<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 MARCH 31, 1998
--------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to __________
Commission File Number 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 May 12, 1998, 5,663,309 shares of Registrant's common stock, no par value,
were outstanding.
<PAGE> 2
INTERNATIONAL MICROCOMPUTER SOFTWARE, INC.
AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page
PART I - FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Interim Consolidated Financial Statements
Consolidated Balance Sheets at March 31, 1998 and June 30, 1997 3
Consolidated Statements of Operations for the three and nine
months ended March 31, 1998 and 1997 4
Consolidated Statements of Cash Flows for the nine months ended
March 31, 1998 and 1997 5
Notes to Consolidated Financial Statements 6-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11-20
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 2. Changes in Securities and Use of Proceeds 21
Item 3. Defaults upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
SIGNATURES 22
</TABLE>
2
<PAGE> 3
INTERNATIONAL MICROCOMPUTER SOFTWARE, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
MARCH 31, 1998 JUNE 30, 1997
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,277,000 $ 1,126,000
Receivables, less allowances for doubtful
accounts and returns of $3,493,000 and $2,943,000 13,543,000 7,535,000
Inventories, net 6,046,000 3,472,000
Prepaid royalties and licenses, net 2,251,000 1,285,000
Deferred tax assets, net 1,169,000 1,473,000
Other current assets 790,000 478,000
------------ ------------
Total current assets 25,076,000 15,369,000
------------ ------------
Furniture and equipment, net 2,856,000 1,694,000
Deferred tax assets, net 2,907,000 265,000
Capitalized software development costs, net 1,745,000 92,000
Other assets, net 145,000 153,000
------------ ------------
Total assets $ 32,729,000 $ 17,573,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Credit line payable $ 6,000,000 $ -
Short-term debt and other obligations 729,000 402,000
Trade accounts payable 7,496,000 4,501,000
Current portion of notes payable 1,609,000 558,000
Wages, benefits and sales tax payable 669,000 515,000
Contracts payable 1,633,000 1,318,000
Income taxes payable 720,000 742,000
------------ ------------
Total current liabilities 18,856,000 8,036,000
Long-term debt and other obligations 1,412,000 2,042,000
------------ ------------
Total liabilities 20,268,000 10,078,000
Shareholders' equity:
Common stock, no par value; 300,000,000 authorized;
issued and outstanding 5,656,858 and 5,128,759 shares,
respectively 12,174,000 6,453,000
Retained earnings 624,000 1,373,000
Cumulative translation adjustment (52,000) (46,000)
Notes receivable from shareholders (285,000) (285,000)
------------ ------------
Total shareholders' equity 12,461,000 7,495,000
------------ ------------
Total liabilities and shareholders' equity $ 32,729,000 $ 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 MARCH 31, NINE MONTHS ENDED MARCH 31,
---------------------------- ----------------------------
1998 1997 1998
---------------------------- ---------------------------- ----------------------------
<S> <C> <C> <C> <C> <C> <C>
Net revenues $ 16,671,000 100.0% $ 10,489,000 100.0% $ 45,562,000 100.0%
Product costs 6,770,000 40.6% 4,326,000 41.2% 17,233,000 37.8%
------------ ------------- ------------ ------------- ------------ -------------
Gross margin 9,901,000 59.4% 6,163,000 58.8% 28,329,000 62.2%
Costs and expenses:
Sales and marketing 4,475,000 26.8% 2,961,000 28.2% 12,770,000 28.0%
General and administrative 1,302,000 7.8% 997,000 9.5% 3,572,000 7.9%
Research and development 2,230,000 13.4% 1,151,000 11.0% 6,254,000 13.7%
Write-off of purchased
in-process research
and development 6,367,000 14.0%
------------ ------------- ------------ ------------- ------------ -------------
Total operating expenses 8,007,000 48.0% 5,109,000 48.7% 28,963,000 63.6%
------------ ------------- ------------ ------------- ------------ -------------
Operating income (loss) 1,894,000 11.4% 1,054,000 10.0% (634,000) -1.4%
Other expense, net (105,000) -0.6% (32,000) -0.3% (536,000) -1.1%
------------ ------------- ------------ ------------- ------------ -------------
Income (loss) before taxes 1,789,000 10.8% 1,022,000 9.7% (1,170,000) -2.5%
Provision (benefit) for income taxes 644,000 3.9% 400,000 3.8% (421,000) -0.9%
------------ ------------- ------------ ------------- ------------ -------------
Net income (loss) $ 1,145,000 6.9% $ 622,000 5.9% $ (749,000) -1.6%
============ ============= ============ ============= ============ =============
Basic earnings (loss) per share $ 0.20 $ 0.12 ($ 0.14)
============ ============ ============
Diluted earnings (loss) per share $ 0.18 $ 0.11 ($ 0.14)
============ ============ ============
Shares used in computing basic
earnings (loss) per share 5,631,000 4,978,000 5,461,000
============ ============ ============
Shares used in
computing diluted
earnings (loss) per share 6,506,000 5,804,000 5,461,000
============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED MARCH 31,
----------------------------
1997
----------------------------
<S> <C> <C>
Net revenues $ 30,393,000 100.0%
Product costs 12,447,000 41.0%
------------ -------------
Gross margin 17,946,000 59.0%
Costs and expenses:
Sales and marketing 8,671,000 28.5%
General and administrative 3,067,000 10.1%
Research and development 3,318,000 10.9%
Write-off of purchased
in-process research
and development
------------ -------------
Total operating expenses 15,056,000 49.5%
------------ -------------
Operating income (loss) 2,890,000 9.5%
Other expense, net (56,000) -0.2%
------------ -------------
Income (loss) before taxes 2,834,000 9.3%
Provision (benefit) for income taxes 1,096,000 3.6%
------------ -------------
Net income (loss) $ 1,738,000 5.7%
============ =============
Basic earnings (loss) per share $ 0.36
============
Diluted earnings (loss) per share $ 0.31
============
Shares used in computing basic
earnings (loss) per share 4,849,000
============
Shares used in
computing diluted
earnings (loss) per share 5,578,000
============
</TABLE>
See Notes to Consolidated Financial Statements
4
<PAGE> 5
INTERNATIONAL MICROCOMPUTER SOFTWARE, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED MARCH 31,
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (749,000) $ 1,738,000
Adjustments to reconcile net income (loss) to net
