-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Wz8T1unkOZdg+ASHk+yzoJbnwLAi+lF16N7g9Cjl5wg9QsRGSoC67edIkgsDbnO+ xqal7JVtuokjJOznUdn2HA== 0000927016-98-004058.txt : 19981118 0000927016-98-004058.hdr.sgml : 19981118 ACCESSION NUMBER: 0000927016-98-004058 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981116 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SPACETEC IMC CORP CENTRAL INDEX KEY: 0001002175 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER PERIPHERAL EQUIPMENT, NEC [3577] IRS NUMBER: 043116697 STATE OF INCORPORATION: MA FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-27302 FILM NUMBER: 98751184 BUSINESS ADDRESS: STREET 1: BOOTT MILL STREET 2: 100 FOOT OF JOHN STREET CITY: LOWELL STATE: MA ZIP: 01852-1126 BUSINESS PHONE: 9782756100 MAIL ADDRESS: STREET 1: BOOTT HILL STREET 2: 100 FOOT OF JOHN STREET CITY: LOWELL STATE: MA ZIP: 01852-1126 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1998 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 or the transition period from __to __ Commission file number 0-27302 -------------------------------------- Spacetec IMC Corporation - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Massachusetts 04-3116697 - -------------------------------------------------------------------------------- (State or other jurisdiction of (IRS Employer Identification incorporation or organization) No.) The Boott Mills, 100 Foot of John Street, Lowell, Massachusetts 01852 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (978) 275-6100 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the 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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No___ - The number of shares outstanding of the issuer's Common Stock as of Class Outstanding at September 30, 1998 ----- --------------------------------- Common Stock, $.01 par value 6,841,534 SPACETEC IMC CORPORATION TABLE OF CONTENTS PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Condensed consolidated balance sheets as of September 30, 1998 and March 3l, 1998......................................................................... 3 Condensed consolidated statements of operations for the three months and six months ended September 30, 1998 and 1997........................................... 4 Condensed consolidated statements of cash flows for the six months ended September 30, 1998 and 1997...................................................... 5 Notes to condensed consolidated financial statements................................... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..................................................................................... 9 Item 3. Quantitative and Qualitative Disclosures About Market Risk............................. 20 PART II. OTHER INFORMATION Item 1. Legal Proceedings-None Item 2. Changes in Securities and Use of Proceeds-Not Applicable Item 3. Defaults upon Senior Securities-None Item 4. Submission of Matters to a Vote of Security Holders-None Item 5. Other Information...................................................................... 20 Item 6. Exhibits............................................................................... 20 SIGNATURES..................................................................................... 21
2 ITEM 1. FINANCIAL STATEMENTS Spacetec IMC Corporation Condensed Consolidated Balance Sheets (in thousands, except share and per share data)
September 30 March 31 1998 1998 ------------ -------- (Unaudited) (Note) ASSETS Current assets Cash and cash equivalents $ 666 $ 490 Securities available-for-sale 5,557 8,536 Accounts receivable, net 2,037 2,069 Inventories 536 687 Prepaid expenses 183 176 Due from employees and officer 4 32 ------------ -------- Total current assets 8,983 11,990 Furniture and equipment, net 638 765 Intangible assets, net 142 216 Other assets 29 28 ------------ -------- 809 1,009 ------------ -------- Total assets $ 9,792 $ 12,999 ============ ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses $ 1,276 $ 1,498 Deferred revenue - 12 ------------ -------- Total current liabilities 1,276 1,510 Shareholders' equity: Preferred stock, $.01 per value; 1,000,000 shares authorized; no shares issued or outstanding Common stock, $.01 par value; 20,000,000 shares authorized; 7,142,742 and 6,841,534 shares issued and outstanding at March 31, 1998 and September 30, 1998, respectively 68 71 Additional paid-in capital 16,007 16,780 Deferred compensation (50) (50) Unrealized gain on available-for-sale securities 3 5 Accumulated deficit (7,556) (5,303) Cumulative translation adjustment 44 (14) ------------ -------- Total shareholders' equity 8,516 11,489 ------------ -------- Total liabilities and shareholders' equity $ 9,792 $ 12,999 ============ ========
Note: The balance sheet at March 31, 1998 has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 3 SPACETEC IMC CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended Six Months Ended September 30 September 30 1998 1997 1998 1997 ------------ ------------ ------------ ----------- Revenues $ 1,436 $ 1,816 $ 3,323 $ 3,899 Cost of revenues 280 487 953 1,149 ------------ ------------ ------------ ----------- 1,156 1,329 2,370 2,750 Operating expenses: Selling and marketing 951 1,019 2,038 2,073 Research and development 589 873 1,407 1,735 General and administrative 885 442 1,392 810 ------------ ------------ ------------ ----------- Total operating expenses 2,425 2,334 4,837 4,618 ------------ ------------ ------------ ----------- Loss from operations (1,269) (1,005) (2,467) (1,868) Interest income 94 142 215 281 ------------ ------------ ------------ ----------- Loss before income taxes (1,175) (863) (2,252) (1,587) Income tax benefit - - - - ------------ ------------ ------------ ----------- Net loss $ (1,175) $ (863) $ (2,252) $ (1,587) ============ ============ ============ =========== Net loss per share - Basic $ (0.17) $(0.12) $ (0.33) $ (0.22) ============ ============ ============ =========== Weighted average common shares outstanding - Basic 6,842 7,191 6,841 7,214 ============ ============ ============ ===========
See accompanying notes to condensed consolidated financial statements. 4 Spacetec IMC Corporation Condensed Consolidated Statements of Cash Flows (Unaudited) (in thousands)
