<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, 2000
[ ] 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)
<TABLE>
<S> <C>
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)
</TABLE>
(415) 878-4000
- --------------
(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 16, 2000, 9,469,366 shares of Registrant's common stock, no par value,
were outstanding.
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INTERNATIONAL MICROCOMPUTER SOFTWARE, INC.
AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets at March 31, 2000 and June 30, 1999 3
Condensed Consolidated Statements of Operations for the three and nine months
ended March 31, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows for the nine months ended
March 31, 2000 and 1999 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk 23
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 24
Item 2. Changes in Securities and Use of Proceeds 24
Item 3. Defaults upon Senior Securities 24
Item 4. Submission of Matters to a Vote of Security Holders 24
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
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
March 31, 2000 June 30, 1999
-------------- -------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 886 $ 3,681
Receivables, less allowances for doubtful
accounts, discounts and returns of $6,157 and $7,445 445 4,933
Inventories 204 2,895
Prepaid royalties and licenses 924 1,858
Income tax refund receivable -- 3,751
Other current assets 983 758
------------ ------------
Total current assets 3,442 17,876
Furniture and equipment 724 3,632
Deferred tax assets -- 465
Capitalized software development costs 2,069 2,856
Other assets 1,898 2,315
============ ============
Total assets $ 8,133 $ 27,144
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Short term borrowings $ 11,051 $ 7,110
Trade accounts payable 2,088 2,256
Accrued and other liabilities 3,216 5,119
Accrued arbitration award 2,610 --
Accrued restructuring charges 769 1,440
Deferred revenue 2,697 3,178
------------ ------------
Total current liabilities 22,431 19,103
Long term debt and other obligations 395 6,599
------------ ------------
Total liabilities 22,826 25,702
Commitments and contingencies -- --
Shareholders' equity (deficit):
Common stock, no par value; 300,000,000 authorized;
Issued and outstanding 7,302,003 and 6,865,367 shares 28,059 27, 526
Accumulated deficit (42,639) (25,963)
Accumulated other comprehensive income 137 129
Notes receivable from shareholders (250) (250)
------------ ------------
Total shareholders' equity (deficit) (14,693) 1,442
------------ ------------
Total liabilities and shareholders' equity (deficit) $ 8,133 $ 27,144
============ ============
</TABLE>
See Notes to Condensed Consolidated Financial Statements
3
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INTERNATIONAL MICROCOMPUTER SOFTWARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, NINE MONTHS ENDED MARCH 31,
------------------------------- -------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net revenues $ 2,968 $ 7,281 $ 14,884 $ 30,902
Product costs 1,295 4,990 9,560 17,273
------------ ------------ ------------ ------------
Gross margin 1,673 2,291 5,323 13,629
Costs and expenses:
Sales and marketing 749 4,312 5,034 15,402
General and administrative 1,833 2,201 6,726 5,742
Research and development 907 2,009 3,399 6,468
Restructuring charge (326) (464) --
------------ ------------ ------------ ------------
Total operating expenses 3,163 8,522 14,695 27,612
------------ ------------ ------------ ------------
Operating loss (1,490) (6,231) (9,372) (13,983)
Gain on product line sale 55 -- 1,495 --
Interest and other expense, net (286) (492) (1,810) (1,197)
Loss on disposition of fixed assets (1,834) -- (1,834) --
Loss on disposition of foreign
subsidiaries (2,023) -- (2,023) --
Arbitration award (10) -- (2,610) --
------------ ------------ ------------ ------------
Loss before income taxes (5,587) (6,723) (16,154) (15,180)
Income tax provision (benefit) 7 2,969 522 (76)
------------ ------------ ------------ ------------
Net Income (Loss) $ (5,594) $ (9,692) $ (16,676) $ (15,104)
============ ============ ============ ============
Basic and diluted loss per share $ (.77) $ (1.52) $ (2.34) $ (2.54)
Shares used in computing loss
per share 7,286 6,364 7,136 5,939
</TABLE>
See Notes to Condensed Consolidated Financial Statements
4
<PAGE> 5
INTERNATIONAL MICROCOMPUTER SOFTWARE, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED MARCH 31, 2000 AND 1999
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net cash (used) provided by operating activities $ (1,891) $ 1,418
------------ ------------
Cash flows from investing activities:
Proceeds from sale of product line 1,555 --
Purchase of equipment (111) (1,225)
Acquisition of software development and in-process
technologies (131) (1,964)
Purchase of Zedcor -- (300)
Other (4) (274)
------------ ------------
Net cash provided (used) by investing activities 1,309 (3,763)
------------ ------------
Cash flows from financing activities:
Credit line borrowings -- 2,025
Credit line repayments (820) (2,773)
Borrowings (repayments) of term loan (750) 1,378
Repayment of capital lease obligations (679) (1,120)
Proceeds from issuance of common stock 28 5,616
------------ ------------
Net cash (used) provided by financing activities (2,221) 5,126
------------ ------------
Effect of exchange rate changes on cash and cash equivalents 8 --
------------ ------------
Net increase (decrease) in cash and cash equivalents (2,795) 2,781
Cash and cash equivalents at beginning of period 3,681 2,093
============ ============
Cash and cash equivalents at end of the period $ 886 $ 4,874
============ ============
SUPPLEMENTAL DISCLOSURES OF NON-CASH
FINANCING AND INVESTING ACTIVITIES
Equipment acquired through capital lease obligations $ -- $ 984
Purchase of technology and assets in exchange for notes payable $ -- $ 4,030
Purchase of technology and assets in exchange for common stock $ -- $ 1,336
IMSI common stock received in satisfaction of receivable $ -- $ 320
Repayment of accounts payable and accrued and other
liabilities with common stock $ -- $ 2,207
Conversion of long-term debt to common stock $ 500 $ 1,444
</TABLE>
See Notes to Condensed Consolidated Financial Statements
5
<PAGE> 6
INTERNATIONAL MICROCOMPUTER SOFTWARE, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The interim condensed consolidated financial statements have been prepared from
the records of International Microcomputer Software, Inc. and Subsidiaries
("IMSI") 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 at March 31, 2000
and the results of operations and cash flows for the periods ended March 31,
2000 and 1999 have been made. The interim condensed consolidated financial
statements should be read in conjunction with our consolidated financial
statements and notes thereto contained in IMSI's Annual Report on Form 10-K for
the fiscal year ended June 30, 1999. The results of operations for the three
months and nine months ended March 31, 2000 and 1999 are not necessarily
indicative of the results to be expected for any other interim period or for
the full year.
2. REALIZATION OF ASSETS
The financial statements have been prepared on a basis that contemplates IMSI's
continuation as a going concern and the realization of our assets and
liquidation of our liabilities in the ordinary course of business. We have an
accumulated deficit of $42.6 million and negative working capital of $19.0
million at March 31, 2000. On February 18, 2000, under the guidance of CMA
Business Credit Services, IMSI held a formally noticed general meeting of its
creditors. At this meeting the creditors elected a committee to represent
creditor interests. The committee agreed to give IMSI a 120 day stand-still
period to prepare and present a plan to the creditors for paying off its debts.
We are currently in the process of preparing this plan. In conjunction with
these actions, we have ceased interest and principal payments on all borrowings,
debt or other interest bearing obligations, with the exception of monthly
interest payments to Union Bank of California on the outstanding line of credit.
