accounting Standards No. 131, Disclosure about Segments of an Enterprise and
Related Information, issued by the FASB in June 1997, effective for fiscal years
beginning after December 15, 1997. The provisions of this standard do not apply
to interim periods in the year of adoption.
7
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This discussion and analysis of financial condition and results of operations
should be read in conjunction with the unaudited financial statements and the
related notes as of and for the three and nine months ended September 30, 1998
included elsewhere herein and Management's Discussion and Analysis included as
part of the Company's Annual Report on Form 10-KSB for the year ended December
31, 1997.
FORWARD LOOKING STATEMENTS
The discussion in this Report contains forward-looking statements that are
subject to substantial risks and uncertainties. The Company's actual results
could differ materially from those discussed herein. Factors that could cause
or contribute to such differences include, but are not limited to, those
discussed in this section and elsewhere in this Report, and the risks discussed
in the "Business Risk Factors" section in the Company's Form 10-KSB.
OVERVIEW
International CompuTex, Inc. ("ICI" or the "Company") is a software technology
and services company that develops, markets and supports enterprise-wide
client/server solutions for discrete manufacturing companies world-wide. The
Company provides consulting and implementation services for the engineering and
manufacturing industries in the areas of Component and Supplier Management
("CSM") and Product Data Management ("PDM"). From the time of its incorporation
in 1991 through mid-1996, all Company revenues resulted from computer software-
related services with a primary focus in the area of PDM software applications.
Among other applications, CSM is a major part of a PDM solution.
Throughout its history, ICI has provided a wide variety of services to IBM,
including product development and, on a subcontract basis, customer
installation, implementation and customization services relating to IBM's PDM
product, ProductManager. Through December 1997, ICI derived the great majority
of its revenues from consulting and implementation services rendered directly to
IBM or as a subcontractor to IBM customers. In 1998, revenues from IBM have
declined to 13% of total revenues for the three months ended September 30, 1998
and 20% of revenues for the nine months ended September 30, 1998.
Beginning in 1995, the Company has developed ItemQuest, an object-oriented CSM
solution, that allows users in design engineering and procurement to search,
select and re-use product data design and manufacturing information based on
engineering and manufacturing attributes. ItemQuest, which has the flexibility
to be integrated into existing software or to operate as a stand-alone system,
provides economic and strategic benefits to discrete manufacturing companies by
improving design, productivity, rationalization of parts, and the implementation
of strategic supplier relationships. It enables manufacturers to reduce design
and development costs, increase procurement efficiencies, and shorten new
products time to market. Management believes that the basis for the Company's
next stage of growth will be the further development, delivery, support and
evolution of ItemQuest. The Company is continuing to make the transition from a
services oriented business to a solutions oriented business combining products
and services. To be successful with ItemQuest, the Company plans over the next
six to twelve months to invest approximately $4 million of the total $9.3
million proceeds of its initial public offering to continue to develop and
implement a strategy for distribution, customer service, maintenance, pricing,
marketing and sales, in addition to the approximately $3.6 million invested
since the Company's initial public offering.
ICI began development work on ItemQuest in April 1995. In the last quarter of
1996, the Company began generating ItemQuest revenues from four customers in a
"controlled availability program". The product became generally available in
April 1997, but was not actively marketed. The ProductManager/ItemQuest
Integration ("PM/IQ") became generally available in July 1997. The Company's
ItemWeb product, part of the ItemQuest product suite, is currently under
development. Using the same architecture as ItemQuest (which "pulls" components
data), ItemWeb will allow a manufacturer to "push" internal parts and component
data to its customers by a secured Web client search interface schema.
Management anticipates that, beginning in 1999, there will be a gradual increase
in revenues generated by ItemQuest license fees as well as implementation and
customization services revenues from ItemQuest customers. There can be no
assurance, however, that the efforts to develop, implement and market ItemQuest
will be successful or profitable. Furthermore, even if the development and
marketing of ItemQuest is successful, there can be no assurance as to when, if
ever, ItemQuest results will represent a substantial portion of the Company's
revenues or net income.
8
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RESULTS OF OPERATIONS
REVENUES
Revenues decreased $310,215, or 7%, from $4,179,645 for the nine months ended
September 30, 1997 to $3,869,430 for the same period in 1998. Software revenue
increased $270,201, or 121%, from $223,000 in 1997 to $493,201 in 1998 due
primarily to the increased marketing and development efforts begun by the
Company in late 1997, as part of the transition to a software solutions-based
company. Services and other revenue decreased $580,416, or 15%, from $3,956,645
in the nine months ended September 30, 1997 to $3,376,229 in 1998 as the Company
continued to de-emphasize PDM services as part of its revenue mix.