SIX MONTHS ENDED SEPTEMBER 30 1998 1997 -------- -------- OPERATING ACTIVITIES Net loss $ (2,252) $ (1,587) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 273 412 Loss on disposal of assets 84 - Changes in operating assets and liabilities: Accounts receivable, net 32 472 Inventories 152 413 Prepaid expenses and other assets (8) 95 Due from employees and officer 30 15 Income taxes receivable - 121 Accounts payable and accrued expenses (223) (432) Deferred revenue (12) (10) -------- -------- Net cash used in operating activities (1,924) (501) INVESTING ACTIVITIES: Net sales of securities available-for-sale 2,977 1,225 Purchase of furniture and equipment (158) (263) Purchase of intangible assets - (3) Software development costs -------- -------- Net cash provided by investing activities 2,819 959 FINANCING ACTIVITIES Proceeds from exercise of stock options 73 10 Stock repurchase (850) (323) Additional offering costs - - -------- -------- Net cash used in financing activities (777) (313) -------- -------- Currency translation effect on cash 58 - Net increase in cash and cash equivalents 176 145 Cash and cash equivalents at beginning of period 490 170 -------- -------- Cash and cash equivalents at end of period $ 666 $ 315 ======== ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Income taxes paid $ 5 ======== ======== NON-CASH INVESTING AND FINANCING ACTIVITIES: Unrealized gain on available-for-sale securities $ 3 $ 12 ======== ========
See accompanying notes to condensed consolidated financial statements. 5 SPACETEC IMC CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (IN THOUSANDS) 1. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments consisting of normal recurring adjustments necessary for a fair presentation of the financial condition, results of operations, and cash flows for the periods presented have been included. Operating results for the six month period ended September 30, 1998 are not necessarily indicative of the results that may be expected for the year ended March 31, 1999. The Company suggests that these interim condensed consolidated financial statements be read in conjunction with the consolidated financial statements and footnotes thereto, included in the Company's annual report on Form 10-K for the year ended March 31, 1998. 2. INVENTORIES Inventories consist of the following:
SEPTEMBER 30 MARCH 31 1998 1998 ------------------------------- MATERIALS $204 $425 WORK-IN-PROCESS 72 77 FINISHED GOODS 260 185 ------------------------------- $536 $687 ===============================
3. LOSS PER COMMON SHARE In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (FAS 128). FAS 128 replaced the previously reported primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants, and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been presented, and where necessary, restated to conform to the Statement 128 requirements. 6 SPACETEC IMC CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED 4. OPEN MOTION SPIN-OFF As the Company decided to focus its efforts on developing and growing its core 3D controller and related software business, management has determined that it does not wish to pursue certain other technology that the Company has developed. Consequently, on June 5, 1998, the Company transferred certain 3D software technology and computer equipment having a net book value of approximately $50,000 to 3D Open Motion, LLC (the "LLC"). The LLC was established by the former CEO and current director of the Company, who is majority owner of the LLC. The Company received a 20% non-voting interest in the LLC. Additionally, the LLC provided the Company with an option to obtain favorable pricing for commercial products developed by the LLC at a 50% discount on the most favorable terms offered to any other customer. This option becomes exercisable on January 1, 1999 and expires on May 31, 1999 if not exercised. To exercise the option the Company must pay $250,000 to the LLC. If the option is exercised the Company's favorable pricing terms would extend through June 2003. In conjunction with this agreement, the former CEO contributed 291,667 shares of stock of Spacetec IMC Corporation to the LLC as his initial investment in the LLC. The Company has repurchased these shares from the LLC at a price of $2.40 per share, which represented a discount of approximately 20% from the fair market value of the shares on June 3, 1998, the date of the repurchase 5. RECENT ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board issued SFAS No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes standards for reporting and display of comprehensive income and its components in a financial statement that is displayed with the same prominence as other financial statements for periods beginning after December 15, 1997. Comprehensive income, as defined, includes all changes in equity during a period from non-owner sources. Examples of items to be included in comprehensive income which are excluded from net income include cumulative translation adjustments resulting from consolidation of foreign subsidiaries' financial statements and unrealized gains and losses on available-for-sale securities. Reclassification of financial statements for earlier periods for comparative purposes is required. The Company has adopted SFAS 130 beginning in its fiscal year 1999 and does not expect such adoption to have a material effect on its consolidated financial statements. During the second quarter and first six months of fiscal 1999, total comprehensive loss amounted to $1,125 and $2,194, respectively, and $854 and $1,621 for the corresponding fiscal 1998 periods, respectively. The difference between total comprehensive loss and net loss is attributable to cumulative translation adjustments and unrealized gains and losses on available- for-sale securities. 