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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended SEPTEMBER 30, 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)
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<CAPTION>
<S> <C>
CALIFORNIA 94-2862863
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No.)
75 ROWLAND WAY, NOVATO, CA 94945
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(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 November 3, 2000, 9,693,892 shares of Registrant's common stock, no par
value, were outstanding.
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INTERNATIONAL MICROCOMPUTER SOFTWARE, INC.
AND SUBSIDIARIES
INDEX
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Page
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PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets at September 30, 2000 and June 30, 2000 3
Condensed Consolidated Statements of Operations for the three months ended
September 30, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows for the three months ended 5
September 30, 2000 and 1999
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and 10
Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities and Use of Proceeds 18
Item 3. Defaults upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
</TABLE>
2
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PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
INTERNATIONAL MICROCOMPUTER SOFTWARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
<TABLE>
<CAPTION>
September 30, 2000 June 30, 2000
------------------ -------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents:
Non-restricted $ 1,646 $ 1,477
Restricted 150 --
Receivables, less allowances for doubtful
accounts, discounts and returns of $510 and $995 843 1,043
Inventories 154 189
Prepaid royalties and licenses 769 760
Other current assets 276 717
-------- --------
Total current assets 3,838 4,186
Fixes assets, net 801 770
Capitalized software development costs, net 1,768 1,918
Other assets, net 1,623 1,760
-------- --------
Total assets $ 8,030 $ 8,634
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion long-term debt $ 12,316 $ 12,430
Trade accounts payable 2,591 2,514
Accrued and other liabilities 3,442 3,010
Accrued restructuring charges 129 129
Accrued arbitration award 2,757 2,717
Deferred revenue 1,574 2,385
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Total current liabilities 22,809 23,185
Long term debt and other obligations 353 302
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Total liabilities 23,162 23,487
Commitments and contingencies -- --
Shareholders' equity (deficit):
Common stock, no par value; 300,000,000 authorized;
Issued and outstanding 9,693,892 and 9,469,366 shares 28,469 28,271
Accumulated deficit (43,325) (42,834)
Accumulated other comprehensive income (1) (3)
Notes receivable from shareholders (250) (250)
Deferred Compensation (25) (37)
-------- --------
Total shareholders' equity (deficit) (15,132) (14,853)
-------- --------
Total liabilities and shareholders' equity (deficit) $ 8,030 $ 8,634
======== ========
</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)
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<CAPTION>
Three Months Ended September 30,
--------------------------------
2000 1999
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<S> <C> <C>
Net revenues $ 3,058 $ 5,634
Product costs 956 3,182
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Gross margin 2,102 2,452
Costs and expenses:
Sales and marketing 517 2,041
General and administrative 952 1,914
Research and development 673 1,311
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Total operating expenses 2,142 5,266
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Operating income (loss) (40) (2,814)
Gain on product line sale 285 1,440
Interest and other, net (745) (462)
------- -------
Income (loss) before income taxes (500) (1,836)
Income tax provision (benefit) (8) 17
------- -------
Net loss $ (492) $(1,853)
======= =======
Basic and diluted loss per share $ (0.05) $ (0.26)
Shares used in computing loss
per share information 9,669 7,019
</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
(In thousands)
(Unaudited)
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<CAPTION>
Three Months Ended September 30,
--------------------------------
2000 1999
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<S> <C> <C>
Cash flows from operating activities:
Net cash (used) provided by operating activities $ 207 $ (93)
------- -------
Cash flows from investing activities:
Proceeds from product line and domain name sales 285 1,500
Purchase of equipment (122) (36)
Additions to other assets (1) (7)
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Net cash provided by investing activities 162 1,457
------- -------
Cash flows from financing activities:
Credit line repayments -- (620)
Repayment of term loan -- (750)
Repayment of capital lease obligations (63) (621)
Proceeds from issuance of common stock 11 21
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Net cash used by financing activities (52) (1,970)
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Effect of exchange rate change on cash and cash equivalents 2 38
------- -------
Net increase (decrease) in cash and cash equivalents 319 (568)
Cash and cash equivalents at beginning of period 1,477 3,681
------- -------
Cash and cash equivalents at end of the period $ 1,796 $ 3,113
======= =======
</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 necessary to present fairly the
financial position at September 30, 2000 and the results of operations and cash
flows as of and for the three months ended September 30, 2000 and 1999 have
been made. The interim condensed consolidated financial statements should be
read in conjunction with the consolidated financial statements and notes
thereto contained in IMSI's Annual Report on Form 10-K for the fiscal year
ended June 30, 2000. The results of operations for the three months ended
September 30, 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 assets and liquidation of
liabilities in the ordinary course of business. The Company has an accumulated
deficit of $43,325,000 and negative working capital of $18,971,000 at September
30, 2000. In January 2000, IMSI 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 non-revolving
reducing loan. Accordingly, the Company is in default of various covenants of
these agreements. On February 18, 2000, under the guidance of CMA Business
Credit Services, IMSI held a formally noticed general meeting of its creditors.