Accordingly, we are in default of various covenants of these agreements.
These matters, among others, raise substantial doubt about our ability to remain
a going concern for a reasonable period of time. The financial statements do not
include any adjustments relating to the recoverability or classification of
assets or the amounts and classification of liabilities that might result from
the outcome of this uncertainty. IMSI's continued existence is dependent on its
ability to obtain additional financing sufficient to allow it to meet its
obligations as they become due and to achieve profitable operations.
To a large extent, IMSI has plans to meet its working capital needs in the
current fiscal year through sales or licensing of non-core product lines. We
sold the rights to the Easy Language product line for $1.7 million in August
1999. In February 2000, we sold the rights to People Scheduler for $55,000. In
March 2000, we executed republishing agreements with firms in Europe and the
United States to manufacture and sell IMSI products. IMSI received $0.3 million
in guarantees, which the Company will recognize over the term of the agreements.
IMSI continues to explore all reasonable offers for the purchase of the
remaining retail software product lines, and we are in discussion with several
outside companies who wish to purchase certain of these retail software product
lines. The sale or licensing of the rights to these product lines is a part of
the Company's restructuring strategy of focusing on our core products while
transitioning to the Internet. This strategy also includes reducing our costs
through
6
<PAGE> 7
manufacturing and warehouse outsourcing, facilities consolidation, and personnel
reductions. There can be no assurance that we will be successful in our efforts.
In January 2000, IMSI retained the investment banking firm of Heartland
Financial to explore alternatives to raise capital and increase shareholder
value. In addition to the sale of product lines, this may include the sale of
either or both of our Internet business units, the restructuring of debt, and
the infusion of new capital. There can be no assurance that we will be
successful in our efforts to raise additional funds.
IMSI received $1.3 million in income tax refunds during the first quarter of
fiscal year 2000, an additional $2.1 million during the second quarter and $0.3
million in February 2000.
3. REVENUE RECOGNITION
Revenue is recognized when earned. IMSI has adopted American Institute of
Certified Public Accountants Statement of Position ("SOP") 97-2, Software
Revenue Recognition, and SOP 98-9, Modification of SOP 97-2, With Respect to
Certain Transactions. Revenue from packaged product sales to distributors,
resellers and end users is recorded when related products are shipped. For
software delivered via the Internet, revenue is recorded when the customer
downloads the software. Subscription revenue is recognized ratably over the
contract period, generally 12 to 15 months. Revenue from hybrid products is
allocated to the underlying components based on the ratio of the value of each
component to the total price. Non-refundable advanced payments received under
license agreements are recognized as revenue when the customer accepts the
delivered software. Revenue from software licensed to republishers, including
royalties earned in excess of non-refundable advanced payments, is recorded as
the republishers ship products containing the licensed software. Costs related
to post-contract customer support, which are minimal and include limited
telephone support and limited on-line maintenance for certain products, are
accrued. Sales to distributors permit limited rights of return upon termination
or when a product is defective. Reserves for returns, price discounts and
rebates are estimated using historical averages and a consideration of open
return requests. Beginning with the quarter ended December 31, 1998, the Company
also considers channel inventories, recent product sell-through activity and
market conditions in establishing its reserves.
4. INVENTORIES
Inventories, consisting primarily of media, manuals, hardware, freight in,
production costs and packing supplies, are valued at the lower of cost or market
and are accounted for on the first-in, first-out basis. Management performs
periodic assessments to determine the existence of obsolete, slow moving and
non-salable inventories, and records necessary provisions to reduce such
inventories to net realizable value. Inventories consist of:
<TABLE>
<CAPTION>
March 31, 2000 June 30, 1999
-------------- -------------
<S> <C> <C>
Raw materials $ 310 $ 2,343
Finished goods 346 3,897
------------ ------------
656 6,240
Reserves for obsolescence (452) (3,345)
------------ ------------
$ 204 $ 2,895
============ ============
</TABLE>
7
<PAGE> 8
5. CAPITALIZED SOFTWARE DEVELOPMENT COSTS
Total capitalized software development costs were $8,197,000 at March 31, 2000
and $8,289,000 at June 30, 1999 less accumulated amortization of $6,128,000 and
$5,433,000, respectively.
6. DEBT
IMSI's short-term borrowings and long term debt and other obligations consist of
the following (in thousands):
<TABLE>
<CAPTION>
March 31, June 30,
Short term borrowings 2000 1999
------------ ------------
<S> <C> <C>
Non-revolving, reducing loan with interest at bank's
reference rate plus 3%, 12.00% at March 31, 2000 $ 4,600 $ 5,400
Term loan with interest at bank's reference rate
plus 3% -- 750
Subordinated loan facility due November 2001 with
interest at 12% net of unamortized warrant cost
at March 31, 2000 of $410 $ 2,090 --
Senior subordinated convertible note due May 2002
with interest at 9% net of unamortized warrant
cost at March 31, 2000 of $807 3,693 --
Capital lease obligations 668 960
------------ ------------
Total short term borrowings $ 11,051 $ 7,110
============ ============
Long term debt and other obligations
Subordinated loan facility due November 2001 with
interest at 12% net of unamortized warrant cost
at June 30, 1999 of $604 -- $ 1,896
Senior subordinated convertible note due May 2002
with interest at 9% net of unamortized warrant
cost at June 30, 1999 of $1,100 -- 3,900
Capital lease obligations 395 803
------------ ------------
Total long term debt and other obligations $ 395 $ 6,599
============ ============
</TABLE>
IMSI is in default on many of the covenants under its agreements relating to the
non-revolving, reducing loan with Union Bank of California ("Union"). The loan
was due September 30, 1999 and remains unpaid. Under the terms of the loan
agreement, Union can declare the loan to be immediately due and payable and can
commence immediate enforcement and collection actions.
IMSI is also in default under the subordinated loan facility with Silicon Valley
Bank for failure to make interest payments during the quarter ended March 31,
2000 and the entry of the Imageline award judgement. The bank noticed IMSI of
the defaults and stated that it reserves all rights, powers and remedies under
the loan agreement. Therefore, IMSI has recorded the full amount of the
subordinated loan as a current liability.
Similarly, Heller Financial, Inc.has noticed IMSI that the Company is in default
under a capital lease obligation, and that all amounts under the lease are now
due and payable. IMSI is negotiating with Heller over the terms of a proposed
confession of judgement, the return of some equipment and the continued lease of
the remaining equipment. At March 31, 2000, the full amount of the capitalized
lease obligation was a current liability.
8
<PAGE> 9
IMSI is in default on its senior subordinated convertible note with BayStar
Capital L.P. ("BayStar") because of failure to pay a penalty for failing to
have a registration statement effective no later than September 21, 1999
covering the resale of shares issuable to BayStar. The penalty is 1% per month
of the principal balance outstanding. We have accrued a liability of $296,000
for this penalty through March 31, 2000 in our financial statements. BayStar
has the right under the note to declare all sums due and payable but has not
done so. Accordingly, the full amount of the note is recorded as a current
liability. Because of the default, BayStar received the right to convert its
convertible note at the price of $2 per share. BayStar converted $500,000 of
the note on December 2, 1999 into common stock of IMSI at a price of
$2.00 per share.
