<PAGE> 1
UNITED STATES
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 quarter ended DECEMBER 31, 1995
-----------------
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
--------------- ---------------
Commission File No 0-15949
INTERNATIONAL MICROCOMPUTER SOFTWARE, INC.
------------------------------------------
(Exact name of registrant as specified in its charter)
CALIFORNIA 94-2862863
---------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No.)
1895 EAST FRANCISCO BLVD., SAN RAFAEL, CA 94901
- ----------------------------------------- -----
(Address of principal executive offices) (Zip code)
(415) 257-3000
--------------
(Registrant's telephone number including area code)
Indicate by check mark whether 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, and (2) has been subject to such filing requirements
for the past 90 days.
YES X NO
- -
As of February 7, 1996, 3,196,071 shares of the Registrant's Common Stock, no
par value, were outstanding.
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INTERNATIONAL MICROCOMPUTER SOFTWARE, INC.
AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page
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<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Information
Consolidated Balance Sheets at December 31, 1995 and June 30, 1995 3
Consolidated Statements of Operations for the three months and six months
ended December 31, 1995 and 1994 4
Consolidated Statements of Cash Flows for the six months ended December
31, 1995 and 1994 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7-10
PART II - OTHER INFORMATION 11
Signatures 12
</TABLE>
2
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INTERNATIONAL MICROCOMPUTER SOFTWARE, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, 1995 JUNE 30, 1995
----------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 240,029 $ 523,235
Receivables, less allowances for doubtful
accounts and returns of $1,168,542 and $777,718 3,882,211 2,590,322
Inventories 2,200,202 1,625,631
Prepaid royalties and licenses 626,116 336,053
Deferred direct marketing costs 340,664 358,398
Deferred tax assets, net 368,362 321,362
Other current assets 198,493 182,637
----------- -----------
Total current assets 7,856,077 5,937,638
Furniture and equipment, net 987,006 836,610
Deferred tax assets, net 442,721 411,721
Capitalized software development costs, net 373,193 244,839
Other assets, net 342,677 39,583
----------- -----------
Total assets $10,001,674 $ 7,470,391
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Credit line payable $ 1,100,000 $ 400,000
Short term debt and other obligations 401,894 186,529
Accounts payable and accrued expenses 3,697,551 3,139,059
Income taxes payable 463,016 245,008
----------- -----------
Total current liabilities 5,662,461 3,970,596
Long term debt and other obligations 615,378 102,570
----------- -----------
Total liabilities 6,277,839 4,073,166
Shareholders' equity:
Preferred stock, no par value; 20,000,000 shares
authorized; none issued or outstanding
Common stock, no par value; 300,000,000 authorized;
issued and outstanding 3,198,324 and 3,173,304 shares 5,881,607 5,863,776
Accumulated deficit (1,864,177) (2,177,369)
Cumulative translation adjustment (28,137) (23,724)
Notes receivable from shareholders (265,458) (265,458)
----------- -----------
Total shareholders' equity 3,723,835 3,397,225
----------- -----------
Total liabilities and shareholders' equity $10,001,674 $ 7,470,391
=========== ===========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
<PAGE> 4
INTERNATIONAL MICROCOMPUTER SOFTWARE, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED DECEMBER 31, SIX MONTHS ENDED DECEMBER 31,
------------------------------- -----------------------------
-------1995-------- -------1994-------- --------1995-------- --------1994--------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues $5,787,870 100.0% $5,895,638 100.0% $10,894,948 100.0% $10,656,211 100.0%
Product costs 1,848,692 31.9% 1,944,587 33.0% 3,522,291 32.3% 3,485,450 32.7%
---------- ----- ---------- ----- ----------- ----- ----------- -----
Gross margin 3,939,178 68.1% 3,951,051 67.0% 7,372,657 67.7% 7,170,761 67.3%
Costs and expenses:
Sales and marketing 2,376,641 41.1% 2,594,658 44.0% 4,284,328 39.3% 4,762,230 44.7%
General and administrative 555,853 9.6% 547,551 9.3% 1,276,684 11.7% 1,109,855 10.4%
Research and development 563,054 9.7% 452,204 7.7% 1,213,449 11.2% 784,262 7.4%
---------- ----- ---------- ----- ----------- ----- ----------- -----
3,495,548 60.4% 3,594,413 61.0% 6,774,461 62.2% 6,656,347 62.5%
---------- ----- ---------- ----- ----------- ----- ----------- -----