At that meeting, the creditors elected a committee to represent creditor
interests. The committee agreed to give IMSI a 120-day standstill period that
has been subsequently extended on a month-to-month basis so long as IMSI
demonstrates progress in achieving a debt settlement acceptable to the
creditors. In July 2000 IMSI presented a preliminary plan to the creditors
committee for paying off its obligations. There can be no assurance that IMSI
will be successful in this plan, or that it will be accepted by the creditors
committee. These matters, among others, raise substantial doubt about IMSI's
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.
In June 1999 IMSI announced a restructuring plan that was intended to end the
large losses and restore profitable operations. This plan included the
outsourcing of operations, consolidation of facilities, reduction of personnel
and the divestiture of non-core products. In January 2000, IMSI announced it was
taking more drastic actions to resolve the Company's very serious financial
problems. During fiscal 2000, IMSI accomplished the announced changes to reduce
costs. The Company was successful in selling products from non-traditional
product lines to generate cash. In August 1999, IMSI sold the rights to the Easy
Language product line for $1,700,000, and, in March 2000, the Company sold the
rights to People Scheduler for $55,000. In March 2000, IMSI executed
republishing agreements with firms in Europe and the United States to
manufacture and sell IMSI products. As part of these agreements, IMSI received
$300,000 in guarantees, which the Company will recognize over the term of the
agreements. All of these efforts stabilized the Company's situation and resulted
in a cash balance of $1,796,000 at September 30, 2000.
Management believes that the efforts during this last year and the resultant
cash balance have provided a sufficient basis to maintain operations so long as
the creditors continue to standstill. Also, IMSI is implementing direct
marketing and internet marketing programs to increase revenues. In fiscal 2001,
IMSI plans to release TurboCAD 7.0, which management believes will increase
revenues. Management believes the combination of last year's actions and this
year's initiatives could return IMSI to profitability. However, IMSI
acknowledges that it is very unlikely that the Company can internally generate
sufficient funds in time to resolve the large debt problem. The Company's
secured creditors have stated that they will not extend the standstill period
indefinitely, and that IMSI must
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make every effort to resolve the situation before the end of calendar year 2000.
The senior secured creditor, Union Bank of California, has indicated that they
prefer that the debt be settled by December 15, 2000.
Therefore, IMSI's continuation as a going concern through the end of fiscal 2001
depends on the Company's ability to obtain additional financing to settle the
debt. In January 2000, IMSI retained the investment banking firm of Heartland
Financial to explore alternatives to raise capital. The alternatives explored
included the sale of either or both of IMSI's Internet business units, the
restructuring of debt, and the infusion of new capital. While Heartland's
efforts did result in several preliminary discussions, none were successful. In
August 2000, IMSI received a proposal from independent investors and suspended
the retention of Heartland Financial. This proposal includes the purchase of
IMSI stock conditioned upon an agreement by the Company's creditors to settle
all debt at a discount. The Company will continue to pursue this proposal and is
continuing to solicit other proposals.
3. REVENUE RECOGNITION
Revenue is recognized when earned. Beginning in 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 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 each 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.
