<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, 1997
------------------
[ ] 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 14, 1997, 5,581,363 shares of Registrant's Common Stock, no par
value, were outstanding.
<PAGE> 2
INTERNATIONAL MICROCOMPUTER SOFTWARE, INC.
AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
PART I - FINANCIAL INFORMATION
Item 1. Interim Consolidated Financial Statements
Consolidated Balance Sheets at September 30, 1997 and June 30, 1997 3
Consolidated Statements of Operations for the three months ended
September 30, 1997 and 1996 4
Consolidated Statements of Cash Flows for the three months ended
September 30, 1997 and 1996 5
Notes to Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-11
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 13
</TABLE>
2
<PAGE> 3
INTERNATIONAL MICROCOMPUTER SOFTWARE, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 JUNE 30, 1997
------------------ -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 502,000 $ 1,126,000
Receivables, less allowances for doubtful
accounts and returns of $2,966,000 and $2,943,000 9,401,000 7,535,000
Inventories, net 3,764,000 3,472,000
Prepaid royalties and licenses 1,266,000 1,285,000
Deferred tax assets, net 1,170,000 1,473,000
Other current assets 547,000 478,000
------------ ------------
Total current assets 16,650,000 15,369,000
------------ ------------
Furniture and equipment, net 2,021,000 1,694,000
Deferred tax assets, net 2,858,000 265,000
Other assets, net 1,522,000 245,000
============ ============
Total assets $ 23,051,000 $ 17,573,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Credit line payable $ 2,090,000 $ -
Short term debt and other obligations 435,000 402,000
Trade accounts payable 5,035,000 4,501,000
Current portion of notes payable 1,615,000 558,000
Wages, benefits and sales tax payable 580,000 515,000
Contracts payable 1,326,000 1,318,000
Income taxes payable 387,000 742,000
------------ ------------
Total current liabilities 11,468,000 8,036,000
Long term debt and other obligations 1,705,000 2,042,000
------------ ------------
Total liabilities 13,173,000 10,078,000
Shareholders' equity:
Common stock, no par value; 300,000,000 authorized;
Issued and outstanding 5,560,000 and 5,129,000 shares 11,805,000 6,453,000
Retained earnings (accumulated deficit) (1,741,000) 1,373,000
Cumulative translation adjustment 99,000 (46,000)
Notes receivable from shareholders (285,000) (285,000)
------------ ------------
Total shareholders' equity 9,878,000 7,495,000
------------ ------------
Total liabilities and shareholders' equity $ 23,051,000 $ 17,573,000
============ ============
</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,
--------------------------------------------------------------
1997 1996
---------------------------- ----------------------------
<S> <C> <C> <C> <C>
Net revenues $ 12,511,000 100.0% $ 8,112,000 100.0%
Product costs 4,531,000 36.2% 2,997,000 36.9%
------------ ----- ------------ -----
Gross margin 7,980,000 63.8% 5,115,000 63.1%
Costs and expenses:
Sales and marketing 3,655,000 29.2% 2,474,000 30.5%
General and administrative 991,000 7.9% 854,000 10.5%
Research and development 1,635,000 13.1% 1,046,000 12.9%
Write-off of purchased research and
development 6,367,000 50.9% - 0.0%
------------ ----- ------------ -----
12,648,000 101.1% 4,374,000 53.9%
------------ ----- ------------ -----
Operating income (loss) (4,668,000) (37.3)% 741,000 9.1%
Other expense, net (198,000) (1.6)% (77,000) (1.0)%
------------ ----- ------------ -----
Income (loss) before income taxes (4,866,000) (38.9)% 664,000 8.2%
Provision (benefit) for income taxes (1,752,000) (14.0)% 254,000 3.1%
------------ ----- ------------ -----
Net income (loss) $ (3,114,000) (24.9)% $ 410,000 5.1%
============ ===== ============ =====
Net income (loss) per common and common
equivalent share: $ (0.51) $ 0.07
============ ============
Weighted average common and common
equivalent shares used to compute
income (loss) per share: 6,151,000 5,505,000
============ ============
</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,
--------------------------------
1997 1996
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $(3,114,000) $ 410,000
Adjustments to reconcile net income (loss) to net
cash used by operating activities
Depreciation and amortization 418,000 239,000
Deferred taxes (2,290,000) -
Write-off of purchased in-process research and 6,367,000 -
development
Changes in operating assets and liabilities:
