<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q/A
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarter ended September 30, 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 Number 0-15949
INTERNATIONAL MICROCOMPUTER SOFTWARE, INC.
------------------------------------------
(Exact name of registrant as specified in its charter)
CALIFORNIA 94-2862863
---------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No.)
75 ROWLAND WAY, NOVATO, CA 94945
---------------------------------------- -----
(Address of principal executive offices) (Zip code)
(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 November 8, 1999, 7,024,409 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
PART I - FINANCIAL INFORMATION ----
<S> <C> <C>
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets at September 30, 1999 and June 30, 1999 3
Condensed Consolidated Statements of Operations for the three months ended
September 30, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows for the three months ended
September 30, 1999 and 1998 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk 24
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 25
Item 2. Changes in Securities and Use of Proceeds 25
Item 3. Defaults upon Senior Securities 25
Item 4. Submission of Matters to a Vote of Security Holders 25
Item 5. Other Information 25
Item 6. Exhibits and Reports on Form 8-K 25
SIGNATURES 26
</TABLE>
2
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INTERNATIONAL MICROCOMPUTER SOFTWARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
September 30, 1999 June 30, 1999
------------------- --------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,113 $ 3,681
Receivables, less allowances for doubtful
accounts, discounts and returns of $6,296 and $7,445 3,355 4,933
Inventories 2,255 2,895
Prepaid royalties and licenses 1,730 1,858
Income tax refund receivable 2,448 3,751
Other current assets 1,155 758
-------- --------
Total current assets 14,056 17,876
Furniture and equipment 3,310 3,632
Deferred tax assets 525 465
Capitalized software development costs 2,544 2,856
Other assets 2,178 2,315
-------- --------
Total assets $ 22,613 $ 27,144
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Short term borrowings $ 5,735 $ 7,110
Trade accounts payable 1,976 2,256
Accrued and other liabilities 4,502 5,119
Accrued restructuring charges 1,041 1,440
Deferred revenue 3,566 3,178
-------- --------
Total current liabilities 16,820 19,103
Long term debt and other obligations 6,145 6,599
-------- --------
Total liabilities 22,965 25,702
Commitments and contingencies -- --
Shareholders' equity (deficit):
Common stock, no par value; 300,000,000 authorized;
Issued and outstanding 7,024,409 and 7,014,078 shares 27,547 27,526
Accumulated deficit (27,816) (25,963)
Accumulated other comprehensive income 167 129
Notes receivable from shareholders (250) (250)
-------- --------
Total shareholders' equity (deficit) (352) 1,442
-------- --------
Total liabilities and shareholders' equity
(deficit) $ 22,613 $ 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 September 30,
--------------------------------
1999 1998
--------- ---------
(Restated)
<S> <C> <C>
Net revenues $ 5,634 $ 13,695
Product costs 3,182 5,469
-------- --------
Gross margin 2,452 8,226
Costs and expenses:
Sales and marketing 2,041 5,684
General and administrative 1,914 1,744
Research and development 1,311 2,281
-------- --------
Total operating expenses 5,266 9,709
-------- --------
Operating loss (2,814) (1,483)
Gain on product line sale 1,440 --
Interest and other, net (462) (177)
-------- --------
Income (loss) before income taxes (1,836) (1,660)
Income tax provision (benefit) 17 (554)
-------- --------
Net loss ($ 1,853) ($ 1,106)
======== ========
Basic and diluted loss per share ($ 0.26) ($ 0.20)
Shares used in computing loss
per share information 7,019 5,667
</TABLE>
See Notes to Condensed Consolidated Financial Statements
4
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INTERNATIONAL MICROCOMPUTER SOFTWARE, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
------- -------
(Restated)
<S> <C> <C>
Cash flows from operating activities:
------- -------
Net cash (used) provided by operating activities (93) 573
------- -------
Cash flows from investing activities:
Proceeds from sale of product line 1,500
Purchase of equipment (36) (269)
Additions to capitalized software development costs -- (139)
Other (7) --
------- -------
Net cash provided (used) by investing activities 1,457 (408)
------- -------
Cash flows from financing activities:
Credit line borrowings 2,025
Credit line repayments (620) (350)
Repayment of term loan, net (750) (188)
Repayment of capital lease obligations, net (621) (67)
Proceeds from issuance of common stock 21 47
------- -------
Net cash (used) provided by financing activities (1,970) 1,467
------- -------
Effect of exchange rate change on cash and cash 38 153
equivalents
------- -------
Net increase (decrease) in cash and cash equivalents (568) 1,785
Cash and cash equivalents at beginning of period 3,681 2,093
------- -------
Cash and cash equivalents at end of the period $ 3,113 $ 3,878
======= =======
SUPPLEMENTAL DISCLOSURES OF NON-CASH
FINANCING AND INVESTING ACTIVITIES
Equipment acquired through capital lease obligations $ -- $ 239
IMSI common stock received in satisfaction of receivable $ -- $ 320
</TABLE>
See Notes to Condensed Consolidated Financial Statements
5
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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 September 30, 1999 and the
results of operations and cash flows as of and for the three months ended
September 30, 1999 and 1998 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 ended September 30, 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
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 $27.8 million and negative working capital of $2.8
million at September 30, 1999. IMSI is also in default of various loan
covenants. 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 plans to meet its working capital needs in the coming
fiscal year through sales or license of the rights to non-core product lines. As
part of its restructuring strategy, IMSI plans to reduce the number of its
product categories by approximately 75%. To this end, IMSI sold the rights to
the Easy Language product for $1.7 million in August 1999 and recorded a gain of
$1.4 million in the quarter ended September 30, 1999.
