<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, 1999
[ ] 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.)
75 ROWLAND WAY, NOVATO, CA 94945
(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 14, 1999, 6,942,930 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>
PART I - FINANCIAL INFORMATION
Item 1. Interim Consolidated Financial Statements
Consolidated Balance Sheets at March 31, 1999 and June 30, 1998 3
Consolidated Statements of Operations for the three and nine
months ended March 31, 1999 and 1998 4
Consolidated Statements of Cash Flows for the nine months ended
March 31, 1999 and 1998 5
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk 22
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 2. Changes in Securities and Use of Proceeds 23
Item 3. Defaults upon Senior Securities 23
Item 4. Submission of Matters to a Vote of Security Holder 23
Item 5. Other Information 24
Item 6. Exhibits and Reports on Form 8-K 24
SIGNATURES 25
</TABLE>
2
<PAGE> 3
INTERNATIONAL MICROCOMPUTER SOFTWARE, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, 1999 JUNE 30, 1998
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4,874 $ 2,093
Receivables, less allowances for doubtful
accounts and returns of $6,910 and $4,081 5,045 13,299
Inventories, net 6,307 6,549
Prepaid royalties and licenses, net 2,488 2,517
Deferred tax assets, net 3,250 1,762
Other 904 759
-------- --------
Total current assets 22,868 26,979
-------- --------
Furniture and equipment, net 4,973 3,430
Deferred tax assets, net 1,000 2,676
Capitalized software development costs, net 3,503 2,101
Goodwill and other assets, net 2,456 314
-------- --------
Total assets $ 34,800 $ 35,500
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,604 $ 6,915
Accrued and other liabilities 6,911 2,703
Credit line payable 7,200 7,948
Short term debt and other obligations 1,071 842
Current portion of notes payable 1,251 1,434
Income taxes payable -- 313
-------- --------
Total current liabilities 22,037 20,155
Long term debt and other obligations 2,872 1,682
-------- --------
Total liabilities 24,909 21,837
Shareholders' equity:
Common stock, no par value; 300,000,000 authorized;
Issued and outstanding 6,865,367 and 5,684,179 shares 24,022 12,718
Retained earnings (accumulated deficit) (13,850) 1,255
Cumulative translation adjustment 4 (25)
Notes receivable from shareholders (285) (285)
-------- --------
Total shareholder's equity 9,891 13,663
-------- --------
Total liabilities and shareholder's equity $ 34,800 $ 35,500
======== ========
</TABLE>
See Notes to Consolidated Financial Statements
3
<PAGE> 4
INTERNATIONAL MICROCOMPUTER SOFTWARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, NINE MONTHS ENDED MARCH 31,
---------------------------------------------- -----------------------------------------------
1999 1998 1999 1998
-------------------- ---------------------- ----------------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues $ 7,281 100.0% $ 16,671 100.0% $ 30,902 100.0% $ 45,562 100.0%
Product costs 4,990 68.5% 6,770 40.6% 17,273 55.9% 17,233 37.8%
----------- ------- ----------- ------- ----------- ------- ----------- -------
Gross margin 2,291 31.5% 9,901 59.4% 13,629 44.1% 28,329 62.2%
Costs and expenses:
Sales and marketing 4,312 59.2% 4,475 26.8% 15,402 49.8% 12,770 28.0%
General and administrative 2,201 30.2% 1,302 7.8% 5,742 18.6% 3,572 7.8%
Research and development 2,009 27.6% 2,230 13.4% 6,468 20.9% 6,254 13.7%
Write off of purchased in
process research and
development 6,367 4.8%
----------- ------- ----------- ------- ----------- ------- ----------- -------
Total operating expenses 8,522 117.0% 8,007 48.0% 27,612 89.4% 28,963 63.6%
----------- ------- ----------- ------- ----------- ------- ----------- -------
Operating income (loss) (6,231) (85.6)% 1,894 11.4% (13,983) (45.3)% (634) (1.4)%
Other (expense), net (492) (6.7)% (105) (0.6)% (1,197) (3.9)% (536) (1.2)%
----------- ------- ----------- ------- ----------- ------- ----------- -------
Income (loss) before taxes (6,723) (92.3)% 1,789 10.7% (15,180) (49.1)% (1,170) (2.6)%
Provision (benefit) for
income taxes 2,969 40.8% 644 3.9% (76) (0.2)% (421) (.9)%
----------- ------- ----------- ------- ----------- ------- ----------- -------
Net income (loss) $ (9,692) (133.1)% $ 1,145 6.9% $ (15,104) (48.9)% $ (749) (1.6)%
=========== ======= =========== ======= =========== ======= =========== =======
Basic earnings (loss)
per share: $ (1.52) $ 0.20 $ (2.54) $ (0.14)
=========== =========== =========== ===========
Diluted earnings (loss)
per share: $ (1.52) $ 0.18 $ (2.54) $ (0.14)
=========== =========== =========== ===========
Shares used in computing
basic earnings (loss)
per share: 6,364,000 5,631,000 5,939,000 5,461,000
=========== =========== =========== ===========
Shares used in computing
diluted earnings (loss)
per share: 6,364,000 6,506,000 5,939,000 5,461,000
=========== =========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
4
<PAGE> 5
INTERNATIONAL MICROCOMPUTER SOFTWARE, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MARCH 31,
-----------------------
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(15,104) $ (749)
Adjustments to reconcile net loss to net cash provided
(used) by operating activities
Depreciation and amortization 2,902 1,566
Deferred taxes 188 (2,338)
Write-off of purchased in-process research and development 6,367
Write off of deferred offering costs 215
Changes in:
Receivables, net 7,954 (6,008)
Inventories, net 242 (2,574)
Prepaid royalties and licenses, net 29 (966)
Other current assets (99) (318)
Accounts payable and accrued liabilities 5,404 3,368
Income taxes payable (313) (22)
-------- --------
Net cash provided (used) by operating activities 1,418 (1,674)
-------- --------
Cash flows from investing activities:
Purchase of equipment (1,225) (625)
Acquisition of software development and in-
process technologies (1,964) (2,257)
Purchase of Zedcor subsidiary (300)
Other (274) (14)
-------- --------
Net cash used by investing activities (3,763) (2,896)
-------- --------
Cash flows from financing activities:
Credit line borrowings 2,025 8,410
Credit line repayments (2,773) (2,410)
Borrowings (repayments) under term loan, net 1,378 (378)
Capital lease and other obligations repayments (1,120) (1,286)