Receivables, net (1,681,000) (1,371,000)
Inventories (292,000) (283,000)
Prepaid royalties and licenses (106,000) (400,000)
Other current assets (69,000) (46,000)
Trade accounts payable (11,000) 238,000
Wages, benefits, and sales tax payable 7,000 18,000
Contracts payable 8,000 71,000
Income taxes payable (355,000) 62,000
Foreign currency translation 145,000 6,000
----------- -----------
Net cash used by operating activities (973,000) (1,056,000)
----------- -----------
Cash flows from investing activities:
Purchase of equipment (484,000) (151,000)
Capitalized software development costs - 11,000
Acquisition of technology and business assets (1,233,000) -
Other (16,000) -
----------- -----------
Net cash used by investing activities (1,733,000) (140,000)
----------- -----------
Cash flows from financing activities:
Credit line borrowings 2,605,000 1,150,000
Credit line repayments (515,000) -
Term loan borrowings - -
Term loan repayments (306,000) -
Capital lease and other obligations additions 305,000 -
Capital lease and other obligations repayment (119,000) (175,000)
Proceeds from issuance of common stock 112,000 266,000
----------- -----------
Net cash provided by financing activities 2,082,000 1,241,000
----------- -----------
Net increase (decrease) in cash and cash
equivalents (624,000) 45,000
Cash and cash equivalents at beginning of period 1,126,000 387,000
----------- -----------
Cash and cash equivalents at end of the period $ 502,000 $ 432,000
=========== ===========
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING AND
INVESTING INFORMATION:
Purchase of intellectual property in exchange
for trading payables $ 383,000 -
Purchase of intellectual property in exchange
for notes payable $ 1,034,000 -
Purchase of intellectual property in exchange
for common stock $ 5,240,000 -
</TABLE>
See Notes to Consolidated Financial Statements
5
<PAGE> 6
INTERNATIONAL MICROCOMPUTER SOFTWARE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
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, 1997, 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, 1997.
The results of operations for the three months ended September 30, 1997 and 1996
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, 1997 June 30, 1997
------------------ -------------
<S> <C> <C>
Raw Materials $2,128,000 $1,379,000
Finished Goods 1,809,000 2,252,000
---------- ----------
3,937,000 3,631,000
Reserves for Obsolescence (173,000) (159,000)
---------- ----------
$3,764,000 $3,472,000
========== ==========
</TABLE>
3. ACQUISITIONS
In the quarter ended September 30, 1997, the Company acquired the rights and
related technologies to products in the CAD, diagramming and consumer
categories from Corel Corporation, for stock and notes payable valued at
$5,640,000. The total purchase price consisted of $5,000,000 in IMSI common
stock (346,020 shares at $14.45 per share), and $640,000 in notes payable, both
of which are due during fiscal year 1998. The Company allocated the purchase
price as follows: $5,044,000 was expensed to in-process research and
development during the September 30, 1997 quarter, $517,000 to capitalized
software and $79,000 to goodwill to be amortized over 18 months.
In the quarter ended September 30, 1997, the Company also acquired the
technology and assets of MapLinx Corporation from Computer Concepts
Corporation, the exclusive license of selected graphics technology from
Quarterdeck, Inc., and MediaPaq, Inc., valued at $2,250,000. The total
6
<PAGE> 7
purchase price consisted of $240,000 in IMSI common stock (20,000 shares at
$12.00 per share), cash of $1,233,500, notes payable of $233,500, which is due
during fiscal year 1998, and the balance in various assumed liabilities. The
Company allocated the purchase price as follows: $1,323,000 was expensed to
in-process research and development during the September 30, 1997 quarter,
$914,000 to capitalized software and $13,000 to goodwill to be amortized over 18
months.
4. NEW ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 "Earnings per Share" (SFAS 128). The
Company is required to adopt SFAS 128 in the December 31, 1997 quarter and will
restate at that time earnings per share (EPS) data for prior periods to conform
with SFAS 128. Earlier application is not permitted.
SFAS 128 replaces current EPS reporting requirements and requires a dual
presentation of basic and diluted EPS. Basic EPS excludes dilution and is
computed by dividing net income by the weighted average of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock.