Operating income 443,630 7.7% 356,638 6.0% 598,196 5.5% 514,414 4.8%
Other expense, net 62,009 1.1% 6,407 0.3% 93,048 0.9% 2,791 0.0%
---------- ----- ---------- ----- ----------- ----- ----------- -----
Income before income taxes 381,621 6.6% 340,231 5.7% 505,148 4.6% 511,623 4.8%
Provision for income taxes 140,075 2.4% 149,215 2.5% 191,956 1.7% 219,486 2.1%
---------- ----- ---------- ----- ----------- ----- ----------- -----
Net income $ 241,546 4.2% $ 191,016 3.2% $ 313,192 2.9% $ 292,137 2.7%
========== ===== ========== ===== =========== ===== =========== =====
Net income per common
and common
equivalent share: $ 0.07 $ 0.06 $ 0.09 $ 0.09
========== ========== =========== ===========
Average common and common
equivalent shares used to
compute earnings per share: 3,560,726 3,254,252 3,498,061 3,244,715
========== ========== =========== ===========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
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INTERNATIONAL MICROCOMPUTER SOFTWARE, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED DECEMBER 31,
-----------------------------
1995 1994
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<S> <C> <C>
Cash flows from operating activities:
Net income $ 313,192 $ 292,137
Adjustments to reconcile net income to net
cash used by operating activities
Depreciation 179,173 155,255
Amortization 263,207 277,572
Deferred income taxes (78,000) (82,640)
Increase in accounts receivable (1,291,889) (720,967)
Increase in inventories (574,571) (191,397)
(Increase)/Decrease in prepaid royalties and licenses (290,063) 30,709
Decrease in direct marketing costs 17,734 316,660
Increase in other current assets (15,856) (84,937)
Increase/(Decrease) in accounts payable
and accrued expenses 558,491 (469,481)
Increase in income taxes payable 218,008 303,271
Currency translation adjustment (4,413) (2,263)
----------- ----------
Net cash used by operating activities (704,987) (176,081)
Cash flows from investing activities:
Purchase of equipment (145,009) (295,103)
Capitalized software development costs (350,815) (108,631)
Increase in other assets (343,840) (50,000)
----------- ----------
Net cash used by investing activities (839,664) (453,734)
Cash flows from financing activities:
Credit line borrowings 1,125,000 1,495,000
Credit line repayments (425,000) (895,000)
Capital lease and other obligations additions 675,000 95,762
Capital lease and other obligations repayment (131,386) (42,557)
Payments on notes receivable -- 20,000
Proceeds from issuance of common stock 17,831 61,889
----------- ----------
Net cash provided by financing activities 1,261,445 735,094
----------- ----------
Net increase (decrease) in cash and cash
equivalents (283,206) 105,279
Cash and cash equivalents at beginning of
period 523,235 521,347
----------- ----------
Cash and cash equivalents at end of the period $ 240,029 $ 626,626
=========== ==========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
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INTERNATIONAL MICROCOMPUTER SOFTWARE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PREPARATION.
The accompanying condensed consolidated financial statements have been prepared
from the records of International Microcomputer Software, Inc. and Subsidiaries
(the "Company") without audit. In the opinion of management, all adjustments,
which consist only of normal recurring adjustments, necessary to present fairly
the financial position, results of operations and cash flows at December 31,
1995, and for all periods presented, have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. Accounting policies followed by the Company are
described in the notes to the financial statements in its Annual Report on Form
10-K for the year ended June 30, 1995. The condensed financial statements should
be read in conjunction with the financial statements and notes thereto contained
in the Company's Annual Report on Form 10-K, for the fiscal year ended June 30,
1995.
The results of operations for the three month and six month periods ended
December 31, 1995 and 1994 are not necessarily indicative of the results to be
expected for the full year. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations".
Certain fiscal 1995 amounts have been reclassified to conform with the method of
presentation in fiscal 1996.
NOTE 2. STOCK SPLIT
In October 1995, the Company's Board of Directors authorized a 3 for 2 stock
split in the form of a dividend. The stock split was payable to shareholders of
record on October 20, 1995 and was distributed to shareholders on November 3,
1995. All share and per share figures presented have been restated to reflect
this stock split.
