-----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, SsUSCy/6PgveyLZtzcyGMNRhokpkcvmljfZ8ezlshSRIpgUKPPkPkwFxQ+6udpve Ik7fpFwzvpsyh6JVPGnQgg== 0000950149-00-001219.txt : 20000519 0000950149-00-001219.hdr.sgml : 20000519 ACCESSION NUMBER: 0000950149-00-001219 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000518 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTERNATIONAL MICROCOMPUTER SOFTWARE INC /CA/ CENTRAL INDEX KEY: 0000814929 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 942862863 STATE OF INCORPORATION: CA FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-15949 FILM NUMBER: 639123 BUSINESS ADDRESS: STREET 1: 75 ROWLAND WAY CITY: NOVATO STATE: CA ZIP: 94945 BUSINESS PHONE: 4158784000 MAIL ADDRESS: STREET 1: 1895 EAST FRANCISCO BLVD CITY: SAN RAFAEL STATE: CA ZIP: 94901 10-Q 1 FORM 10-Q FOR THE QUARTERLY PERIOD ENDED 3/31/2000 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended MARCH 31, 2000 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______________________ to ______________________ Commission File Number 0-15949 INTERNATIONAL MICROCOMPUTER SOFTWARE, INC. - ------------------------------------------ (Exact name of registrant as specified in its charter) CALIFORNIA 94-2862863 ---------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) identification No.) 75 ROWLAND WAY, NOVATO, CA 94945 -------------------------- ----- (Address of principal executive offices) (Zip code)
(415) 878-4000 - -------------- (Registrant's telephone number including area code) Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] As of May 16, 2000, 9,469,366 shares of Registrant's common stock, no par value, were outstanding. 2 INTERNATIONAL MICROCOMPUTER SOFTWARE, INC. AND SUBSIDIARIES INDEX
Page ---- PART I - FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements Condensed Consolidated Balance Sheets at March 31, 2000 and June 30, 1999 3 Condensed Consolidated Statements of Operations for the three and nine months ended March 31, 2000 and 1999 4 Condensed Consolidated Statements of Cash Flows for the nine months ended March 31, 2000 and 1999 5 Notes to Condensed Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 16 Item 3. Quantitative and Qualitative Disclosures About Market Risk 23 PART II - OTHER INFORMATION Item 1. Legal Proceedings 24 Item 2. Changes in Securities and Use of Proceeds 24 Item 3. Defaults upon Senior Securities 24 Item 4. Submission of Matters to a Vote of Security Holders 24 Item 5. Other Information 24 Item 6. Exhibits and Reports on Form 8-K 24 SIGNATURES 25
2 3 INTERNATIONAL MICROCOMPUTER SOFTWARE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
March 31, 2000 June 30, 1999 -------------- ------------- (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 886 $ 3,681 Receivables, less allowances for doubtful accounts, discounts and returns of $6,157 and $7,445 445 4,933 Inventories 204 2,895 Prepaid royalties and licenses 924 1,858 Income tax refund receivable -- 3,751 Other current assets 983 758 ------------ ------------ Total current assets 3,442 17,876 Furniture and equipment 724 3,632 Deferred tax assets -- 465 Capitalized software development costs 2,069 2,856 Other assets 1,898 2,315 ============ ============ Total assets $ 8,133 $ 27,144 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Current liabilities: Short term borrowings $ 11,051 $ 7,110 Trade accounts payable 2,088 2,256 Accrued and other liabilities 3,216 5,119 Accrued arbitration award 2,610 -- Accrued restructuring charges 769 1,440 Deferred revenue 2,697 3,178 ------------ ------------ Total current liabilities 22,431 19,103 Long term debt and other obligations 395 6,599 ------------ ------------ Total liabilities 22,826 25,702 Commitments and contingencies -- -- Shareholders' equity (deficit): Common stock, no par value; 300,000,000 authorized; Issued and outstanding 7,302,003 and 6,865,367 shares 28,059 27, 526 Accumulated deficit (42,639) (25,963) Accumulated other comprehensive income 137 129 Notes receivable from shareholders (250) (250) ------------ ------------ Total shareholders' equity (deficit) (14,693) 1,442 ------------ ------------ Total liabilities and shareholders' equity (deficit) $ 8,133 $ 27,144 ============ ============
See Notes to Condensed Consolidated Financial Statements 3 4 INTERNATIONAL MICROCOMPUTER SOFTWARE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) UNAUDITED