Revenue from minimum guaranteed royalties in republishing agreements is
recognized ratably over the term of the agreement. Royalties in excess of the
guaranteed minimums are recognized when collected. Costs related to
post-contract customer support, which are minimal and include limited telephone
support and online 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, channel
inventories, recent product sell-through activity and market conditions.
4. 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:
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September 30, 2000 June 30, 2000
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<S> <C> <C>
Raw materials $ 263 $ 386
Finished goods 203 114
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466 500
Reserves for obsolescence (312) (311)
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$ 154 $ 189
===== =====
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7
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5. SEGMENT INFORMATION
IMSI has three reportable operating segments based on the sales market. Two
geographic segments generate revenues and incur expenses related to the sale of
the Company's PC productivity software.
The third segment comprises the revenues and expenses related to ArtToday.com
(formerly Zedcor, Inc.) the Company's graphic design Internet subsidiary that
was purchased in October 1998. The following table details segment information
as follows (in thousands):
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<CAPTION>
Quarter Ended September 30, 2000 ArtToday.com North America Other Foreign Eliminations Total
-------------------------------- ------------ ------------- ------------- ------------ -------
<S> <C> <C> <C> <C> <C>
Net Revenues-external $ 809 $ 2,137 $ 112 $ -- $ 3,058
-internal -- -- -- -- --
Income (loss) before taxes 263 (776) 13 -- (500)
Income tax expense (credit) -- 5 (13) -- (8)
Net Income (loss) 263 (781) 26 -- (492)
Identifiable assets 1,036 7,146 (1) (151) 8,030
Quarter Ended September 30, 1999
--------------------------------
Net Revenues-external $ 585 $ 2,620 $2,429 $ -- $ 5,634
-internal -- 347 -- (347) --
Income (loss) before taxes (115) (2,090) 369 -- (1,836)
Income tax expense (credit) -- 15 2 -- 17
Net Income (loss) (115) (2,105) 367 -- (1,853)
Identifiable assets 59 20,723 1,831 -- 22,613
</TABLE>
6. 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:
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Three Months Ended September 30,
---------------------------------------
2000 1999
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<S> <C> <C>
Net Loss $ (492,000) $(1,853,000)
============ ===========
Shares used to compute basic EPS 9,668,628 7,019,000
Add effect of dilutive securities:
Convertible Note 155,670 658,000
Warrants 1,124,291 263,000
Stock options 2,268,955 674,000
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Shares used to compute diluted EPS 13,217,544(1) 8,614,000(1)
============ ===========
</TABLE>
(1) Not presented as results were anti-dilutive
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7. 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,
---------------------------------
2000 1999
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<S> <C> <C>
Net Loss $(492,000) $(1,853,000)
Other comprehensive (loss) gain
Foreign currency translation adjustments (2,000) (38,000)
--------- -----------
Total comprehensive loss $(494,000) $(1,891,000)
========= ===========
</TABLE>
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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 2000 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 and future
performance 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 2000 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 $492,000 or ($0.05) per share for the quarter ended
September 30, 2000, as compared to a net loss of $1,853,000 or ($0.26) per share
for the comparable quarter of fiscal 2000, representing a decrease in net loss
of $1,361,000. IMSI reported an operating loss of $40,000 for the quarter ending
September 30, 2000 as compared to an operating loss of $2,814,000 for the
quarter ending September 30, 1999. In the quarter ended September 30, 1999, the
company sold the rights to the Easy Language product for $1.7 million in cash
and realized a gain of $1,440,000 on the sale. IMSI received $1.5 million during
the first quarter of the previous fiscal year and deferred $200,000 while these
funds were held into an escrow account. During the quarter ended September 30,
2000, the company collected the remaining proceeds from the sale and recorded a
one-time gain of $200,000. During the same quarter, ArtToday (IMSI's wholly
owned subsidiary) sold the domain name "Caboodles" for $85,000 and recorded a
one-time gain for the same amount.