cash used by operating activities
Depreciation and amortization 1,566,000 702,000
Deferred taxes (2,338,000)
Write-off of purchased in-process research and development 6,367,000
Changes in operating assets and liabilities:
Receivables, net (6,008,000) (2,975,000)
Inventories, net (2,574,000) (1,382,000)
Prepaid royalties and licenses, net (966,000) (354,000)
Other current assets (312,000) 83,000
Trade accounts payable 2,899,000 1,941,000
Wages, benefits and sales tax payable 154,000 164,000
Contracts payable 315,000 734,000
Income taxes payable (22,000) (763,000)
Foreign currency translation (6,000) (120,000)
----------- -----------
Net cash used by operating activities (1,674,000) (232,000)
----------- -----------
Cash flows from investing activities:
Purchase of equipment (625,000) (260,000)
Additions to capitalized software development costs (2,257,000) (58,000)
Other (14,000)
----------- -----------
Net cash used by investing activities (2,896,000) (318,000)
----------- -----------
Cash flows from financing activities:
Credit line borrowings 8,410,000 4,180,000
Credit line repayments (2,410,000) (2,435,000)
Term loan repayments (378,000)
Capital lease and other obligations repayment (1,286,000) (905,000)
Proceeds from issuance of common stock 385,000 303,000
Other 154,000
----------- -----------
Net cash provided by financing activities 4,721,000 1,297,000
----------- -----------
Net increase in cash and cash equivalents 151,000 747,000
Cash and cash equivalents at beginning of period 1,126,000 387,000
----------- -----------
Cash and cash equivalents at end of the period $ 1,277,000 $ 1,134,000
=========== ===========
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING AND INVESTING INFORMATION:
Purchase of equipment through capital leases $ 1,042,000 $ 518,000
Acquisition of products and in-process technologies in exchange for:
Long-term debt $ 300,000
Trade accounts payable $ 383,000
Notes payable $ 1,034,000
Common stock $ 5,240,000
</TABLE>
See Notes to the 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 (other than those described
below), necessary to present fairly the financial position, results of
operations and cash flows as of and for the periods ended March 31, 1998, 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 and nine months ended March 31, 1998 and
1997 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 reclassifications have been made to prior periods to conform to the
presentation as of and for the periods ended March 31, 1998.
2. INVENTORIES
Inventories consist primarily of CD ROMs, diskettes, manuals, hardware,
freight-in, production costs and packing supplies for the Company's software
products. Inventories are valued at the lower of cost or market, on a first-in,
first-out basis, and consist of:
<TABLE>
<CAPTION>
March 31, 1998 June 30, 1997
-------------- -----------
<S> <C> <C>
Raw materials $ 2,945,000 $ 1,379,000
Finished goods 3,721,000 2,252,000
----------- -----------
6,666,000 3,631,000
Reserves for obsolescence (620,000) (159,000)
----------- -----------
$ 6,046,000 $ 3,472,000
=========== ===========
</TABLE>
The Company evaluates the estimated net realizable value of inventories at each
balance sheet date and records writedowns to net realizable value and reserves
for obsolescence for any finished goods or raw materials for which the carrying
value is in excess of the estimated net realizable value.
3. CAPITALIZED SOFTWARE DEVELOPMENT COSTS
Costs incurred in the initial design phase of software development are expensed
as incurred as research and development. Once the point of technological
feasibility is reached, direct production costs are capitalized. The Company
ceases capitalizing computer software costs
6
<PAGE> 7
when the product is available for general release to customers. Costs associated
with acquired completed software are capitalized.
Capitalized software development costs, net were $1,745,000 and $92,000 at March
31, 1998 and June 30, 1997, respectively. This increase in capitalized software
development costs was primarily due to the acquisitions of completed software of
$1,431,000 discussed in Notes 4, 6, 7, and 8.
The Company amortizes capitalized software development costs on a
product-by-product basis. The amortization for each product is the greater of
the amount computed using (a) the ratio of current gross revenues to the total
of current and anticipated future gross revenues for the product or (b) 18
months. In addition, the Company evaluates the net realizable value of each
software product at each balance sheet date and records writedowns to net
realizable value for any products for which the carrying value is in excess of
the estimated net realizable value.
4. ACQUISITION OF PRODUCTS AND IN-PROCESS TECHNOLOGIES FROM COREL CORPORATION
On September 30, 1997, the Company acquired the rights to three completed
products (Corel(R)Flow, Lumiere(TM) and Family Heritage(TM)(formerly, Corel
Family Tree(TM))) and four in-process technologies (CorelCAD(TM), Corel Click
and Create(TM), Visual CADD(TM) and Corel Personal Architect(TM)) in the CAD,
diagramming and consumer categories from Corel (the "Acquisition"), for
$5,000,000 in IMSI common stock (346,020 shares valued at approximately $14.45
per share) and $640,000 in notes payable due in two installments, $140,000 due
in March 1998 (which has not yet been paid), and $500,000 due in September 1998.
The Company allocated the $5,640,000 as follows, based upon management's
estimates of future cash flows and costs to enable such technologies to reach
technological feasibility and upon a valuation:
- $5,044,000 relating to the four in-process technologies was
expensed as purchased in-process research and development in the
quarter ended September 30, 1997. At the time of the
Acquisition, the Company determined that the technological
feasibility of the four in-process technologies had not yet been
established and that, as of September 30, 1997, such
technologies had no alternative future uses.
- $517,000 relating to the three completed products was allocated
to capitalized software ($206,000 of which was attributable to
the Family Heritage product, see Note 5) to be amortized over
the shorter of the life of the products' respective expected
revenues or 18 months, pursuant to the Company's amortization
policy for capitalized software development costs discussed in
Note 3.
- $79,000 was allocated to goodwill to be amortized over 3 years.
