<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 SEPTEMBER 30, 1996
[ ] 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 November 7, 1996, 3,283,266 shares of Registrant's Common Stock, no par
value, were outstanding.
<PAGE> 2
INTERNATIONAL MICROCOMPUTER SOFTWARE, INC.
AND SUBSIDIARIES
INDEX
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Interim Consolidated Financial Statements
Consolidated Balance Sheets at September 30,
1996 and June 30, 1996 3
Consolidated Statements of Operations for the
three months ended September 30, 1996 and 1995 4
Consolidated Statements of Cash Flows for the
three months ended September 30, 1996 and 1995 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
Item 1. Legal Proceedings 11
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURES 12
2
<PAGE> 3
INTERNATIONAL MICROCOMPUTER SOFTWARE, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996 JUNE 30, 1996
------------------ -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 431,818 $ 387,406
Receivables, less allowances for doubtful
accounts and returns of $1,673,955 and $1,301,509 5,492,506 4,121,210
Inventories 2,820,596 2,538,093
Prepaid royalties and licenses 1,146,404 746,677
Deferred direct mail costs 257,587 217,513
Deferred tax assets, net 791,301 791,301
Other 268,434 262,108
------------ ------------
Total current assets 11,208,646 9,064,308
Furniture and equipment, net 1,346,098 1,101,306
Deferred tax assets, net 344,067 344,067
Capitalized software development costs, net 177,412 272,102
Other assets, net 243,565 276,595
------------ ------------
Total assets $ 13,319,788 $ 11,058,378
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Credit line payable $ 1,150,000 $ --
Short term debt and other obligations 569,095 565,419
Accounts payable and accrued expenses 4,722,492 4,395,461
Income taxes payable 1,073,134 1,011,118
------------ ------------
Total current liabilities 7,514,721 5,971,998
Long term debt and other obligations 601,275 564,571
------------ ------------
Total liabilities 8,115,996 6,536,569
Shareholders' equity:
Preferred stock, no par value; 20,000,000 shares
authorized; none issued or outstanding
Common stock, no par value; authorized 300,000,000
issued and outstanding - 3,273,258 shares at September
30, 1996 and 3,223,125 shares at June 30, 1996 6,238,784 5,972,850
Accumulated deficit (813,833) (1,223,797)
Cumulative translation adjustment 72,299 66,214
Notes receivable from shareholders (293,458) (293,458)
------------ ------------
Total shareholders' equity 5,203,792 4,521,809
------------ ------------
Total liabilities and shareholders' equity $ 13,319,788 $ 11,058,378
============ ============
</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 SEPTEMBER 30,
---------------------------------------------------------
1996 1995
---------- ----------
<S> <C> <C> <C> <C>
Net revenues $8,112,099 100.0% $5,107,078 100.0%
Product costs 2,996,564 36.9% 1,673,599 32.8%
---------- ----- ---------- -----
Gross margin 5,115,535 63.1% 3,433,479 67.2%
Costs and expenses:
Sales and marketing 2,474,823 30.5% 1,907,687 37.4%
General and administrative 853,792 10.5% 720,831 14.1%
Research and development 1,045,548 12.9% 650,395 12.7%
---------- ----- ---------- -----
4,374,163 53.9% 3,278,913 64.2%
---------- ----- ---------- -----
Operating income 741,372 9.1% 154,566 3.0%
Interest and other expense, net (77,358) (1.0%) (31,039) (0.6%)
---------- ----- ---------- -----
Income before taxes 664,014 8.2% 123,527 2.4%
Provision for income taxes 254,049 3.1% 51,881 1.0%
---------- ----- ---------- -----
Net income $ 409,965 5.1% $ 71,646 1.4%
========== ===== ========== =====
Primary and fully diluted net income per
common and common equivalent share: $ 0.11 $ 0.02
========== ==========
Average common and common equivalent
shares used to compute earnings per share: 3,669,875 3,435,396
========== ==========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
<PAGE> 5
INTERNATIONAL MICROCOMPUTER SOFTWARE, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------
1996 1995
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 409,965 $ 71,646