NET REVENUES
Net revenues for the three month period ended September 30, 2000 were $3,058,000
compared to $5,634,000 in the comparable quarter of the previous fiscal year,
representing a decrease in net revenues of 46%. The following table summarizes
product revenues in absolute dollars and as a percentage of total net revenues
for each of IMSI's principal product categories for the periods indicated (in
thousands):
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<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
------------------------------------------------------------
2000 1999
----------------------- ------------------------
$ % $ %
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<S> <C> <C> <C> <C>
PRECISION DESIGN $ 942 31% $ 1,795 32%
GRAPHIC DESIGN 1,524 50% 2,520 45%
BUSINESS APPLICATION 279 9% 2,006 36%
UTILITIES 607 20% 1,039 18%
OTHER PRODUCTS 24 1% 498 9%
PROVISION FOR RETURNS AND REBATES NOT YET RECEIVED (318) -10% (2,224) -39%
------- --- ------- ---
NET REVENUES $ 3,058 100% $ 5,634 100%
======= === ======= ===
</TABLE>
Product category revenues are shown gross of sales reserves for returns, price
discounts and rebates. Accrued sales reserves totaled $318,000 at September 30,
2000 as compared to $689,000 at June 30,
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2000. Reserves for returns, price discounts and rebates are classified along
with allowances for doubtful accounts as contra receivables on IMSI's balance
sheet. 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, 2000 by $853,000 or 47% from $1,795,000 to $942,000 as
compared to the first quarter of fiscal 2000. Sales of FloorPlan and IMSI's
flagship product, TurboCAD, decreased significantly. Engineering delays in the
revision of TurboCAD, the inability to properly fund a marketing strategy, the
lack of distribution through channels and the intense competition that
characterized the computer-aided design market negatively impacted both of these
products. Unit volume and average selling price both declined.
Revenue in the graphic design category decreased by $996,000 or 40% for the
three-month period ended September 30, 2000 from $2,520,000 to $1,524,000 as
compared to the quarter ended September 30, 1999. Sales revenue from the most
significant revenue producing product line within this category, MasterClips,
decreased significantly and consisted almost exclusively of the recognition of
previously deferred revenues from subscriptions.
On January 14, 2000, an arbitration ruling against IMSI pertaining to the
dispute with Imageline required IMSI to discontinue manufacturing and
distributing all Masterclips products containing Imageline images. This
arbitration ruling, combined with a continuing increase in competitive product
offerings and discount pricing in the visual content market, contributed to the
decline in MasterClips sales. Revenues from IMSI's wholly owned subsidiary,
ArtToday.com are included in this category. Because ArtToday.com's revenues are
based on subscriptions, these amounts are initially deferred and then amortized
over the subscription period, generally over 12 months. ArtToday.com, Inc.,
contributed to sales with $809,000 in net revenue during the quarter ended
September 30, 2000.
Revenues in the business applications category for the three-month period ended
September 30, 2000 decreased by $1,727,000 or 86% from $2,006,000 to $279,000 as
compared to the first quarter of fiscal 2000. Sales of Flow!, FormTool, Maplinx,
MasterPublisher, OrgPlus, People Scheduler, Web Business Builder, Hijaak and
TurboProject all declined as compared to the first quarter of fiscal 2000. This
decrease in revenues from sales in the business applications category reflects
the general decline in the overall unit sales and the company's strategy to
focus on its new Internet business and on its core products in the precision
design and graphic design categories. Under IMSI's restructuring plan, the
company 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 2001.
Revenues in the utilities category for the three month period ended September
30, 2000 decreased by $432,000 or 42%, from the comparable period of fiscal
2000. Although net revenues in the utilities category decreased in absolute
dollars, the slight increase as a percentage of net sales reflects the overall
decline in total net sales. In the United States particularly, intense price
competition and rebates impacted consumer-oriented software products, including
the utilities category. Sales of Net Accelerator and CD Copier declined during
the first quarter of fiscal 2001 and Voice Direct did not generate any revenues.
These 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, 2000 decreased by $474,000, or 95%, from the comparable period of
fiscal 2000. The decrease was primarily due to a discontinuation of non-core
products in this category.