THREE MONTHS ENDED MARCH 31, NINE MONTHS ENDED MARCH 31, ------------------------------- ------------------------------- 2000 1999 2000 1999 ------------ ------------ ------------ ------------ Net revenues $ 2,968 $ 7,281 $ 14,884 $ 30,902 Product costs 1,295 4,990 9,560 17,273 ------------ ------------ ------------ ------------ Gross margin 1,673 2,291 5,323 13,629 Costs and expenses: Sales and marketing 749 4,312 5,034 15,402 General and administrative 1,833 2,201 6,726 5,742 Research and development 907 2,009 3,399 6,468 Restructuring charge (326) (464) -- ------------ ------------ ------------ ------------ Total operating expenses 3,163 8,522 14,695 27,612 ------------ ------------ ------------ ------------ Operating loss (1,490) (6,231) (9,372) (13,983) Gain on product line sale 55 -- 1,495 -- Interest and other expense, net (286) (492) (1,810) (1,197) Loss on disposition of fixed assets (1,834) -- (1,834) -- Loss on disposition of foreign subsidiaries (2,023) -- (2,023) -- Arbitration award (10) -- (2,610) -- ------------ ------------ ------------ ------------ Loss before income taxes (5,587) (6,723) (16,154) (15,180) Income tax provision (benefit) 7 2,969 522 (76) ------------ ------------ ------------ ------------ Net Income (Loss) $ (5,594) $ (9,692) $ (16,676) $ (15,104) ============ ============ ============ ============ Basic and diluted loss per share $ (.77) $ (1.52) $ (2.34) $ (2.54) Shares used in computing loss per share 7,286 6,364 7,136 5,939
See Notes to Condensed Consolidated Financial Statements 4 5 INTERNATIONAL MICROCOMPUTER SOFTWARE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS NINE MONTHS ENDED MARCH 31, 2000 AND 1999 (IN THOUSANDS) (UNAUDITED)
2000 1999 ------------ ------------ Cash flows from operating activities: Net cash (used) provided by operating activities $ (1,891) $ 1,418 ------------ ------------ Cash flows from investing activities: Proceeds from sale of product line 1,555 -- Purchase of equipment (111) (1,225) Acquisition of software development and in-process technologies (131) (1,964) Purchase of Zedcor -- (300) Other (4) (274) ------------ ------------ Net cash provided (used) by investing activities 1,309 (3,763) ------------ ------------ Cash flows from financing activities: Credit line borrowings -- 2,025 Credit line repayments (820) (2,773) Borrowings (repayments) of term loan (750) 1,378 Repayment of capital lease obligations (679) (1,120) Proceeds from issuance of common stock 28 5,616 ------------ ------------ Net cash (used) provided by financing activities (2,221) 5,126 ------------ ------------ Effect of exchange rate changes on cash and cash equivalents 8 -- ------------ ------------ Net increase (decrease) in cash and cash equivalents (2,795) 2,781 Cash and cash equivalents at beginning of period 3,681 2,093 ============ ============ Cash and cash equivalents at end of the period $ 886 $ 4,874 ============ ============ SUPPLEMENTAL DISCLOSURES OF NON-CASH FINANCING AND INVESTING ACTIVITIES Equipment acquired through capital lease obligations $ -- $ 984 Purchase of technology and assets in exchange for notes payable $ -- $ 4,030 Purchase of technology and assets in exchange for common stock $ -- $ 1,336 IMSI common stock received in satisfaction of receivable $ -- $ 320 Repayment of accounts payable and accrued and other liabilities with common stock $ -- $ 2,207 Conversion of long-term debt to common stock $ 500 $ 1,444
See Notes to Condensed Consolidated Financial Statements 5 6 INTERNATIONAL MICROCOMPUTER SOFTWARE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The interim condensed consolidated financial statements have been prepared from the records of International Microcomputer Software, Inc. and Subsidiaries ("IMSI") without audit. In the opinion of management, all adjustments, which consist only of normal recurring adjustments (other than those described below), necessary to present fairly the financial position at March 31, 2000 and the results of operations and cash flows for the periods ended March 31, 2000 and 1999 have been made. The interim condensed consolidated financial statements should be read in conjunction with our consolidated financial statements and notes thereto contained in IMSI's Annual Report on Form 10-K for the fiscal year ended June 30, 1999. The results of operations for the three months and nine