If SFAS 128 had been in effect during the quarters ended September 30 1997 and
1996, EPS would have been $(0.60) and $0.08, respectively. Diluted EPS under
SFAS 128 would not have been significantly different than fully diluted EPS
currently reported for the periods.
In June 1997, the Financial Accounting Standard Board issued Statements of
Financial Accounting Standards No. 130 (Reporting Comprehensive Income), which
requires that an enterprise report, by major components and as a single total,
the change in its net assets during the period from non-owner sources; and No.
131 (Disclosures about Segments of an Enterprise and Related Information), which
establishes annual and interim reporting standards for an enterprise's operating
segments and related disclosures about its products, services, geographic areas,
and major customers. Adoption of these statements will not impact the Company's
consolidated financial position, results of operations or cash flows, and any
effect will be limited to the form and content of its disclosures. Both
statements are effective for fiscal years beginning after December 15, 1997,
with earlier application permitted.
7
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following information should be read in conjunction with the consolidated
financial statements and the notes thereto and in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations in the
Company's Form 10-K for the year ended June 30, 1997. This quarterly report on
Form 10-Q, and in particular Management's Discussion and Analysis of Financial
Condition and Results of Operations, may contain forward-looking statements
regarding future events or the future performance of the Company that involve
certain risks and uncertainties including those discussed on Form 10-K, as filed
with the Securities and Exchange Commission ("SEC"). Actual events or the actual
future results of the Company may differ materially from any forward-looking
statements due to such risks and uncertainties. The Company assumes no
obligation to update these forward-looking statements to reflect actual results
or changes in factors or assumptions affecting such forward-looking statements.
This analysis is not intended to serve as a basis for projection of future
events.
RESULTS OF OPERATIONS
SUMMARY
The Company reported a net loss of $3,114,000 for the quarter ended September
30, 1997 compared to a net income of $410,000 for the comparable quarter of
1996. During the first quarter of fiscal 1998, the Company consummated four
acquisitions in which approximately $6.4 million of in-process research and
development costs were expensed. The Company reported an operating loss for the
quarter ended September 30, 1997 of $4,668,000 or 37% of net revenues, compared
to operating income of $741,000 or 9% of net revenues for the comparable quarter
last year.
NET REVENUES
Net revenues for the quarter ended September 30, 1997 were $12,511,000 compared
to $8,112,000 for the same period in the previous year, representing an increase
of $4,399,000 or 54%. Growth during the quarter was fueled by several important
releases, upgrades and continued sales from products including FormTool(R) 97,
the best-selling forms design software, WinDelete(TM) 97, which includes
Internet technology and system management features, NetAccelerator(TM), an
Internet speedup utility, as well as TurboProject(TM) Professional, a corporate
version of TurboProject with top-down project management features. During the
quarter, IMSI also introduced MasterPublisher(TM) 97, which has a
web-publishing suite and professional tools for business desktop publishing
users. Extending the Company's best-selling line of clip art, IMSI began
shipping its new MasterClips(R) lineup for the fall. Growth during the quarter
was also a result of continued channel penetration both in the U.S. and
internationally.
Net revenues from channel sales accounted for $10,683,000 or 85% of total net
revenue and $6,716,000 or 83% of total net revenues, for the quarters ended
September 30, 1997 and 1996, respectively. Net revenues from channel sales
increased $3,967,000 or 59% in the first quarter of fiscal 1998 compared with
the first quarter of fiscal 1997. Net revenues from direct mail sales accounted
for $1,828,000 or 15% of total net revenues and $1,396,000 or 17% of total net
revenues, for the quarters ended September 30, 1997 and 1996, respectively. Net
revenues from direct mail sales increased $432,000 or 31% in the first quarter
of fiscal 1998 compared with the first quarter of fiscal 1997.
8
<PAGE> 9
International net revenues of $3,831,000 accounted for 31% of total net revenues
in the first quarter of fiscal 1998 compared to $3,196,000 or 39% for the
comparable quarter in fiscal 1997, representing an increase of $662,000 or 21%.