Proceeds from issuance of common stock 5,616 385
-------- --------
Net cash provided by financing activities 5,126 4,721
-------- --------
Net increase in cash and cash equivalents 2,781 151
Cash and cash equivalents at beginning of period 2,093 1,126
-------- --------
Cash and cash equivalents at end of the period $ 4,874 $ 1,277
======== ========
</TABLE>
See Notes to Consolidated Financial Statements
5
<PAGE> 6
INTERNATIONAL MICROCOMPUTER SOFTWARE, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SUPPLEMENTAL SCHEDULE OF NON-CASH NINE MONTHS ENDED
FINANCING AND INVESTING INFORMATION MARCH 31,
-------------------------------
1999 1998
------------- --------------
<S> <C> <C>
PURCHASE OF TECHNOLOGY AND ASSETS IN EXCHANGE FOR:
TRADE PAYABLES $383
NOTES PAYABLE $4,030 $1,034
LONG TERM DEBT $300
COMMON STOCK $1,336 $5,240
EQUIPMENT ACQUIRED THROUGH CAPITAL LEASE $984 $1,042
OBLIGATIONS
IMSI COMMON STOCK RECEIVED IN SATISFACTION OF
RECEIVABLE $320
REPAYMENT OF ACCOUNTS PAYABLE AND ACCRUED AND
OTHER LIABILITIES WITH IMSI COMMON STOCK $2,207
REPAYMENT OF TERM LOANS WITH IMSI COMMON STOCK $1,444
</TABLE>
See Notes to Consolidated Financial Statements
6
<PAGE> 7
INTERNATIONAL MICROCOMPUTER SOFTWARE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The interim consolidated financial statements have been prepared from the
records of International Microcomputer Software, Inc. and subsidiaries (the
"Company" or "IMSI") without audit. In the opinion of management, all
adjustments (which consist only of normal recurring adjustments, other than
described below) necessary to present fairly the financial position, results of
operations and cash flows as of and for the periods ended March 31, 1999 and
March 31, 1998, 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, 1998. The results of operations for the three and
nine months ended March 31, 1999 and 1998 are not necessarily indicative of the
results to be expected for any other interim period or for the full year.
2. REALIZATION OF ASSETS
IMSI has experienced, and expects to continue to experience, significant
fluctuations in operating results due to a variety of factors. The Company
experienced growth during fiscal 1998, 1997, and 1996. However, during fiscal
year 1999, IMSI suffered a significant decline in revenue, and the Company
reported net losses for both the three and nine months ended March 31, 1999, of
$9,692,000 and $15,104,000, respectively. The consolidated financial statements
have been prepared on the going concern basis, which contemplates the
realization of assets and satisfaction of liabilities in the normal course of
business. The losses discussed above, and other factors such as the Company's
liquidity, raise questions concerning the Company's ability to continue as a
going concern.
The consolidated financial statements do not include any adjustments relating to
the recoverability and classification of recorded asset amounts or the amounts
and classification of liabilities that might be necessary should the Company be
unable to continue as a going concern. The Company's continuation as a going
concern is dependent upon, among other factors, its ability to generate
sufficient cash flow to meet its obligations on a timely basis, to obtain
additional financing or refinance existing obligations, and ultimately to attain
successful operations.
3. DEFERRED REVENUE
Revenue received from subscriptions is deferred and recognized over the life of
the subscription agreement, generally 12 to 15 months. As of March 31, 1999,
deferred revenue, net of accumulated amortization, totaled $1,958,000. During
fiscal year 1999, $525,000 of deferred revenue was recognized. No revenue was
deferred as of June 30, 1998.
7
<PAGE> 8
4. 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, 1999 June 30, 1998
-------------- -------------
<S> <C> <C>
Raw materials $ 2,509,000 $ 2,882,000
Finished goods 4,791,000 4,282,000
----------- -----------
7,300,000 7,164,000
Reserves for obsolescence (993,000) (615,000)
----------- -----------
$ 6,307,000 $ 6,549,000
=========== ===========
</TABLE>
The Company evaluates the estimated net realizable value of inventories at each
balance sheet date and records write downs 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.
5. 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 when the product is available for
general release to customers. Costs associated with acquired completed software
are capitalized. Total capitalized software development costs were $8,420,000
and $5,261,000 at March 31, 1999 and June 30, 1998, respectively, less
accumulated amortization of $4,917,000 and $3,160,000, respectively.
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 or 60 months in the case of visual content products. In addition, the
Company evaluates the net realizable value of each software product at each
balance sheet date and records write-downs to net realizable value for any
products for which the carrying value is in excess of the estimated net
realizable value.
6. BASIC AND DILUTED EARNINGS PER SHARE ("EPS")
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.
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:
8
<PAGE> 9
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
---------------------------------- ----------------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net income (loss) $ (9,692,000) $ 1,145,000 $(15,104,000) $ (749,000)
============ ============ ============ ============
Shares used to compute basic
EPS 6,364,000 5,631,000 5,939,000 5,461,000
Add effect of dilutive
securities:
Warrants 30,000
Stock options 914,000 875,000 690,000 --
------------ ------------ ------------ ------------
Shares used to compute diluted
EPS 7,308,000 6,506,000 6,629,000 5,461,000
============ ============ ============ ============
(1) (1) (1)
</TABLE>
(1) Not presented as results were anti-dilutive
7. AMENDED BANK LINE OF CREDIT
The Company has a line of credit agreement with Union Bank under which it can
borrow the lesser of $13,500,000 or 80% of eligible accounts receivable, at
Union Bank's reference rate plus 1/2 % or LIBOR plus 2%, at IMSI's option. The
line of credit agreement requires IMSI 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.