From the Acquisition through March 31, 1998, the Company spent approximately
$600,000 on research and development, and it expects to spend an additional
approximately $300,000 on research and development through May 31, 1998 to have
the four in-process technologies reach technological feasibility. The Company
released one product in March 1998, and plans to release the remaining three
products in the fourth quarter of fiscal 1998 or the first quarter of fiscal
1999. However, there can be no assurance that such technologies will reach
technological feasibility within the foregoing time frames or at all, or that,
if such products are released, they will obtain market acceptance or generate
significant sales revenues for the Company.
7
<PAGE> 8
5. SALE OF FAMILY HERITAGE PRODUCT
On March 13, 1998, the Company sold the rights to Family Heritage, one of the
completed products acquired from Corel, to Mindscape(R), Inc. (which was
subsequently acquired by The Learning Company(R)) for a purchase price of
$2,500,000 (plus $115,000 for inventories and prepaid royalties). The purchase
price was split into four equal payments of $625,000, the first of which was
paid upon closing. The remaining $625,000 payments are due July 15, 1998,
October 15, 1998, and January 15, 1999, pursuant to the sale agreement with
Mindscape. However, no separate notes payable for such amounts were issued by
Mindscape. The Company recognized a net gain on such sale of $409,000 which was
included in net revenues in the quarter ended March 31, 1998. The remaining
amounts due, which total $1,875,000, will be recognized as revenues upon receipt
of cash payments from Mindscape.
6. ACQUISITION OF PRODUCTS AND IN-PROCESS TECHNOLOGIES FROM QUARTERDECK
CORPORATION
On July 1, 1997, the Company acquired certain products and in-process
technologies from Quarterdeck(R) for a cash payment of $1,000,000. Based upon
the Company's estimates of future cash flows and costs to have certain of these
technologies reach technological feasibility and based upon a valuation, the
Company allocated the purchase price as follows:
- $517,000 was allocated to purchased in-process research and
development. At the time of the acquisition, management believed
that technological feasibility of certain of the acquired
technologies had not yet been established and that, as of July
1, 1997, these technologies had no alternative future uses. See
Note 8.
- $483,000 was allocated to capitalized software to be amortized
over the shorter of the life of the products' expected revenues
or 18 months, pursuant to the Company's amortization policy for
capitalized software development costs discussed in Note 3.
7. ACQUISITION OF PRODUCTS AND IN-PROCESS TECHNOLOGIES FROM MAPLINX
CORPORATION
On July 1, 1997, the Company acquired certain products and in-process
technologies from MapLinx(R) Corporation for a total purchase price of $850,000
as follows: $233,500 in cash, a note payable for $233,500 and $383,000 in
assumed net liabilities. Based upon the Company's estimates of future cash flows
and costs to have certain technologies reach technological feasibility and based
upon a valuation, the Company allocated the purchase price as follows:
- $506,000 was allocated to purchased in-process research and
development. At the time of the acquisition, management believed
that technological feasibility of certain of the acquired
technologies had not yet been established and that, as of July
1, 1997, these technologies had no alternative future uses. See
Note 8.
- $331,000 was allocated to capitalized software to be amortized
over the shorter of the life of the products' expected revenues
or 18 months, pursuant to the Company's amortization policy for
capitalized software development costs discussed in Note 3.
- $13,000 was allocated to goodwill to be amortized over three
years.
8
<PAGE> 9
8. ACQUISITION OF MEDIAPAQ, INC. AND RESEARCH AND DEVELOPMENT EXPENDITURES
FOR IN-PROCESS TECHNOLOGIES ACQUIRED FROM MEDIAPAQ, QUARTERDECK AND
MAPLINX
On August 22, 1997, the Company acquired 100% of the common stock of
MediaPaq(TM) for a total purchase price of $400,000 as follows: $240,000 in IMSI
common stock (20,000 shares at $12.00 per share) and $160,000 in assumed
liabilities. Based upon the Company's estimates of future cash flows and costs
to have certain of MediaPaq's products and in-process technologies reach
technological feasibility, the Company allocated the purchase price as follows:
- $300,000 was allocated to purchased in-process research and
development. At the time of the acquisition, management believed
that technological feasibility of certain of the acquired
technologies had not yet been established and that, as of July
1, 1997, these technologies had no alternative future uses.
- $100,000 was allocated to capitalized software to be amortized
over the shorter of the products' expected revenues or 18
months, pursuant to the Company's amortization policy for
capitalized software development costs discussed in Note 3.
For the periods from the respective acquisition dates (July 1, 1997 and August
22, 1997) of the products and in-process technologies from Quarterdeck
Corporation (see Note 6), MapLinx Corporation (see Note 7) and MediaPaq, Inc.
until March 31, 1998, the Company spent approximately $300,000 on research and
development to have the acquired in-process technologies reach technological
feasibility. Certain of the acquired technologies reached technological
feasibility and the related products were released in the quarter ended March
31, 1998.
9. NEW BANK LINE OF CREDIT AND NEW TERM LOAN
On May 4, 1998, the Company entered into a new line of credit agreement with a
bank under which it can borrow the lesser of $10,000,000 or 80% of eligible
accounts receivable, at the bank's reference rate plus 1/2 % or LIBOR plus 2%,
at the Company's option. The line of credit agreement requires the Company to
comply with certain financial covenants including maintenance of net worth and
working capital requirements. Under the terms of the agreement, all assets not
subject to liens of other financial institutions have been pledged as collateral
against the line of credit. The credit line expires October 31, 1999. On May 4,
1998, the Company also secured a term loan from the same bank in the amount of
$1,500,000, to be repaid in eight equal quarterly installments of $187,500 plus
interest. The interest rate is the bank's reference rate plus 1/2 % or LIBOR
plus 2%, at the Company's option. The term loan matures on April 30, 2000.
On May 4, 1998 the Company borrowed $1,500,000 under the term loan, and
approximately $7,800,000 under the credit line. The Company selected 90-day
LIBOR (5.69% on May 4, 1998) +2% as the interest rate option for both the line
of credit and the term loan. The Company used a portion of the proceeds from
these borrowings to repay the amounts outstanding under its previous bank line
of credit and previous term loan, which were then terminated.