Adjustments to reconcile net income to net
cash used by operating activities:
Depreciation 122,011 97,278
Amortization 116,763 115,074
Deferred income taxes -- (19,000)
Changes in:
Accounts receivable (1,371,296) (1,024,848)
Inventories (282,503) (50,095)
Prepaid royalties and licenses (399,727) (126,250)
Deferred direct mail costs (40,074) (48,933)
Other current assets (6,326) (107,915)
Accounts payable and accrued expenses 327,030 951,596
Income taxes payable 62,016 44,127
Foreign currency translation 6,085 376
----------- -----------
Net cash used by operating activities (1,056,056) (96,944)
----------- -----------
Cash flows from investing activities:
Purchases of equipment (150,976) (24,635)
Capitalized software development costs 10,956 910
FloorPlan acquisition -- (687,500)
----------- -----------
Net cash used by investing activities (140,020) (711,225)
----------- -----------
Cash flows from financing activities:
Credit line borrowings 1,150,000 375,000
Credit line repayments -- (425,000)
Borrowings through term loan and other obligations -- 675,000
Repayments on capital lease and other obligations (175,446) (35,287)
Proceeds from issuance of common stock 265,934 7,781
----------- -----------
Net cash provided by financing activities 1,240,488 597,494
----------- -----------
Net increase (decrease) in cash and cash
equivalents 44,412 (210,675)
Cash and cash equivalents at beginning of
period 387,406 523,235
----------- -----------
Cash and cash equivalents at end of the period $ 431,818 $ 312,560
=========== ===========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
<PAGE> 6
INTERNATIONAL MICROCOMPUTER SOFTWARE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying interim 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 as of and for the
period ended September 30, 1996, and for all periods presented, have been made.
The interim consolidated financial statements should be read in conjunction with
the consolidated financial statements and notes thereto contained in the
Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1996.
The results of operations for the three month periods ended September 30, 1996
and 1995 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".
2. INVENTORIES
Inventories are valued at the lower of cost or market, on a first-in, first-out
basis, and consist of:
<TABLE>
<CAPTION>
September 30, 1996 June 30, 1996
------------------ -------------
<S> <C> <C>
Raw Materials $ 1,136,112 $ 775,026
Finished Goods 2,159,973 1,959,248
----------- -----------
3,296,085 2,734,274
Reserves for Obsolescence (475,489) (196,181)
----------- -----------
$ 2,820,596 $ 2,538,093
=========== ===========
</TABLE>
3. ACQUISITION
In September 1995, the Company entered into an agreement with Forte/ComputerEasy
International, Inc. to acquire certain assets including the software assets
known as FloorPlan, FloorPlan 3D, and 3D Design for approximately $687,500. The
acquisition was accounted for as a purchase with $343,750 allocated to
capitalized software development costs and $343,750 allocated to intangibles
(amortized over 3 years).
6
<PAGE> 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SUMMARY
The Company reported net income of $409,965 for the quarter ended September 30,
1996 compared to $71,646 for the comparable quarter of 1995, representing an
increase of $338,319 or 472%. Operating income for the quarter ended September
30, 1996 rose to $741,372 or 9.1% of net revenues, compared to $154,566 or 3.0%
of net revenues for the comparable period last year. Operating income increased
primarily due to new product introductions, growth in existing product lines, as
well as decreased sales and marketing expenses as a percentage of total net
revenue during the first quarter of fiscal 1997, compared with the same quarter
last year.
Any forward looking statements contained in the following discussion or
elsewhere in this document involve risks and uncertainties which may cause
actual results to differ materially from those discussed. A wide range of
factors could contribute to those differences, including those discussed in
this document.