7 SPACETEC IMC CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS From time to time, Spacetec IMC through its management may make forward-looking public statements, such as statements concerning then expected future revenues or earnings or concerning projected plans, performance, product development and commercialization as well as other estimates relating to future operations. Forward-looking statements may be in reports filed under the Securities Exchange Act of 1934, as amended, in press releases or in oral statements made with the approval of an authorized executive officer. The words or phrases "will likely result," "are expected to," "will continue," "is anticipated," "estimate," "project," or similar of Section 21E of the Securities Exchange Act of 1934 and Section 27A of the Securities Act of 1933, as enacted by the Private Securities Litigation Reform Act of 1995. RESULTS OF OPERATIONS THREE AND SIX MONTHS ENDED SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997 Revenues: Revenues decreased 20.9% to $1,436,000 for the three months ended September 30, 1998 ("current quarter") from $1,816,000 for the three months ended September 30, 1997 ("prior quarter"). For the six months ended September 30, 1998 ("current six month period"), revenues decreased 14.8% to $3,323,000 from $3,899,000 for the six months ended September 30, 1997 ("prior six month period"). The decrease in revenues is mainly attributable to a decrease in orders from the automotive sector as a result of a General Motors strike and a short-term delay in the start of the ASCII release to the Sphere 360 controller for the Sony Play Station. Mechanical CAD [M-CAD] and multimedia sales for the current six-month period decreased 23.5% to $2.6 million from $3.4 million in the comparable period of the prior year. During the current quarter of 1999, Mechanical CAD [M-CAD] and multimedia sales were $1.4 million compared with $1.7 million in the same period in fiscal year 1998. The decrease in revenues is mainly attributable to a decrease in orders from the automotive sector as a result of a General Motors strike and a short-term delay in the start of the ASCII release of the Sphere 360 controller for the Sony Play Station. The Company did not record any software and licensing revenues for the first quarter of 1999, compared with $97,000 for the first quarter of fiscal 1998. Consumer sector revenues of the SpaceOrb 360 3D game controller and other consumer related revenue totaled $17,000 for the current quarter of fiscal 1999, down from $81,000 for the prior quarter. During the current six-month period, more emphasis was placed on the industrial business as evidenced by orders received from accounts such as Carrier, Chrysler, Ingersol Rand and Sony. The Company seeks to achieve a balance between various business units consisting of OEM's corporate accounts and resellers. In the coming quarters expects to continue discussions with potential partners to assist in capitalizing on its technology. However, there is no assurance that such relationships, if established, will be able to generate substantial revenue. 8 SPACETEC IMC CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Gross Profit: The Company's gross profit is arrived at after the costs of materials, manufacturing overhead, royalties, and amortization of capitalized software are subtracted from revenues. Gross profit decreased 13.8% to $2,370,000 in the current six-month period from $2,750,000 in the prior six-month period, and represented 71.3% of current six-month period revenues versus 70.5% of prior year six-month period revenues. As the Company continues to shift its sales mix from direct to OEM and general distribution channels for its industrial and consumer products, it is expected that the gross profit percentage experienced by the Company may decline. The Company's expectations regarding the decline in gross profit percentage is a forward-looking statement. There can be no assurance that such decreases in gross profit will not be greater than anticipated. Selling and Marketing Expenses: Selling and marketing expenses, which include personnel costs, advertising and marketing costs, sales commissions and trade show expenses, decreased 1.7% to $2,038,000 in the current six month period from $2,073,000 in the comparable period of the prior year, and represented 61.3% of current six-month period revenues, up from 53.2% of revenues in the comparable period of the prior year. Current quarter selling and marketing expenses decreased 6.7% to $951,000 down fronm $1,019,000 in the prior quarter. Action has been taken by the Company to further reduce these selling and marketing expenses to restore profitability. This action included a reduction in both direct and indirect selling and marketing staff as well as a decline in general selling and marketing expenses. The Company anticipates that efficiencies may ensue in this area as a result of a proposed merger with Labtec, Inc. Research and Development Expenses: Research and development expenses, which consist primarily of personnel and equipment costs required to conduct the Company's software and hardware development and engineering efforts, decreased 18.9% to $1,407,000 in the current six-month period versus $1,735,000 in the comparable period of the prior year. These expenses represent 42.3% of current six-month period revenues and 44.5% of revenues in the comparable period of the prior year. Current quarter research and development expenses declined 32.5% to $589,000 in the current quarter, down from $873,000 in the prior quarter. The decrease in those expenses reflect the spin-off of the Open Motion technology, and the related staff reduction and decreased expenditures in hardware design. Further reduction in expenses in this area are anticipated in November as further reductions in the workforce are undertaken. General and Administrative Expenses: General and administrative expenses, which include the costs of the Company's finance, human resources and administrative functions increased 71.9% to $1,392,000 in the current six-month period versus $810,000 in the comparable period of the prior year. These expenses represented 41.9% of current six-month period revenues compared with 20.8% of revenues in the comparable period of the prior year. In the current quarter, general and administrative expenses increased 50% to $885,000, up from $442,000 in the prior quarter. 