7. ACCRUED RESTRUCTURING CHARGES
The following table details the rollforward activity in the accrued
restructuring liability account (in thousands):
<TABLE>
<CAPTION>
Balance Balance
June 30, Paid March 31,
1999 (Accrued) 2000
------------ ------------ ------------
<S> <C> <C> <C>
Warehouse closure:
Accrued rent $ 249 $ (256) $ 505
Broker's fee 103 -- 103
Warehouse transition costs 284 231 53
Facilities consolidation:
Novato:
Rent 180 180 --
Broker's fee 65 49 16
Excess furniture lease 14 11 3
Additional walls and doors 29 22 7
Miscellaneous charges 3 2 1
Tech support facility 110 37 73
Consolidation of Foreign Offices 6 6 --
Personnel reductions 397 389 8
------------ ------------ ------------
Total accrued restructuring liability $ 1,440 $ 671 $ 769
============ ============ ============
</TABLE>
The following table reports the rollforward activity of planned terminations
under the restructuring plan plus additional terminations in January 2000. These
additional terminations in January were necessitated by the higher than
anticipated losses and the termination of negotiations to sell ArtToday, which
would have provided needed working capital.
<TABLE>
<CAPTION>
Planned Cumulative
Terminations as Terminations as
of June 30,1999 of March 31, 2000
--------------- -----------------
<S> <C> <C>
Sales and Marketing 22 50
General and Administrative 8 10
Manufacturing 23 23
Research and Development 37 37
------------ ------------
90 120
============ ============
</TABLE>
During the quarter ended December 31, 1999, we increased the restructuring
accrual for warehouse rent by $438,000 due to changing our estimate of how long
it will take to sublease this facility. Also during the quarter ended December
31, 1999, we decreased the restructuring
9
<PAGE> 10
accrual for personnel reductions costs by $138,000 primarily due to the re-hire
of, and cessation of termination benefits payable to, formerly terminated
executive, Geoffrey Koblick.
8. SEGMENT INFORMATION AND CLOSING OF EUROPEAN SUBSIDIARIES
Until January 2000, IMSI had five reportable operating segments. Four of the
segments were geographic: North America, the United Kingdom, Germany and
Australia, and each of these segments generated revenues and incurred expenses
related to the sale of our PC productivity software. The fifth segment comprised
the revenues and expenses related to ArtToday.com (formerly Zedcor, Inc.). which
IMSI purchased in October 1998. Previously, the Company included the results of
this graphic design Internet subsidiary in the North America geographic segment
because ArtToday's separate results were not material.
On January 28, 2000, IMSI announced that it was exiting the retail software
business, closing its German office and liquidating its European subsidiaries.
Earlier, in the first quarter of fiscal year 2000, the Company closed its
United Kingdom and French offices. Upon appointment of the liquidators, the
liquidators assumed control of IMSI's European subsidiaries. Therefore, the
Company is no longer consolidating these subsidiaries within its financial
statements. For the six months ended December 31, 1999, revenue from Europe was
$ 3,078,000 and the operating loss was $54,000. For the three months ended
March 31, 2000, revenues and operating results were not material.
The loss on the disposition of the Company's foreign subsidiaries as a result of
liquidating the Company's European subsidiaries was $2,023,000. This loss
includes the $1,562,000 write-off of the parent Company inter-company accounts
receivable, the $68,000 write-off of the parent Company investment in the
foreign subsidiaries and the $393,000 write-off of the foreign subsidiaries net
assets. The liquidation process, which is proceeding according to the legal
requirements of the respective countries, may take up to one year to complete.
Future sales of our products in Europe, will occur primarily through third party
licenses with IMSI receiving royalties for such sales. Also, the Company has
executed several republishing agreements and will be receiving a percentage
share of net sales revenues. The Company does not anticipate any additional
costs pertaining to the closure of the European subsidiaries.
An important element of IMSI's strategy is to bring the Company's precision
design software, TurboCAD and FloorPlan 3D, to the Internet. The Company created
a separate division, HomeDesignToday.com, to execute this new strategy. Revenues
from this new division are not yet material, and, therefore, the Company is
including the results of this division in the North American segment.
The following tables report the segment information (in thousands):
<TABLE>
<CAPTION>
Quarter Ended March 31, ArtToday. Other North
2000 Com America UK Germany
- ------------------------ ------------ ------------ ----------- ----------
<S> <C> <C> <C> <C>
Net Revenues-external $ 840 $ 1,948 $ -- $ --
-internal -- -- --
Income (loss) before taxes 194 (5,629) -- --
Income tax expense (credit) -- -- -- --
Net income (loss) 194 (5,629) -- --
Identifiable assets $ 544 $ 7,477 $ -- $ --
</TABLE>
<TABLE>
<CAPTION>
Quarter Ended March 31, Rest of Elimina-
2000 Australia World tions Total
- ------------------------ ------------ -------- --------- ------------
<S> <C> <C> <C> <C>
Net Revenues-external $ 180 $ -- $ -- $ 2,968
-internal -- -- --
Income (loss) before taxes (152) -- -- (5,587)
Income tax expense (credit) 7 -- -- 7
Net Income (loss) (159) -- -- (5,594)
Identifiable assets $ 112 $ -- -- $ 8,133
</TABLE>
10
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<TABLE>
<CAPTION>
Quarter Ended March 31, ArtToday. Other North
1999 Com America UK Germany
- ------------------------ ------------ ------------ ----------- ----------
<S> <C> <C> <C> <C>
Net Revenues-external $ 5 $ 5,908 $ 759 $ (50)
-internal -- -- --
Income (loss) before taxes (422) (5,628) 175 (967)
Income tax expense (credit) -- 2,934 -- --
Net Income (loss) (422) (8,562) 175 (967)
Identifiable assets $ 670 $ 21,307 $ 1,181 $ 2,102
</TABLE>
<TABLE>
<CAPTION>
Quarter Ended March 31, Rest of Elimina-
1999 Australia World tions Total
- ------------------------ ------------ -------- --------- ------------
<S> <C> <C> <C> <C>
Net Revenues-external $ 379 $ 280 $ -- $ 7,281
-internal -- -- --
Income (loss) before taxes -- 119 -- (6,723)
Income tax expense (credit) 9 26 -- 2,969
Net Income (loss) (9) 93 -- (9,692)
Identifiable assets $ 870 $ 1,014 $ -- $ 27,144
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended ArtToday. Other North
March 31, 2000 Com America UK Germany
- ------------------------ ------------ ------------ ----------- ----------
<S> <C> <C> <C> <C>
Net Revenues-external $ 2,147 $ 8,028 $ 687 $ 1,696
-internal -- 712 -- --
Income (loss) before taxes (24) (16,191) 130 (124)
Income tax expense (credit) -- 503 -- --
Net Income (loss) (24) (16,694) 130 (124)
Identifiable assets $ 544 $ 7,477 $ -- $ --
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended Rest of Elimina-
March 31, 2000 Australia World tions Total
------------ -------- --------- ------------
<S> <C> <C> <C> <C>
Net Revenues-external $ 1,245 $ 1,081 $ -- $ 14,884
-internal -- -- (712) --
Income (loss) before taxes (52) 107 -- (16,154)
Income tax expense (credit) 23 (4) -- 522
Net Income (loss) (75) 111 -- (16,676)
Identifiable assets $ 112 $ -- -- $ 8,133
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended ArtToday. Other North
March 31, 2000 Com America UK Germany
------------ ------------ ----------- ----------
<S> <C> <C> <C> <C>
Net Revenues-external $ 303 $ 21,207 $ 2,455 $ 3,335
-internal -- 2,003 -- --
Income (loss) before taxes (515) (14,372) 18 (655)
Income tax expense (credit) -- (163) -- --
Net Income (loss) (515) (14,209) 18 (655)
Identifiable assets $ 670 $ 21,307 $ 1,181 $ 2,102
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended Rest of Elimina-
March 31, 2000 Australia World tions Total
------------ -------- --------- ------------
<S> <C> <C> <C> <C>
Net Revenues-external $ 1,773 $ 1,829 $ -- $ 30,902
-internal -- -- (2,003) --
Income (loss) before taxes 234 110 -- (15,180)
Income tax expense (credit) 27 60 -- (76)
Net Income (loss) 207 50 -- (15,104)
Identifiable assets $ 870 $ 1,014 $-- $ 27,144
</TABLE>
9. BASIC AND DILUTED EARNINGS PER SHARE
Net loss and the weighted average number of shares outstanding (denominator)
used to calculate basic earnings per share are reconciled to the number of
shares used in calculating diluted earnings per share as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
---------------------------- ----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net loss $ (5,594) $ (9,692) $ (16,676) $ (15,104)
============ ============ ============ ============
Shares used to compute basic
EPS 7,286 6,364 7,136 5,939
Add effect of dilutive
securities:
Convertible Note 2,250 -- 2,250 --
Warrants 298 30 298 30
Stock options 2,237 914 2,237 690
------------ ------------ ------------ ------------
Shares used to compute diluted
EPS* 12,071 7,308 11,921 6,659
============ ============ ============ ============
</TABLE>
* Not presented, as presentation would be anti-dilutive.