As a result of covenant violations, certain events of default have occurred, and
are continuing, that among other things, entitle Union Bank to declare all loans
and other obligations of IMSI under the line of credit to be immediately due and
payable and to commence immediate enforcement and collection actions. On March
5, 1999, IMSI and Union Bank executed a forbearance agreement, whereby IMSI
agreed to pay down the amount by which IMSI's obligations to Union Bank exceeded
the sum permitted to be borrowed in accordance with the agreement such that the
remaining over-advance did not exceed $2,250,000. IMSI accordingly paid
approximately $1,773,000 of the balance outstanding on the line of credit in
March 1999. Union Bank agreed to forbear taking any enforcement actions until
April 5, 1999. IMSI is continuing to negotiate with Union Bank regarding new
terms, and to date Union Bank has not taken any action against the Company.
However, failure to negotiate an acceptable arrangement with Union Bank could
have a material adverse effect on IMSI's business, operating results and
financial condition.
8. RESERVE FOR REBATES, RETURNS, PRICE DISCOUNTS, AND DOUBTFUL ACCOUNTS
The Company's allowances for rebates, returns and price discounts ("price
protection") were $700,000, $4,889,000, and $683,000, respectively, as of March
31, 1999. The Company's allowances for rebates, returns and price discounts were
$0, $2,286,000, and $287,000, respectively, as of March 31, 1998. Allowances for
rebates, returns, and price protection, are based on management's best judgment
using historical experiences adjusted for current situations. The accrual of
sales reserves attempts to match anticipated rebates, returns and price
9
<PAGE> 10
discounts with the recognition of the related sales revenue. The Company
recognizes revenue, net of estimated returns and allowances, upon shipment of a
product and only when no significant obligations remain and collectability is
probable. The Company's return policy allows its distributors, subject to
certain limitations, to return purchased products in exchange for new products
or for credit towards future purchases as part of stock balancing programs. In
addition, the Company provides price protection to its distributors when it
reduces the prices of its products. End users may return products through
dealers and distributors within a reasonable period from the date of purchase
for a full refund, and retailers may return older versions of products for a
full refund. Various distributors and resellers may have different return
practices that adversely affect the number of products that are returned to the
Company. Product returns often occur when the Company introduces upgrades and
new versions of products or when distributors or resellers overestimate demand.
The Company reports receivables on its balance sheet net of allowances for
doubtful accounts, returns, price protection and rebates. These allowances were
in total, 57.8% and 23.5%, of gross receivables at March 31, 1999 and June 30,
1998, respectively. The Company's allowances for doubtful accounts were
$1,199,000 and $590,000 as of March 31, 1999 and June 30, 1998, respectively.
The allowance for rebates deducted from gross receivables does not include
amounts anticipated to be paid to third party vendors (see note 9). As of March
31, 1999, $139,000 was deducted from gross receivables as an allowance for
rebates. As of June 30, 1998, none of the reserve for rebates was deducted from
gross receivables.
9. RECLASSIFICATIONS
Sales rebates are primarily payable to third party vendors on behalf of end
users. To this extent, rebates do not reduce the amounts receivable from the
Company's customers when processed. In prior periods, the Company has reported
all amounts accrued for rebates as a reduction (allowance) from receivables. As
of March 31, 1999, the rebate accrual attributable to amounts that will be
payable to third party vendors ($561,000) has been reclassified to accrued
liabilities. As of June 30, 1998, all of the rebate accrual was attributable to
amounts that were payable to third party vendors ($150,000). This amount has
also been reclassified to accrued liabilities to conform with the current period
presentation.
10. COMPREHENSIVE INCOME (LOSS)
Comprehensive income includes changes in the balance of items that are reported
directly in a separate component of stockholders' equity on the consolidated
balance sheets. The reconciliation of net income (loss) to comprehensive income
(loss) is as follows.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
---------------------------------- ----------------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net income (loss) $ (9,692,000) $ 1,145,000 $(15,104,000) $ (749,000)
Other comprehensive income (loss):
Foreign currency translation
adjustments (170,000) (53,000) 29,000 (6,000)
------------ ------------ ------------ ------------
Total comprehensive income (loss) $ (9,862,000) $ 1,092,000 $(15,075,000) $ (755,000)
============ ============ ============ ============
</TABLE>
10
<PAGE> 11
11. ISSUANCE OF COMMON STOCK
The Company is in the process of preparing a registration statement to register
the resale of certain shares of common stock that either were previously issued
or may be issued in the future pursuant to exercise of previously granted
warrants or other rights. These shares are the result of the following
agreements that the Company entered into during fiscal year 1999.
The Exchange Agreement. In October 1998, IMSI acquired all the outstanding
common stock of Zedcor, Inc. ("Zedcor"), an Internet provider of art and
animations, pursuant to an Exchange Agreement. The total purchase price
consisted of cash, a promissory note and 176,455 shares of common stock. The
Company agreed to register those shares for resale.
Zedcor Fee Agreement. On February 25, 1999, IMSI entered into a fee agreement
with Zedcor. Under the terms of the Zedcor Fee Agreement, IMSI issued 150,321
shares of common stock and will issue an additional 47,680 shares of common
stock in satisfaction of a debt owed Zedcor (the principal amount of which is
$1,503,000) under the terms of the Exchange Agreement described above. In May
1999, the Company entered into an agreement with Zedcor and its former
shareholders pursuant to which the Company agreed, among other things, to
issue approximately 47,500 shares of common stock in consideration of the
release of a security interest in favor of the former Zedcor shareholders and
certain other agreements by those shareholders.
The Warrant Agreement. On November 3, 1998, IMSI borrowed funds under a
three-year subordinated loan facility with Silicon Valley Bank. As part of the
loan facility, IMSI issued warrants, which have a five-year term, to purchase
30,000 shares of common stock with an exercise price of $7.00 per share. As part
of the original loan agreement, IMSI was required to register shares by February
1, 1999. Silicon Valley Bank and IMSI agreed to extend this deadline until June
5, 1999. Additional warrants are required to be granted as follows:
<TABLE>
<CAPTION>
If not paid in full prior to: Additional warrants to be issued Exercise price per share
----------------------------- -------------------------------- ------------------------
<S> <C> <C>
October 31, 1999 5,000 $7.00
January 31, 2000 25,000 7.00
April 30, 2001 65,000 6.00
October 31, 2001 125,000 5.00
</TABLE>
IMSI intends to register 30,000 of the shares issuable upon exercise of these
warrants. If it is necessary to register the remaining shares, IMSI will do so
at a later date.