Revenues decreased $604,720, or 46%, from $1,309,454 for the three months
ended September 30, 1997 to $704,734 for the same period in 1998, reflecting
substantial decreases in the Company's PDM services revenues. Software revenue
was $16,250 in third quarter 1998 compared to no revenues in third quarter 1997.
Services and other revenue decreased $620,970, or 47%, from $1,309,454 in third
quarter 1997 to $688,484 in third quarter 1998. The relative levels of software
revenues and services and other revenue for the third quarter can be attributed
to the same factors as discussed above for the nine-month periods.
One-time revenues in the amount of $1,149,000, or 34% of the services and
other revenue for the nine months ended September 30, 1998, were related to
services performed under the Strategic Business Alliance entered into with IHS
Group, Inc. (IHS) of Denver, Colorado, in January 1998, arising from the
investment by Thybo New Ventures Limited, an affiliate of IHS, in common stock
of the Company in February 1998. The revenue was recognized using the
percentage of completion method with $574,500 recognized for each of the first
and second quarters of 1998. The Thybo/IHS revenue offset a decline in PDM
services revenue of approximately $1,900,000 for the nine months ended
September 30, 1998 compared to prior year amounts. This decline in PDM services
revenue was part of the Company's planned transition from a PDM services
oriented business.
Revenue consists primarily of consulting services, licensing fees, and post
contract customer support. The Company accounts for such revenue in accordance
with the AICPA Statement of Position 97-2, Software Revenue Recognition.
Revenue from the license of software is recognized after shipment of the product
and fulfillment of acceptance terms, provided collection of the resulting
receivable is deemed probable. Services revenue is recognized when services are
provided. Support revenue is recognized ratably over the life of the contract
from the effective date. Deferred revenue represents payments received from
customers or billings invoiced to customers for software and services billed in
advance of revenue recognition.
DIRECT COSTS
Direct costs for services consisting of payroll-related expenses increased
$481,271, or 46%, from $1,049,078, or 27% of services and other revenues, for
the nine months ended September 30, 1997 to $1,530,349, or 45% of services and
other revenues, for the nine months ended September 30, 1998. Direct costs were
lower as a percentage of revenues in 1997 because of certain fixed bid contracts
which resulted in higher than normal margins. Direct costs for software revenues
in the nine months ended September 30,1997 were $62,000, or 28% of software
revenues, compared to $133,398, or 27% of software revenues, in the nine months
ended September 30, 1998, an increase of 115%. These expenses were comprised of
amortization of software development costs, which began in second quarter 1997
when the Company's ItemQuest software product became generally available.
Direct costs for services consisting of payroll-related expenses increased
$46,145, or 13%, from $365,720, or 28% of services and other revenues, in third
quarter 1997, to $411,865, or 60% of services and other revenues, in third
quarter 1998. As in the nine-month periods, direct costs were lower as a
percentage of revenues in 1997 because of certain fixed bid contracts which
resulted in higher than normal margins. Direct costs for software revenues in
third quarter 1997 were $35,600 compared to $44,466 in third quarter 1998,
comprised of amortization of software development costs.
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SELLING AND MARKETING
Selling and marketing expenses increased $1,066,558, or 271%, from $393,424,
or 9% of total revenues, in the nine months ended September 30, 1997 to
$1,459,982, or 38% of total revenues, in the nine months ended September 30,
1998. Payroll-related selling and marketing expenses increased $596,055, or
298%, from $200,064 in 1997 to $796,119 in 1998 as a result of increased sales,
marketing, and sales management personnel. Other selling and marketing
expenses, including marketing, travel, trade shows and collateral materials,
increased $470,503, or 243%, from $193,360 in 1997 to $663,863 in 1998 as the
Company continued the planned implementation of its marketing program related to
ItemQuest.