IMSI's serious financial problems and the Company's major change in strategy
were the primary causes of the decreased revenues. On January 28, 2000, IMSI
announced a major change: it was exiting the retail software business,
liquidating the Company's European and South African subsidiaries, and
consolidating domestic operations to reduce operating losses and focus on its
Internet strategy. IMSI terminated all existing distributor agreements and
immediately ceased to support the retail business. As a result, sales of all
products ended abruptly. In February 2000, IMSI's new management team launched
efforts to restore sales through the retail channel by establishing republishing
agreements for the Company's core products. By the end of fiscal year 2000, IMSI
had executed republishing agreements; however, the lapse in time and normal
start-up problems limited the revenues from these new agreements before
year-end.
The continuing trend of intense price competition also adversely affected sales
in all product categories. This trend had particular impact in consumer-oriented
software products such as FloorPlan and the Utilities products. These trends
decrease revenue as a result of decreased average selling price. The volume of
units sold also decreased.
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In addition, net revenues declined because IMSI was not able to upgrade many of
the Company's consumer software products or spend monies to advertise the
products. Product updates and effective advertising programs are important
competitive factors in maintaining unit sales volume, share of the market, and
shelf space in distribution.
In an effort to establish an alternative distribution channel and revitalize
the sales of the Company's core products, IMSI executed several new publishing
agreements during the second half of fiscal 2000.
On March 14, 2000, the Company granted to ValuSoft the exclusive rights to
reproduce and distribute its products in North America in exchange for royalty
payments based on net sales of these products. The agreement also provides for
minimum guaranteed royalty payments over the next sixteen months.
Internationally, IMSI executed similar exclusive republishing agreements. IMSI
granted the exclusive rights to manufacture and distribute its products to AB
Soft in France and French speaking countries; MicroBasic in Germany, Austria and
Switzerland; MediaGold in all other European countries, the Middle East and
Africa. All of these international republishing agreements call for royalty
payments based on net sales with minimum guaranteed payments over the next
twelve months.
Net revenues from domestic sales decreased by $466,000 or 14.5% to $2,739,000
and were 89.6% of total net revenues for the three month period ended September
30, 2000. This compares to net revenues from domestic sales of $3,205,000, or
56.9% of total net revenues, for the comparable period in the previous fiscal
year.
Net revenues from international sales declined by $2,110,000 or 86.9%, and were
$319,000 or 10.5% of net revenues for the three month period ended September 30,
2000. This compares to $2,429,0000 or 43.1% of net revenues for the three months
ended September 30, 1999. These results are consistent with IMSI's decision in
January 2000 to close down its European and South African subsidiaries. The
liquidation of these subsidiaries resulted in a loss of $2,043,000 from the
write off of the intercompany receivables and investment in subsidiaries that
the Company believes are not recoverable. This loss was reflected in the
company's fiscal 2000 financial results as reported on IMSI's fiscal 2000 Form
10-K.
With the liquidation of the Company's European and South African subsidiaries,
the risks associated with transactions in foreign currencies have been
substantially reduced. Nonetheless, IMSI's operating results may be affected by
the risks customarily associated with international operations, including a
devaluation of the U.S. dollar, increases in duty rates, exchange or price
controls, longer collection cycles, government regulations, political
instability and changes in international tax laws.
PRODUCT COSTS
Product costs decreased from $3,182,000 to $956,000 representing a decrease as a
percentage of net revenues from 56.5% to 31.3% for the three-month periods ended
September 30, 1999 and September 30, 2000, respectively. IMSI's product costs
include the costs of diskette and CD-ROM duplication, printing of manuals,
packaging and fulfillment, freight-in, license fees, royalties that IMSI pays to
third parties based on sales of published software and amortization of
capitalized software acquisition
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and development costs. Costs associated with the return of products, such as
refurbishment and the write down in value of returned goods are also included in
Product Costs. The decrease in product costs in absolute dollars and as a
percentage of net revenues in the quarter ended September 30, 2000 was primarily
attributable to a lower fixed manufacturing burden and overhead costs. In
addition, direct costs associated with materials and labor were substantially
reduced since IMSI has shifted the manufacturing and distribution of a number of
its products to republishers.