6
<PAGE> 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
SUMMARY
The Company's 1996 fiscal second quarter net revenues of $5,787,870 decreased
1.8% from second quarter net revenues of $5,895,638 in the prior fiscal year.
Gross margin in the second quarter of fiscal 1996 increased to 68.1% from 67.0%
from the same quarter in the previous year. Operating expenses in the second
quarter of fiscal 1996 were $3,495,548 compared to $3,594,413 for the same
period last year, representing a decrease of 2.8%. Net income of $241,546
increased 26.5% over second quarter's net income of $191,016 in the prior fiscal
year. The increase in net income was primarily a result of lower overall
operating expenses, particularly sales and marketing expenses which have
decreased as the Company focuses increasingly upon retail, rather than direct
sales channels, and a reduced effective tax rate in fiscal 1996.
RESULTS OF OPERATIONS
NET REVENUES
Net revenues for the quarter and six months ended December 31, 1995 were
$5,787,870 and $10,894,948, respectively compared to $5,895,638 and $10,656,211
for the same periods in the previous year. Decreased net revenues are
attributable to a decrease in sales directly to end users, partially offset by
an increase in retail channel sales for the same periods. This decrease in
direct sales is consistent with the Company's strategy to transition a portion
of these sales over to the retail channel
Net revenues from channel sales accounted for $3,984,968 or 69% and $7,613,031
or 70% of net revenues for the quarter and six months ended December 31, 1995
and for $3,476,849 or 59% and $6,031,436 or 57% of net revenues for the
comparable periods in fiscal year 1995. Channel sales increased $508,119 or 15%
and $1,581,595 or 26% for the quarter and six months ended December 31,1995
compared to the same periods last year.
Net revenues from direct mail sales accounted for approximately $1,802,902 or
31% and $3,281,917 or 30% of net revenues for the quarter and six months ended
December 31, 1995 compared to approximately $2,418,789 or 41% and $4,624,775 or
43% of net revenues for the quarter and six months ended December 31, 1994. Net
direct mail revenues decreased approximately $615,887 or 25% and $1,342,858 or
29% for the quarter and six months ended December 31, 1995 compared to the same
periods last year.
International net revenues accounted for approximately $1,441,594 or 25% and
$2,930,994 or 27% of total net revenues for the quarter and six months ended
December 31, 1995 compared to $2,027,236 or 34% and $3,423,427 or 32% of total
net revenues for the same periods in the previous fiscal year. The decrease in
international net revenues of $585,642 or 29% and $492,433 or 14% of total net
revenues for the quarter and six months ended December 31, 1995 over the same
periods in the previous fiscal year was primarily the result of decreased direct
mail sales, partially offset by increased sales through the retail channel.
7
<PAGE> 8
PRODUCT COSTS
Product costs include direct costs of production (manuals, diskettes, compact
disks, duplication, packaging materials and assembly), shipping, royalties,
inventory spoilage, reserves for obsolete inventory, and amortization of
capitalized software development costs. Product costs were $1,848,692 and
$3,522,291 for the quarter and six months ended December 31, 1995 compared to
$1,944,587 and $3,485,450 or the comparable periods in the previous fiscal year.
Gross margin as a percentage of revenues improved 1.1% for the quarter and 0.4%
for the six months ended December 31, 1995 as compared to the same periods in
the previous fiscal year. The improvement was primarily a result of an improved
mix of sales with higher gross margins.
Amortization of capitalized software development costs and acquired software
costs included in product costs were $148,133 and $263,207 for the quarter and
six months ended December 31, 1995 compared to $126,962 and $277,572 for the
same periods in the previous fiscal year.
SALES AND MARKETING
Sales and marketing expenses include salaries and benefits for retail channel,
direct mail and marketing personnel, commissions, advertising, trade show,
design, and direct mail promotional costs (design, postage, printing,
fulfillment and list rentals).
Sales and marketing expenses decreased to $2,376,641 and $4,284,328 in the
quarter and six months ended December 31, 1995 from $2,594,658 and $4,762,230
for the same periods in the previous fiscal year. As a percentage of revenues,
sales and marketing costs decreased to 41.1% and 39.3%, respectively in the
quarter and six months ended December 31, 1995 from 44.0% and 44.7%,
respectively for the same periods in the previous fiscal year. This decrease was
primarily caused by lower direct mail promotional activities. Direct mail sales
and marketing expenses comprised 48% and 47%, respectively of total sales and
marketing expense for the quarter and six months ended December 31, 1995,
compared to 65% and 67%, respectively for the same periods last year.