9 SPACETEC IMC CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) The increase in expense in the current quarter and current six month period is mainly the result of the following one-time expenses totally approximately $643,000 related to: accounting, legal, and administration fees related to Open Motion spin-off and the Labtec, Inc. merger as well as other legal and administrative expenses incurred in pursuing various strategic relationships during the period; consulting fees related to the installation and implementation of a new enterprise-wide accounting system; and severance costs associated with the former Chief Executive Officer, Ray Boelig, and other employees terminated during the quarter ended September 30, 1998. In addition, the Company incurred consulting fees for George Rea, Acting Chief Executive Officer, and consulting fees for the Acting Controller. The anticipated merger with Labtec, Inc. is expected to result in the discontinuance of some of these significant non-recurring expenses. In addition, the Company anticipates a reduction of up to 25% of general and administrative expenses associated with the planned reduction in facilities costs, consolidation of several remote sales offices, and the lowered administrative costs associated with a reduced workforce. Provision for Income Taxes: As the Company has recognized losses in the current fiscal year, it has not recorded a provision for income taxes. The benefit attributable to carryback of losses to prior six-month periods was fully utilized during the fiscal year ended March 31, 1997. The Company has unbenefited federal net operating loss carryforwards of approximately $4,300,000. Year 2000 Compliance. Many currently installed computer systems and software products are coded to accept only two digit entries in the date code field. As a result, in less than two years, computer systems and/or software used by many companies may need to be upgraded to comply with such "Year 2000 or Y2K" requirements. Significant uncertainty exists in the software industry concerning the potential effects associated with the Year 200 issue. The Company in its ordinary course of business tests and evaluates its own products. Since the Company's products do not use any date related processing in the hardware or driver software, the products are Y2K compliant, meaning that the use or occurrence of dates on or after January 1, 2000 and the occurrence of leap years will not materially affect the performance of the Company's products. As the company's products are intended to be used in conjunction with other hardware and applications through third party suppliers, there can be no assurances that users of the Company's products will not experience Y2K problems as a result of the integration of the Company's products with non-compliant Y2K products of such third party suppliers. In addition, in certain circumstances, the Company has warranted that the use or occurrence of dates on or after January 1, 2000 will not adversely affect the performance of the Company's products with respect to its lack of any date related processing the hardware or driver software. If any of these customers experience Y2K problems, such customers could assert claims for damages against the Company. 10 The Company is in the process of forming a Y2K committee that will review the Y2K status of the Company's software and systems used in its internal business processes. This committee will also obtain the appropriate assurances of compliance from the manufacturers of these products or, in the event that such assurances cannot be obtained, will provide for the modification or replacement of all non-compliant products. Management has verified that its accounting software is Year 2000 compliant. The Company is in the process of contacting its critical suppliers and major customers to determine whether the products obtained by the Company from such vendors or sold by the customer to third parties are Y2K compliant. The Company's suppliers and customers are under no contractual obligation to provide such information to the Company. The Company intends to continue its efforts to monitor the Y2K compliance of suppliers and major customers. Based on the information available to date, the Company believes it will be able to complete its Y2K compliance review and make all necessary modifications prior to the end of 1999. The Company is prioritizing its efforts to focus on any Y2K discrepancies found that would impact its operations. Nevertheless, particularly to the extent the Company is relying on the products of other vendors to resolve Y2K issues, there can be no assurances that the Company will not experience delays in implementing such changes. If key systems, or a significant number of systems were to fail as a result of Y2K problems, or the Company were to experience delays implementing Y2K compliant software products, the Company could incur substantial costs and disruption of its business, which could potentially have a material effect on the Company's business and results of operations. In addition, as the Company purchases many critical components from single or sole source suppliers, failure of any such vendor to adequately address issues related to the Y2K problem may have a material adverse effect on the Company's business, financial condition and results of operations. To date the Company has not required a complete and separate budget for investigating and remedying issues related to Y2K compliance whether involving the Company's own products or the software or systems used in its internal operations. However, the cost of these Y2K initiatives is not expected to be material to the Company's results of operations or financial position. Additionally, the Company has not developed a contingency plan related to Y2K. There can be no assurances that the Company's resources spent on investigating and remedying Y2K compliance issues, or that lack of a contingency plan related to Y2K, will not have a material adverse effect on the Company's business, financial condition and results of operations. 11 SPACETEC IMC CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) LIQUIDITY AND CAPITAL RESOURCES As of September 30, 1998 the Company had cash and cash equivalents and securities available for sale of $6,223,000 and working capital of $7,707,000 versus $9,026,000 and $10,480,000, respectively, at March 31, 1998. Operating activities of the Company absorbed $1,924,000 of cash in the current six-month period as compared to $501,000 in the comparable period of the prior year. The use of funds in the current six-month period was primarily due to the net loss of $2,252,000. A decrease in accounts payable and accrued expenses from $1,493,000 at March 31, 1998, to $1,276,000 on September 30, 1998, used $223,000 in cash. Inventory levels decreased in the current six month period from $687,000 at March 31, 1998 to $536,000 at September 30, 1998. Net cash provided to the Company in the current six month period from investing activities totaled $2,819,000 versus $959,000 in the comparable period of the prior year. The primary reason for the increase was the sale of securities to fund stock repurchases and operating expenses. Additionally, expenditures for furniture and equipment were reduced ($158,000 in the current six month period versus $263,000 in the prior six month period.) Financing activities used $777,000 of net cash in the current six month