10. BASIC AND DILUTED EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"). The
Company adopted SFAS 128 in the December 31, 1997 quarter, as required, and
restated earnings per share ("EPS") data for prior periods to conform with
requirements of SFAS 128.
9
<PAGE> 10
Basic EPS is computed by dividing net income (loss) by the weighted average
number of common shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur from common shares issuable as a result of
the exercise or conversion of stock options, restricted stock warrants or other
convertible securities. Diluted securities for the nine month period ended March
31, 1998 have not been included in the table below because their inclusion would
be anti-dilutive.
Net income (loss) and the weighted average numbers of shares outstanding
(denominator) used to calculate basic earnings per share are reconciled to the
numbers of shares used in calculating diluted earnings per share as follows:
<TABLE>
<CAPTION>
Three Months Ended March 31, Nine Months Ended March 31,
---------------------------- ---------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net Income (loss) $ 1,145,000 $ 622,000 $ (749,000) $ 1,738,000
----------- ----------- ----------- -----------
Shares used to compute basic EPS 5,631,000 4,978,000 5,461,000 4,849,000
Add effect of dilutive securities:
Stock options 875,000 826,000 -- 729,000
----------- ----------- ----------- -----------
Shares used to compute diluted EPS 6,506,000 5,804,000 5,461,000 5,578,000
=========== =========== =========== ===========
</TABLE>
10
<PAGE> 11
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 (the "Form 10-K"). 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 in the "Other Factors that May Affect Future Operating Results"
section of this Form 10-Q, as well as in the Company's 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.
OVERVIEW AND SUMMARY OF RESULTS
IMSI is a leading developer and publisher of PC productivity software in the
business applications, utility and digital image categories targeted primarily
to small- and medium-sized businesses and consumers. The Company sells software
in 13 languages in 60 countries, and sold approximately 1.3 million units in the
first nine months of fiscal 1998. The Company's best-known product families
include TurboCAD(R) in the business applications category, WinDelete(R) in the
utilities category and MasterClips(R) in the digital image category.
The Company focuses on developing and marketing productivity software in
categories that extend the basic functionality of PCs beyond the word
processing, spreadsheet, e-mail and database applications offered by standard
office productivity software suites. The Company's products enhance PC
functionality by providing capabilities in areas such as precision drawing,
forms automation, project management, scheduling and voice recognition. The
Company seeks to create product franchises by developing, licensing or acquiring
products in growing categories where it believes it can capture market share
with better technology, lower prices or its extensive distribution network. The
Company targets PC applications that appeal to a broad variety of users,
particularly small- to medium-sized businesses in categories underserved by
major software vendors. The Company distributes its products worldwide primarily
through the retail channel.
The Company reported net revenues for the three and nine month periods ended
March 31, 1998 of $16,671,000 and $45,562,000 respectively, compared to
$10,489,000 and $30,393,000 for the comparable periods in the previous year,
representing increases of 59% and 50%, respectively, due primarily to new
product releases and upgrades. The Company reported net income of $1,145,000 or
$0.18 per share on a diluted basis for the quarter ended March 31, 1998,
compared to net income of $622,000 or $0.11 per share on a diluted basis for the
comparable quarter of 1997, representing an increase of $523,000 or 84%. The
Company reported a net loss of $749,000 or ($0.14) per share on a diluted basis
for the nine month period ended March 31, 1998, compared to net income of
$1,738,000 or $0.31 per share on a diluted basis for the nine month period ended
March 31, 1997 due to the write-off of in-process research and development as
described below. Excluding such write-off of in-process research and development
costs, the Company would have reported operating income for the nine month
period ended March 31,
11
<PAGE> 12
1998 of $5,733,000 or 13% of net revenues, compared to operating income of
$2,890,000 or 10% of net revenues for the comparable period last in the previous
fiscal year.
During the first quarter of fiscal 1998, the Company made four acquisitions
consisting of products and in-process technologies. The total purchase price for
such acquisitions was approximately $7.9 million, of which approximately $6.4
million was expensed as in-process research and development costs, approximately
$1.4 million was recorded as capitalized software and approximately $.1 million
was recorded as goodwill.
ACQUISITIONS AND SALES TRANSACTIONS
Acquisition of Products and In-Process Technologies from Corel
On September 30, 1997, the Company acquired the rights to three completed
products (Corel Flow, Lumiere and Family Heritage (formerly, Corel Family Tree))
and four in-process technologies (CorelCAD, Corel Click and Create, Visual CADD
and Corel Personal Architect) in the CAD, diagramming and consumer categories
from Corel (the "Acquisition"), for $5,000,000 in IMSI common stock (346,020
shares valued at approximately $14.45 per share) and $640,000 in notes payable
due in two installments, $140,000 due in March 1998 (which has not yet been
paid), and $500,000 due in September 1998. The Company allocated the $5,640,000
as follows, based upon management's estimates of future cash flows and costs to
enable such technologies to reach technological feasibility and upon a
valuation:
- $5,044,000 relating to the four in-process technologies was
expensed as purchased in-process research and development in the
quarter ended September 30, 1997. At the time of the
Acquisition, the Company determined that the technological
feasibility of the four in-process technologies had not yet been
established and that, as of September 30, 1997, such
technologies had no alternative future uses.
- $517,000 relating to the three completed products was allocated
to capitalized software ($206,000 of which was attributable to
the Family Heritage product, see Note 5 of Notes to Consolidated
Financial Statements) to be amortized over the shorter of the
life of the products' respective expected revenues or 18 months,
pursuant to the Company's amortization policy for capitalized
software development costs discussed in Note 3 of Notes to
Consolidated Financial Statements.
- $79,000 was allocated to goodwill to be amortized over 3 years.
From the Acquisition through March 31, 1998, the Company spent approximately
$600,000 on research and development, and it expects to spend an additional
approximately $300,000 on research and development through May 31, 1998 to have
the four in-process technologies reach technological feasibility. The Company
released one product in March 1998, and plans to release the remaining three
products in the fourth quarter of fiscal 1998 or the first quarter of fiscal
1999. However, there can be no assurance that such technologies will reach
technological feasibility within the foregoing time frames or at all, or that,
if such products are released, they will obtain market acceptance or generate
significant sales revenues for the Company.