The $1.4 million gain reflects the sales proceeds ($1.7 million) less the
balance of prepaid royalties and capitalized software costs related to the EZ
Language product that had not been previously amortized (approximately
$100,000), less $200,000 of proceeds that went into an escrow account,
representing a gain contingency. The escrow amount of $200,000 represents a hold
back from the purchase to cover any claims against the product during the first
year following the closing date, and was recorded as deferred revenue.
IMSI has engaged in, and expects to engage in, discussions with third parties
concerning the sale or licensing of a material part of its remaining non-core
product lines. The sale or licensing of the rights to these product lines is
consistent with our restructuring 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.
6
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IMSI received $1.3 million in tax refunds in the first quarter of fiscal year
2000 and an additional $2.1 million up to the date of filing this Form 10-Q. We
anticipate that we will receive about $300,000 in further income tax refunds in
fiscal year 2000. We believe that the cash derived from the sale or license of
non-core product lines and tax refunds will improve our balance sheet and
working capital position. If our restructuring efforts succeed in improving our
operating performance, we believe we will be able to obtain the additional
financing we will require to continue in business. There can be no assurance
that we will be successful in our efforts. If these efforts are unsuccessful,
IMSI will consider selling one or more of its core product lines.
3. RESTATEMENT OF FISCAL 1998 FINANCIAL STATEMENTS
On October 12, 1999, the last day that IMSI's Annual Report on Form 10-K for the
fiscal year ended June 30, 1999 (the "Fiscal 1999 Form 10-K") was due, IMSI and
its independent auditors identified a $320,000 royalty transaction recorded in
fiscal 1998, which appeared more appropriately recorded in the first quarter of
fiscal 1999.
IMSI's management, after review of certain licensing agreements and consultation
with our current and former auditors, determined that we should have deferred
the recognition of revenue related to three advanced royalty payments recorded
in fiscal 1998 for certain technology-licensing agreements. Previously, IMSI
recognized revenue in the amount of these advanced payments upon execution of
the licensing agreement. The revenue related to these advance payments should
have been recognized as it was earned as royalties under the terms of the
agreements. As a result, the financial statements as of and for the year ended
June 30, 1998, including for the quarter ended September 30, 1999, have been
restated from amounts previously reported to defer recognition of revenue until
earned as royalties in subsequent periods. Because of the delay caused by the
restatement, IMSI's fiscal 1999 Form 10-K was filed on October 28, 1999. See
Note 16 to the June 30, 1999 consolidated financial statements included in
IMSI's fiscal 1999 Form 10-K.
A total of $407,000 of royalty income was deferred from fiscal year 1998 to
fiscal year 1999. Royalty income of $335,000 has been added to the quarter ended
September 30, 1998. As of July 1, 1998, IMSI changed the amortization period for
visual content from 36 months to 60 months. In the fourth quarter of fiscal year
1999, reevaluating the amortization periods, the Company's management revised
the amortization period for visual content back to 36 months, effective for the
entire fiscal year. As a result, additional amortization charges of $99,000 are
attributable to the quarterly period ended September 30, 1998.
The following table shows the effect of these restatements on the quarter ended
September 30, 1998.
<TABLE>
<CAPTION>
As Reported Restated
----------- ---------
<S> <C> <C>
Net revenues $ 13,360 $ 13,695
Product costs 5,370 5,469
-------- --------
Gross margin 7,990 8,226
======== ========
Operating loss (1,719) (1,483)
======== ========
Net Income before Taxes (1,896) (1,660)
Provision for Income Taxes (682) (554)
-------- --------
Net Income $ (1,214) $ (1,106)
======== ========
Basic and diluted loss per share ($ 0.21) ($ 0.20)
======== ========
</TABLE>
7
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4. REVENUE RECOGNITION
Revenue is recognized when earned. For fiscal 1999 the Company 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. Prior to fiscal 1999 the Company followed SOP
91-1. 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
and that portion is recognized accordingly. Non-refundable advanced payments
received under license agreements are recognized as revenue when the customer
accepts the delivered software. Revenue from software licensed to developers,
including royalties earned in excess of non-refundable advanced payments, is
recorded as the developers ship products containing the licensed software. Costs
related to post-contract customer support, which are minimal and include limited
telephone support and 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 considered
channel inventories, recent product sell-through activity and market conditions
in establishing its reserves.
5. INVENTORIES
Inventories, consisting primarily of diskettes, 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>
September 30, 1999 June 30, 1999
------------------ -------------
<S> <C> <C>
Raw materials $ 2,673 $ 2,343
Finished goods 2,436 3,897
------- -------
5,109 6,240
Reserves for obsolescence (2,854) (3,345)
------- -------
$ 2,255 $ 2,895
======= =======
</TABLE>
6. CAPITALIZED SOFTWARE DEVELOPMENT COSTS
Total capitalized software development costs were $8,289,000 at both September
30, 1999 and June 30, 1999 less accumulated amortization of $5,745,000 and
$5,433,000, respectively.