period, primarily as a result of the Company repurchasing $700,000 worth of its stock as part of the Open Motion spinoff, and an additional $150,000 worth of common stock in a periodic, open market purchase program. The amount paid for the repurchase of stock was partially offset by the proceeds from the exercise of employee stock options. The Company believes that its existing cash and investment securities together with future anticipated funds from operations, will satisfy its projected working capital and other cash requirements through the end of its fiscal year ending March 31, 1999. The Company anticipates that additional funds will be required to continue software and hardware development, as well as to develop the sales and marketing infrastructure, distribution channel and market awareness of the Company's products. The Company's capital requirements will depend on many factors, including the rate at which the Company can develop its products, the market acceptance of such products, and the levels of promotion and advertising required to launch such products and attain a competitive position in the marketplace. Changes in technology or growth in revenues beyond currently established capabilities will also require further investment. To the extent that the Company's current financial resources are insufficient to fund the Company's operating requirements, it may be necessary for the Company to seek additional funding through public or private financing. There can be no assurance that additional financing will be available on acceptable terms or at all. If additional funds are raised by issuing equity securities, further dilution to the existing stockholders will result. If adequate funds are not available, the Company's business would be materially adversely affected, and, as a result, the Company may be required to curtail its 12 SPACETEC IMC CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) operations significantly. There can be no assurance that the Company's cash flow from operations will be adequate to find its long-term working capital requirements, or that it will be able if necessary, to obtain equity financing an favorable terms (if at all). RISK FACTORS From time to time. Spacetec IMC through its management may make forward- looking public statements, such as statements concerning ten expected future revenues or earnings or concerning projected plans, performance, product development and commercialization as well as other estimates relating to future operations. Forward-looking statements may be in reports filed under the Securities Exchange Act of 1934, as amended, in press releases or in oral statements made with the approval of an authorized executive officer. The words or phrases "will likely result," are expected to, "will continue." is anticipated," "estimate,"or similar expressions are intended to identify' "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934 and Section 27A of the Securities Act of 1933, as enacted by the Private Securities Litigation Reform Act of 1995. The Company wishes to caution readers not to place undue reliance on these forward-looking statements which speak only as of the date on which they are made. In addition, the Company wishes to advise readers that the factors Listed below, as well as other factors not currently identified by management, could affect the Company's financial or other performance and could cause the Company's actual results for fixture periods to differ materially from any opinions or statements expressed with respect to future periods or events in any current statement. 13 SPACETEC IMC CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) The Company will not undertake and specifically declines any obligation to publicly release the result of any revisions which may be made to any forward- looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events which may cause management to re-evaluate such forward-looking statements. In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, the Company is hereby filing cautionary statements identifying important factors that could cause the Company's actual results to differ materially from those projected in forward-looking statements of the Company made by or on behalf of the Company. Risks Relating to the Proposed Merger with Labtec. Inc. The Company recently announced a proposed merger with Labtec, Inc. Acquisitions Involve a number of operating risks that could materially adversely affect the Company's results of operations, including the diversion of management's attention to assimilate the operations, products and personnel of the acquired companies, the amortization of acquired intangible assets, and the potential loss of key employees of the acquired companies. There can be no assurance that the Company will be able to manage this merger successfully, or that the Company will be able to integrate the operations products, or personnel gained through this merger without a material adverse effect on the Company's business, financial condition and results of operations. Uncertainties Relating to Integration of Operations. The Company and Labtec believe that the merger will result in long-term strategic benefits. However, the realization of these benefits will depend on whether management can integrate the operation of the two companies in an efficient and effective manner. Among other things, the two companies must integrate the respective companies' products, technologies, management information systems, distribution channels and key personnel. Furthermore, the combined companies must coordinate the sales, marketing and research development efforts. The difficulties integrating the two companies may be increased by the need to coordinate organizations with distinct cultures and widely dispersed operations. The Company and a majority of its employees are located in Massachusetts while Labtec and a majority of its employees are located in Washington State. The effective integration of various operations will depend on the ability of the combined companies to attract and retain key management, sales, marketing and research and development personnel. The integration of operations following the merger will require significant attention of management and thus may distract attention from the day-to-day operations of the two companies. 