Selling and marketing expenses increased $442,863, or 290%, from $152,600, or
12% of total revenues, in third quarter 1997 to $595,463, or 84% of revenues, in
third quarter 1998. Payroll-related selling and marketing expenses increased
$252,646, or 362%, from $69,853 in third quarter 1997 to $322,499 in third
quarter 1998 as a result of increased sales, marketing, and sales management
personnel. Other selling and marketing expenses, including marketing, travel,
trade shows, and collateral materials, increased $190,217, or 230%, from $82,747
in third quarter 1997 to $272,964 in third quarter 1998 as the Company continued
the planned implementation of its marketing program related to ItemQuest.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $597,274, or 14% of revenues, for the
nine months ended September 30, 1997, compared to $1,329,717, or 34% of
revenues, for the nine months ended September 30, 1998, an increase of $732,443,
or 123%. Payroll-related expenses increased $56,852, or 27%, from $208,368 in
1997 to $265,220 in 1998 as administrative personnel were added to accommodate
the anticipated increase in the Company's revenues and assets and the additional
demands related to being a public company. Other general and administrative
expenses increased $675,591, or 174%, from $388,906 in the nine months ended
1997 to $1,064,497 in the nine months ended September 30, 1998. The largest
increases were in legal and accounting expenses, primarily due to the legal
proceedings between the Company and Aspect Development, Inc. and CADIS, Inc.
(see Part II, Item 1 "Legal Proceedings"), insurance expenses, primarily due to
directors' and officers' insurance made necessary by the Company's initial
public offering, and rent, due to the Company's move to new, larger office
facilities in Charlotte in June 1997 and expanding its Atlanta location in June
1997.
General and administrative expenses were $266,346, or 20% of revenues, in
third quarter 1997 compared to $513,720, or 73% of revenues, in third quarter
1998, an increase of $247,374, or 93%. Payroll-related expenses increased
$1,738, or 2%, from $81,020 in the 1997 period to $82,758 in the 1998 period.
Other general and administrative expenses increased $245,636, or 133%, from
$185,326 in 1997 to $430,962 in 1998. The same factors affecting the nine-month
period expenses accounted for the increases in third quarter expenses.
DEPRECIATION
Depreciation increased $63,384, or 108%, from $58,800, or 1% of revenues, in
the nine months ended September 30, 1997 to 122,184, or 3% of revenues, in the
nine months ended September 30, 1998. Depreciation increased $18,864, or 72%,
from $25,500, or 2% of revenues, in third quarter 1997 to $43,964, or 6% of
revenues, in third quarter 1998. The contributing factor for these increases
was additional fixed assets purchases in 1998 versus 1997.
RESEARCH AND DEVELOPMENT
The Company expended $453,288, or 11% of total revenues, for research and
development in the nine months ended September 30, 1997, compared to $651,287,
or 17% of revenues, in the nine months ended September 30, 1998, an increase of
$197,999, or 44%. Of the amounts expended, $280,615 was capitalized in 1997,
and the entire $651,287 was expensed in 1998. The Company began expensing
research and development expenditures in July 1997, after the Company's
ItemQuest product became generally available.
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The Company expended $172,673, or 13% of total revenues, for research and
development in third quarter 1997 compared to $353,639 or 50% of revenues, for
third quarter 1998, an increase of $180,966, or 105%. The entire amounts
expended were expensed in both 1997 and 1998 as the Company began expensing
research and development expenditures in July 1997, after general availability
of the Company's products.
OTHER INCOME (EXPENSE)
Other income (expense) net changed from $315,672 (net interest expense)
related to the Company's Senior Debentures in the nine months ended September
30, 1997 to $347,917 (investment income) in 1998. This change was the net
result of the Company paying off the Senior Debentures in May 1997, and earning
investment income on the Company's cash and investments accounts resulting from
proceeds of the Company's initial public offering in April 1997 and private
placement in January 1998. Included in the 1997 interest expense amounts was a
non-recurring non-cash charge of $319,241 (nine-month period) that was a result
of warrants issued by the Company's original stockholders in connection with the
Senior Debentures. The Company determined that the warrants had a fair market
value of $2.72 per warrant or an aggregate of $319,241 based upon 117,368
warrants granted. As a result of the Company's initial public offering, the
Senior Debentures were prepaid in May 1997, and the balance of the non-cash
charge ($297,071) was recognized in second quarter 1997. This value ascribed to
the warrants was deemed to be a contribution to capital by the original
stockholders of the Company and treated as additional interest paid to the
holders of the Senior Debentures. An additional non-recurring charge to
interest expense of $132,650 was recognized in the nine months ended September
30, 1997 related to financing costs, primarily underwriting expenses, recognized
when the Senior Debentures were prepaid. Other income, comprised of investment
income from the Company's cash and short-term investments, was $88,294 in third
quarter 1997 compared to $91,383 in third quarter in 1998, an increase of 3%.