8
<PAGE> 9
7. DEBT
IMSI's short-term borrowings and long term debt and other obligations consist of
the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1999 1999
------------- --------
<S> <C> <C>
Short term borrowings
Non-revolving, reducing loan with interest at bank's
reference rate plus 3%, 11.25% at September 30, 1999 $4,780 $5,400
Term loan with interest at bank's reference rate plus 3% -- 750
Capital lease obligations 955 960
------ ------
Total short term borrowings $5,735 $7,110
====== ======
Long term debt and other obligations
Subordinated loan facility due November 2001 with
interest at 12% net of unamortized warrant cost
of $539 and $604, respectively $1,961 $1,896
Senior subordinated convertible note due May 2002
with interest at 9% net of unamortized warrant cost
of $1,003 and 1,100 3,997 3,900
Capital lease obligations 187 803
------ ------
Total long term debt and other obligations $6,145 $6,599
====== ======
</TABLE>
IMSI is in default of 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 is 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. Although there can be no
assurances, IMSI anticipates it will be able to repay the remaining amount owed
to Union with proceeds to be received from the planned sale or license of
non-core product lines. IMSI is negotiating with Union to attempt to obtain a
forbearance to provide time to allow IMSI to cure its default.
8. SEGMENT INFORMATION
IMSI has five reportable operating segments. Four of the segments are
geographic: North America, the United Kingdom, Germany and Australia. Each of
these segments generates revenues and incurs expenses related to the sale of our
PC productivity software. The last segment comprises the revenues and expenses
related to ArtToday.com (formerly Zedcor, Inc.) our graphic design Internet
subsidiary that was purchased in October of 1998 and previously was included in
the results of the North America geographic segment. Revenue from our precision
design Internet efforts are not yet material. The following table details
segment information as follows (in thousands):
<TABLE>
<CAPTION>
Other
Quarter Ended ArtToday North Rest of
September 30, 1999 .com America UK Germany Australia World Eliminations Total
------------------ -------- ------- ---- ------- --------- ------- ------------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Revenues-external $ 585 $ 2,620 $348 $ 989 $ 527 $ 565 $ -- $ 5,634
-internal 347 -- -- -- -- (347) --
</TABLE>
9
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<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Income (loss) before taxes (115) (2,090) 10 169 86 104 -- (1,836)
Income tax expense (credit) 15 -- -- 7 (5) -- 17
Net Income (loss) (115) (2,105) 10 169 79 109 (1,853)
Identifiable assets $ 59 $ 20,723 $547 $675 $290 $319 -- $22,613
</TABLE>
<TABLE>
<CAPTION>
Quarter Ended
September 30, 1998 North Rest of
(restated) America UK Germany Australia World Eliminations Total
------------------ ------- ------ ------- --------- ------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Revenues-external $ 9,958 $ 749 $ 1,835 $ 640 $ 513 $ -- $ 13,695
-internal 542 -- -- -- -- (542) --
Income (loss) before taxes (1,652) (93) 167 157 (62) -- (1,483)
Income tax expense (credit) (563) -- -- 9 -- -- (554)
Net Income (loss) (1,266) (93) 167 148 (62) -- (1,106)
Identifiable assets $ 21,085 $1,100 $ 3,257 $ 839 $ 863 -- $27,144
</TABLE>
Pro forma results of operations for the quarter ending September 30, 1998 (as
restated) assuming that the ArtToday.com acquisition occurred at the beginning
of the quarter would be as follows (in thousands except per share amounts):
<TABLE>
<S> <C>
Revenues $14,315
Loss before taxes 1,587
Net loss 1,059
Diluted earnings (loss) per share ($0.19)
</TABLE>
9. BASIC AND DILUTED EARNINGS PER SHARE
Net loss and the weighted average numbers of shares outstanding (denominator)
used to calculate basic earnings per share are reconciled to the numbers of
shares used in calculating diluted earnings per share as follows:
<TABLE>
<CAPTION>
Three Months Ended September 30,
--------------------------------
1999 1998
---- ----
<S> <C> <C>
Net Loss $(1,853,000) $ (1,106,000)
=========== ============
Shares used to compute basic EPS 7,019,000 5,667,000
Add effect of dilutive
securities:
Convertible Note 658,000 --
Warrants 263,000 --
Stock options 674,000 589,000
----------- ------------
Shares used to compute diluted EPS 8,614,000 (1) 6,256,000(1)
=========== ============
</TABLE>
(1) Not presented as results were anti-dilutive
10
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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.
<TABLE>
<CAPTION>
Three Months Ended September 30,
--------------------------------
1999 1998
---- ----
<S> <C> <C>
Net Loss $(1,853,000) $ (1,106,000)
Other comprehensive (loss) gain
Foreign currency translation
adjustments (38,000) 153,000
----------- ------------
Total comprehensive loss $(1,891,000) $ (953,000)
=========== ============
</TABLE>
11. SUBSEQUENT EVENTS
POTENTIAL DE-LISTING FROM THE NASDAQ NATIONAL MARKET
By letter of November 2, 1999, the Nasdaq National Market notified us that we
did not meet the $4 million net tangible assets requirement for continued
listing on the Nasdaq National Market. Our June 30, 1999 annual report on Form
10-K reported net assets of $1.4 million. The Nasdaq National Market deducts
goodwill from net assets to arrive at net tangible assets. As of June 30, 1999,
IMSI had $1,156,000 of unamortized goodwill and net tangible assets of $286,000.
A hearing before the Nasdaq Listings Qualifications Panel is scheduled for
November 18, 1999, at which time we will present our plan for compliance with
the net tangible assets requirement. There can be no assurance that IMSI will
continue to be listed on the Nasdaq National Market. Any de-listing instituted
by the Nasdaq would likely 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. The
securities laws of several states could impose limitations on the liquidity of
the common stock. Such 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.
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 including shares issued or issuable under agreements
with The Learning Company (now Mattel, Inc., "TLC"), Capital Ventures
International ("CVI"), BayStar Capital, Americ Disc and Homestyles. 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
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
11
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registration statements, we may be liable for financial penalties or other
payments under the terms of the agreements. The aggregate amount of one or more
of these penalties or other payments could have a material effect on our
financial statements, business, liquidity and results of operations.