14 SPACETEC IMC CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Failure to Achieve Beneficial Synergies. Spacetec has entered into the merger agreement with the expectation that the merger will result in beneficial synergies. Achieving these anticipated synergies will depend on a number of factors including, without limitation, the successful integration of the combined operations and general and industry-specific economic factors. In particular, since the Company's retail marketing efforts have been less successful than expected, the combined company intends to utilize Labtec's established distribution channels to bolster sales of Spacetec's products. Even if Spacetec and Labtec are able to integrate their distribution channels and other operations, and economic conditions remain stable, the anticipated synergies still may not be achieved. Attraction and Retention of Key Employees. In recent months, three executive officers of the Company have resigned. These officers include Dennis Gain, the Company's founder, principal stockholder and former President and Chief Executive Officer, Neil Rossen, the Company's Vice President and Chief Financial Officer, and more recently, Ray Boelig, the Company's former Vice President, and its President, and Chief Operating Officer. The Company has not currently found replacements to fill the vacancies caused by these departures, except that the Company recently appointed a director, George Rea, to serve as Acting Chief Executive Officer, and a consultant to serve as Acting Controller. The Company needs to fill the positions of chief executive officer and a senior financial officer as expeditiously as possible ad is currently recruiting candidates. While these positions remain unfilled, the business and operations of the Company could be materially adversely effected by the lack of permanent chief executive officer and a senior financial officer. The loss of the services of one or more key employees could have a material adverse effect an the Company. The Company believes that its future success will be affected by its ability to attract and retain skilled technical, managerial and marketing personnel. Although the Company has not experienced difficulty to dare, there can be no assurance that the Company will be successful in attracting or retaining the personnel it requires to continue to grow and operate profitably. Fluctuations in Results of Operations. The Company's results of operations have varied significantly in the past and may vary significantly in the future, on a quarterly and annual basis as a result of a variety of factors, many of which are outside the Company's control. 15 SPACETEC IMC CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Future Capital Needs. The Company's capital requirements will depend on many factors, including the rate at which the Company can develop its products, the market acceptance of such products, the levels of promotion and advertising required to launch such products and. attain a competitive position in the marketplace, the response of competitors-to the products based an the Company's technology. and capital necessary for potential acquisitions, Changes in technology or a growth of sales beyond currently established capabilities will also require further investment, To the extent that internally generated funds are insufficient to fund the Company's operating requirements, it may be necessary for the Company to seek additional funding through public or private financing. There can be a assurance that additional financing will be available an acceptable terms or at all. If additional funds are raised by issuing equity securities, further dilution to the existing shareholders will result. if adequate funds are not available, the Company's business would be materially adversely affected, and, as a result, the Company may be required to curtail its operations significantly. Developing Market. During the fiscal year 1997, the Company began to market its products designed for the consumer marketplace. The Company has bad little experience in marketing its products to consumers, The entry into the consumer market has created considerable risks for the Company, some of which axe outside of the Company's control. Expansion is Retail Distribution Channels. The Company commenced retail shipments of its SpaceOrb 360 during fiscal 1997. Retail distribution channel sales bays required significantly greater marketing and sales expenditures and post-sale support coats than the Company's industrial sector products. Penetration of this market has depended upon building relationships with distributors and retailers. An increasing number of vendors compete for access to these distributors and retailers, which generally offer products of several difFerent companies, including products competitive with the Company's products- The Company has committed substantial resources to the penetration of this distribution channel to date but has decided to develop its business in this area through alliances with OEM, distributors, and major accounts. The Company is no longer involved in selling consumer products through retail distribution channels. To the extent that it sells components and products trough alliances wit partners for the consumer market, the Company could be subject to the risk of product returns and warranty claims. Reliance an Third-Party Distribution Channels. The Company expects to increase its product sales Through third-party distribution channels, including original equipment manufacturers ("OBMs"), value-added resellers ("VARs"), system integrators and distributors. Such OEMs and Y2K are not under the control of the Company. Although these customers in turn sell to a wide variety of end-users, the Company is subject not only to the risk that its customers will discontinue selling and marketing its products, but also to the risk that the end-users supplied by the Company's customers wilt alter their preferences in a manner that has a material adverse effect on the Company's operations. There can be no assurance that the Company will be able to retain its current resellers or expand its distribution channels by entering into arrangements with new resellers. 