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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 condensed
consolidated balance sheets. The reconciliation of net loss to comprehensive
loss is as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended March 31, Nine Months EndedMarch 31,
---------------------------- ----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
NET LOSS $ (5,594) $ (9,692) $ (16,676) $ (15,104)
============ ============ ============ ============
Other comprehensive (loss) gain
Foreign currency translation
adjustments 2 (170) 12 29
------------ ------------ ------------ ------------
Total comprehensive loss $ (5,592) $ (9,862) $ (16,664) $ (15,075)
============ ============ ============ ============
</TABLE>
11. DE-LISTING FROM THE NASDAQ SMALL CAP MARKET
On November 24, 1999 Nasdaq granted IMSI an exception from the net tangible
listing requirement, allowing IMSI to transfer from the Nasdaq National Market
to the Nasdaq Small Cap Market, with the symbol IMSIC. IMSI transferred to the
Nasdaq Small Cap Market on November 30, 1999. To maintain our listing on the
Nasdaq Small Cap Market, IMSI was required to file on or before January 31, 2000
reports evidencing at least $7 million in net tangible assets with the
Securities Exchange Commission and Nasdaq. We notified Nasdaq on January 28,
2000 that we were unable to achieve this requirement. On January 31, 2000, IMSI
was delisted from the Nadsaq Small Cap Market and began trading on the OTC
Bulletin Board. Concurrently, the ticker symbol IMSI was appended with a "C". On
February 25, 2000, the ticker symbol IMSI was appended with an "E". On March 28,
2000, IMSI was delisted from the OTC Bulletin Board and began trading on the
National Quotation Bureau Pink Sheets, because the Company had failed to file
the December 31, 1999 Form 10-Q.
Our de-listing by Nasdaq may have an adverse and material effect on the price of
IMSI's stock and on the ability of IMSI's shareholders to sell their shares.
Securities laws could impose limitations on liquidity of the common stock
traded on the Pink Sheets. The de-listing could also adversely affect IMSI's
ability to obtain additional debt and/or equity financing and may result in the
reduction in the amount and quality of securities analyst and news media
coverage of IMSI. De-listing is also a triggering event, allowing the holder of
the convertible subordinated note owing to BayStar to declare all sums due and
payable, as described in Note 6.
IMSI filed the December Form 10-Q on May 10, 2000, and the Company will file the
June 30, 1999 Form 10-K/A and September 30,1999 Form 10-Q/A on May 15. With the
filing of this March 31, 2000 Form 10-Q, IMSI should be in compliance with SEC
and Nasdaq requirements and expects to return to the OTC Bulletin Board before
the end of May.
12. POTENTIAL PENALTIES FOR AGREEMENTS RELATING TO REGISTRATION OF SHARES
We agreed to file one or more registration statements covering the resale of the
shares described in Notes 6 and 7 to the consolidated financial statements in
our fiscal 1999 Form 10-K. These agreements included shares issued or issuable
with BayStar Capital L.P. ("BayStar"), The Learning Company (now owned by
Mattel, Inc., "TLC"), Capital Ventures International ("CVI"), and others. We
have filed registration statements pursuant to these agreements. The SEC
Division of Corporate Finance has had, and may continue to have, comments
related to our
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recent filings. We are working with the SEC to resolve these comments as soon as
possible. However, as a result of delays in the effectiveness of the
registration statements, we are liable for financial penalties or other payments
under the terms of the agreements with TLC and BayStar. The aggregate amount of
these penalties or other payments could have a material effect on our financial
statements, business, liquidity and results of operations.
BayStar
The BayStar Note and Warrant Agreement required that IMSI have a registration
statement declared effective by September 21, 1999 covering resale of the
shares issuable to BayStar. Under the Agreement IMSI is required to pay cash
penalties if it failed to effectively file the registration statement. The
Company was not able to comply, and, on November 17, 1999, BayStar notified IMSI
that the Company was in default under the 9% Subordinated Convertible Note due
2002 because IMSI failed to pay the cash penalties. Because of the default,
BayStar converted $507,767 of the Note and accrued interest into 253,884 shares
of IMSI common stock at $2 per share on December 2, 1999. IMSI has accrued the
penalties for both quarters ending December 31, 1999 and March 31, 2000.
TLC
In January 1999, IMSI and TLC agreed to amend the terms of the Org Plus
agreement to allow IMSI to settle the $1.8 million cash obligation by the
issuance of 200,000 shares of IMSI's common stock. In April 1999, IMSI and TLC
agreed that if TLC sells any shares within 30 days following the effectiveness
of a registration statement covering the 200,000 shares issued to TLC, IMSI will
pay TLC the difference between the sales price and $8.50 per share, such payment
to be made either in cash or by issuing shares based on the average share price
during the thirty day protection period, at IMSI's option. In September 1999,
IMSI and TLC orally agreed that, in consideration for 300,000 shares and the
waiver of a $200,000 receivable due from TLC, TLC would not terminate the April
agreement nor seek to reinstate the $1.8 million cash obligation and that TLC
would deem any claim that it may have for additional shares to be satisfied. No
written agreement was executed and no shares have been delivered.
In view of the length of time that has passed since TLC and IMSI reached a
verbal agreement, during which time IMSI's stock price has fallen and TLC's
current shares remain unregistered, it is unlikely that TLC will continue to
accept 300,000 shares in satisfaction of all claims. The nature of the claims
that TLC might assert based on the agreements described above, and the
resolution of these potential claims, is highly speculative. Based on the terms
of the April agreement, no penalties have been incurred. The price protection
feature of the April agreement is contingent and a charge will be taken at the
time the contingency is resolved.