Asset Purchase Agreement. On December 24, 1998, IMSI purchased certain assets of
Clipartconnection.com, an Internet provider of art and animation, for a purchase
price of 18,053 shares of common stock.
Garay Fee Agreement. On January 11, 1999, IMSI entered into a fee agreement with
the Law Offices of Mark Garay, Inc. ("Garay") Under the terms of the Garay Fee
Agreement, IMSI issued 11,112 shares of common stock in satisfaction of a
$100,000 debt owed to Garay.
TLC Fee Agreement. On October 2, 1998, The Learning Company ("TLC") and IMSI
entered into a software license agreement whereby TLC sold Org Plus to IMSI in
exchange for current and future cash payments. In January 1999, IMSI and TLC
agreed to amend the terms of the Org Plus agreement to allow IMSI to settle the
$1,800,000 portion of the unpaid purchase price by the issuance of 200,000
shares of common stock. In addition, IMSI has agreed that if TLC sells any
shares pursuant to the registration statement within 30 days of the effective
date of the registration statement at a sale price of less than the price per
share of the common stock as of
11
<PAGE> 12
April 30, 1999, IMSI will pay TLC the difference between the price TLC receives
per share and the price per share as of April 30, 1999 in cash, or at IMSI's
option, by issuing additional shares based on the average share price during the
thirty day protection period.
Greentree Fee Agreement. On February 18, 1999, IMSI entered into a fee agreement
with Greentree to satisfy a $150,000 debt owed to Greentree under the terms of a
software license agreement between IMSI and Greentree. In settlement of this
debt, IMSI issued to Greentree 18,053 shares.
Capital Ventures International Agreement. On March 3, 1999, IMSI entered into a
stock purchase agreement and related agreements with Capital Ventures
International ("CVI"). Under the terms of the agreement, CVI paid IMSI
$5,000,000 and IMSI issued 437,637 shares of its common stock. IMSI may be
required to issue additional shares depending on the market price of the common
stock at certain future dates. Additionally, pursuant to the CVI agreement, CVI
can purchase up to $3,000,000 worth of additional shares of common stock, up to
a maximum number of 375,117 shares. CVI also acquired a warrant to purchase
131,291 shares of common stock.
Homestyles Agreement. On January 11, 1999, IMSI entered into a fee agreement
with Homestyles to satisfy a $90,000 debt IMSI owed Homestyles under the terms
of various software license agreements between IMSI and Homestyles. In
settlement of this debt, IMSI issued to Homestyles 10,000 shares of common
stock.
Minnevich Agreement. On January 11, 1999, IMSI entered into a fee agreement with
Minnevich to satisfy a $45,000 debt IMSI owed Minnevich under the terms of
various software license agreements between IMSI and Minnevich. In settlement of
this debt, IMSI issued to Minnevich 5,000 shares of common stock.
Gateway Agreement. On March 1, 1999, IMSI entered into a fee agreement with
Gateway to satisfy a $72,000 debt IMSI owed Gateway under the terms of various
manufacturing agreements between IMSI and Gateway. In settlement of this debt,
IMSI issued to Gateway 8,000 shares of common stock.
Spatial Agreement. On March 25, 1999, IMSI entered into a fee agreement with
Spatial to satisfy a $45,000 debt IMSI owed Spatial under the terms of various
software license agreements between IMSI and Spatial. In settlement of this
debt, IMSI issued to Spatial 5,000 shares of common stock.
StarBase Agreement. On March 26, 1999, IMSI entered into a fee agreement with
StarBase to satisfy a $121,00 debt IMSI owed StarBase under the terms of various
software license agreements between IMSI and StarBase. In settlement of this
debt, IMSI issued to StarBase 10,750 shares of common stock.
13. LEGAL PROCEEDINGS
On March 3, 1999 RGC International Investors, LDC ("RGC") filed an action in the
District Court for the Northern District of California against IMSI for alleged
breach of contract and of the implied covenant of good faith and fair dealing,
seeking payment by IMSI of unspecified amount of compensatory damages, specific
performance, costs and fees, but exceeding the jurisdictional minimum of
$75,000. RGC alleges in its complaint that IMSI was obligated to proceed with a
$5,000,000 million investment
12
<PAGE> 13
transaction by RGC in IMSI. IMSI notified RGC in January 1999 that it was
terminating discussions regarding an investment.
14. SUBSEQUENT EVENTS
Subsequent to March 31, 1999, the Company was in the process of implementing a
company-wide restructuring in response to its fiscal year 1999 decline in
revenues and net losses. In this regard, IMSI is attempting to reduce the costs
associated with its retail operations, focus on its strongest product
franchises, and discontinue investment in non-strategic products. The Company
plans to move to a more variable cost model and reduce fixed infrastructure.
Although amounts can not be quantified due to the preliminary nature of the
restructuring plan, the Company expects to incur a significant restructuring
charge in the current fourth fiscal quarter. This charge may include write-downs
of inventories and other intangible assets relating to non-strategic products,
as well as costs associated with personnel reductions and facilities closures.
On or about May 10, 1999, a motion for a default judgment motion for
approximately $430,000 was filed in Jackson County, Oregon against IMSI in
connection with a lawsuit filed by Commercial Printing Company, Inc. alleging
non-payment of invoices. The amount of the invoices is already reflected in the
Company's financial statements. IMSI and Commercial Printing Company, Inc. were
in the process of negotiating a settlement of the lawsuit at the time the motion
was filed. The parties are still in negotiations to settle the lawsuit. IMSI
intends to respond to the motion.
13
<PAGE> 14
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, 1998 (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 on the Company's Form 10-K. 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
IMSI is a developer and publisher of PC productivity software in the business
applications, utilities and visual content categories. The Company's PC
applications are sold to a broad variety of users, particularly small to medium
sized businesses, in categories that the Company believes are under served by
other major software vendors. IMSI markets its products in up to 13 languages
and 60 countries. Historically, the Company has sold its products through the
retail channel primarily through large wholesale distributors. Pursuant to
requests of certain large software retailers, the Company has begun shipping
directly to these customers as well.
IMSI's marketplace has recently experienced a higher emphasis on online and
Internet-related services and content tailored for this new delivery vehicle.