16 SPACETEC IMC CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Dependence on Relationships with Independent Software Vendors ("ISVs"). The Company maintains relationships with Independent Software Vendors, which incorporate the Company's enabling software into their 3D applications. As a result, sales of the Company's products are dependent upon the continued market acceptance of the product/application offerings of the ISVs. The ISVs are under no contractual obligation to incorporate the Company's enabling software into their products/applications. The incorporation of the Company's enabling software can involve a substantial amount of time and money. Sales of the Company's hardware products can lag from 6 to 18 months behind the actual incorporation of the Company's enabling software into the ISV's application. Any delay in the product development of an ISV or a decision by the ISV to incorporate the enabling software of a competitor of the Company into its products/applications would have a material adverse effect on the Company's business, financial condition and results of operations. Rapid Technological Change; Dependence on New Product Development. The electronics industry in general, and the markets for the Company's products in particular, are characterized by rapidly changing technology, evolving industry standards, frequent new product introductions, short product life cycles and significant competition. The introduction of products embodying new technologies and the emergence of new industry standards present opportunities for current and potential competitors of the Company to gain market share and can quickly render the Company's products less attractive or obsolete and unmarketable. In order to keep pace with this rapidly changing market environment, the Company must continually develop and incorporate into its products new technological advances and features desired by the marketplace at acceptable prices. The successful development and commercialization of new products involves many risks, including the identification of new product opportunities, the timely completion of the development process, the control and recoupment of development and production costs and acceptance by customers of the Company's products. There can be no assurance that the Company will be successful in identifying, developing, manufacturing and marketing new products in a timely and cost effective manner, that the Company's products will be accepted in the marketplace, or that products or technologies developed by others will not render the Company's products or technologies uncompetitive. Dependence on Relationships with Significant Customers. The Company sells substantially all of its products to and maintains strategic relationships with original equipment manufactures ("OEMs") and value added resellers ("VARs"). As a result, sales of the Company's products are dependent upon the continued market acceptance of the service and product offerings of the Company's customers. Although the Company maintains contractual relationships with a substantial number of is customers, such contracts do not provide for minimum purchase requirements nor do they contain provisions requiring the exclusive purchase of the Company's products. Competition. The market for computer products is intensely competitive and rapidly changing. The Company's products currently compete against established products and no assurance can be given that the Company's products will not be rendered obsolete by technological advance of others. The Company expects that competition from existing competitors will increase and that new competitors will enter the 3D-motion control market. Many of the existing and potential competitors have experienced management, larger technical staffs, more established and larger marketing and sales organizations, better developed distribution systems and significantly greater financial resources than the Company. 17 SPACETEC IMC CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) The Company anticipates that its competitors will ultimately develop hardware products based on technology that does not infringe an the patent rights of the Company, which may provide capabilities similar or superior to those of the Company's products. Increased competition could result in price reductions and loss of market share for the Company. There can be no assurance that the Company will be able to compete successfully or that competition will not have a material adverse effect on the Company's business, operating result and financial condition. Patents and Proprietary Technology. The Company's success is heavily dependent upon its proprietary hardware and software technology. The Company relies on a combination of patent, trade secret, copyright and trademark law, software license agreements. nondisclosure agreements, and technical measures to protect its rights pertaining to its products. Such protection may not preclude competitors from developing products with features similar to the Company's products. The Company's success will depend in part on its ability to obtain and defend United States and foreign patent protection for its products and preserve its trade secrets. There can be no assurance that the Company's issued patents, or any future patents, will provide the Company with significant protection against competitive products or otherwise be commercially valuable. Moreover, there can be no assurance that any patents issued to or licensed by the Company will not be infringed upon by others. In the case of infringement of the Company's technologies, there can be no assurance that the Company would be able to afford the expense of any litigation that may be necessary to enforce its proprietary rights. In addition to seeking patent protection, in some cases the Company may rely on contractual arrangements or trade secrets to protect its proprietary technology. There can be no assurance that trade secrets will be developed and maintained, that secrecy obligations will be honored, or that others will not independently develop similar or superior technology. Disputes as to the ownership of such information may arise if consultants, key employees, or other third parties apply technological information independently developed by them or by others to Company projects, and such disputes may not be resolved in favor of the Company. Due to the importance of patent and trade secret protections and the competitive nature of its industry, the Company may also be subject to claims that its technologies infringe on the proprietary rights of other companies. There can be no assurance that such claims will not arise, that the Company will have sufficient resources to pursue any resulting litigation to a final judgment, or that the Company will prevail in such litigation. Dependence on Contract Manufacturers, including Overseas Manufacturers. The Company has and will continue to rely on outside