IMSI is attempting to reach a negotiated settlement with BayStar and TLC,
including negotiations for the issuance of additional shares of common stock.
There can be no assurance that such negotiations will be successful. See Notes 6
and 7 to the consolidated financial statements in our Fiscal 1999 Form 10-K.
CVI
On March 1, 2000, IMSI agreed to settle its price protection adjustment
obligations to CVI with the issuance of 2,062,363 additional shares. Under this
agreement, IMSI has no further obligation to issue any additional adjustment
shares or other consideration to CVI and is relieved of making any further
payments to CVI in connection with its failure to obtain the effectiveness
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of the respective registration statement. Since this resolution provides CVI
with fewer shares than it was entitled to under the original price protection
agreement, no additional charge was required to be booked.
Zedcor
The May 1999 amendments to the Zedcor Fee Agreement provide for the issuance of
additional shares if the average market price of IMSI stock is less than $8 per
share three days before the effective date of the registration of the shares.
This price protection applies only to the 190,797 shares issued for the (i)
conversion of the note balance into 150,321 shares, and (ii) the issuance of the
additional 40,476 shares under the May amendments to the Zedcor Fee Agreement.
In the third quarter of fiscal year 2000, a verbal agreement was reached
stipulating that IMSI would issue to the former Zedcor shareholders an
additional 185,005 shares, the maximum number of additional shares to which they
were entitled under the price protection, in settlement of all claims. Written
execution of this agreement is awaiting final approval of the banks and
creditors, who have already indicated that approval will be granted. Because
IMSI was not contractually obligated to offer the price protection under the
Zedcor Fee Agreement, it will recognize a charge equal to 185,005 shares times
the market price of IMSI stock on the date of the execution of the settlement
agreement.
13. ADVERSE AWARD IN IMAGELINE ARBITRATION
On January 14, 2000, Imageline, Inc. received a $2.6 million arbitration award
against IMSI for intellectual property violations and attorneys fees. The award
is comprised of $1.2 million in actual damages, $1.2 in punitive damages and $.2
million in attorneys' fees. IMSI is appealing the award in the federal district
court in Richmond, VA. See Note 17 to IMSI's consolidated financial statements
contained in IMSI's Annual Report on Form 10-K for the fiscal year ended June
30, 1999.
In April, IMSI and Imageline initiated negotiations to settle the award. The
proposed settlement includes a cash payment of $170,000 upon execution of the
agreement, three subsequent payments of $75,000, a consulting agreement,
warrants, payment of legal fees and royalties on certain sales of Masterclips.
While IMSI and Imageline appear to be close to agreement, there can be no
assurance that the Company will successfully settle this matter.
14. CHANGES IN BUSINESS, MANAGEMENT AND THE BOARD OF DIRECTORS
On February 15, 2000, Geoffrey Koblick was named president, chief executive
officer, chief financial officer and a member of the IMSI's board of directors.
Geoffrey Koblick, who founded IMSI in 1983, stepped down as chief operating
officer and chairman of the board in May of 1999. Geoffrey Koblick replaced
Costa John, who served as president, chief executive officer and chief financial
officer. In addition, Mark Boyer, a principal in ROI capital, one of IMSI's
largest shareholders, was also appointed to the board of directors. IMSI's other
directors, Costa John, Bill Lane, Abe Ostovsky and Lisa Crane resigned on
February 15, 2000. See Form 8-K dated February 15, 2000. On February 17, 2000,
Jeffrey Morgan joined IMSI as chief financial officer, assuming the
responsibilities of that position from Geoffrey Koblick.
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15. ESTABLISHMENT OF CREDITORS' COMMITTEE
On February 18, 2000, under the guidance of CMA Business Credit Services, IMSI
held a formally noticed general meeting of its creditors. At this meeting the
creditors elected a committee to represent creditor interests. The committee
agreed to give IMSI a 120 day stand-still period to prepare and present a plan
to the creditors for paying off its debts. We are currently in the process of
preparing this plan. In conjunction with these actions, we have ceased interest
and principal payments on all borrowings, debt or other interest bearing
obligations, with the exception of monthly interest payments to Union Bank of
California on the outstanding line of credit. Accordingly, we are in default on
various covenants of these agreements.
16. CLOSING OF EUROPEAN SUBSIDIARIES
On January 28, 2000, IMSI announced that it is exiting the retail software
business. As a result, IMSI began closing its German office and liquidating its
European subsidiaries. In the first quarter of fiscal year 2000, the Company
closed the United Kingdom and French office. Although IMSI has ceased our
European operations, the liquidation process, which is proceeding according to
the legal requirements of the respective countries, may take up to one year to
complete. Upon appointment of the liquidators, the liquidators assumed control
of the European subsidiaries, and, therefore, IMSI is no longer consolidating
these subsidiaries within its financial statements. For the six months ended
December 31, 1999, revenue from Europe was $3,078,000 and the operating loss was
$54,000. For the three months ended March 31, 2000, the revenues and operating
result were not material. The loss on the disposition of foreign subsidiaries as
a result of liquidating the Company's European subsidiaries is $2,023,000. Once
the liquidation is complete, future sales of IMSI's products in Europe will
occur through third parties paying the Company primarily on a royalty basis.
17. SUBSEQUENT EVENTS
Software License Agreements
In March, IMSI executed an agreement to license the object code and source code
of the Company's TurboProject and Flow programs for $350,000. The license is
worldwide, perpetual and non-exclusive. IMSI did not complete the delivery of
all necessary program documentation until May and, therefore, did not recognize
the revenues in March but in May. As of the date of this Form 10-Q, IMSI has
received $175,000 and expects to receive the remaining $175,000 before
month-end.
In April, IMSI entered into a similar agreement with another firm to license the
object code and source code of the Company's Lumiere program for $120,000. IMSI
completed delivery of all documentation and received full payment in April.
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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
IMSI's Fiscal 1999 Form 10-K. This quarterly report on Form 10-Q, and in
particular this "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 IMSI. These future events 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 IMSI's
Fiscal 1999 Form 10-K, as filed with the Securities and Exchange Commission
("SEC"). Actual events or the actual future results of IMSI may differ
materially from any forward-looking statements due to such risks and
uncertainties. IMSI assumes no obligation to update these forward-looking
statements to reflect actual results or changes in factors or assumptions
affecting such forward-looking statements. This analysis is not intended to
serve as a basis for projection of future events.
RESULTS OF OPERATIONS
IMSI reported a net loss of $5,594,000 or ($.77) per share for the quarter ended
March 31, 2000 and a net loss of $16,676,000, or ($2.34) per share for the nine
months ended March 31, 2000. This compares to a net loss of $9,692,000 or
($1.52) per share for the quarter ended March 31, 1999 and a net loss of
$15,104,000 or ($2.54) per share for the nine months ended March 31, 1999. We
reported an operating loss of $1,490,000 and $9,372,000 for the three and nine
months ending March 31, 2000, respectively. This compares to an operating loss
of $6,231,000 and $13,983,000 for the three and nine months ended March 31,
1999.