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 that $8 per
share three days before the registration of the shares issued is declared
effective. 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, IMSI agreed to immediately 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 original 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.
CVI
Under the agreement with CVI, where CVI invested $5 million, if the registration
statement was not effective by July 3, 1999, then we may be obligated to pay CVI
one percent of the amount invested by CVI for the first month after July 3, 1999
and two percent for each month thereafter until the registration statement is
declared effective.
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 of
the respective registration statement.
BayStar
On November 15, 1999, IMSI received a letter from BayStar Capital relating to
the 9% Convertible Note due 2002, the Warrant, the Registration Rights Agreement
and the Securities Purchase Agreement all dated May 24,1999 (the "BayStar
Agreements"). In the letter, BayStar stated that IMSI owes BayStar penalties
relating to the failure of the registration statement relating to the securities
underlying the Note and the Warrant to be declared effective by September 21,
1999. BayStar asserts in the letter that, after a 15-day notice period, it
intends to exercise rights that it claims to have under the BayStar Agreements
to modify the conversion terms of the Note so that the conversion price would be
reset to the closing bid price for the common stock on the day before conversion
of the Note. IMSI believes it is unclear from the letter and the language of the
Note what rights BayStar believes it has under the BayStar Agreements that it
purports to be asserting. There can be no assurances concerning the outcome of
any subsequent discussions between BayStar and IMSI or any litigation that
BayStar may subsequently initiate. If BayStar was entitled to convert, and did
convert the Note at a conversion price based on the closing bid price of the
common stock on the day before conversion rather than at the conversion price
originally fixed in the Note (subject to adjustment), and if, as is true on the
date of this Form 10-Q, the market price of the common stock was significantly
12
<PAGE> 13
below the conversion price originally fixed in the Note, such conversion could
result in a materially larger number of shares of common stock being issued,
with resulting dilution to existing shareholders.
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 agreed
that if TLC sells any shares within 30 days following the effectiveness of a
registration statement covering the 200,000 shares, IMSI will pay TLC the
difference between the sales price and $8.50 per share, such payment to be made
either in cash, or at IMSI's option or by issuing additional shares based on the
average share price during the thirty day protection period, at IMSI's option.
Based on the June 30, 1999 share price, IMSI was contingently liable to pay TLC
$725,000 under this protection clause. A registration statement was filed on
June 8, 1999 for the 200,000 shares, but that registration statement is not yet
effective.
On August 27, 1999, TLC (now owned by Mattel) served upon IMSI an arbitration
demand based on allegations that IMSI failed to timely file the registration
statement and asserting that the original obligation was revived. Management
believed that it had reached an agreement in principal with Mattel for the
issuance of 300,000 additional shares of common stock in satisfaction of its
claim. However, no written agreement has been executed between the parties.
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 and seek $1.8 million in cash and that it would
deem any claim that TLC 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 outcome with these entities, 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.
No liabilities have been recorded, and no accruals or reserves have been
established, in the financial statements with respect to the potential penalties
or payments described above.
13
<PAGE> 14
12. RESTRUCTURING CHARGE
The following table reflects the rollforward activity in the accrued
restructuring liability account:
<TABLE>
<CAPTION>
Accrued Restructuring Liability: Balance First Balance
June 30, Quarter September 30,
1999 Activity 1999
---------- -------- -------------
<S> <C> <C> <C>
</TABLE>
<TABLE>
<S> <C> <C> <C>
Warehouse closure:
Accrued rent $ 249,000 $ 61,000 $ 188,000
Broker's fee 103,000 103,000
Warehouse transition costs 284,000 22,000 262,000
Facilities consolidation:
Novato:
Rent 180,000 135,000 45,000
Broker's fee 65,000 16,000 49,000
Excess furniture lease 14,000 4,000 10,000
Additional walls and doors 29,000 7,000 22,000
Miscellaneous charges 3,000 1,000 2,000
Tech support facility 110,000 12,000 98,000
Consolidation of Foreign Offices 6,000 6,000
Personnel reductions 397,000 141,000 256,000
---------- -------- ----------
Total accrued restructuring liability $1,440,000 $399,000 $1,041,000
========== ======== ==========
</TABLE>
The following table reflects the rollforward activity of planned terminations
under the restructuring plan.
<TABLE>
<CAPTION>
Planned Cumulative
terminations as of Terminations as of
June 30, 1999 September 30, 1999
------------------ ------------------
<S> <C> <C>
Sales and Marketing 22 18
General and Administrative 8 5
Manufacturing 23 8
Research and Development 37 3
------------------ ------------------
90 34
------------------ ------------------
</TABLE>
14
<PAGE> 15
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 that involve certain risks and
uncertainties including those discussed in the "Other Factors That May Affect
Future Operating Results" section of this Form 10-Q, as well as in 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 $1,853,000 or ($0.26) per share for the quarter
ended September 30, 1999, as compared to a net loss of $1,106,000 or ($0.20) per
share for the comparable quarter of fiscal 1998, representing an increase in net
loss of $747,000. We reported an operating loss of $2,814,000 for the quarter
ending September 30, 1999 as compared to an operating loss of $1,483,000 for the
quarter ending September 30, 1998. In the quarter ended September 30, 1999, we
sold the Easy Language product for $1.7 million in cash and realized a gain of
$1,440,000 on the sale. This gain offsets a portion of the current period's
higher net loss.