PROVISION FOR INCOME TAXES
Prior to its initial public offering, the Company had elected to be treated as
an S Corporation pursuant to the Internal Revenue Code for federal and state
income tax purposes. The income of an S Corporation is taxable to the
individual stockholders and is distributable to the stockholders without any
further tax consequences. The stockholders revoked the S Corporation status on
April 30, 1997 immediately prior to the closing of the Company's initial public
offering, and the Company became taxable as a C Corporation from that date
forward. A pro forma provision for income taxes has been presented for January
through April 1997, which represents income taxes that would have been provided
had the Company operated as a C Corporation throughout its history. An
effective income tax rate of 37.7% has been used for 1997 for financial
statement purposes both before and after the S Corporation termination. The
1998 results are actual because the Company was a C Corporation during the
period.
NET INCOME (LOSS) AND EARNINGS (LOSS) PER SHARE
The Company realized pro forma net income of $684,823, or $.23 per share
(diluted), for the nine months ended September 30, 1997 compared to a net loss
of $1,009,570, or $.29 per share for the 1998 period.
The Company realized net income of $243,096, or $.07 per share (diluted), for
third quarter 1997 compared to a net loss of $1,107,648, or $.31 per share for
third quarter 1998. Net income declined in 1998 for the three and nine month
periods primarily due to significant increases in administrative, sales and
marketing, and product development expenses related to the development and
enhancement of ItemQuest and ItemWeb, and the focus of marketing efforts on
those products combined with the substantial decrease in service revenues and
the lack of software license revenues.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital increased $597,109 from $9,014,310 as of
December 31, 1997 to $9,611,419 as of September 30, 1998. This increase
principally reflects proceeds received from the Company's private equity
placement in January 1998 offset by cash used in operations in third quarter
1998. In the nine months ended September 30, 1998, the Company used net cash in
operations of $461,551 as compared to cash provided from
11
<PAGE>
operations of $1,200,103 in the nine months ended September 30, 1997. In the
nine months ended September 30, 1998, the Company used net cash in investing
activities of $1,387,434 as compared to $701,519 in the nine months ended
September 30, 1997. Cash used in investing activities for the nine months ended
September 30, 1998 resulted from an increase in short-term investments of
$1,047,115 and acquisition of fixed assets totaling $340,319. Cash provided by
financing activities of $1,567,163 in the nine months ended September 30, 1998
resulted primarily from proceeds received from the Company's private equity
placement in first quarter 1998. Cash provided by financing activities for the
nine months ended September 30, 1997 totaled $6,967,946 primarily as a result of
the Company's initial public offering in third quarter 1997.
The Company's management anticipates that it will have adequate cash to fund
operations for at least the next twelve months, although there can be no
assurance that such funds will be adequate to fully implement the Company's
long-term expansion plans.
PRIVATE PLACEMENT
On February 2, 1998, Thybo New Ventures Limited, an affiliate of IHS Group,
Inc. ("IHS") of Denver, Colorado, purchased 300,000 shares of the Company's
Common Stock. No commissions or finders fees were payable. The gross proceeds
from the transaction were $2,850,000, or $9.50 per share. For accounting
purposes, based on a valuation performed as of the date of issuance, the Company
determined that the fair market value of the unregistered, non-voting restricted
stock was $5.67 per share, with resultant par value and paid in capital of
$1,674,498, net of closing costs. The purchaser obtained certain limited
registration rights with respect to a portion of these shares. Emil Dahan, CEO
of the Company, received exclusive voting rights with respect to such shares for
a two-year period. The 300,000 shares represent approximately 8.4% of the
outstanding stock of the Company.
The balance of the proceeds ($1,149,000) was treated as deferred services
revenue related to the Strategic Business Alliance entered into with IHS on
January 23, 1998. $574,500 of the services revenue was recognized in first
quarter 1998, and the remaining $574,500 of services revenue was recognized in
second quarter 1998.
YEAR 2000 COMPLIANCE
The Company may experience future uncertainties regarding year 2000
compliance of its products. The Company has designed all of its product
offerings to be year 2000 compliant and continues to monitor and update its
product offerings for year 2000 compliance. Such costs are included in net
research and development expenses. There can be no assurances, however, that
the Company's currently compliant products do not contain undetected problems
associated with year 2000 compliance. Such problems may result in litigation
and/or increased expenses negatively affecting future operating results.