NET REVENUES
Net revenues for the three month and nine month periods ended March 31, 2000
were $2,968,000 and $14,884,000, respectively. This compares to net revenues of
$7,281,000 and $30,902,000 for the same periods in the previous fiscal year.
This change represents a decrease in net revenues of 59% and 52% for the three
and nine months periods, respectively. Sales have continued to decline since
IMSI reported net revenues of $16,738,000 for the quarter ending June 30, 1998.
Due to the rapid and continuing decline of IMSI's retail software sales, we
announced on January 28, 2000 that we would be exiting the retail software
business. Because our sales revenue no longer supported the existing level of
overhead, we discontinued our European operations and consolidated our domestic
and Canadian offices into our facilities in Novato, California and Tucson,
Arizona. We will continue to sell software by direct mail and electronic
download for as long as these sales generate net cash. Also, we have executed
and are continuing to pursue repackaging agreements, non-exclusive sales of
source code and licensing arrangements to grow revenues. IMSI's longer term
strategy is to derive a majority of the Company's future revenues from our
precision design and graphic design websites.
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Product revenues in absolute dollars and as a percentage of total revenues for
each of IMSI's principal product categories were as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended March 31, Nine Months Ended March 31,
------------------------------------------- --------------------------------------------
2000 1999 2000 1999
------------------- -------------------- -------------------- --------------------
$ % $ % $ % $ %
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Precision Design 592 20% 4,398 60% 4,703 32% 8,376 27%
Graphic Design 1,223 41% 2,334 32% 5,757 39% 8,950 29%
Business Applications 471 16% 568 8% 4,265 29% 11,665 38%
Utilities 548 18% 688 9% 3,033 20% 3,635 12%
Other Products 85 3% 150 2% 984 7% 2,944 10%
Sales Reserves 48 2% (857) -12% (3,857) -26% (4,668) -15%
-------- -------- -------- -------- -------- -------- -------- --------
Net Revenues $ 2,968 100% $ 7,281 100% $ 14,884 100% $ 30,902 100%
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
Product category revenues are shown gross without sales reserves recorded in the
respective periods for returns, price discounts and rebates. Sales reserves are
based on estimates of future activity and by their nature are subject to certain
risks and uncertainties. In the past these risks and uncertainties have caused
actual results to differ materially from estimates. Since IMSI is no longer
selling product to channel resellers, the risks and uncertainties for IMSI
related to future returns, price discounts and rebates are significantly
reduced.
Net revenues in all categories for both the three months ended and nine months
ended March 31, 2000 declined from the revenues in the same periods last year.
The declines reflect IMSI's decision, in January, to exit the retail software
business and end all relations with the Company' channel resellers. While the
Company is now attempting to rebuild these sales through licensing and
republishing agreements, these efforts had no impact on third quarter 2000 sales
revenues.
Net revenues in the precision design category decreased for the three-month
period ended March 31, 2000 by $3,806,000 or 87% from the comparable period in
fiscal 1999. The decline is due to a decrease in TurboCad and Floorplan sales as
explained above. However, pursuant to IMSI's strategy of supporting its
precision design line of product and growing its internet business, net revenues
in this category should increase substantially during the next quarter and the
next fiscal year with the release of newer versions of TurboCad and FloorPlan.
For the three-month period ended March 31, 2000, net revenue in the graphic
design category decreased by $1,111,000 or 48% from the comparable period in
fiscal year 1999. The decline in this category is due to a decrease in the sales
of the primary product within this category, MasterClips. In February, IMSI
ceased all sales of MasterClips to comply with the court's ruling to uphold the
Imageline Arbitration judgement. ArtToday, contributed net revenue of $840,000
within this category during the quarter ended March 31, 2000.
Revenues in the business applications category decreased by $97,000 or 17% in
the three-month period ended March 31, 2000 as compared to the same period in
fiscal year 1999. TurboProject and HiJaak sales decreased compared to the same
period for the prior fiscal year. Moreover, consistent with IMSI's restructuring
plan, a number of other non-core products within this category were not upgraded
or actively marketed contributing to the decline in revenue.
For the three month period ended March 31, 2000, revenues in the utilities
category decreased by $140,000 or 20% as compared to the same period in fiscal
1999. In the United States particularly, intense price competition and rebate
programs have negatively impacted these
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consumer oriented software products. Consistent with IMSI's restructuring plan,
the utilities products are also not being updated or actively marketed.
Revenues in the other products category decreased by $65,000 or 43% for the
three month period ended March 31, 2000 as compared to the same period in fiscal
year 1999. The decrease was primarily due to the discontinuation of products
within this category.
For the three month period ended March 31, 2000 net revenues from domestic sales
were $2,788,000. This is a decrease of $2,871,000 or 50.7% from net domestic
sales revenues of $5,659,000 during the same period in the previous year. During
the third quarter of fiscal year 2000, net revenues from domestic sales climbed
to 93.9% of total net revenues as compared to 77.8% of total net revenues for
the comparable period in the previous fiscal year. This increase reflects the
Company's decision in January to discontinue all European and South African
operations.
Net revenues from international sales declined by $1,442,000 or 88.9% to
$180,000 for the three month period ended March 31, 2000. For this quarter, net
revenues from international sales were only 6.1% of total net sales. This is a
substantial decline from last year when net revenues from international sales
were 22.3 % of total net revenues.
Australia accounted for all of IMSI's international net revenues in the
three-month period ended March 31, 2000. As a result of our decision in January
2000 to liquidate our European operations, we are no longer consolidating our
European subsidiaries. This change resulted in a loss of $2,023,000 from the
write off of inter-company receivables and investment in subsidiaries. See Note
8 to the condensed consolidated financial statement for segment information.
With the liquidation of the Company's European subsidiaries, the risks
associated with transactions in foreign currencies have been substantially
reduced. Nonetheless, our operating results may be affected by the risks
customarily associated with international operations, including changes in the
value of the dollar versus other currencies, increases in duty rates, exchange
or price controls, longer collection cycles, government regulations, political
instability and changes in international tax laws.
In the second quarter of fiscal 2000, TechData terminated its distribution
agreement with IMSI as a result of a disagreement over payment terms. The
Company's distributorship agreement with TechData allowed for product returns
upon termination. In December 1999 and January 2000, the Company received total
returns of approximately $522,000. IMSI's agreement with TechData required us to
accept returns of the products in TechData's inventory at the price paid by
TechData less any subsequent returns or credits, provided that the products have
been unopened and are in their original factory sealed packages. To date, we
have credited TechData for only $25,000 of valid returns because IMSI believes
the remainder of the product inventory returned by TechData did not meet these
conditions. TechData has contested our right to refuse the balance of the
returns.
IMSI's receivable balance from TechData as of March 31, 2000 was approximately
$650,000, and the Company has reserved all of this receivable as a bad debt. The
Company is currently in negotiations with TechData to resolve this issue. We do
not anticipate paying a cash refund to TechData for returned product.
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PRODUCT COSTS
For the three months ended March 31, 2000, product costs decreased $3,695,000 to
$1,295,000 as compared to $4,990,000 for the same period in 1999. The reduction
in product costs is associated with the decrease in sales. As a percentage of
revenue, product costs decreased from 68.5 % to 43.6%, when compared to the same
period in the previous fiscal year. This reflects in part the reduction in fixed
product costs generated by the closing of the Company's Vacaville distribution
center and the associated termination of employees. In addition the recognition
of deferred revenues during the quarter ended March 31, 2000 were a greater
proportion of total revenues than during the same quarter last year. Similarly,
ArtToday accounted for a greater share of revenues this quarter, and their cost
of sales is lower than the parent Company's.