Sale of Family Heritage Product
12
<PAGE> 13
On March 13, 1998, the Company sold the rights to Family Heritage, one of the
completed products acquired from Corel, to Mindscape, Inc. (which was
subsequently acquired by The Learning Company) for a purchase price of
$2,500,000 (plus $115,000 for inventories and prepaid royalties). The purchase
price was split into four equal payments of $625,000, the first of which was
paid upon closing. The remaining $625,000 payments are due July 15, 1998,
October 15, 1998, and January 15, 1999, pursuant to the sale agreement with
Mindscape. However, no separate notes payable for such amounts were issued by
Mindscape. The Company recognized a net gain on such sale of $409,000 which was
included in net revenues in the quarter ended March 31, 1998. The remaining
amounts due, which total $1,875,000, will be recognized as revenues upon receipt
of cash payments from Mindscape.
Acquisition of Products and In-Process Technologies from Quarterdeck Corporation
On July 1, 1997, the Company acquired certain products and in-process
technologies from Quarterdeck for a cash payment of $1,000,000. Based upon the
Company's estimates of future cash flows and costs to have certain of these
technologies reach technological feasibility and based upon a valuation, the
Company allocated the purchase price as follows:
- $517,000 was allocated to purchased in-process research and
development. At the time of the acquisition, management believed
that technological feasibility of certain of the acquired
technologies had not yet been established and that, as of July
1, 1997, these technologies had no alternative future uses. See
Note 8 of Notes to Consolidated Financial Statements.
- $483,000 was allocated to capitalized software to be amortized
over the shorter of the life of the products' expected revenues
or 18 months, pursuant to the Company's amortization policy for
capitalized software development costs discussed in Note 3 of
Notes to Consolidated Financial Statements.
Acquisition of Products and In-Process Technologies from MapLinx Corporation
On July 1, 1997, the Company acquired certain products and in-process
technologies from MapLinx Corporation for a total purchase price of $850,000 as
follows: $233,500 in cash, a note payable for $233,500 and $383,000 in assumed
net liabilities. Based upon the Company's estimates of future cash flows and
costs to have certain technologies reach technological feasibility and based
upon a valuation, the Company allocated the purchase price as follows:
- $506,000 was allocated to purchased in-process research and
development. At the time of the acquisition, management believed
that technological feasibility of certain of the acquired
technologies had not yet been established and that, as of July
1, 1997, these technologies had no alternative future uses. See
Note 8 of Notes to Consolidated Financial Statements.
- $331,000 was allocated to capitalized software to be amortized
over the shorter of the life of the products' expected revenues
or 18 months, pursuant to the Company's amortization policy for
capitalized software development costs discussed in Note 3 of
Notes to Consolidated Financial Statements.
- $13,000 was allocated to goodwill to be amortized over three
years.
13
<PAGE> 14
Acquisition of MediaPaq, Inc. and Research and Development Expenditures for
In-Process Technologies Acquired from MediaPaq, Quarterdeck and MapLinx
On August 22, 1997, the Company acquired 100% of the common stock of MediaPaq
for a total purchase price of $400,000 as follows: $240,000 in IMSI common stock
(20,000 shares at $12.00 per share) and $160,000 in assumed liabilities. Based
upon the Company's estimates of future cash flows and costs to have certain of
MediaPaq's products and in-process technologies reach technological feasibility,
the Company allocated the purchase price as follows:
- $300,000 was allocated to purchased in-process research and
development. At the time of the acquisition, management believed
that technological feasibility of certain of the acquired
technologies had not yet been established and that, as of July
1, 1997, these technologies had no alternative future uses.
- $100,000 was allocated to capitalized software to be amortized
over the shorter of the products' expected revenues or 18
months, pursuant to the Company's amortization policy for
capitalized software development costs discussed in Note 3 of
Notes to Consolidated Financial Statements.
For the periods from the respective acquisition dates (July 1, 1997 and August
22, 1997) of the products and in-process technologies from Quarterdeck
Corporation (see Note 6 of Notes to Consolidated Financial Statements), MapLinx
Corporation (see Note 7 of Notes to Consolidated Financial Statements) and
MediaPaq, Inc. until March 31, 1998, the Company spent approximately $300,000 on
research and development to have the acquired in-process technologies reach
technological feasibility. Certain of the acquired technologies reached
technological feasibility and the related products were released in the quarter
ended March 31, 1998.
RESULTS OF OPERATIONS
NET REVENUES
Net revenues for the three and nine month periods ended March 31, 1998 were
$16,671,000 and $45,562,000, respectively, compared to $10,489,000 and
$30,393,000 for the comparable periods in the previous fiscal year, representing
increases of 59% and 50%, respectively, due primarily to new product releases
and upgrades. During the quarter ended March 31, 1998, IMSI's significant new
product releases and upgrades included TurboCAD v5, TurboCAD Solid Modeler,
TurboCAD 3D Modeler, MasterClips 303,000, MasterPhotos(TM) Studio, HiJaak(R) Pro
4.5, MapLinx Professional, Web Business Builder(TM), RAM Shield(TM) and Easy
Language(TM) 25 World Languages. Growth during the three and nine month periods
ended March 31, 1998 was also a result of continued channel penetration both in
the U.S. and internationally with localized versions on most product lines.