vendors to manufacture hardware devices among the Company's products. Although the Company's hardware devices are relatively simple devices to manufacture, and the Company has not encountered any delays in obtaining adequate products from its outside contracting organizations, there can be no assurance that delays incurred or quality problems caused by any of the contract manufacturing organizations will not have a material adverse effect on the Company's ability to fill customer orders. In 1996, the Company entered into a manufacturing contract with an entity located in the People's Republic of China. The Company's reliance on outside manufacturers involves several risks, including a potential inability to obtain an adequate supply of required products, and reduced control over the price, timeliness of delivery, reliability and quality of finished products. Certain of the Company's contract manufacturers have relatively limited financial and other resources. Any inability to obtain timely deliveries of products and services having acceptable qualities or any other circumstance that would require the Company to seek alternative sources 18 SPACETEC IMC CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) of contract manufacturing services or to manufacture its own hardware devices internally, could delay the Company's ability to ship its products. Any such delay could damage relationships with customers and such delay could have a material adverse effect on the Company. The use of a foreign manufacturer, in a country with an emerging commercial base, subjects the Company to additional risks, including unexpected changes in regulatory requirements and tariffs and difficulties in communications with such foreign entity. Finally, the laws of certain countries do not protect the Company's products and intellectual property rights to the same extent as do the laws of the United States. There can be no assurance that these factors will not have a material adverse effect on the Company. To the extent that such foreign manufacturer fails to perform in accordance with its contract with the Company or to the extent the Company has other claims against such manufacturer, it may be difficult to enforce such claims in the Peoples Republic of China. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not Applicable PART II. OTHER INFORMATION ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS There were no sales of unregistered securities. The Company's S-1 registration (File No. 33-98064) became effective on December 5, 1995. The net proceeds received from the offering totaled $14,726,721 The Company has filed the Form SR disclosing the sale of securities and use of proceeds through September 5, 1996. No information has changed, except for the use of proceeds. The following table lists the use of proceeds (in thousands) from the effective date of the registration (December 5, 1995) through September 30, 1998. Cash and available-for-sale securities: $ 6,223 Purchases of machinery and equipment: 1,597 Repurchase of the Company's Common Stock: 1,291 Expenses incurred in connection with the acquisition of Spatial Systems, Ltd: 150 Working capital: 5,466 ------- Total $14,727 ------- None of these payments were made to directors or officers of the Company or their associates, or to persons owning more than ten percent of any class of equity securities of the Company, and to the affiliates of the Company. 19 SPACETEC IMC CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) ITEM 3. DEFAULTS UPON SENIOR SECURITIES--NONE ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS--NONE ITEM 5. OTHER INFORMATION Proposals of stockholders intended for inclusion in the proxy statement to be furnished to all stockholders entitled to vote at the next annual meeting of stockholders of the Company must be received at the Company's principal executive offices not later than February 22, 1999. The deadline for providing timely notice to the Company of matters that stockholders otherwise desire to introduce at the next annual meeting of stockholders of the Company is February 22, 1999. In order to curtail any controversy as to the date on which the Company received a proposal, it is suggested that proponents submit their proposals by Certified Mail, Return Receipt Requested. The following exhibits are included herein; (4.5) Consulting Agreement between the Company and George R. Rea (27) Financial Data Schedule 20 SIGNATURES Pursuant to the requirement 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. Spacetec IMC Corporation - ------------------------------------- (Registrant) By /s/ George Rea November 16, 1998 ---------------------------------- ------------------- George Rea, Acting Chief Executive Officer Date 21 EX-4.5 2 CONSULTANT AGREEMENT EXHIBIT 4.5 Consulting Agreement Parties: Spacetec IMC Corp and George R. Rea - -------- Issue to be addressed: SIMC needs to make revenue targets for Q2. Several distracting factors may keep top management from concentrating on this goal (Sun Capital, CFO missing/recruitment, issues listed in BOD presentation regarding shortfall in Q1) Consultant Function: - -------------------- a) provide focal point for all BOD-related issues. Resolve and communicate with Board and President/COO. b) Provide back-up management to enable Pres/COO to place heavy emphasis on Sales activities. c) Support Gain and Sullivan on any projects to free Pres/COO to place heavy emphasis on Sales activities. Responsibility/Authority: - ------------------------- a) President/COO retains decision making and personnel management authority for SIMC. b) Consultant will work using the general form of the standard SIMC consulting agreement. c) Consultant will have office in Boott Mill and be on-site a majority of days, and will be available telephonically on other days. Period: Until Sun Capital is completed or 9/30/98 or whichever other date is agreed by the parties. Compensation: - ------------- a) Expenses of rental car, apartment or condo in good location, travel to Florida for 2 twice per month, reasonable miscellaneous living costs. b) Cash compensation of $1,500 per day being $30,000 per month, pro-rated if completed before 9/30/98. EX-27 3 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS MAR-31-1999 JUL-01-1998 SEP-30-1998 666 5,557 2,146 109 535 8,982 1,674 1,036 9,792 1,276 0 0 0 68 7,240 9,792 1,436 1,436 280 280 2,426 0 0 (1,176) 0 (1,176) 0 0 0 (1,176) (.17) (.17)
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