NET REVENUES
Net revenues for the three month period ended September 30, 1999 were $5,634,000
compared to $13,695,000 in the comparable quarter of the previous fiscal year,
representing a decrease in net revenues of 58.9%. Product revenues in absolute
dollars and as a percentage of total net revenues for each of IMSI's principal
product categories were as follows for the periods indicated (in thousands):
15
<PAGE> 16
<TABLE>
<CAPTION>
Three Months Ended September 30,
-----------------------------------------------------
1999 1998
------------------------ -------------------------
<S> <C> <C> <C> <C>
Precision Design $1,795 32% $3,777 28%
Graphic Design 2,520 44% 4,268 31%
Business Applications 2,006 36% 3,135 23%
Utilites 1,039 18% 3,580 26%
Other Products 498 9% 3,842 28%
Sales Reserves (2,224) -39% (4,907) -36%
------------- ---- ------------- -----
Net Revenues $5,634 100% $13,695 100%
============= ==== ============= =====
</TABLE>
Product category revenues are shown gross of sales reserves recorded in the
respective quarters for returns, price discounts and rebates. Accrued sales
reserves totaled $5,344,000 at September 30, 1999 as compared to $6,719,000 at
June 30, 1999. Except for a portion of rebates that are payable to a
non-customer processing agent, reserves for returns, price discounts and rebates
are classified along with allowances for doubtful accounts as contra receivables
on IMSI's balance sheet. A total of $452,000 and $553,000 of rebate reserves
were classified as accrued liabilities at September 30, 1999 and June 30, 1999,
respectively. Sales reserves are based on estimates of future activity and by
their nature are subject to certain risks and uncertainties, which could cause
actual results to differ materially from estimates.
Revenues in the precision design category decreased for the three-month period
ended September 30, 1999 by $1,982,000 or 52% from the comparable period in
fiscal 1998. TurboCAD and Floorplan revenue both declined significantly, as
intense competition characterized the computer-aided design software market.
Unit volume and average selling price both declined.
Revenue in the graphic design category decreased by $1,748,000 or 41% for the
three-month period ended September 30, 1999 from the comparable period of fiscal
1998. Within the category, MasterClips revenue declined by 51% in comparison to
the prior year period. MasterClips, which historically is updated every 6 to 9
months, has not been updated recently, and this is a significant factor in the
decline in sales. IMSI's Internet subsidiary, ArtToday.com, Inc., contributed to
sales with $585,000 in net revenue during the quarter.
Revenues in the business applications category for the three-month period ended
September 30, 1999 decreased by $1,129,000 or 36% from the comparable period of
fiscal 1998. The sales of TurboProject were comparable to last year, and HiJack
sales increased by 103%. These gains were more than offset by the declining
sales of other products, which are non-core products. Under IMSI's restructuring
plan, IMSI is not spending as much on marketing non-core products as during the
comparable period last year, and such reduced spending contributed to the
decline in revenues during the first quarter of fiscal 2000.
Revenues in the utilities category for the three month period ended September
30, 1999 decreased by $2,541,000 or 71%, from the comparable period of fiscal
1998. In the United States particularly, intense price competition and rebates
impacted consumer-oriented software products, including the utilities category.
The utilities products have also not been updated recently, which contributed to
the decline in sales, in both unit volume and average selling price.
Revenues in the other products category for the three month period ended
September 30, 1999 decreased by $3,344,000, or 87.0%, from the comparable period
of fiscal 1998. The decrease was primarily due to a discontinuation of products
in this category.
16
<PAGE> 17
Sales decreased in all categories due to the continuing trends of intense price
competition and rebates. These trends had particular impact in consumer-oriented
software products such as MasterClips, FloorPlan and the Utilities products.
Intense price competition continued in both the United States and Europe,
although there were no rebates in Europe. These trends decrease revenue as a
result of decreased average selling price. The volume of units sold also
decreased. The decline in sales was due to both reduced unit volume and lower
average selling prices. In addition, net revenues declined because many of
IMSI's consumer software products have not been updated recently. Product
updates are an important competitive factor in maintaining unit sales volume,
share of the market, and shelf space in distribution. Our reduction in
advertising expenses also is a factor in causing reduced sales in all product
lines.
Net revenues from domestic sales decreased by $6,753,000 or 67.8% to $3,205,000
and were 56.9% of total net revenues for the three month period ended September
30, 1999. This compares to net revenues from domestic sales of $9,958,000, or
72.7% of total net revenues, for the comparable period in the previous fiscal
year.
Net revenues from international sales declined by $1,308,000 or 35%, and were
$2,429,000 or 43.1% of net revenues for the three month period ended September
30, 1999. This compares to $3,737,000 or 27.3% of net revenues for the three
months ended September 30, 1998. Net revenues from international sales increased
as a percentage of total sales because of the much steeper decline in domestic
sales as a part of the total.
IMSI's international net revenues in the three-month period ended September 30,
1999 were generated primarily from Germany, Australia, South Africa, the United
Kingdom and France. As compared to the three-month period in the prior year,
sales declined 17.7% in Australia, declined 53.5 % in the United Kingdom, and
declined 46.1% in Germany.
Although IMSI believes that the risks associated with transactions in foreign
currencies are mitigated by diversified exposure to multiple currencies, 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.