14
<PAGE> 15
Net revenues in absolute dollars and as a percentage of total net revenues for
each of the Company's principal product categories were as follows for the
periods indicated:
<TABLE>
<CAPTION>
Three Months Ended March 31, Nine Months Ended March 31,
---------------------------- ---------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Business Applications $ 5,983,000 36% $ 2,471,000 23% $17,113,000 37% $ 8,589,000 28%
Utilities 4,497,000 27% 1,545,000 15% 10,029,000 22% 3,651,000 12%
Digital images 3,701,000 22% 5,735,000 55% 14,000,000 31% 15,722,000 52%
Other products 2,490,000 15% 738,000 7% 4,420,000 10% 2,431,000 8%
--------- -- ------- - --------- -- --------- -
Total $16,671,000 100% $10,489,000 100% $45,562,000 100% $30,393,000 100%
=========== === =========== === =========== === =========== ===
</TABLE>
Net revenues in the business applications category for the three and nine month
periods ended March 31, 1998 increased by $3,512,000 and $8,524,000, or 142% and
99%, respectively from the comparable periods of fiscal 1997. For the three
month period, this increase was due primarily to higher sales of TurboCAD,
TurboCAD Professional and MapLinx. For the nine month period, this increase was
due primarily to higher sales of TurboCAD Professional, HiJaak, MapLinx and
FloorPlan(R).
Net revenues in the utilities category for the three and nine month periods
ended March 31, 1998 increased by $2,952,000 and $6,378,000, or 191% and 175%,
respectively from the comparable periods of fiscal 1997. For the three month
period, this increase was due primarily to higher sales of VoiceDirect(TM),
NetAccelerator(TM) and WinDelete Deluxe. For the nine month period, this
increase was due primarily to higher sales of VoiceDirect and NetAccelerator.
Net revenues in the digital image category for the three and nine month periods
ended March 31, 1998 decreased by $2,034,000 and $1,722,000, or 35% and 11%,
respectively from the comparable periods of fiscal 1997. For both the three and
nine month periods, the Company believes that this decrease was due primarily to
increased competition in this category, resulting in lower average selling
prices for the Company's MasterClips line of products.
Net revenues in the other products category for the three and nine month periods
ended March 31, 1998 increased by $1,752,000 and $1,989,000, or 237% and 82%,
respectively from the comparable periods of fiscal 1997. For the both the three
and nine month periods, this increase was due primarily to higher sales of
products in the Company's Easy Language product line. For the three month period
ended March 31, 1998, the Company's sale of Family Heritage to Mindscape, Inc.
also contributed to the increase.
Net revenues from retail sales were $15,380,000 or 92% and $41,227,000 or 90% of
net revenues for the three and nine month periods ended March 31, 1998, compared
to $9,763,000 or 93% and $26,935,000 or 89% of net revenues for the comparable
periods in the previous fiscal year. Net revenues from direct mail sales were
$1,291,000 or 8% and $4,335,000 or 10% of net revenues for the three and nine
month periods ended March 31, 1998, compared to $726,000 or 7% and $3,458,000 or
11% of net revenues for the comparable periods in the previous fiscal year. Net
revenues from retail sales for the three and nine month periods ended March 31,
1998 increased by 58% and 53%, respectively from the comparable periods of
fiscal 1997, while net revenues from direct mail sales for the three and nine
month periods ended March 31, 1998 increased by 78% and 25%, respectively from
the comparable periods of fiscal 1997. This growth in both
15
<PAGE> 16
retail and direct mail sales was a result of continued channel penetration both
in the U.S. and internationally, as well as strong direct mail revenues from new
product releases and upgrades.
Net revenues from domestic sales were $11,046,000 or 66% and $28,229,000 or 62%
of net revenues for the three and nine month periods ended March 31, 1998,
compared to $6,604,000 or 63% and $17,966,000 or 59% of net revenues for the
comparable periods in the previous fiscal year. Net revenues from international
sales were $5,625,000 or 34% and $17,333,000 or 38% of net revenues for the
three and nine month periods ended March 31, 1998, compared to $3,885,000 or 37%
and $12,427,000 or 41% of net revenues for the comparable periods in the
previous fiscal year. Net revenues from domestic sales for the three and nine
month periods ended March 31, 1998 increased by 67% and 57%, respectively from
the comparable periods of fiscal 1997, while net revenues from international
sales for the three and nine month periods ended March 31, 1998 increased by 45%
and 39%, respectively from the comparable periods of fiscal 1997. This growth in
both domestic and international sales was a result of continued channel
penetration in the U.S., as well as strong international revenues through the
retail channel, particularly in Germany, expansion into Latin American markets
and new product introductions.
The Company's international net revenues in the nine month period ended March
31, 1998 were generated primarily from Germany, the United Kingdom and
Australia. Although the Company believes that the risks associated with
transactions in foreign currencies are mitigated by diversified exposure to
multiple currencies, the Company's operating results may be affected by the
risks customarily associated with international operations, including a
devaluation of the U.S. dollar, increases in duty rates, exchange or price
controls, longer collection cycles, government regulations, political
instability and changes in international tax laws.
PRODUCT COSTS
Product costs as a percentage of net revenues were 41% and 38% of revenues for
the three and nine month periods ended March 31, 1998, compared to 41% for both
of the comparable periods in the previous fiscal year. The improvements in the
nine month period in gross margin are primarily attributable to purchasing
efficiencies, better bill-of-material management and a product mix that yields a
higher gross margin. Amortization of capitalized software development costs, and
other amortization included in product costs were $408,000 and $1,055,000 for
the three and nine month periods ended March 31, 1998, compared to $105,000 and
$324,000 for the comparable periods in the previous fiscal year.
SALES AND MARKETING
Sales and marketing expenses increased from $2,961,000 to $4,475,000 for the
three month periods ended March 31, 1997 and March 31, 1998, respectively, and
from $8,671,000 to $12,770,000 for the nine month periods ended March 31, 1997
and March 31, 1998, respectively. These increases are primarily due to increases
required to support a higher level of sales, including increased headcount,
additional cooperative advertising and increased commissions. Sales and
marketing expenses as a percentage of net revenues decreased from 28% to 27% of
net revenues for the three month periods ended March 31, 1997 and March 31,
1998, respectively, and from 29% to 28% for the nine month periods ended March
31, 1997 and March 31, 1998, respectively. The slight decline in sales and
marketing expenses as a percentage of net revenues
16
<PAGE> 17
reflects continuing improvements and efficiencies in the Company's sales and
marketing activities.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased from $997,000 to $1,302,000 for
the three month periods ended March 31, 1997 and March 31, 1998, respectively,
and from $3,067,000 to $3,572,000 for the nine month periods ended March 31,
1997 and March 31, 1998, respectively. These increases are primarily due to the
Company's continued infrastructure improvements and headcount additions,
primarily in the areas of information systems, human resources, accounting and
operations. General and administrative expenses as a percentage of net revenues
decreased from 10% to 8% of net revenues for the both the three and nine month
periods ended March 31, 1997 and March 31, 1998, respectively. The decline in
general and administrative expenses as a percentage of net revenues is primarily
attributable to the fixed nature of a large portion of these expenses.