months ended March 31, 2000 and 1999 are not necessarily indicative of the results to be expected for any other interim period or for the full year. 2. REALIZATION OF ASSETS The financial statements have been prepared on a basis that contemplates IMSI's continuation as a going concern and the realization of our assets and liquidation of our liabilities in the ordinary course of business. We have an accumulated deficit of $42.6 million and negative working capital of $19.0 million at March 31, 2000. On February 18, 2000, under the guidance of CMA Business Credit Services, IMSI held a formally noticed general meeting of its creditors. At this meeting the creditors elected a committee to represent creditor interests. The committee agreed to give IMSI a 120 day stand-still period to prepare and present a plan to the creditors for paying off its debts. We are currently in the process of preparing this plan. In conjunction with these actions, we have ceased interest and principal payments on all borrowings, debt or other interest bearing obligations, with the exception of monthly interest payments to Union Bank of California on the outstanding line of credit. Accordingly, we are in default of various covenants of these agreements. These matters, among others, raise substantial doubt about our ability to remain a going concern for a reasonable period of time. The financial statements do not include any adjustments relating to the recoverability or classification of assets or the amounts and classification of liabilities that might result from the outcome of this uncertainty. IMSI's continued existence is dependent on its ability to obtain additional financing sufficient to allow it to meet its obligations as they become due and to achieve profitable operations. To a large extent, IMSI has plans to meet its working capital needs in the current fiscal year through sales or licensing of non-core product lines. We sold the rights to the Easy Language product line for $1.7 million in August 1999. In February 2000, we sold the rights to People Scheduler for $55,000. In March 2000, we executed republishing agreements with firms in Europe and the United States to manufacture and sell IMSI products. IMSI received $0.3 million in guarantees, which the Company will recognize over the term of the agreements. IMSI continues to explore all reasonable offers for the purchase of the remaining retail software product lines, and we are in discussion with several outside companies who wish to purchase certain of these retail software product lines. The sale or licensing of the rights to these product lines is a part of the Company's restructuring strategy of focusing on our core products while transitioning to the Internet. This strategy also includes reducing our costs through 6 7 manufacturing and warehouse outsourcing, facilities consolidation, and personnel reductions. There can be no assurance that we will be successful in our efforts. In January 2000, IMSI retained the investment banking firm of Heartland Financial to explore alternatives to raise capital and increase shareholder value. In addition to the sale of product lines, this may include the sale of either or both of our Internet business units, the restructuring of debt, and the infusion of new capital. There can be no assurance that we will be successful in our efforts to raise additional funds. IMSI received $1.3 million in income tax refunds during the first quarter of fiscal year 2000, an additional $2.1 million during the second quarter and $0.3 million in February 2000. 3. REVENUE RECOGNITION Revenue is recognized when earned. IMSI has adopted American Institute of Certified Public Accountants Statement of Position ("SOP") 97-2, Software Revenue Recognition, and SOP 98-9, Modification of SOP 97-2, With Respect to Certain Transactions. Revenue from packaged product sales to distributors, resellers and end users is recorded when related products are shipped. For software delivered via the Internet, revenue is recorded when the customer downloads the software. Subscription revenue is recognized ratably over the contract period, generally 12 to 15 months. Revenue from hybrid products is allocated to the underlying components based on the ratio of the value of each component to the total price. Non-refundable advanced payments received under license agreements are recognized