GENERAL AND ADMINISTRATIVE
General and administrative expenses are comprised primarily of the costs of the
Company's administrative, finance and human resources functions. General and
administrative expenses increased to $555,853 and $1,276,684 in the quarter and
six months ended December 31, 1995 from $547,551 and $1,109,855 for the same
periods in the previous fiscal year. As a percentage of revenues general and
administrative expenses remained relatively level during the quarter,
representing 9.6% and 9.3%, respectively for the quarters ended December 31,
1995 and 1994. General and administrative expenses increased to 11.7% of net
revenues in the six months ended December 31, 1995, compared to 10.4% for the
comparable period last year, primarily as a result of increased investor
relations activities and the expansion of international activities.
RESEARCH AND DEVELOPMENT
Research and development expenses are comprised primarily of personnel costs,
costs required to conduct the Company's development effort and third-party
software development costs. Research and development expense increased to
$563,054 and $1,213,449 in the quarter and six months ended December 31, 1995
from $452,204 and $784,262 in the same periods for the previous fiscal year. As
a
8
<PAGE> 9
percentage of revenues, research and development expenses increased to 9.7% and
11.2%, respectively for the quarter and six months ended December 31, 1995,
compared to 7.7% and 7.4%, respectively for the same periods last year. The
increase can be attributed to increased domestic headcount, the utilization of
additional software development personnel in Russia and other third party
development costs relating to the development and expansion of the Company's
product offerings. In addition, capitalization of internal software development
costs in the quarter and six months ended December 31, 1995 were immaterial,
compared with capitalization of $23,158 and $108,631 for the same periods of the
previous year.
OTHER EXPENSE, NET
Other expense, net was $62,009 and $93,048, respectively for the quarter and six
months ended December 31, 1995 compared to $16,407 and $2,791 for the same
periods in the previous fiscal year. The increase in other expense in both the
quarter and six months ended December 31, 1995 can be attributed to increased
interest expense relating to higher levels of both short term and long term debt
in fiscal 1996.
PROVISION FOR INCOME TAXES
The Company's provision for income tax was $140,075 and $191,956, respectively
for the quarter and six months ended December 31, 1995, compared to $149,215 and
$219,486 for the same periods in the previous fiscal year. The Company's
estimated annual effective income tax rate for fiscal 1996 is 38%, compared to
43% estimated at December 31, 1994 for fiscal 1995. The primary reason for this
decrease is attributable to the utilization of research and experimentation tax
credits in fiscal 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its business primarily from operating revenues,
short-term and long-term bank borrowings, capital leases and proceeds from the
sale of stock. Working capital increased to $2,193,616 at December 31, 1995 from
$1,967,042 at June 30, 1995 primarily due to the increased investment in
receivables, inventories and prepaid royalties, partially offset by increased
short-term and long-term borrowings and higher accounts payable and accrued
expenses.
The Company has used cash generated from operations and short-term borrowings to
fund its working capital requirements and to acquire capital equipment. The
Company's operating activities used net cash of $704,987 in the six months ended
December 31, 1995 and $176,081 in the six months ended December 31, 1994. The
use of cash by operating activities in fiscal 1996 can be primarily attributed
to increased investment in receivables and prepaid royalties arising from
numerous additions to the Company's product lines, and to increased investment
in receivables arising from the Company's increased focus upon retail sales as
opposed to direct sales to end users. The Company's investing activities totaled
$839,664 and $453,734 in the six months ended December 31, 1995 and 1994,
respectively. These investing activities were primarily for the acquisition and
development of software products. The increase is fiscal 1996 is primarily
attributable to the Company's purchase of the FloorPlan software product line in
September 1995, for approximately $700,000. Borrowings on the line of credit
provided cash of $1,125,000 and repayments used cash of $425,000 in the six
months ended December 31, 1995, compared to borrowings of $1,495,000 and
repayments of $895,000 in the six months ended December 31, 1994. In addition,
the Company obtained a term loan in September 1995 which provided cash of
$675,000. During the six months ended December 31, 1995, principal payments on
this term loan totaled $37,500.