During the quarter ended September 30, 1999, the Company's significant new
product releases and upgrades included:
o Stanley(R) Home Design Software, released August 31, 1999, developed
and marketed in alliance with The Stanley Works. Stanley Home Design
is a software tool that allows residential home remodelers to draw
and preview a prospective home in 3D. The product is a combination
of the capabilities found in IMSI's Floor Plan and TurboProject
products.
o FloorPlan 3D Design Suite v5, released August 31, 1999, is an easy
to use tool for Home and Garden design projects. Floor Plan allows
the customer to transform designs into 3D walkthroughs.
o Form Tool v4, and Form Tool Express 4.0, released September 30,
1999, are fast and easy tools for effective forms management. Form
Tool has built-in relational data base support, incorporates
drag-and-drop design, powerful data storage, and
17
<PAGE> 18
integrated scanning and OCR technology. Customers may design and
print business forms quickly, or choose from over 400 pre-built
templates. The customer can then complete and electronically sign
and route the form over a company Intranet to other people in the
organization. Data is automatically stored in an integrated
relational database.
Product returns often increase when IMSI introduces upgrades and new versions of
products. New version releases may result in an increase in return reserves of
previous versions. Therefore, new product introductions by competitors also
increase returns. As of September 30, 1999, management considered likely product
upgrades and factored in an appropriate return reserve for such products
accordingly. Current and planned product upgrades were and are among the factors
used to establish reserves for product inventory. Other factors considered
include product sales trends, competition from other products, product inventory
on hand and termination of distribution agreements.
On September 27, 1999, TechData notified us that it would terminate its
distribution agreement with us within 60 days as a result of a disagreement over
payment terms. Although TechData was one of our largest distributors, we
anticipate only a minimal impact on future sales because other distributers
assumed substantially all of the accounts previously serviced by TechData.
Based on reports received from TechData, we estimated, as of September 27, 1999,
that Tech Data held $566,000 of IMSI product in its inventory. Because our
distributorship agreement with TechData allowed for product returns upon
termination, our return reserve included an allowance of $566,000 for TechData's
entire reported inventory as of September 30, 1999. After September 30, 1999,
Tech Data requested to return $575,000 of IMSI inventory. We received inventory
of approximately $265,000 on December 19, 1999 and approximately $257,000 on
January 27, 2000, for a total of approximately $522,000. We do not anticipate
receiving any further returns from TechData.
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 were unopened and in their original
factory sealed packages. To date, we have credited TechData for only $25,000 of
the $522,000 in returns because we believe 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 September 30, 1999 was
approximately $752,000. After applying the reserve for expected returns, the net
receivable due from TechData at September 30, 1999, was $186,000. We do not
anticipate paying a cash refund to TechData for returned product. The financial
statements as of December 31, 1999 will reflect the entire receivable due from
TechData as uncollectable based on our subsequent discussions with and
correspondence from TechData.
PRODUCT COSTS
Product costs decreased from $5,469,000 to $3,182,000 representing an increase
as a percentage of net revenues from 39.9% to 56.5% for the three-month periods
ended September 30, 1998 and September 30, 1999, respectively. Major factors
were decreased selling prices for our products due to price discounts and end
user rebates and costs associated with the refurbishment of returned products in
the United States. Product costs also increased as a percentage of net revenues
because of amortization of capitalized software and license fees over a lower
sales base.
18
<PAGE> 19
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 at minimum over 18 to 36 months, and license fees are amortized
over 36 months.
Aggregate amortization of such costs was $623,000 and $656,000 in the
three-month periods ended September 30, 1999 and September 30, 1998,
respectively.
SALES AND MARKETING
Sales and marketing expenses decreased from $5,684,000 to $2,041,000 for the
three month periods ended September 30, 1998 and September 30, 1999,
respectively, a decrease of 64.1%. Sales and marketing expenses as a percentage
of net revenues decreased from 41.5% to 36.2% of net revenues for the
three-month periods ended September 30, 1998 and September 30, 1999,
respectively. The decrease is primarily due to reduced advertising, marketing
staff, merchandisers and corporate sales representatives, and lower overhead
expense. Staff reductions and reduced expenses have occurred as part of IMSI's
restructuring plan. These reductions had a significant effect in the first
quarter of fiscal year 2000.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased from $1,744,000 to $1,914,000 for
the three-month periods ended September 30, 1998 and September 30, 1999,
respectively. General and administrative expenses as a percentage of net
revenues increased from 12.7% to 34.0% of net revenues for the three month
period ended September 30, 1998 and September 30, 1999, respectively. The
increase as a percentage of revenues reflected reduced sales volume for the
first quarter of fiscal 2000 and the addition of the general and administrative
expenses of ArtToday.com, Inc., our Internet subsidiary. ArtToday.com was
acquired in October 1998. ArtToday.com's general and administrative expenses
were not included in the expenses reported for the three months ending September
30, 1998. ArtToday.com had net revenue of $585,000, operating expenses of
$611,000 including general and administrative expense of $326,000 and an
operating loss of $112,000 during the three months ended September 30, 1999.
Increased amortization and depreciation were also factors in increased general
and administrative expense. IMSI's total employees in the United States declined
from 258 as of September 30, 1998, to 140 as of September 30, 1999.
RESEARCH AND DEVELOPMENT
Research and development expenses decreased in amount from $2,281,000 to
$1,311,000 for the three-month periods ended September 30, 1998 and September
30, 1999. This decrease was primarily attributable to a decrease in domestic
employees as part of the restructuring, and reduction in the number of products
under development as part of the streamlining of IMSI's product offerings.
ArtToday.com had research and development expense of $145,000 during the
three-month period ended September 30, 1999. ArtToday.com's research and
development expense was not included in the comparable period of last year.