The Company has taken steps, at significant cost, to take advantage of
opportunities created by the Internet and online networks, and it expects to
continue incurring significant additional costs in connection with its Internet
infrastructure. These changes include material and costly additions to the
existing hardware, increases in experienced web designer personnel, acquisitions
and cross licenses to drive traffic to the Company's web site(s) and a
transition to an Internet sales and marketing strategy. Their can be no
assurance that an Internet strategy will be successful, or that the costs and
investments in this area will provide adequate, or any, results. Delivery of
software using online services or the Internet will necessitate certain changes
in the Company's business and operations, including addressing operational
challenges, such as improving download time for pictures, images and programs,
ensuring proper regulation of content quality, and developing sophisticated
security for transmitting payments. The failure to adapt to and utilize such
technologies and media successfully and in a timely manner could materially and
adversely affect the Company's competitive position and financial results.
IMSI has experienced, and expects to continue to experience, significant
fluctuations in operating results due to a variety of factors. The Company
experienced growth during fiscal 1998, 1997, and 1996. However, during fiscal
year 1999, IMSI suffered a significant decline in revenue and reported net
losses for both the three and nine months ended March 31, 1999, of $9,692,000
and $15,104,000, respectively. This compares with net income of $1,145,000 and a
net loss of $749,000 in the same periods of the previous fiscal year. See note 2
to the unaudited
14
<PAGE> 15
consolidated financial statements in regards to accounting for the realization
of assets and continuation as a going concern.
RESULTS OF OPERATIONS
NET REVENUES
Net revenues for the three and nine months ended March 31, 1999 were $7,281,000
and $30,902,000 respectively, compared to $16,671,000 and $45,562,000 for the
comparable periods in the previous fiscal year. Contributing to the decline in
revenues was an increase in provisions for product rebates, returns, and price
discounts. The Company's allowances for rebates, returns and price discounts
were $700,000, $4,889,000, and $683,000, respectively, as of March 31, 1999. The
Company's allowances for rebates, returns and price discounts were $0,
$2,286,000, and $287,000, respectively, as of March 31, 1998. See note 8 to the
unaudited consolidated financial statements for a description of certain
policies concerning revenue recognition and return policies.
The Company recognizes revenue, net of estimated returns and allowances, upon
shipment of a product and only when no significant obligations remain and
collectability is probable. The Company's return policy allows its distributors,
subject to certain limitations, to return purchased products in exchange for new
products or for credit towards future purchases as part of stock balancing
programs. In addition, the Company provides price protection to its distributors
when it reduces the prices of its products. End users may return products
through dealers and distributors within a reasonable period from the date of
purchase for a full refund, and retailers may return older versions of products
for a full refund. Various distributors and resellers may have different return
practices that adversely affect the number of products that are returned to the
Company. Product returns often occur when the Company introduces upgrades and
new versions of products or when distributors or resellers overestimate demand.
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 (in thousands, except for percentage amounts) :
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
---------------------------- ------------------------------
1999 1998 1999 1998
------------- ------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Business
applications $4,966 68% $ 5,983 36% $16,063 52% $17,113 38%
Utilities 688 9% 4,497 27% 3,635 12% 10,029 22%
Visual content 2,334 32% 3,701 22% 12,928 42% 14,000 31%
Other products 150 2% 3,320 20% 2,944 10% 5,869 13%
Reserves (857) (12%) (831) (5%) (4,668) (15%) (1,449) (3%)
------------- ------------- -------------- --------------
Total $7,281 100% $16,671 100% $30,902 100% $45,562 100%
============= ============= ============== ==============
</TABLE>
Net revenues in the business applications category for the three month period
ended March 31, 1999 decreased by $1,017,000 or 17% from the comparable period
of fiscal 1998. For the nine months ended March 31, 1999, net revenues in the
business applications category decreased by $1,050,000 or 6%. In general, the
Company experienced a broad decline in sales of many of its business application
products, including TurboCad, TurboProject, HiJaak, MapLinx, MasterPublisher,
Web Business Builder, Graphics Converter, Master Photo Studio and MultiMedia
Fusion. Although sales of FormTool, People Scheduler, Flow, Org Chart Plus,
Sales
15
<PAGE> 16
Forecaster, and Floorplan increased during the current periods, these increases
were not sufficient to offset the declines of the other products.
Net revenues in the utilities category for the three month period ended March
31, 1999 decreased by $3,809,000, or 85%, from the comparable period of fiscal
1998. For the nine months ended March 31, 1999, net revenues in the utilities
category decreased $6,394,000 or 64%. Declines in product sales of WinDelete and
Net Accelerator were primarily responsible for the declines in net revenues.
Sales also declined for VoiceDirect and Ram Shield. Product sales of CD Copier,
Update Now, and Year 2000 Now increased during the current periods.
Net revenues in the visual content category for the three month period ended
March 31, 1999 decreased by $1,367,000, or 37%, from the comparable period of
fiscal 1998. For the nine months ended March 31, 1999, net revenues in the
visual content category decreased $1,072,000 or 8%. The decrease was primarily
due to the decline in sales of the MasterClips product line. Sales of
MasterPhotos also declined. Sales increased for WebArt sales and ArtToday.
Net revenues in the other products category for the three month period ended
March 31, 1999 decreased by $3,170,000, or 95%, from the comparable period of
fiscal 1998. For the nine months ended March 31, 1999, net revenues in the other
products category decreased $2,925,000 or 50%. The decrease was primarily due to
a decline in sales of Easy Language, Micro Cookbook and Family Heritage (product
license to Family Heritage was sold on September 29, 1998).
Net revenues from domestic sales decreased by 49% to $5,659,000, or 78% of net
revenues, for the three month period ended March 31, 1999 as compared to
$11,046,000, or 66% of net revenues, for the same period in the previous fiscal
year. For the nine months ended March 31, 1999, net revenues from domestic sales
decreased by 24% to $21,510,000, or 70% of net revenues, as compared to
$28,229,000, or 62% of net revenues, for the same period in the previous fiscal
year. Net revenues from international sales were $1,622,000, or 22% of net
revenues, for the three month period ended March 31, 1999, compared to
$5,625,000, or 34% net revenues, for the three months ended March 31, 1998. For
the nine months ended March 31, 1999, net revenues from international sales
decreased by 46% to $9,392,000, or 30% of net revenues, as compared to
$17,333,000, or 38% of net revenues, for the nine months ended March 31, 1998.