Product costs include royalty fees and the amortization of capitalized software
and license fees. IMSI amortizes capitalized software development costs and
license fees 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) the economic life of such product. Generally, capitalized software
development costs are amortized over a maximum of 18 to 36 months, and license
fees are amortized over a maximum of 36 months.
.
SALES AND MARKETING
Sales and marketing expenses for the three months ending March 31, 2000
decreased $3,563,000 or 82.6% to $749,000 as compared to the same period in the
previous fiscal year. Sales and marketing expenses for the nine months ending
March 31, 2000 decreased $10,368,000 or 67.3% to $5,034,000 as compared to the
same period in the previous fiscal year. As a percentage of net revenues, sales
and marketing expenses for the three and nine month periods ending March 31,
2000, were 25.2% and 33.8%, respectively, as compared with 59.2% and 49.8%,
respectively, for the previous fiscal year. The decrease in dollar and
percentage amounts is primarily due to a reduction in advertising, marketing
staff, merchandisers, corporate sales representatives and other sales overhead
expenses. Sales and marketing expenses should continue to decline in future
periods as a result of the Company's exit from the retail software business.
GENERAL AND ADMINISTRATIVE
General and administrative expenses for the three months ending March 31, 2000
decreased $368,000 or 16.7% to $1,833,000. For the nine months ending March 31,
2000, general and administrative expenses increased $984,000 or 17.1% to
$6,726,000 compared to the same period in the previous fiscal year. The increase
in the nine month period ended March 31, 2000 is due primarily to increased
professional fees and legal expenses incurred in connection with our
restructuring, the restatement of financial results, the Imageline arbitration
and efforts to achieve effectiveness of our registration statements. This
increase in general and administrative expenses also reflects higher accruals
for bad debt expense associated with our exit from the retail software market.
General and administrative expenses for the three and nine month periods ending
March 31, 2000, were 61.8% and 45.2 %, respectively, of net revenues. This
compares with 30.2% and 18.6%, respectively, for the previous fiscal year. The
large increases in general and administrative expenses as a percent of net
revenue is primarily attributable to a lower net revenue base and the fixed
nature of these expenses. Our wholly owned Internet subsidiary, ArtToday, had
operating expenses of $478,000 that included general and administrative expense
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of $266,000. Due to employee layoffs and facility closures at IMSI in February
2000, general and administrative expenses declined significantly.
RESEARCH AND DEVELOPMENT
Research and development expenses for the three months ended March 31, 2000
decreased $1,102,000 or 54.9% to $907,000. For the nine months ending March 31,
2000, research and development expenses decreased $3,069,000 or 47.4% to
$3,399,000. As a percentage of net revenues, research and development expenses
for the three and nine month periods ending March 31, 2000, were 30.6% and
22.8%, respectively, as compared with 27.6% and 20.9%, respectively, for the
previous fiscal year. The reduction in absolute amounts reflects the cost
containment efforts, including a reduction in headcount, and the reduction in
the number of products under development as part of the streamlining of IMSI's
product offerings. The increase as a percentage of net revenues reflects the
need to maintain a core research and development resource to implement IMSI's
Internet strategy.
OTHER EXPENSE, NET
Other expense, net, which consists of interest expense on short and long-term
borrowings, financing penalties, and net gains or losses on foreign currency
transactions, decreased from $492,000 to $286,000 for the three month period
ended March 31, 2000 compared to the same period of the previous fiscal year.
For the nine months ended March 31, 2000, other expense, net, increased from
$1,197,000 to $1,810,000 from the previous fiscal year. Other expense, net for
the quarter ending March 31, 2000 includes $135,000 in penalties owed to Bay
Star related to registration requirements in the share purchase agreements. See
Note 12 to the Condensed Consolidated Financial Statements.
LOSS ON DISPOSITION OF FIXED ASSETS
During the nine months ended March 31, 2000, IMSI has undergone closure of
facilities and significant personnel reductions. Consequently, a large
percentage of the furniture and equipment are now surplus and will be
liquidated. Additionally, building improvements have been abandoned and written
off.
PROVISION FOR INCOME TAXES
IMSI did not record a tax benefit in the three or nine month periods ending
March 31, 2000 for our domestic tax losses because of the uncertainty of
realization. Our effective tax rate was 40.8% for the three month period and
(0.2)% for the nine month period ending March 31, 1999. We adhere 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.
For the three months ended March 31, 2000, IMSI had income tax expense of
$7,000 at its Australian subsidiary. For the nine months ended March 31, 2000,
IMSI has written-off all deferred tax benefits because of the uncertainty of
the realization of any benefit as the Company continues to experience losses.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2000, we had $886,000 in cash and cash equivalents, a decline of
$2,795,000 from our cash and cash equivalents balance of $3,681,000 at June 30,
1999. Working capital declined by $17,762,000 from a negative $1,227,000 at June
30, 1999 to a negative $18,989,000 at March 31, 2000.
Despite our net loss of $16,676,000 for the nine months ending March 31, 2000,
operating activities used net cash of only $1,891,000 during this period. The
lower amount is primarily due to the collection of accounts receivable,
reduction in inventories, advance payments on republishing agreements and income
tax refunds. In February, the Company received an additional $335,000 in income
tax refunds bringing the total for the year to $3.7 million.
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Our investing activities during the nine months ended March 31, 2000, generated
net cash of $1,309,000. Sales of non-core product lines provided $1,555,000, and
purchases of equipment and technology consumed $246,000.
Our financing activities used net cash of $2,221,000 for the nine-month period
ended March 31, 2000. In addition to making capital lease obligation payments,
we repaid Union Bank's $750,000 term loan and paid down the bank's non-revolving
reducing loan to us (our former credit line) by $820,000.
The loans with Union Bank were due on September 30, 1999. A balance of
$4,600,000 on the non-revolving reducing loan remains unpaid. Under the terms of
the loan agreement, Union Bank can declare the loan to be immediately due and
payable and can commence immediate enforcement and collection actions.
Enforcement and collection actions by Union Bank would have a material adverse
effect on IMSI's ability to continue as a going concern.
We will require additional working capital to meet our ongoing operating
expenses, to execute our continued transition to the Internet, to develop new
products, and to conduct other activities. We believe that our existing cash and
cash equivalents will be insufficient to satisfy IMSI's working capital and
capital expenditure requirements over the next 12 months. The large accumulated
losses of IMSI and the negative shareholder's equity of $14,693,000 as of March
31, 2000 will make it difficult for IMSI to obtain new debt or equity financing.
See Note 2 to the condensed consolidated financial statements concerning
realization of assets and basis of presentation.
To a large extent, IMSI planned to meet its working capital needs in the current
fiscal year through the sale or license of the rights to its non-core products.