The Company recognizes the significance of the year 2000 problem as it
relates to its internal systems and understands that the impact extends beyond
traditional hardware and software to automated facility systems and third
parties. The Company is creating an overall plan intended to make its internal
financial and administrative systems year 2000 ready by June 1999. With regard
to facility related systems (phone, voicemail, security systems, etc.), the
Company plans to conduct assessment audits and send questionnaires to vendors
and service providers to confirm year 2000 readiness. The Company expects to
substantially complete year 2000 readiness preparations by June 1999 and to
continue comprehensive testing through calendar 1999. The total cost of
preparing internal systems to be year 2000 compliant is not expected to be
material to the Company's operations, liquidity or capital resources. Total
expenditures related to internal systems year 2000 readiness, excluding
personnel costs of existing staff, is expected to be less than $50,000 and to be
incurred in 1998 and 1999. However, there can be no assurances that the Company
will not experience significant unanticipated negative performance and/or flaws
in the technology used in its internal systems. The Company plans to complete
its contingency plan for potential hardware and software failures by March 1999.
The Company believes that Year 2000 issues may affect the purchasing patterns
of customers and potential customers in a variety of ways. Many companies are
expending significant resources to correct or patch their current software
systems for Year 2000 compliance. These expenditures may result in reduced
funds available to purchase software products such as those offered by the
Company. Potential customers may also choose to defer purchasing Year 2000
compliant products until they believe it is absolutely necessary, thus resulting
in potentially stalled market sales within the industry. Conversely, Year 2000
issues may cause other companies to accelerate purchases, thereby causing an
increase in short-term demand and a consequent decrease in long-term demand for
software products.
12
<PAGE>
Additionally, Year 2000 issues could cause a significant number of companies,
including current Company customers and prospects, to reevaluate their current
software needs, and as result switch to alternative systems and suppliers. Any
of the foregoing could result in a material adverse impact on the Company's
business, operating results and financial condition.
RECENT ACCOUNTING PRONOUNCEMENTS
On January 1, 1998, the Company adopted Statement of Position 97-2, Software
Revenue Recognition, issued by the Accounting Standards Executive Committee, and
Statement of Financial Accounting Standards No. 130, Reporting Comprehensive
Income, issued by the Financial Accounting Standards Board. The Company
continues to evaluate the requirements of Statement of Financial Accounting
Standards No. 131, Disclosures about Segments of an Enterprise and Related
Information, which does not apply to interim periods in the year of adoption.
13
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings:
The only pending litigation to which the Company is a party is
litigation between the Company and Aspect Development, Inc. and CADIS,
Inc., discussed in Part II, Item 1 of the Company's Form 10-QSB for the
quarter ended March 31, 1998.
Item 2. Changes in Securities and Use of Proceeds
(a) Initial Public Offering
Effective Date of Registration Statement: April 29, 1997
SEC File Number: 333-21647
Date Offering Commenced: April 30, 1997
Unsold Securities: Underwriter's option to purchase 168,750 shares for
over-allotment was not exercised
Managing Underwriter: H.J. Meyers & Co., Inc.
Title of Securities:
Common stock, par value $0.001 per share
Warrant to purchase common stock
Common stock issuable upon exercise of warrant
Securities sold:
Title: Common stock
Amount registered: 1,293,750
Aggregate price registered: $12,290,625
Amount sold: 1,125,000
Aggregate sold: $10,687,500
Expenses:
Underwriting discounts and commissions: $ 961,875
Expenses paid to underwriters: 226,862
Other expenses: 211,700
Total expenses $ 1,400,437
Net Offering proceeds: $ 9,287,063
Use of proceeds to date:
Construction of facilities: $ 121,409
Purchase of equipment: 535,110
Repayment of indebtedness: 1,134,795
Marketing and sales 1,740,000
Working capital 5,755,749
Net Offering proceeds $ 9,287,063
There were no direct or indirect payments to directors or officers of
the issuer or their associates; to persons owning ten percent or more
of any class of equity securities of the issuer; or to affiliates of
the issuer.