RESEARCH AND DEVELOPMENT
Research and development expenses increased from $1,151,000 to $2,230,000 for
the three month periods ended March 31, 1997 and March 31, 1998, respectively,
and from $3,318,000 to $6,254,000 for the nine month periods ended March 31,
1997 and March 31, 1998, respectively. This increase can be attributed to an
increase in domestic headcount, the utilization of additional independent
contractors and other third party development costs relating to the development
and expansion of the Company's product offerings. Research and development costs
as a percentage of net revenues increased from 11% to 13% of net revenues for
the three month periods ended March 31, 1997 and March 31, 1998, respectively,
and from 11% to 14% for the nine month periods ended March 31, 1997 and March
31, 1998, respectively. The percentage increases reflect the Company's continued
commitment to invest in research and development, and the research and
development expenditures associated with the in-process technologies acquired
during the quarter ended September 30, 1997. The Company expects that given its
intention to invest in research and development, such research and development
expenditures as a percentage of net revenues may continue at rate consistent
with those experienced for the three and nine month periods ended March 31,
1998.
WRITE-OFF OF PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT
In the nine month period ended March 31, 1998 the Company expensed $6,367,000 of
in-process research and development resulting from the acquisitions from Corel,
Quarterdeck, MapLinx and MediaPaq described above.
OTHER EXPENSE, NET
Other expense, net, which consists of interest expense on short- and long-term
borrowings as well as net gains or losses on foreign currency transactions,
increased from $32,000 to $105,000 for the three month periods ended March 31,
1997 and March 31, 1998, respectively, and from $56,000 to $536,000 for the nine
month periods ended March 31, 1997 and March 31, 1998, respectively. For the
three month period ended March 31, 1998, other expense, net consisted of $49,000
in foreign exchange gain and $154,000 of interest expense, compared to $13,000
in foreign exchange gain and $45,000 of interest expense for the comparable
period in the previous
17
<PAGE> 18
fiscal year. For the nine month period ended March 31, 1998, other expense, net
consisted of $154,000 of foreign exchange loss and $382,000 of interest expense,
compared to $66,000 in foreign exchange gain and $122,000 of interest expense
for the comparable period in the previous fiscal year.
PROVISION FOR INCOME TAXES
The Company's effective tax rate is 36% for the nine month period ended March
31, 1998 and 39% for the nine month period ended March 31, 1997. The reduction
in the effective tax rate is primarily attributable to the expected benefit of
international tax planning begun in fiscal 1997 and expected to generate more
income in fiscal 1998 in international locations with lower statutory tax rates.
LIQUIDITY AND CAPITAL RESOURCES
Since July 1, 1996, the Company has financed its working capital and capital
expenditure requirements primarily from net income before depreciation and
amortization and short-term and long-term bank borrowings. Working capital
decreased to $6,220,000 at March 31, 1998, from $7,333,000 at June 30, 1997,
resulting primarily from increases in receivables and inventories offset by
borrowings under the bank line of credit and increases in accounts payable to
finance the growth of the business and acquisitions.
The Company's operating activities during the nine month period ended March 31,
1998 used cash of $1,674,000 primarily to support increased receivables and
inventory buildup. The Company also used cash of $232,000 for the comparable
period in the previous year, also primarily to support increased receivables and
inventory buildup. The Company's investing activities used cash of $2,896,000
and $318,000 in the nine month period ended March 31, 1998 and 1997,
respectively. The fiscal 1998 capital expenditures were primarily for the
acquisition of capitalized software, resulting from the acquisitions discussed
above and the purchase of equipment. At March 31, 1998, the Company had no
material commitments for capital expenditures. Cash provided by financing
activities was $4,721,000 and $1,297,000 for the nine month period ended March
31, 1998 and 1997, respectively. Cash inflows from financing activities, for the
nine month period ended March 31, 1998, were primarily the result of net line of
credit borrowings of $6,000,000.
On May 4, 1998, the Company entered into a new line of credit agreement with a
bank under which it can borrow the lesser of $10,000,000 or 80% of eligible
accounts receivable, at the bank's reference rate plus 1/2 % or LIBOR plus 2%,
at the Company's option. The line of credit agreement requires the Company to
comply with certain financial covenants including maintenance of net worth and
working capital requirements. Under the terms of the agreement, all assets not
subject to liens of other financial institutions have been pledged as collateral
against the line of credit. The credit line expires October 31, 1999. On May 4,
1998, the Company also secured a term loan from the same bank in the amount of
$1,500,000, to be repaid in eight equal quarterly installments of $187,500 plus
interest. The interest rate is the bank's reference rate plus 1/2 % or LIBOR
plus 2%, at the Company's option. The term loan matures on April 30, 2000.
On May 4, 1998 the Company borrowed $1,500,000 under the term loan, and
approximately $7,800,000 under the credit line. The Company selected 90-day
LIBOR (5.69% on May 4, 1998)
18
<PAGE> 19
+ 2% as the interest rate option for both the line of credit and the term loan.
The Company used the proceeds from these borrowings to repay the amounts
outstanding under its previous bank line of credit and previous term loan, which
were then terminated.
The Company believes that its existing cash and cash equivalents, ($1,277,000 at
March 31, 1997), cash flow from operations, and remaining availability under its
line of credit are sufficient to satisfy the Company's working capital and
capital expenditure requirements for at least the next 12 months. However, in
order to support expansion of the Company's operations, future acquisitions of
products or companies, increases in expenses or other factors, the Company
expects to seek additional debt or equity financing in the near term. 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.