9
<PAGE> 10
As of December 31, 1995, the Company had a credit agreement with a bank under
which it can borrow the lesser of $1,500,000 or 25% of eligible inventory up to
a cap of $500,000 and 80% of eligible accounts receivable, at the bank's index
rate plus 1/2%. This credit agreement will expire on October 31, 1996. Under
terms of the agreement, all assets not subject to liens of other financial
institutions have been pledged as collateral against the line of credit. As of
December 31, 1995 the Company had $1,100,000 outstanding under this line of
credit. In January 1996, the Company increased its borrowing capacity to the
lesser of $1,800,000 or 25% of eligible inventory up to a cap of $500,000 and
80% of eligible accounts receivable as noted above, until May 31, 1996.
The Company believes that cash flow from operations, together with existing
sources of liquidity, will satisfy the Company's working capital and capital
expenditure requirements for at least the next twelve months. The Company's long
term goal, however, is to grow substantially. Expansion of the Company's current
business may involve significant financial risk and require significant capital
investment. Significant expansion of the Company's operations, future
acquisitions of products or companies, unexpected increases in expenses or other
factors might lead the Company to seek additional debt or equity financing.
While the Company believes it will be able to raise any necessary funds, there
can be no assurances that the Company will be able to do so, and failure to
obtain sufficient capital could have a material adverse effect on the Company or
adversely affect the Company's ability to continue to grow. In order to finance
future growth or for other reasons, the Company may consider an offering of its
equity securities within the next year or thereafter. The decision to undertake
such an offering, and the size of such an offering, would depend upon many
factors, such as the market price of the Common Stock, the working capital and
capital expenditure needs of the Company, the availability of alternative
sources of capital, and general market conditions.
QUARTERLY TRENDS
The Company's consolidated results of operations to date have not been
materially affected by seasonal trends. However, the Company believes that in
the future its results may be impacted by such factors as order deferrals in
anticipation of new product releases, delays in shipments of new products, a
slower growth rate in the software markets in which the Company operates, or
adverse general economic and industry conditions in any of the countries in
which the Company does business. In addition, with significant portions of net
revenues contributed by international operations, fluctuations of the U.S.
dollar against foreign currencies and the seasonality of the European,
Asia/Pacific, and other international markets could impact the Company's results
of operations and financial position in a particular quarter. Rapid
technological change and the Company's ability to develop, manufacture, and
market products that successfully adapt to the change may also impact results of
operations. Further, increased market competition from competitors either known
or unknown to the Company could also negatively impact the Company's results of
operations. Due to these factors, the Company's future earnings and stock price
may be subject to significant volatility, particularly on a quarterly basis. Any
shortfall in revenues or earnings from anticipated levels could have an
immediate and adverse effect on the trading price of the Company's common stock.
10
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PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
None.
ITEM 6. Exhibits and Reports on Form 8-K
On December 27, 1995, the Company filed a Form 8-K, announcing the
termination of Coopers and Lybrand LLP as its independent auditors effective
December 20, 1995, and the concurrent appointment of Deloitte & Touche LLP as
its new independent auditors.
11
<PAGE> 12
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.
DATE: February 8, 1996 INTERNATIONAL MICROCOMPUTER SOFTWARE, INC.
By: /s/MARK H. COSMEZ II
-------------------------
Mark H. Cosmez II
V.P. Finance & Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
12
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> DEC-31-1995
<CASH> 240,029
<SECURITIES> 0
<RECEIVABLES> 3,882,211
<ALLOWANCES> 1,168,542
<INVENTORY> 2,200,202
<CURRENT-ASSETS> 7,856,077
<PP&E> 987,006
<DEPRECIATION> 801,000
<TOTAL-ASSETS> 10,001,674
<CURRENT-LIABILITIES> 5,662,461
<BONDS> 0
<COMMON> 5,881,607
0
0
<OTHER-SE> (2,157,772)
<TOTAL-LIABILITY-AND-EQUITY> 10,001,674
<SALES> 10,894,948
<TOTAL-REVENUES> 10,894,948
<CGS> 3,522,291
<TOTAL-COSTS> 3,522,291
<OTHER-EXPENSES> 6,774,461
<LOSS-PROVISION> 75,025
<INTEREST-EXPENSE> 93,048
<INCOME-PRETAX> 505,148
<INCOME-TAX> 191,956
<INCOME-CONTINUING> 313,192
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 313,192
<EPS-PRIMARY> .09
<EPS-DILUTED> .09
</TABLE>