as revenue when the customer accepts the delivered software. Revenue from software licensed to republishers, including royalties earned in excess of non-refundable advanced payments, is recorded as the republishers ship products containing the licensed software. Costs related to post-contract customer support, which are minimal and include limited telephone support and limited on-line maintenance for certain products, are accrued. Sales to distributors permit limited rights of return upon termination or when a product is defective. Reserves for returns, price discounts and rebates are estimated using historical averages and a consideration of open return requests. Beginning with the quarter ended December 31, 1998, the Company also considers channel inventories, recent product sell-through activity and market conditions in establishing its reserves. 4. INVENTORIES Inventories, consisting primarily of media, manuals, hardware, freight in, production costs and packing supplies, are valued at the lower of cost or market and are accounted for on the first-in, first-out basis. Management performs periodic assessments to determine the existence of obsolete, slow moving and non-salable inventories, and records necessary provisions to reduce such inventories to net realizable value. Inventories consist of:
March 31, 2000 June 30, 1999 -------------- ------------- Raw materials $ 310 $ 2,343 Finished goods 346 3,897 ------------ ------------ 656 6,240 Reserves for obsolescence (452) (3,345) ------------ ------------ $ 204 $ 2,895 ============ ============
7 8 5. CAPITALIZED SOFTWARE DEVELOPMENT COSTS Total capitalized software development costs were $8,197,000 at March 31, 2000 and $8,289,000 at June 30, 1999 less accumulated amortization of $6,128,000 and $5,433,000, respectively. 6. DEBT IMSI's short-term borrowings and long term debt and other obligations consist of the following (in thousands):
March 31, June 30, Short term borrowings 2000 1999 ------------ ------------ Non-revolving, reducing loan with interest at bank's reference rate plus 3%, 12.00% at March 31, 2000 $ 4,600 $ 5,400 Term loan with interest at bank's reference rate plus 3% -- 750 Subordinated loan facility due November 2001 with interest at 12% net of unamortized warrant cost at March 31, 2000 of $410 $ 2,090 -- Senior subordinated convertible note due May 2002 with interest at 9% net of unamortized warrant cost at March 31, 2000 of $807 3,693 -- Capital lease obligations 668 960 ------------ ------------ Total short term borrowings $ 11,051 $ 7,110 ============ ============ Long term debt and other obligations Subordinated loan facility due November 2001 with interest at 12% net of unamortized warrant cost at June 30, 1999 of $604 -- $ 1,896 Senior subordinated convertible note due May 2002 with interest at 9% net of unamortized warrant cost at June 30, 1999 of $1,100 -- 3,900 Capital lease obligations 395 803 ------------ ------------ Total long term debt and other obligations $ 395 $ 6,599 ============ ============
IMSI is in default on many of the covenants under its agreements relating to the non-revolving, reducing loan with Union Bank of California ("Union"). The loan was due September 30, 1999 and remains unpaid. Under the terms of the loan agreement, Union can declare the loan to be immediately due and payable and can commence immediate enforcement and collection actions. IMSI is also in default under the subordinated loan facility with Silicon Valley Bank for failure to make interest payments during the quarter ended March 31, 2000 and the entry of the Imageline award judgement. The bank noticed IMSI of the defaults and stated that it reserves all rights, powers and remedies under the loan agreement. Therefore, IMSI has recorded the full amount of the subordinated loan as a current liability. Similarly, Heller Financial, Inc.has noticed IMSI that the Company is in default under a capital lease obligation, and that all amounts under the lease are now due and payable. IMSI is negotiating with Heller over the terms of a proposed confession of judgement, the return of some equipment and the continued lease of the remaining equipment. At March 31, 2000, the full amount of the capitalized lease obligation was a current liability. 