RESULTS OF OPERATIONS
NET REVENUES
Net revenues for the quarter ended September 30, 1996 were $8,112,099 compared
to $5,107,078 for the same period in the previous year, representing an
increase of $3,005,021 or 59%. Increased net revenues are attributable to an
increase in retail channel sales of 85%, partially offset by decrease in
direct sales of 6%. The increase in net revenues from retail sales and the
decrease in net revenues from direct sales is consistent with the Company's
strategy to transition towards an operating model focused increasingly upon
retail sales.
Net revenues from channel sales accounted for $6,715,667 or 83% of total net
revenues and $3,628,063 or 71% of total net revenues, for the quarterly periods
ended September 30, 1996 and 1995, respectively. Channel sales increased
$3,087,604 or 85% in the first quarter of fiscal 1997 compared with the first
quarter of fiscal 1996. Net revenues from direct mail sales accounted for
$1,396,432 or 17% of total net revenues and $1,479,015 or 29% of total net
revenues, for the quarters ended September 30, 1996 and 1995, respectively. Net
direct mail revenues decreased $82,583 or 6% in the first quarter of fiscal 1997
compared with the first quarter of fiscal 1996.
International net revenues of $2,530,746 accounted for 31% of total net revenues
in the first quarter of fiscal 1997 compared to $1,489,400 in the comparable
quarter of fiscal 1996, representing an increase of $1,041,346 or 70%.
International net revenues as a percent of total net revenues increased to 31%
in the first quarter of fiscal 1997 from 29% in the first quarter of fiscal 1996
due to significant growth in international sales.
PRODUCT COSTS
Product costs include the 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 $2,996,564 and
$1,673,599 for the quarters ended September 30, 1996 and 1995, respectively.
Product costs as a percentage of total net revenues rose slightly, representing
36.9% and 32.8% for the quarters ended September 30, 1996 and 1995,
respectively. This increase is primarily due to a change in product mix.
7
<PAGE> 8
Amortization of capitalized software development costs and acquired software
costs, and other amortization included in product costs were $116,763 and
$115,074 for the quarters ended September 30, 1996 and 1995, respectively.
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 increased to $2,474,823 in the period ended
September 30, 1996 from $1,907,687 for the same period in the previous year,
representing an increase of 30%. As a percentage of total net revenues, sales
and marketing costs decreased to 30.5% in the period ended September 30, 1996
from 37.4% for the same period in the previous year. The decrease in sales and
marketing costs as a percentage of revenues is attributable to the change in
distribution from direct mail to retail channel sales, which has lower sales and
marketing cost. Direct mail sales and marketing expenses comprised 34% and 46%
of total sales and marketing expense in the quarters ended September 30, 1996
and 1995, respectively.
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 $853,792 in the period ended September 30,
1996 from $720,831 in the period ended September 30, 1995. As a percentage of
total net revenues, general and administrative expenses decreased to 10.5% in
the period ended September 30, 1996 from 14.1% in the same period last year.
This decrease is primarily attributable to a higher net revenue base, and the
fixed nature of general and administrative expenses. Expenses incurred during
the quarter ended September 30, 1996 also included certain management
infrastructure costs and additions to the bad debt reserves.
RESEARCH AND DEVELOPMENT
Research and development expenses are comprised primarily of personnel costs,
costs required to conduct the Company's development efforts and third-party
software development costs. Research and development expense increased to
$1,045,548 in the period ended September 30, 1996 from $650,395 in the same
period of the previous year. As a percentage of revenues, research and
development expenses increased to 12.9% in the period ended September 30, 1996
from 12.7% in the same period last year. The increase can be attributed to
increased domestic headcount, the utilization of additional contractors and
other third party development costs relating to the development and expansion of
the Company's product offerings.
8
<PAGE> 9
INTEREST AND OTHER EXPENSE, NET
Interest and other expense, net was $77,358 or 1.0% of total net revenues for
the quarter ended September 30, 1996, compared to $31,039, or 0.6% for the same
period last year. Interest and other expense, net is comprised primarily of
interest expense on short term and long term borrowings and foreign currency
transaction gains and losses.