In August 1999, IMSI sold the rights to the Easy Language product for $1.7, and,
in January 2000, the Company sold PeopleScheduler for $55,000. IMSI has engaged
in, and will continue to engage in, discussions with third parties concerning
the sale or licensing of remaining non-core product lines. The sale or licensing
of the rights to these products is consistent with our strategy of focusing on
our core products while transitioning to the Internet. This strategy also
includes reducing our costs through manufacturing and warehouse outsourcing,
facilities consolidation, and personnel reductions. No assurance can be given
that we will be successful in these efforts.
Under the guidance of CMA Business Credit Services, on February 18, 2000 IMSI
held a formally noticed general meeting of its creditors. At this meeting a
committee was elected to represent creditor interests. The committee agreed to
give IMSI a 120 day stand-still period to prepare and present a plan to the
creditors for paying off its debts
Our forecast period of time through which our financial resources will be
adequate to support our working capital and capital expenditure requirements is
a forward-looking statement that involves risks and uncertainties, and actual
results could vary. The factors described in "Risk Factors", here and in our
Fiscal 1999 Form 10-K, will affect our future capital requirements and the
adequacy of our available funds. No assurance can be given that needed financing
will be available on terms attractive to us, or at all. Furthermore, any
additional equity financing, if available, may be dilutive to shareholders, and
debt financing, if available, may involve restrictive covenants. If IMSI fails
to raise capital when needed, then lack of capital will hamper our ability to
continue as a going concern.
IMSI had no material commitments for capital expenditures as of March 31, 2000.
21
<PAGE> 22
IMSI's international revenues are generally denominated in the foreign
currencies of IMSI's subsidiaries. Consequently, a decrease in the value of a
relevant foreign currency in relation to the U.S. dollar can adversely affect
IMSI's net revenues. Further, a decrease in the value of a relevant foreign
currency in relation to the U.S. dollar occurring after sale and before receipt
of payment by IMSI would have an adverse effect on IMSI's results of operations
and cash flows. IMSI had a $8,000 and $29,000 foreign exchange gain, in the nine
months periods ending March 31, 2000 and 1999, respectively.
OTHER FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
For further discussion please refer to the subheading "Future Performance and
Additional Risk Factors" in the Fiscal 1999 Form 10-K.
OPERATING RESULTS REFLECT CONTINUED LOSSES IN THE THIRD QUARTER OF FISCAL 2000.
IMSI continues to experience deteriorating operating results due to a variety of
factors. The following table shows IMSI's operating income (loss) and net INCOME
(LOSS) for the periods presented (in thousands), as restated:
<TABLE>
<CAPTION>
OPERATING NET INCOME
QUARTER ENDING INCOME (LOSS) (LOSS)
- -------------- ------------ ------------
<S> <C> <C>
Fiscal 1998
September 30 $ (4,668) $ (3,114)
December 31 2,140 1,220
March 31 1,894 1,000
June 30 720 524
------------ ------------
$ 86 $ (370)
============ ============
Fiscal 1999
September 30 $ (1,483) $ (1,106)
December 31 (6,103) (4,274)
March 31 (6,231) (9,692)
June 30 (10,073) (11,894)
============ ============
$ (23,890) $ (26,966)
============ ============
Fiscal 2000
September 30 $ (2,814) $ (1,853)
December 31 (5,069) (7,376)
March 31 (1,490) (5,594)
</TABLE>
We experienced growth during fiscal 1997 and earlier years. However, starting in
fiscal year 1998, our operating results began to steadily worsen. While the
Company substantially reduced the operating loss in the third quarter, IMSI
continues to lose money in fiscal year 2000. The trend of continued losses
raises the question of our ability to continue as a going concern.
Factors that may cause fluctuations of, or a continuing decline in, operating
results in the future include the market factors and competitive factors
described at page 23 in our Fiscal 1999 Form 10-K, under "Future Performance and
Additional Risk Factors."
22
<PAGE> 23
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
IMSI is exposed to the impact of interest rate and, to a very minor degree,
foreign currency fluctuations. IMSI'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. IMSI's major market risk exposure is changing interest rates in
the United States, which would change interest expense on our non-revolving,
reducing loan. IMSI does not hedge foreign currency risk.
23
<PAGE> 24
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
On April 23, 1998 IMSI began arbitration proceedings against Imageline, Inc.
("Imageline") before the American Arbitration Association in San Francisco,
California. IMSI requested that all matters within the scope of the agreements
between Imageline and IMSI be resolved by arbitration, including a dispute in
which Imageline sued Mindscape, Inc. for alleged copyright infringement, for
which IMSI may be required to indemnify Mindscape, in whole or in part. IMSI
further requested that the arbitration decide the rights and liabilities of the
parties, and the validity of the copyrights under which Imageline asserted its
claims against IMSI. IMSI also requested compensatory damages and attorney's
fees.
On August 12, 1999 Imageline filed a counterclaim in the arbitration, alleging
breach by IMSI of an agreement between the parties, including unauthorized
sublicensing, and instituting arbitration proceedings without notice and
opportunity to cure. Imageline requested liquidated damages, alleged to be more
than $200,000, compensatory damages of at least $500,000, punitive damages,
legal fees, interest and costs.
On January 14, 2000, Imageline received a $2.6 million arbitration award against
IMSI for intellectual property violations. IMSI is appealing the award in the
federal district court in Richmond, VA and is also conducting negotiations to
settle the award for a lesser amount.
ITEM 2. Changes in Securities and Use of Proceeds
Not Applicable
ITEM 3. Defaults upon Senior Securities
We are in default of our non-revolving reducing loan to Union Bank of
California and our subordinated convertible notes to BayStar Capital L.P. and
Silicon Valley Bank. See Note 6 to the condensed consolidated financial
statements, at page 8 above.
ITEM 4. Submission of Matters to a Vote of Security Holders
Not Applicable
ITEM 5. Other Information
On January 31, 2000, IMSI was delisted form the Nadsaq Small Cap Market. See
Note 11 to the condensed consolidated financial statements, at page 11 above.
ITEM 6. Exhibits and Reports on Form 8-K
Exhibits
27.1 Financial Data Schedule
No report on Form 8-K was filed during the quarter ended March 31, 2000.
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 16, 2000 INTERNATIONAL MICROCOMPUTER SOFTWARE, INC.
By: /S/ GEOFFREY KOBLICK
-------------------------------------
Geoffrey Koblick
President and Chief Executive Officer
(Principal Executive Officer)
By: /S/ JEFFREY MORGAN
-------------------------------------
Jeffrey Morgan
Chief Financial Officer
(Principal Accounting Officer)
25
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 886
<SECURITIES> 0
<RECEIVABLES> 6,602
<ALLOWANCES> 6,157
<INVENTORY> 204
<CURRENT-ASSETS> 3,442
<PP&E> 6,029
<DEPRECIATION> 5,305
<TOTAL-ASSETS> 8,133
<CURRENT-LIABILITIES> 22,431
<BONDS> 0
0
0
<COMMON> 28,059
<OTHER-SE> (42,752)
<TOTAL-LIABILITY-AND-EQUITY> 8,133
<SALES> 2,968
<TOTAL-REVENUES> 2,901
<CGS> 242
<TOTAL-COSTS> 1,295
<OTHER-EXPENSES> 3,163
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 643
<INCOME-PRETAX> (5,587)
<INCOME-TAX> 7
<INCOME-CONTINUING> (5,594)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,594)
<EPS-BASIC> (.77)
<EPS-DILUTED> (.77)
</TABLE>