The Company's international net revenues in the three and nine month periods
ended March 31, 1999 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
For the three months ended March 31, 1999, product costs decreased $1,780,000 to
$4,990,000 but increased as a percent of revenue from 40.6% to 68.5% when
compared to the same period in the previous fiscal year. For the nine months
ended March 31, 1999, product costs increased $40,000 to $17,273,000 and
increased as a percent of revenue from 37.8% to 55.9% when
16
<PAGE> 17
compared to the same period in the previous fiscal year. The decline in product
costs for the three months ended March 31, 1999 was caused by the larger decline
in sales for the same period. The decline in sales also caused manufacturing
burden and overhead to comprise a larger percentage of sales. A portion of labor
and overhead included in product costs is fixed in nature and does not decrease
proportionally when a decline in sales volume occurs. The increase in product
costs as a percentage of revenues was also caused by increased costs related to
a higher level of product returns.
During the nine months ended March 31, 1999, the Company relocated its principal
warehouse facility from Richmond, California to Vacaville, California. The
increase in product costs for the this period includes one-time costs associated
with the inefficiencies and added expense associated with setting up the new
warehouse facility. During this relocation period, the Company maintained staffs
at both warehouse facilities. Other factors contributing to the increase in
product costs in the three and nine months periods ended March 31, 1999 include
higher per unit material and labor costs and increased amortization costs of
capitalized software from acquisitions made in the fiscal year ended June 30,
1998.
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 or 60 months in the case of visual content products.
SALES AND MARKETING
Sales and marketing expenses for the three months ending March 31, 1999
decreased $163,000 or 3.6% to $4,312,000. Sales and marketing expenses for the
nine months ending March 31, 1999 increased $2,632,000 or 20.6% to $15,402,000.
As a percentage of net revenues, sales and marketing expenses for the three and
nine month periods ending March 31, 1999, were 59.2% and 49.8%, respectively, as
compared with 26.8% and 28.0%, respectively, for the same periods in the
previous fiscal year. The increase in sales and marketing expense in the nine
months ending March 31, 1999 was primarily due to the establishment of
additional reserves for cooperative advertising. The decrease in expense for the
three months ended March 31, 1999 and the smaller percentage increase for the
three and nine months periods ending March 31, 1999, reflects cost containment
efforts, including ongoing reductions in headcount, initiated by the Company
in October 1998.
GENERAL AND ADMINISTRATIVE
General and administrative expenses for the three and nine month periods ending
March 31, 1999 increased $899,000 or 69.0% to $2,201,000 and $2,171,000 or 60.8%
to $5,743,000, respectively, as compared to the same periods in the previous
year. These increases were primarily due to increased provisions for doubtful
accounts, increased amortization of acquired intangible assets, increased legal
fees, and additional costs associated with issuing common stock. Also
contributing to the increase for the nine months ending March 31, 1999 was the
Company's write-off of deferred offering costs of $250,000 and the Company's
move to its new corporate headquarters.
As a percentage of net revenues, general and administrative expenses for the
three and nine month periods ending March 31, 1999, were 30.2% and 18.6%,
respectively, as compared with
17
<PAGE> 18
7.8% and 7.8%, respectively, for the previous fiscal year. In addition to the
dollar amount increases in general and administrative expenses, the large
increases in general and administrative expenses as a percent of net revenue
were attributable to a lower net revenue base.
RESEARCH AND DEVELOPMENT
Research and development expenses for the three months ended March 31, 1999
decreased $221,000 or 9.9% to $2,009,000. For the nine month period ending March
31, 1999, research and development expenses increased $214,000 or 3.4% to
$6,468,000. As a percentage of net revenues, research and development expenses
for the three and nine month periods ending March 31, 1999, were 27.6% and
20.9%, respectively, as compared with 13.4% and 13.7%, respectively, for the
previous fiscal year. The increase for the nine months ended March 31, 1999 can
be attributed to the utilization of additional contractors and other third party
development costs relating to the development and expansion of the Company's
product offerings. The decrease in research and development expenses for the
quarter ending March 31, 1999 reflects cost containment efforts, including
ongoing reductions in headcount, initiated by the Company starting in October
1998.
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 $387,000 to $492,000 for the three month period ended March 31, 1999
compared to the same period of the previous fiscal year. For the nine months
ended March 31, 1999, other expense, net, increased $661,000 to $1,197,000 from
the same period in the previous fiscal year. The increase in other expense, net,
was primarily due to an increase in interest expense which was directly related
to the Company's increased borrowings during these periods.
PROVISION FOR INCOME TAXES
The Company's effective tax rate is 36% for the three and nine month periods
ended March 31, 1999 and for the three and nine month periods ended March 31,
1998. The Company adheres to Statement of Financial Accounting Standards (SFAS)
No. 109 "Accounting for Income Taxes," which requires an asset and liability
approach to financial accounting and reporting for income taxes. Valuation
allowances are established when necessary to reduce deferred tax assets to the
amount expected to be realized. Accordingly, during the three months ended March
31, 1999, the Company recorded a valuation allowance of $5,389,000 against
deferred tax assets previously recognized of $9,639,000, resulting in a deferred
tax expense of $2,969,000.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents as of March 31, 1999 increased by $2,781,000 to
$4,874,000 from $2,093,000 at June 30, 1998. However, working capital decreased
by $5,993,000 to $831,000 from $6,824,000 at June 30, 1998. The decrease in the
Company's working capital was primarily due to the losses it has suffered during
the current periods. Primarily due to a net collection of receivables
($7,954,000) and increases in accounts payable and accrued and other liabilities
($5,404,000), net cash provided by operating activities for the nine months
ended March 31, 1999 was $1,418,000.
18
<PAGE> 19
For the nine months ended March 31, 1999, investing activities used total net
cash of $3,763,000. The source of funds for investing activities was primarily
financing activities. During the nine months ended March 31, 1999, net cash from
financing activities was $5,126,000; in addition, during the nine months ended
March 31, 1999, IMSI issued $4,987,000 of common stock in non-cash transactions
(see note 11 to the consolidated financial statements included herein). Other
non-cash transactions included purchasing assets of $5,014,000 through issuing
notes payables and capital lease obligations.