8 9 IMSI is in default on its senior subordinated convertible note with BayStar Capital L.P. ("BayStar") because of failure to pay a penalty for failing to have a registration statement effective no later than September 21, 1999 covering the resale of shares issuable to BayStar. The penalty is 1% per month of the principal balance outstanding. We have accrued a liability of $296,000 for this penalty through March 31, 2000 in our financial statements. BayStar has the right under the note to declare all sums due and payable but has not done so. Accordingly, the full amount of the note is recorded as a current liability. Because of the default, BayStar received the right to convert its convertible note at the price of $2 per share. BayStar converted $500,000 of the note on December 2, 1999 into common stock of IMSI at a price of $2.00 per share. 7. ACCRUED RESTRUCTURING CHARGES The following table details the rollforward activity in the accrued restructuring liability account (in thousands):
Balance Balance June 30, Paid March 31, 1999 (Accrued) 2000 ------------ ------------ ------------ Warehouse closure: Accrued rent $ 249 $ (256) $ 505 Broker's fee 103 -- 103 Warehouse transition costs 284 231 53 Facilities consolidation: Novato: Rent 180 180 -- Broker's fee 65 49 16 Excess furniture lease 14 11 3 Additional walls and doors 29 22 7 Miscellaneous charges 3 2 1 Tech support facility 110 37 73 Consolidation of Foreign Offices 6 6 -- Personnel reductions 397 389 8 ------------ ------------ ------------ Total accrued restructuring liability $ 1,440 $ 671 $ 769 ============ ============ ============
The following table reports the rollforward activity of planned terminations under the restructuring plan plus additional terminations in January 2000. These additional terminations in January were necessitated by the higher than anticipated losses and the termination of negotiations to sell ArtToday, which would have provided needed working capital.
Planned Cumulative Terminations as Terminations as of June 30,1999 of March 31, 2000 --------------- ----------------- Sales and Marketing 22 50 General and Administrative 8 10 Manufacturing 23 23 Research and Development 37 37 ------------ ------------ 90 120 ============ ============
During the quarter ended December 31, 1999, we increased the restructuring accrual for warehouse rent by $438,000 due to changing our estimate of how long it will take to sublease this facility. Also during the quarter ended December 31, 1999, we decreased the restructuring 9 10 accrual for personnel reductions costs by $138,000 primarily due to the re-hire of, and cessation of termination benefits payable to, formerly terminated executive, Geoffrey Koblick. 8. SEGMENT INFORMATION AND CLOSING OF EUROPEAN SUBSIDIARIES Until January 2000, IMSI had five reportable operating segments. Four of the segments were geographic: North America, the United Kingdom, Germany and Australia, and each of these segments generated revenues and incurred expenses related to the sale of our PC productivity software. The fifth segment comprised the revenues and expenses related to ArtToday.com (formerly Zedcor, Inc.). which IMSI purchased in October 1998. Previously, the Company included the results of this graphic design Internet subsidiary in the North America geographic segment because ArtToday's separate results were not material. On January 28, 2000, IMSI announced that it was exiting the retail software business, closing its German office and liquidating its European subsidiaries. Earlier, in the first quarter of fiscal year 2000, the Company closed its United Kingdom and French offices. Upon appointment of the liquidators, the liquidators assumed control of IMSI's European subsidiaries. Therefore, the Company is no longer consolidating these subsidiaries within its financial statements. For the six months ended December 31, 1999, revenue from Europe was $ 3,078,000 and the operating loss was $54,000. For the three months ended March 31, 2000, revenues and operating results were not material. The loss on the disposition of the Company's foreign subsidiaries as a result of liquidating the Company's European subsidiaries was $2,023,000. This loss includes the $1,562,000 write-off of the parent Company inter-company accounts receivable, the $68,000 write-off of the parent Company investment in the foreign subsidiaries and the $393,000 write-off of the foreign subsidiaries net assets. The liquidation process, which is proceeding according