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 18 to 36 months, and license fees are amortized over 36
months.
Aggregate amortization of such costs was $656,000 and $150,000 in the
three-month periods ended September 30, 2000 and September 30, 1999,
respectively.
SALES AND MARKETING
Sales and marketing expenses decreased from $2,041,000 to $517,000 for the three
month periods ended September 30, 1999 and September 30, 2000, respectively, a
decrease of 74.7%. Sales and marketing expenses as a percentage of net revenues
decreased from 36.2% to 16.9% of net revenues for the three-month periods ended
September 30, 1999 and September 30, 2000, respectively. IMSI's sales and
marketing expenses consist primarily of salaries and benefits of sales and
marketing personnel, commissions, advertising, printing and direct mail
expenses. The decrease is primarily due to reduced advertising, marketing staff,
merchandisers and corporate sales representatives, and lower overhead expense.
GENERAL AND ADMINISTRATIVE
General and administrative expenses decreased from $1,914,000 to $952,000 for
the three-month periods ended September 30, 1999 and September 30, 2000,
respectively. General and administrative expenses as a percentage of net
revenues decreased from 34.0% to 31.1% of net revenues for the three month
period ended September 30, 1999 and September 30, 2000, respectively. IMSI's
general and administrative expenses consist primarily of the salaries and
benefits for employees in the legal, finance, accounting, human resources,
information systems and operations departments and fees to IMSI's legal and
professional advisors. The decrease in general and administrative expenses
reflected the decrease in IMSI's overall headcount. IMSI's total employees in
the United States declined from 140 as of September 30, 1999, to 59 as of
September 30, 2000.
RESEARCH AND DEVELOPMENT
Research and development expenses decreased from $1,311,000 to $673,000 for the
three-month periods ended September 30, 1999 and September 30, 2000. 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. IMSI's research and
development expenses consist primarily of salaries and benefits for research and
development employees and payments to independent contractors. Research and
development costs as a percentage of net revenues decreased from 23.3% to 22.0%
of net revenues for the three month periods ended September 30, 1999 and
September 30, 2000, respectively. Although research and development costs
decreased in absolute dollars, the steady ratio as a percentage of net revenues
reflects IMSI's commitment to invest in research and development for its core
products, for its Internet subsidiary, ArtToday.com, and its new internet
division Design.Net.
INTEREST AND OTHER, NET
Interest and 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 $462,000 for the three-
13
<PAGE> 14
month period ended September 30, 1999, to $745,000 for the three-month period
ended September 30, 2000. For the three-month period ended September 30, 2000,
interest and other expense, net, included $30,000 in foreign exchange gain and
$537,000 of interest and penalty expenses, compared to $92,000 in foreign
exchange gain and $392,000 of interest expense for the comparable period in the
previous fiscal year. Interest and other expense, net also includes a charge of
$187,490 for the period related to the issuance of 185,005 shares of common
stock in July 2000 as settlement of the ArtToday.com Fee Agreement. Because of
its default with respect to the loans owed to Silicon Valley Bank and BayStar
Capital, IMSI re-classed all amounts due to the banks as current and accelerated
the amortization of the warrants attached to these loans during fiscal 2000.
IMSI is paying higher interest rates and additional penalties due to the
defaults.
PROVISION FOR INCOME TAXES
IMSI did not record a tax benefit in the quarter ending September 30, 2000 for
domestic tax losses because of the uncertainty of realization. The Australian
subsidiary recognized an $8,000 a tax benefit during the quarter ended September
30, 2000. The Company 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, 2000, IMSI had $1,796,000 in cash and cash equivalents, of
which $150,000 is restricted. While this represents a $1,317,000 decline from
September 30, 1999, it is an increase of $319,000 from the $1,477,000 balance at
June 30, 2000. Working capital at September 30, 2000 was a negative $18,971,000,
which was a $16,207,000 increase in negative working capital from the negative
$2,764,000 at September 30, 1999 but a $28,000 improvement from the negative
working capital of $18,999,000 as of June 30, 2000.