The Company needs to raise significant new working capital in the near future
through additional debt or equity financing to satisfy the Company's near term
working capital expenditure requirements and planned transition to the internet,
and to finance future operations and future acquisitions of products or
companies. Any additional equity financing may be dilutive to
shareholders, and debt financing, if available, may involve restrictive
convenants. The Company is pursuing and will continue to pursue various sources
of additional funding including, but not limited to, debt, equity, strategic
investors, and strategic relationships that may enhance the Company's ability to
develop and distribute its products. No assurance can be given that additional
financing will be available or that, if available, such financing will be
obtainable on terms favorable to the Company. Failure to obtain required
financing will have a material adverse effect on the Company's business,
financial condition and results of operations.
As discussed in note 2 to the unaudited consolidated financial statements,
included herein, the consolidated financial statements have been prepared on the
going concern basis, which contemplates the realization of assets and
satisfaction of liabilities in the normal course of business. The matters
discussed above, among others, may indicate that the Company will be unable to
continue as a going concern. The Company's continuation as a going concern is
dependent upon, among other factors, its ability to generate sufficient cash
flow to meet its obligations on a timely basis, to obtain additional financing
or refinance existing obligations and ultimately to attain successful
operations.
Transactions with TLC. 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 ("TLC")) 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, and the second payment was paid July 15, 1998. The
remaining $625,000 payments were due 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.
On September 29, 1998, TLC paid the Company approximately $1,700,000,
representing amounts due to the Company, after discount, from the Family
Heritage sale and other existing contractual agreements ($430,000). On October
2, 1998, TLC and the Company entered into a software license agreement whereby
TLC sold Org Plus to the Company in exchange for $3,500,000 as follows:
$1,700,000 paid by the Company on October 2, 1998, and $450,000 due on each of
January 1, 1999, April 1, 1999, July 1, 1999, and October 1, 1999. In January
1999, the Company and TLC agreed to amend the terms of the Org Plus agreement to
allow the Company to settle the $1,800,000 obligation by the issuance of 200,000
shares of the Company's common stock. IMSI has agreed to register these shares
for resale and agreed that if TLC sells any shares pursuant to the registration
statement within 30 days of the effective date of the registration statement at
a sale price of less than the price per share of the common stock as of April
30, 1999, IMSI will pay TLC the difference between the price TLC receives per
share and the price per share as of April 30, 1999 in cash, or at IMSI's option,
by issuing additional shares based on the average share price during the thirty
day protection period.
19
<PAGE> 20
The September 29, 1998 $1,700,000 cash receipt from the TLC and the October 2,
1998 $3,500,000 purchase of Org Plus from TLC were accounted for as one
transaction; accordingly, the Company recorded the acquisition of Org Plus at a
net amount of $1,800,000. No revenue was recognized by the Company as a result
of these transactions.
The Company is currently in default under its credit agreements with Union
Bank. See note 7 to the unaudited consolidated financial statements above for a
discussion of IMSI's credit agreements with Union Bank, certain events of
default thereunder, and negotiations between IMSI and the bank.
OTHER FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
For other factors that may affect future operating results, please refer to the
subheading "Future Performance and Additional Risk Factors" in the Company's
Annual Report on Form 10-K for the Fiscal Year Ended June 30, 1998.
20
<PAGE> 21
YEAR 2000 RISKS. The Company recognizes the need to ensure its operations will
not be adversely impacted by Year 2000 software failures. Software failures due
to processing errors potentially arising from calculations using the Year 2000
date are a known risk. The Company has established procedures for evaluating and
managing the risks and costs associated with this problem, and, as part of the
general upgrade of the Company's information systems, the Company is putting in
place systems which will be Year 2000 compliant.
The Company has initiated a Year 2000 Compliance Plan that addresses three types
of systems that must be Year 2000 compliant.
PRODUCTS: The Company's software products have been undergoing Year 2000
compliance testing since January 1998. Approximately 85% of the Company's
currently supported products have been verified as Year 2000 compliant; the
Company believes that remaining products will be verified as compliant by
June 1999.
IT SYSTEMS: The Company believes it has identified all internal data
processing and networking systems that are at risk form the Year 2000
problem and is currently reviewing the manufacturer's Year 2000 Compliance
statement for each system. Any systems that are determined to be
non-compliant will be upgraded or replaced. Internal testing will be
initiated for any mission critical systems for which the manufacturer's Year
2000 Compliance statement is not adequate to ensure the reliability of the
system. The Company believes that all IT systems will be verified as Year
2000 Compliant by July 1999. In addition, no new IT systems will be
implemented without first ensuring that they are Year 2000 Compliant.
NON-IT SYSTEMS: The Company has identified a wide range of general computing
and facilities systems that must be verified as Year 2000 Compliant. The
majority of these systems will be upgraded or replaced as necessary during
normal maintenance if they are not compliant. The manufacturer's year 2000
Compliance statements are currently under review for the remaining systems
and will be upgraded or replaced if necessary. Because new systems are
continually being integrated into the Company, the effort to ensure Year
2000 Compliance for these systems is an ongoing effort.
The Company has communicated with others with whom it does significant business
to determine their Year 2000 compliance readiness and the extent to which the
Company is vulnerable to any third party Year 2000 issues. However, there can be
no guarantee that the systems of other companies on which the Company's systems
rely will be timely converted, or that a failure to convert by another company,
or a conversion that is incompatible with the Company's systems, would not have
a material adverse effect on the Company. For further discussion please refer to
the subheading "Future Performance and Additional Risk Factors" in the Company's
Annual Report on Form 10-K for the Fiscal Year Ended June 30, 1998.
21
<PAGE> 22
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to the impact of interest rate and foreign currency
fluctuations. The Company's objective in managing its exposure to interest rate
changes and foreign currency fluctuations is to limit the impact of interest
rate changes on earnings and cash flow and to lower its overall borrowing costs.
The Company's major market risk exposure is changing interest rates in the
United States, which would change interest expense on the Company's line of
credit and term loan.