OTHER FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
The Company has experienced, and expects to continue to experience, significant
fluctuations in operating results due to a variety of factors. Although the
Company experienced growth during fiscal 1996 and 1997, the Company experienced
a decline in revenues and a net loss for fiscal 1995. In addition, for the
quarter ended September 30, 1997, the Company reported a net loss of
approximately $3.1 million, reflecting in part charges, accounted for primarily
as a write-off of in-process research and development, amounting to
approximately $6.4 million relating to several product acquisition and licensing
transactions. Factors that may cause fluctuations in operating results in the
future include, but are not limited to, market acceptance of the Company's
products or those of its competitors; the timing of introductions of new
products and new versions of existing products; expenses relating to the
development and promotion of such new product and new version introductions;
product returns and reserves; difficulty in securing retail shelf space for the
Company's products; changes in pricing policies by the Company or its
competitors; changes in product mix; projected and actual changes in platforms
and technologies; timely and successful adaptation to such platforms or
technologies; the accuracy of forecasts of, and fluctuations in, consumer
demand; the extent of third party royalty payments; market seasonality; the rate
of growth of the consumer software market; fluctuations in foreign exchange
rates; the timing of orders or order cancellation from major customers; order
cancellations; changes or disruptions in the consumer software distribution
channels; the successful acquisition and integration of new businesses, products
and technologies; the timing of any write-offs in connection with such
acquisitions; and economic conditions, both generally and within the Company's
industry. In addition, the Company's strategy is to increase the focus of its
sales efforts on volume licensing to corporate accounts, and the timing of such
licenses could significantly affect quarterly results of operations. The Company
may also be required to pay fees in advance or to guarantee royalties, which may
be substantial, or to obtain software licenses from third parties before the
commercial viability of such software has been determined, which could cause
operating results to fluctuate. As a result of these and other factors, the
Company's operating results in any given period are inherently difficult to
predict. Any significant shortfall in revenues and earnings from the levels
expected by securities analysts and shareholders could result in a substantial
decline in the trading price of the Company's common stock.
While the Company's business has not generally been materially affected by
seasonal trends, the seasonality of the European, Asia/Pacific and other
international markets could impact the
19
<PAGE> 20
Company's operating results and financial condition in a particular quarter
given the significant portion of net revenues contributed by international
operations. These seasonal patterns may be overshadowed in particular quarters
by the timing of new product introductions, expansion into international markets
and other factors affecting the Company's business. Furthermore, the markets for
the Company's products are characterized by significant price competition, which
may cause the Company's operating results to fluctuate. In addition to seasonal
and product pricing factors, the Company anticipates that its operating results
for the remainder of fiscal 1998 and fiscal 1999 will be affected by the timing
and the number of new product releases or upgraded versions of existing
products, as well as marketing and promotional expenditures in connection with
the product releases and the timing of product announcements or introductions by
the Company's competitors.
Products are generally shipped as orders are received. Therefore, the Company
has historically operated with little order backlog and sales and operating
results for any quarter have depended on the volume and timing of orders
received during that quarter, which cannot be predicted with any degree of
certainty. A significant portion of the Company's operating expenses are
relatively fixed, and planned expenditures are based on sales forecasts. Thus,
if revenue levels are below expectations due to either the timing of orders
received or delays in products releases, operating results are likely to be
materially adversely affected. Without growth in revenues in any particular
quarter, the Company's increasing fixed operating expenses could cause net
income to decline when compared to the same period in the previous year or the
immediately preceding quarter. In such event, the market price of the Company's
common stock may be materially adversely affected. Due to the foregoing factors,
the Company believes that quarter to quarter comparisons of its operating
results are not necessarily meaningful and should not be relied upon as
indications of future performance.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
20
<PAGE> 21
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
Not Applicable
ITEM 2. Changes in Securities and Use of Proceeds
Not Applicable
ITEM 3. Defaults upon Senior Securities
Not Applicable
ITEM 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Stockholders of International
Microcomputer, Inc. was held on December 19, 1997. The majority
of shares were voted by proxy.
(b) The shareholders resolved by a majority of shares to
re-elect the current Board members: Martin Sacks, Geoffrey
Koblick, Robert Mayer, Earl Hamlin, Charles Federman and Gordon
Landies.
(c) Additionally, the shareholders resolved by a majority of shares
to amend the Company's 1993 Employee Incentive Plan to increase
the number of shares of common stock reserved for issuance
thereunder by 750,000 shares.
ITEM 5. Other Information
Not Applicable
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) No report on Form 8-K was filed during the quarter ended March
31, 1998.
21
<PAGE> 22
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: May 15, 1998 INTERNATIONAL MICROCOMPUTER SOFTWARE, INC.
By: /s/ MARTIN SACKS
----------------------------------------
Martin Sacks
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ KENNETH R. FINEMAN
----------------------------------------
Kenneth R. Fineman
Vice President of Finance and Chief
Financial Officer
(Principal Financial Officer)
22
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 1,277,000
<SECURITIES> 0
<RECEIVABLES> 17,036,000
<ALLOWANCES> 3,493,000
<INVENTORY> 2,251,000
<CURRENT-ASSETS> 25,076,000
<PP&E> 4,846,000
<DEPRECIATION> 1,990,000
<TOTAL-ASSETS> 32,729,000
<CURRENT-LIABILITIES> 18,856,000
<BONDS> 0
0
0
<COMMON> 12,174,000
<OTHER-SE> 287,000
<TOTAL-LIABILITY-AND-EQUITY> 32,729,000
<SALES> 45,562,000
<TOTAL-REVENUES> 45,562,000
<CGS> 17,233,000
<TOTAL-COSTS> 17,233,000
<OTHER-EXPENSES> 28,963,000
<LOSS-PROVISION> 550,000
<INTEREST-EXPENSE> 536,000
<INCOME-PRETAX> (1,170,000)
<INCOME-TAX> (421,000)
<INCOME-CONTINUING> (749,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (749,000)
<EPS-PRIMARY> (.14)
<EPS-DILUTED> (.14)
</TABLE>