14
<PAGE>
(b) February 2, 1998 Private Placement
Date of Offering: February 2, 1998
Title of Securities: Common stock, par value $0.001 per share
Securities sold:
Amount sold: 300,000
Aggregate Proceeds: $2,850,000
Expenses:
Underwriting discounts and commissions: None
Expenses paid to underwriters: None
Other expenses: $ 26,502
Total expenses: $ 26,502
Net Offering proceeds: $2,823,498
Use of proceeds to date:
Construction of facilities: $ 0
Purchase of equipment: $ 0
Repayment of indebtedness: $ 0
Marketing and sales: $ 0
Working capital: $2,823,498
There were no underwriters or finders fees associated with this private
placement.
Shares were offered and sold solely to Thybo New Ventures Limited, a
Bermuda corporation. The Company relied upon Rules 505 and 506,
promulgated under Sections 3(b) and 4(2) of the Securities Act of 1933,
for an exemption from the registration requirements of such Act, as
well as reliance upon Sections 4(2) and 4(6). The basis for this
reliance was the accredited status of the sole investor and the limited
nature of the offering to a single, highly sophisticated investor. A
Form D was filed with respect to this offering, on a timely basis.
Item 3. Defaults Upon Senior Securities: None
Item 4. Submission of Matters to a Vote of Security Holders:
The Company's Annual Meeting was held on April 21, 1998. At that
meeting, in addition to the election of its directors, the shareholders
voted upon a proposed amendment to the 1996 Stock Option Plan to
increase the base number of shares of Common Stock authorized for
issuance under that plan from 500,000 shares to 900,000 shares, as
described in the Proxy Statement for the Annual Meeting. The results of
the vote were as follows: 2,267,045 votes "for"; 25,724 "against"; and
2,500 votes "abstaining". This information was inadvertently omitted
from the Form 10-QSB for the three-month period ended June 30, 1998.
Item 5. Other Information: None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
11.1 Computation of Earnings Per Share
27.1 Financial Data Schedule
(b) Reports on Form 8-K: None
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.
INTERNATIONAL COMPUTEX, INC.
By: /s/ Haim E. Dahan
-----------------
Haim E. Dahan
Chief Executive Officer
(Principal Executive Officer)
By: /s/ Ralph E. Walter
-------------------
Ralph E. Walter
Chief Financial Officer
(Principal Financial Officer)
November 12, 1998
16
<PAGE>
EXHIBIT 11.1
INTERNATIONAL COMPUTEX, INC.
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Three Months ended Sept 30, Nine Months ended Sept 30,
1997 1998 1997 1998
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Net income/(loss) (Pro forma for
nine months ended September 30, 1997) $ 243,096 $(1,107,648) $ 684,823 $(1,009,570)
========== =========== ========== ===========
Weighted average number of common
and common equivalent shares:
Weighted average common
shares outstanding 3,250,000 3,577,380 2,750,000 3,532,064
Shares issued from assumed exercise
of common stock equivalents (1) 230,245 -- 230,245 --
---------- ----------- ---------- -----------
Weighted average number
of common and common equivalent
shares outstanding 3,480,245 3,577,380 2,980,245 3,532,064
========== =========== ========== ===========
Earnings (loss) per share (Pro forma
for nine months ended September 30, 1997):
Basic $ .07 $ (.31) $ .25 $ (.29)
========== =========== ========== ===========
Diluted (2) $ .07 $ (.31) $ .23 $ (.29)
========== =========== ========== ===========
</TABLE>
- ---------------------
(1) Shares issued from assumed exercise of common stock equivalents include the
number of incremental shares which would result from applying the treasury
stock method.
(2) Diluted weighted average common shares outstanding are not included in the
1998 calculations due to the anti-dilution of the net losses for the three
and nine month periods.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 6,661,529
<SECURITIES> 2,093,677
<RECEIVABLES> 866,548
<ALLOWANCES> 60,000
<INVENTORY> 0
<CURRENT-ASSETS> 9,760,134
<PP&E> 1,040,911
<DEPRECIATION> 274,567
<TOTAL-ASSETS> 10,824,468
<CURRENT-LIABILITIES> 148,715
<BONDS> 0
0
0
<COMMON> 3,577
<OTHER-SE> 10,614,157
<TOTAL-LIABILITY-AND-EQUITY> 10,824,468
<SALES> 493,201
<TOTAL-REVENUES> 3,869,430
<CGS> 0
<TOTAL-COSTS> 1,663,747
<OTHER-EXPENSES> 3,563,170
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,009,570)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,009,570)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,009,570)
<EPS-PRIMARY> (.29)
<EPS-DILUTED> (.29)
</TABLE>