The decline in cash and cash equivalents from September 30, 1999 reflects the
Company's decreased level of operating activity in the United States and closing
the Company's European and South African subsidiaries. The increase since June
30, 2000 includes the proceeds from the sale of a non-core product line and a
domain name. The increase is also due in part to the Company's continued success
in controlling operating costs and the profitability of ArtToday.
The decline in working capital relative to September 30, 1999 includes the
following major items:
<TABLE>
<CAPTION>
Description Amount
----------- -----------
<S> <C>
Liquidation of European and South African Subsidiaries $ 1,916,000
Imageline Arbitration Award Including Interest 2,757,000
Reclassification of Silicon Valley Bank Subordinated Note Including Warrants 2,500,000
Reclassification of BayStar Subordinated Note Including Warrants 4,500,000
Receipt and Expenditure of Federal Tax Refund 2,448,000
Increased Trade Payables United States & Australia 938,000
Write-off Accrued Inventory Assets (Second Quarter Fiscal 2000) 547,000
Tech Data Write-offs 211,000
Other (Net) 390,000
-----------
Total Decrease $16,207,000
===========
</TABLE>
The $28,000 improvement in negative working capital during the quarter ended
September 30, 2000 reflects changes in nearly all of the current accounts, but
the main cause of the decreased working capital deficit is reduction in deferred
revenue during the quarter.
Although IMSI is reporting a net loss of $492,000 for the three months ending
September 30, 2000, operating activities did not consume cash but instead
generated net cash $207,000. Depreciation and amortization of $374,000 and the
non-payment of interest, which totaled $436,000, were the primary factors for
this difference.
14
<PAGE> 15
IMSI's investing activities during the three months ended September 30, 2000
provided $162,000 in cash from the sale of a non-core product line and a domain
name, offset by equipment purchases.
IMSI's financing activities consumed net cash of $52,000 for the three-month
period ended September 30, 2000. During the quarter, IMSI paid capital lease
obligations of $63,000 and received $11,000 for the issuance of common stock
from the exercise of previously issued stock options.
The financial statements have been prepared on a basis that contemplates IMSI's
continuation as a going concern and the realization of the Company's assets and
liquidation of IMSI's liabilities in the ordinary course of business. The
Company has an accumulated deficit of $43.3 million at September 30, 2000. IMSI
is also in default of various loan covenants. These matters, among others, raise
substantial doubt about IMSI's 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.
See Note 2 to the condensed consolidated financial statements, "Realization of
Assets."
IMSI will require additional working capital to meet its ongoing operating
expenses, to execute its planned transition to the Internet, to develop new
products, and to conduct other activities. Historically, IMSI has financed its
working capital and capital expenditure requirements primarily from retained
earnings, short-term and long-term bank borrowings, capitalized leases and sales
of common stock. During fiscal year 2000, IMSI relied primarily on the
collection of receivables and sales of non-core product lines to fund
operations. IMSI cannot rely on these sources of cash to fund the Company during
fiscal 2001. IMSI must obtain additional equity capital and restructure the
Company's significant debt to meet its funds requirements. The large accumulated
losses of IMSI and the negative amount of shareholder's equity as of September
30, 2000 will make it difficult for IMSI to obtain new debt financing or to
obtain equity financing at attractive prices.
The forecast period of time through which the Company's financial resources will
be adequate to support working capital and capital expenditure requirements is a
forward-looking statement that involves risks and uncertainties, and actual
results could vary. The other factors described below will affect future capital
requirements and the adequacy of available funds. IMSI can provide no assurance
that needed financing will be available. 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 have a material adverse effect on IMSI's
business, operating results, financial condition and ability to continue as a
going concern.
IMSI had no material commitments for capital expenditures as of September 30,
2000.
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 2000 Form 10-K.