Research and development costs as a percentage of net revenues increased from
16.7% to 23.3% of net revenues for the three month periods ended September 30,
1998 and September 30, 1999, respectively. The percentage
19
<PAGE> 20
increase reflected IMSI's commitment to invest in research and development for
its core products, and for our Internet subsidiary, ArtToday.com, and reflected
the decline in sales for the first quarter of fiscal 2000.
OTHER EXPENSE, NET
Other expense, net, which consists of interest expense on short- and long-term
borrowings as well as net gains or losses on foreign currency transactions,
increased from an expense of $177,000 for the three-month period ended September
30, 1998, to $462,000 for the three-month period ended September 30, 1999. For
the three-month period ended September 30, 1999, other expense, net included
$92,000 in foreign exchange gain, $162,000 in warrant amortization, and $392,000
of interest expense, compared to $105,000 in foreign exchange gain and $282,000
of interest expense for the comparable period in the previous fiscal year. We
are paying higher interest rates, and this category of expense includes the
amortization of warrants issued in connection with debt, an expense that IMSI
did not incur in the comparable period last year.
PROVISION FOR INCOME TAXES
IMSI did not record a tax benefit in the quarter ending September 30, 1999 for
our domestic tax losses because of the uncertainty of realization. Our effective
tax rate was 33.4% for the three-month period ended September 30, 1998. 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.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1999, we had $3,113,000 in cash and cash equivalents.
Although our cash and cash equivalents declined by only $568,000 from $3,681,000
at June 30, 1999, working capital declined by $1,537,000 from a negative
$1,227,000 at June 30, 1999 to a negative $2,764,000 at September 30, 1999. The
decline in working capital was partially due to the accumulation of an
additional $388,000 in deferred revenue as of September 30, 1999 as compared to
June 30, 1999.
Despite our net loss of $1,853,000, operating activities used net cash of
$93,000 in the three months ending September 30, 1999 primarily due to the
collection of trade receivables and income tax refunds. IMSI has received $1.3
million in tax refunds in the first quarter of fiscal year 2000 and about $2.1
million to date in the second quarter of fiscal year 2000. We anticipate that we
will receive approximately an additional $300,000 in income tax refunds in
fiscal year 2000.
Our investing activities during the three months ended September 30, 1999,
provided $1,457,000 in cash, primarily from the sale of a non-core product line.
Our financing activities used net cash of $1,970,000 for the three-month period
ended September 30, 1999. During the quarter ended September 30, 1999 we repaid
$621,000 of capital lease obligations. We also 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 $620,000.
The loans with Union Bank were due on September 30, 1999. The $4,780,000 balance
on the non-revolving reducing loan is unpaid. Under the terms of the loan
agreement, Union Bank can
20
<PAGE> 21
declare the loan to be immediately due and payable and can commence immediate
enforcement and collection actions. We anticipate that we will be able to repay
the remaining amount owed with proceeds we expect to generate from the sale or
license of non-core product lines. IMSI is in the process of negotiating with
Union to attempt to obtain a forbearance to provide time to allow IMSI to cure
its defaults. Enforcement and collection actions by Union Bank could have a
material adverse effect on IMSI's business, operating results and financial
condition.
IMSI will require additional working capital to meet its ongoing operating
expenses, to execute its continued transition to the Internet, to develop new
products, and to conduct other activities. IMSI believes that its 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 relative small amount of shareholder's equity remaining
as of September 30, 1999 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 plans to meet its working capital needs in the coming
twelve months through sale or license of the rights to its non-core products. As
part of its restructuring strategy, IMSI plans to reduce the number of its
product SKU's by approximately 75% through sales of its non-core product lines.
To this end, IMSI sold the rights to the Easy Language product for $1.7 million
in August 1999. IMSI has engaged in, and expects to engage in, discussions with
third parties concerning sale or license of a material part of its remaining
non-core product lines. The sale or license of the rights to these products is
consistent with our strategy of focusing on our core products while
transitioning to the Internet.
The strategy for meeting the Company's working capital requirements also
includes reducing our costs through manufacturing and warehouse outsourcing,
facilities consolidation, and personnel reductions. See note 12 on page above
for the table that reflects the rollforward activity in the accrued liability
account relating to the restructuring. For a complete discussion of the
Company's restructuring plan, please refer to our Form 10-K for the year ending
June 30, 1999.
IMSI believes that the cash derived from the anticipated sale or license of
non-core product lines and its tax refunds will improve its balance sheet and
working capital position. If our restructuring efforts succeed in improving our
financial performance, management believes it will be able to obtain the
additional financing our working capital needs require. There can be no
assurance that we will be successful in our efforts. If these efforts are
unsuccessful, IMSI will consider selling one or more of its core product lines.
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 September 30,
1999.
IMSI's international revenues are generally denominated in foreign currencies of
IMSI's subsidiaries. Consequently, a decrease in the value of a relevant foreign
currency in relation to
21
<PAGE> 22
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 $92,000
foreign exchange gain and a $105,000 foreign exchange loss, in the three-month
periods ending September 30, 1999 and September 30, 1998, 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 REDUCED LOSSES IN THE FIRST QUARTER OF FISCAL 2000.
IMSI has experienced, and may continue 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>
------------- -------------
QUARTER ENDING OPERATING NET INCOME
INCOME (LOSS)
(LOSS)
----------------------- ------------- -------------
<S> <C> <C>
Fiscal 1998 (Restated)
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 (6,319) (9,780)
June 30 (9,985) (11,806)
--------- ---------
$ (23,890) $ (26,966)
========= =========
Fiscal 2000
September 30 $(2,814) $(1,853)
</TABLE>
We experienced growth during fiscal 1997 and earlier years. However, starting in
fiscal year 1998, our operating results began to steadily worsen. IMSI continues
to lose money in fiscal year 2000. While the quarterly net loss in the three
months ended September 30, 1999 is $747,000 greater than the quarterly net loss
during the comparable period last year, the current quarterly results reverse
seven quarters of declining operating income (loss). 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."