Most of the Company's international revenues are denominated in foreign
currencies. Consequently a decrease in the value of a relevant foreign currency
in relation to the U.S. dollar could adversely affect the Company's net
revenues. The Company's foreign currency transactional exposures exist primarily
with the U.K. pound and German mark. The Company does not utilize interest rate
swaps or hedge exposures with foreign currency forward contracts.
22
<PAGE> 23
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
On March 3, 1999 RGC International Investors, LDC ("RGC") filed an action in the
District Court for the Northern District of California against IMSI for alleged
breach of contract and of the implied covenant of good faith and fair dealing,
seeking payment by IMSI of unspecified amount of compensatory damages, specific
performance, costs and fees but exceeding the jurisdictional minimum of $75,000.
RGC alleges in its complaint that IMSI was obligated to proceed with a
$5,000,000 million investment by RGC in IMSI. IMSI notified RGC in January 1999
that it was terminating discussions regarding an investment.
On or about May 10, 1999, a motion for a default judgment for approximately
$430,000 was filed in Jackson County, Oregon against IMSI in connection with a
lawsuit filed by Commercial Printing Company, Inc. alleging non-payment of
invoices. The amount of the invoices is already reflected in the Company's
financial statements. IMSI and Commercial Printing Company, Inc. were in the
process of negotiating a settlement of the lawsuit at the time the motion was
filed. The parties are still in negotiations to settle the lawsuit. IMSI intends
to respond to the motion.
ITEM 2. Changes in Securities and Use of Proceeds
Not Applicable
ITEM 3. Defaults upon Senior Securities
IMSI has a line of credit agreement with Union Bank under which it can borrow
the lesser of $13,500,000 or 80% of eligible accounts receivable, at Union
Bank's reference rate plus 1/2 % or LIBOR plus 2%, at IMSI's option. The line of
credit agreement requires IMSI 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.
As a result of covenant violations, certain events of default have occurred, and
are continuing, that among other things, entitle Union Bank to declare all loans
and other obligations of IMSI under the line of credit to be immediately due and
payable and to commence immediate enforcement and collection actions.
On March 5, 1999, IMSI and Union Bank executed a forbearance agreement, whereby
IMSI agreed to pay down the amount by which IMSI's obligations to Union Bank
exceeded the sum permitted to be borrowed in accordance with the agreement such
that the remaining over-advance did not exceed $2,250,000. IMSI accordingly paid
approximately $1,773,000 of the balance outstanding on the line of credit in
March 1999. Union Bank agreed to forbear taking any enforcement actions until
April 5, 1999. IMSI is continuing to negotiate with Union Bank regarding
amendments to its credit agreements, and to date Union Bank has not taken any
action against the Company. However, failure to negotiate an acceptable
arrangement with Union Bank could have a material adverse effect on IMSI's
business, operating results and financial condition.
ITEM 4. Submission of Matters to a Vote of Security Holders
Not Applicable
23
<PAGE> 24
ITEM 5. Other Information
On May 6, 1999, the Company announced the appointment Costa John, the Company's
chief financial officer, as chief executive officer. Mr. John remains the
Company's chief financial officer. Martin Sacks, formerly chief executive
officer and president of the Company, has resigned as CEO and president, but
remains a director and was elected chairman of the Board of Directors. As part
of the restructuring of the management team and the Board of Directors, Geoffrey
Koblick, formerly chief operating officer and chairman, has retired from both
positions, but continues to be available as an advisor to the Company. In
addition, Robert Mayer, who continues as executive vice president of worldwide
sales and marketing, has stepped down from the Board of Directors.
Following the filing of a Report on Form 8-K on April 26, 1999 relating to the
resignation of the Company's accountants, the Company received a letter from
the Securities and Exchange Commission asking why certain questions relating to
the matters reported in the Form 8-K. The Company has responded to the letter
and believes that the Staff's questions have been resolved.
Satisfactory resolution with the Staff of outstanding accounting issues is
required before the Form S-3 registration statement that the Company is
obligated to file under certain agreements with certain shareholders, see note
11 to the financial statements above, can be declared effective, and might
further delay the filing of the registration statement.
On May 13, 1999, the Company issued a press release regarding its results for
the three and nine month periods ending March 31, 1999 and certain related
matters. The Company indicated that it planned to reduce costs associated with
its retail operations in line with revenues, to focus on its strongest product
franchises and discontinue investment in non-strategic products. The Company
indicated that it intends to move to a more variable cost model and reduce
fixed infrastructure accordingly, and that the Company expects to incur a
restructuring charge in the fourth fiscal quarter. The charge may include
write-downs of inventories and other intangible assets relating to
non-strategic products, as well as cost associated with personnel reduction
and facilities closures.
ITEM 6. Exhibits and Reports on Form 8-K
On April 26, 1999, the Company filed a report on Form 8-K reporting on the
resignation of Deloitte & Touche LLP as the Company's accountants. On May 12,
1999 the Company filed a report on Form 8-K reporting on the retention of Grant
Thornton LLP as the Company's accountants.
Exhibits: 27.1 Financial Data Schedule
24
<PAGE> 25
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 17, 1999 INTERNATIONAL MICROCOMPUTER SOFTWARE, INC.
By: /s/ COSTA JOHN
--------------------------------
Costa John
Chief Executive Officer &
Chief Financial Officer
(Principal Financial Officer)
25
<PAGE> 26
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<CASH> 4,874
<SECURITIES> 0
<RECEIVABLES> 11,955
<ALLOWANCES> 6,910
<INVENTORY> 6,307
<CURRENT-ASSETS> 22,868
<PP&E> 8,462
<DEPRECIATION> 3,489
<TOTAL-ASSETS> 34,800
<CURRENT-LIABILITIES> 22,037
<BONDS> 0
0
0
<COMMON> 24,037
<OTHER-SE> (14,131)
<TOTAL-LIABILITY-AND-EQUITY> 34,800
<SALES> 30,902
<TOTAL-REVENUES> 30,902
<CGS> 17,273
<TOTAL-COSTS> 17,273
<OTHER-EXPENSES> 27,612
<LOSS-PROVISION> 1,199
<INTEREST-EXPENSE> 1,197
<INCOME-PRETAX> 15,180
<INCOME-TAX> (76)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (15,104)
<EPS-PRIMARY> 2.54
<EPS-DILUTED> 2.54
</TABLE>