PROVISION FOR INCOME TAXES
The Company's provision for income taxes was $254,049 and $51,881 for the
quarters ended September 30, 1996 and 1995, respectively. The Company's
effective tax rate for these periods is 38.3% and 42.0%, respectively. The
primary differences between the Company's pre-tax income for financial reporting
purposes and taxable income for income tax purposes are deferred direct mail
costs, software development costs, purchased intangibles, net operating loss
carryforwards, package design costs, capitalized inventory costs and reserves.
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 $3,693,925 at September 30, 1996
from $3,092,310 at June 30, 1996, resulting primarily from growth in accounts
receivables, inventories, and prepaid royalties and licenses, which is partially
offset by growth in accounts payable and accrued expenses.
The Company has used cash generated from its financing activities to fund its
working capital requirements and to acquire software products and capital
equipment. The Company's operating activities used net cash of $1,056,056 and
$96,944 in the quarters ended September 30, 1996 and 1995, respectively. The
Company's investing activities totaled $140,020 and $711,225 in the first
quarter of fiscal 1997 and 1996, respectively. These capital expenditures were
primarily for the acquisition and development of software (including the
FloorPlan acquisition discussed in Note 3, above) and the purchase of additional
equipment. At September 30, 1996, the Company had no material commitments for
capital expenditures. Borrowings on the line of credit provided cash of
$1,150,000 and there were no repayments in the quarter ended September 30, 1996,
compared with borrowings of $375,000 and repayments of $425,000 during the same
period last year. In addition, the Company obtained a term loan during the
quarter ended September 30, 1995 which provided cash of $675,000. During the
quarter ended September 30, 1996, $56,250 of principal was repaid on this loan,
reducing the balance to $450,000.
As of September 30, 1996, the Company had a credit agreement with a bank under
which it can borrow the lesser of $2,000,000 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 line of credit expires on November 30, 1996. Management
believes that the Company will be able to renew or replace such credit agreement
with the bank or another financial institution on substantially similar terms.
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
September 30, 1996 the Company had $1,150,000 outstanding under this line of
credit.
9
<PAGE> 10
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 (including payment of income tax liabilities, which
were approximately $1,000,000 at September 30, 1996) for at least the next
twelve months. The Company believes that these sources will also be sufficient
to satisfy its working capital and capital expenditure requirements beyond the
next 12 months at the Company's current level of operations. 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 by 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
<PAGE> 11
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
None.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter ended
September 30, 1996.
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: November 14, 1996 INTERNATIONAL MICROCOMPUTER SOFTWARE, INC.
By: /s/ MARTIN SACKS
-----------------
Martin Sacks
President & Chief Executive Officer
(Principal Executive Officer)
By: /s/ KENNETH R. FINEMAN
-----------------------
Kenneth R. Fineman
V.P. Finance & Chief Financial Officer
(Principal Financial Officer)
12
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 431,818
<SECURITIES> 0
<RECEIVABLES> 7,166,461
<ALLOWANCES> 1,673,955
<INVENTORY> 2,820,596
<CURRENT-ASSETS> 11,208,646
<PP&E> 2,453,383
<DEPRECIATION> 1,107,285
<TOTAL-ASSETS> 13,319,788
<CURRENT-LIABILITIES> 7,514,721
<BONDS> 0
0
0
<COMMON> 6,238,784
<OTHER-SE> (1,034,992)
<TOTAL-LIABILITY-AND-EQUITY> 13,319,788
<SALES> 8,112,099
<TOTAL-REVENUES> 8,112,099
<CGS> 2,996,564
<TOTAL-COSTS> 2,996,564
<OTHER-EXPENSES> 4,374,163
<LOSS-PROVISION> 186,037
<INTEREST-EXPENSE> 50,220
<INCOME-PRETAX> 664,014
<INCOME-TAX> 254,049
<INCOME-CONTINUING> 409,965
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 409,965
<EPS-PRIMARY> .11
<EPS-DILUTED> .11
</TABLE>