<TABLE>
<CAPTION>
Three Months Ended September 30,
Change From
1999 Previous Year 1998
------------------ --------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
Precision Design $ 1,239 21% ($ 2,348) -65% $ 3,587 27%
Graphic Design 689 12% (3,070) -82% 3,759 28%
Business Applications 1,199 21% (1,220) -50% 2,419 18%
Utilities 901 15% (602) -40% 1,503 11%
Other products (38) -1% (2,350) -102% 2,312 17%
Increase in sales reserves 1,856 32% 2,076 -944% (220) -2%
-------- --- -------- -------- ---
Total $ 5,846 100% ($ 7,514) $ 13,360 100%
======== === ======== ======== ===
</TABLE>
22
<PAGE> 23
YEAR 2000 ISSUES COULD AFFECT OUR BUSINESS IF OUR PRODUCTS, OR THE SYSTEMS WE
USE, OR THE SYSTEMS OUR SUPPLIERS USE FAIL BECAUSE THEY ARE NOT YEAR 2000
COMPLIANT. Software, embedded processors, or computer systems may fail if they
do not accurately recognize the Year 2000. We recognize the need to ensure that
our 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. We established procedures for
evaluating and managing the risks and costs associated with this problem. As
part of the general upgrade of our information systems we are putting in place
systems that will be Year 2000 compliant.
We have initiated a Year 2000 Compliance Plan that addresses three types of
systems that must be Year 2000 compliant.
Products: Our software products have been undergoing Year 2000 Compliance
testing since January 1998. We believe that all current versions of our products
are Year 2000 compliant. Our products that are no longer current and products
developed years ago may not be Year 2000 compliant. We advise our customers to
upgrade to current versions of our products.
INFORMATION TECHNOLOGY SYSTEMS: We identified all internal data processing and
networking systems that we believe were at risk from the Year 2000 problem, and,
where available, reviewed the manufacturer's Year 2000 Compliance statement for
each system. Internal testing was done for any mission critical system for which
the manufacturer's Year 2000 Compliance statement was not adequate to ensure the
reliability of the system. All information technology systems will be verified
as Year 2000 Compliant by the end of November 1999. In addition, no new
information technology systems will be implemented without first ensuring that
they are Year 2000 Compliant.
NON-INFORMATION TECHNOLOGY SYSTEMS: We have 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, the effort to ensure Year 2000 Compliance for these systems is
an ongoing effort.
We have communicated with our customers and suppliers to determine their Year
2000 compliance readiness, and the extent to which we are vulnerable to any
third party Year 2000 issues. However, there can be no guarantee that the
systems of other companies on which our systems rely will be timely converted.
Failure to convert by another company, or a conversion that is incompatible with
our systems, would have a material adverse effect on us, our results of
operations and our financial condition.
23
<PAGE> 24
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
IMSI is exposed to the impact of interest rate and 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 the our non-revolving, reducing
loan.
Most of our 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 our net revenues. IMSI does not hedge
foreign currency risk.
24
<PAGE> 25
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
On April 23, 1998 IMSI began arbitration proceedings against Imageline, Inc.
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. IMSI cannot provide any assurance as to the
outcome of the arbitration. An adverse outcome on this matter could require IMSI
to pay a large amount of damages to Imageline.
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. See Note 7 to the condensed consolidated financial statements, at
page 9 above.
ITEM 4. Submission of Matters to a Vote of Security Holders
Not Applicable
ITEM 5. Other Information
The Nasdaq National Market has informed us that as of November 2, 1999 IMSI is
no longer in compliance with the net tangible assets requirement of $4 million
for continued listing on the Nasdaq National Market. See Note 11 to the
condensed consolidated financial statements, at page 11 above.
ITEM 6. Exhibits and Reports on Form 8-K
Exhibits
10.1 August 10, 1999 Asset Purchase Agreement with L&H Applications
USA, Inc.
27.1 Financial Data Schedule
No report on Form 8-K was filed during the quarter ended September 30, 1999.
25
<PAGE> 26
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 11, 2000 INTERNATIONAL MICROCOMPUTER SOFTWARE, INC.
By: /s/ Geoffrey Koblick
----------------------------------
Geoffrey Koblick
Chairman of the Board of Directors
26
<PAGE> 27
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
-------- -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-1-1999
<PERIOD-END> SEP-30-1999
<CASH> 3,113
<SECURITIES> 0
<RECEIVABLES> 3,355
<ALLOWANCES> 6,296
<INVENTORY> 2,255
<CURRENT-ASSETS> 14,056
<PP&E> 3,310
<DEPRECIATION> 0
<TOTAL-ASSETS> 22,613
<CURRENT-LIABILITIES> 16,820
<BONDS> 6,145
0
0
<COMMON> 27,547
<OTHER-SE> (27,899)
<TOTAL-LIABILITY-AND-EQUITY> 22,613
<SALES> 5,634
<TOTAL-REVENUES> 5,634
<CGS> 3,182
<TOTAL-COSTS> 5,266
<OTHER-EXPENSES> (1,440)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 462
<INCOME-PRETAX> (1,836)
<INCOME-TAX> 17
<INCOME-CONTINUING> (1,853)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,853)
<EPS-BASIC> (0.26)
<EPS-DILUTED> (0.26)
</TABLE>