PRODUCT COSTS
Product costs, as a percentage of total net revenue was $4,531,000 or 36% and
$2,997,000 or 37% for the quarters ended September 30, 1997 and 1996,
respectively. Amortization of capitalized software development costs and
acquired software costs, and other amortization included in product costs were
$260,000 and $117,000 for the quarters ended September 30, 1997 and 1996,
respectively.
SALES AND MARKETING
Sales and marketing expenses increased to $3,655,000 or 29% of net revenue,
compared with $2,474,000 or 31% of net revenue for the quarters ended September
30, 1997 and 1996, respectively. The quarter over quarter increase $1,181,000 or
48% is attributed to expenses associated with net revenue growth. The slight
improvement in expense as a percentage of net revenue is attributed to achieving
economies of scale associated with the Company's net revenue growth.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased to $991,000 or 8% of net revenue
as compared to $854,000 or 11% of net revenue for the quarters ended September
30, 1997 and September 30, 1996, respectively. 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, 1997 also included certain management infrastructure costs.
RESEARCH AND DEVELOPMENT
Research and development expense increased to $1,635,000 or 13% of net revenue
as compared to $1,046,000 or 13% of net revenue for the quarters ended September
30, 1997 and September 30, 1996, respectively. The increase can be attributed to
an increase in 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.
PROVISION FOR INCOME TAXES
The Company's provision (benefit) for income taxes were $(1,752,000) and
$254,000 for the quarters ended September 30, 1997 and 1996, respectively. The
Company's effective tax rate for these periods is 36% and 38%, respectively. The
reduction in tax provision percentage is primarily attributed to international
tax restructuring.
9
<PAGE> 10
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 decreased to $5,182,000 at September 30, 1997
from $7,333,000 at June 30, 1997, resulting primarily from the growth in line
of credit borrowing and term loan borrowing.
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 cash of $973,000 and
$1,056,000 in the quarters ended September 30, 1997 and 1996, respectively. The
Company's investing activities used cash of $1,733,000 and $140,000 in the
quarter ended September 30 1997 and 1996, respectively. These capital
expenditures were primarily for the acquisition and development of software,
trademarks and the purchase of capital equipment. At September 30, 1997, the
Company had no material commitments for capital expenditures. Cash provided by
financing activities were $2,082,000 and $1,241,000 for the quarters ended
September 30, 1997 and 1996 respectively. Quarter ended September 30, 1997 cash
inflows from financing activities were primarily the result of net line of
credit borrowings of $2,090,000.
As of November 14, 1997, the Company had a credit agreement with a bank under
which it can borrow the lesser of $4,500,000 or 25% of eligible inventory up to
a cap of $500,000 and 80% of eligible accounts receivable, at the bank's index
rate (8.5% at September 30, 1997). The line of credit agreement requires the
Company to maintain certain financial ratios including net worth and working
capital. This line of credit expires on October 31, 1998. 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, 1997 the Company had $2,090,000 outstanding under this line of
credit.
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
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.
10
<PAGE> 11
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.
11
<PAGE> 12
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) Form 8-K filing, September 30, 1997. Company acquired the
rights to products in the CAD, diagramming and consumer
categories from Corel Corporation.
12
<PAGE> 13
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, 1997 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)
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLAR
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 502,000
<SECURITIES> 0
<RECEIVABLES> 12,367,000
<ALLOWANCES> 2,966,000
<INVENTORY> 3,764,000
<CURRENT-ASSETS> 16,650,000
<PP&E> 3,663,000
<DEPRECIATION> 1,642,000
<TOTAL-ASSETS> 23,051,000
<CURRENT-LIABILITIES> 11,468,000
<BONDS> 0
0
0
<COMMON> 11,805,000
<OTHER-SE> (1,927,000)
<TOTAL-LIABILITY-AND-EQUITY> 23,051,000
<SALES> 12,511,000
<TOTAL-REVENUES> 12,511,000
<CGS> 4,531,000
<TOTAL-COSTS> 4,531,000
<OTHER-EXPENSES> 12,648,000
<LOSS-PROVISION> 14,423
<INTEREST-EXPENSE> (198,000)
<INCOME-PRETAX> (4,866,000)
<INCOME-TAX> (1,752,000)
<INCOME-CONTINUING> (4,668,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,114,000)
<EPS-PRIMARY> .51
<EPS-DILUTED> .51
</TABLE>