OPERATING RESULTS REFLECT CONTINUED NET LOSSES IN THE FIRST QUARTER
OF FISCAL 2001. The following table reports IMSI's operating income (loss) and
net income (loss) for the periods presented (in thousands):
<TABLE>
<CAPTION>
Quarter Ending Operating income (loss) Net income (loss)
-------------- ----------------------- -----------------
<S> <C> <C>
FISCAL 1999
-----------
September 30 $(1,483) $ (1,106)
December 31 (6,105) (4,274)
March 31 (6,319) (10,739)
June 30 (9,983) (10,847)
-------- --------
$(23,890) $(26,966)
======== ========
</TABLE>
15
<PAGE> 16
<TABLE>
<S> <C> <C>
FISCAL 2000
-----------
September 30 $ (2,814) $ (1,853)
December 31 (5,069) (9,229)
March 31 (1,490) (5,594)
June 30 1,354 (195)
-------- --------
$ (8,019) $(16,871)
======== ========
FISCAL 2001
-----------
September 30 $ (40) $ (492)
</TABLE>
Starting in fiscal year 1998, IMSI's operating results began to worsen, and the
Company continued to lose money in fiscal years 1999 and 2000. While the
quarterly net losses for the three months ended June 30, 2000 and September 30,
2000 are significantly smaller than the net losses of previous quarters, the
trend of continued losses and growing shareholder deficit raise the question of
IMSI's 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 30 in the Company's Fiscal 2000 Form 10-K, under "Future
Performance and Additional Risk Factors."
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<PAGE> 17
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 the non-revolving,
reducing loan. IMSI does not hedge foreign currency risk.
17
<PAGE> 18
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 the
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, Inc. received a
$2.6 million arbitration award against IMSI for intellectual property violations
and attorney's fees. The award is comprised of $1.2 million in actual damages,
$1.2 in punitive damages and $0.2 million in attorneys' fees.
In April 2000, IMSI and Imageline initiated negotiations to settle the award.
The original proposed settlement included a variety of considerations, including
cash, a consulting agreement, warrants, payment of legal fees, and royalties on
certain future sales of Masterclips. Since that original proposal, IMSI and
Imageline have continued discussions. While IMSI and Imageline are continuing
negotiations, there can be no assurance that the Company will successfully
settle this matter.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
IMSI is in default of the Company's non-revolving reducing loan to Union Bank of
California, the three year subordinated loan facility with Silicon Valley Bank
and the subordinated note with BayStar Capital L.P. See Note 4 to the
consolidated financial statements, in the Fiscal 2000 form 10-K.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 5. OTHER INFORMATION
On January 31, 2000, IMSI was de-listed from the Nasdaq Small Cap Market and on
February 25, 2000, began trading on the OTC Bulletin Board with the symbol
IMSIE. On March 28, 2000, IMSI was de-listed from the OTC Bulletin Board and
began trading on the National Quotation Bureau Pink Sheets, because the Company
had failed to file its December 31, 1999 Form 10-Q on a timely basis.
In September 2000, IMSI filed amended reports on Form 10-K/A for the year ended
June 30, 1999 and Form 10-Q/A for the quarters ended September 30, 1999,
December 31, 1999, and March 31, 2000 with the SEC. The filing of these
amendments ended a year-long examination by the SEC, during which IMSI responded
to the SEC's requests for information, clarification and expanded disclosure.
With these filings IMSI believes it is in compliance with SEC and Nasdaq
requirements. On October 12, 2000 IMSI filed the Form 10-K for the year ended
June 30, 2000, and the Company
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<PAGE> 19
has resumed efforts to return to the OTC Bulletin Board.
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 September 30, 2000.
19
<PAGE> 20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATE: November 14, 2000 INTERNATIONAL MICROCOMPUTER SOFTWARE, INC.
By: /s/ Geoffrey Koblick
-------------------------------------
Geoffrey Koblick
Chairman of the Board of Directors
By: /s/ Jeffrey Morgan
-------------------------------------
Jeffrey Morgan
Chief Financial Officer
20
<PAGE> 21
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBITS DESCRIPTION
-------- -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