to the legal requirements of the respective countries, may take up to one year to complete. Future sales of our products in Europe, will occur primarily through third party licenses with IMSI receiving royalties for such sales. Also, the Company has executed several republishing agreements and will be receiving a percentage share of net sales revenues. The Company does not anticipate any additional costs pertaining to the closure of the European subsidiaries. An important element of IMSI's strategy is to bring the Company's precision design software, TurboCAD and FloorPlan 3D, to the Internet. The Company created a separate division, HomeDesignToday.com, to execute this new strategy. Revenues from this new division are not yet material, and, therefore, the Company is including the results of this division in the North American segment. The following tables report the segment information (in thousands):
Quarter Ended March 31, ArtToday. Other North 2000 Com America UK Germany - ------------------------ ------------ ------------ ----------- ---------- Net Revenues-external $ 840 $ 1,948 $ -- $ -- -internal -- -- -- Income (loss) before taxes 194 (5,629) -- -- Income tax expense (credit) -- -- -- -- Net income (loss) 194 (5,629) -- -- Identifiable assets $ 544 $ 7,477 $ -- $ --
Quarter Ended March 31, Rest of Elimina- 2000 Australia World tions Total - ------------------------ ------------ -------- --------- ------------ Net Revenues-external $ 180 $ -- $ -- $ 2,968 -internal -- -- -- Income (loss) before taxes (152) -- -- (5,587) Income tax expense (credit) 7 -- -- 7 Net Income (loss) (159) -- -- (5,594) Identifiable assets $ 112 $ -- -- $ 8,133
10 11
Quarter Ended March 31, ArtToday. Other North 1999 Com America UK Germany - ------------------------ ------------ ------------ ----------- ---------- Net Revenues-external $ 5 $ 5,908 $ 759 $ (50) -internal -- -- -- Income (loss) before taxes (422) (5,628) 175 (967) Income tax expense (credit) -- 2,934 -- -- Net Income (loss) (422) (8,562) 175 (967) Identifiable assets $ 670 $ 21,307 $ 1,181 $ 2,102
Quarter Ended March 31, Rest of Elimina- 1999 Australia World tions Total - ------------------------ ------------ -------- --------- ------------ Net Revenues-external $ 379 $ 280 $ -- $ 7,281 -internal -- -- -- Income (loss) before taxes -- 119 -- (6,723) Income tax expense (credit) 9 26 -- 2,969 Net Income (loss) (9) 93 -- (9,692) Identifiable assets $ 870 $ 1,014 $ -- $ 27,144
Nine Months Ended ArtToday. Other North March 31, 2000 Com America UK Germany - ------------------------ ------------ ------------ ----------- ---------- Net Revenues-external $ 2,147 $ 8,028 $ 687 $ 1,696 -internal -- 712 -- -- Income (loss) before taxes (24) (16,191) 130 (124) Income tax expense (credit) -- 503 -- -- Net Income (loss) (24) (16,694) 130 (124) Identifiable assets $ 544 $ 7,477 $ -- $ --
Nine Months Ended Rest of Elimina- March 31, 2000 Australia World tions Total ------------ -------- --------- ------------ Net Revenues-external $ 1,245 $ 1,081 $ -- $ 14,884 -internal -- -- (712) -- Income (loss) before taxes (52) 107 -- (16,154) Income tax expense (credit) 23 (4) -- 522 Net Income (loss) (75) 111 -- (16,676) Identifiable assets $ 112 $ -- -- $ 8,133
Nine Months Ended ArtToday. Other North March 31, 2000 Com America UK Germany ------------ ------------ ----------- ---------- Net Revenues-external $ 303 $ 21,207 $ 2,455 $ 3,335 -internal -- 2,003 -- -- Income (loss) before taxes (515) (14,372) 18 (655) Income tax expense (credit) -- (163) -- -- Net Income (loss) (515) (14,209) 18 (655) Identifiable assets $ 670 $ 21,307 $ 1,181 $ 2,102
Nine Months Ended Rest of Elimina- March 31, 2000 Australia World tions Total ------------ -------- --------- ------------ Net Revenues-external $ 1,773 $ 1,829 $ -- $ 30,902 -internal -- -- (2,003) -- Income (loss) before taxes 234 110 -- (15,180) Income tax expense (credit) 27 60 -- (76) Net Income (loss) 207 50 -- (15,104) Identifiable assets $ 870 $ 1,014 $-- $ 27,144
9. BASIC AND DILUTED EARNINGS PER SHARE Net loss and the weighted average number of shares outstanding (denominator) used to calculate basic earnings per share are reconciled to the number of shares used in calculating diluted earnings per share as follows (in thousands):
Three Months Ended Nine Months Ended March 31, March 31, ---------------------------- ---------------------------- 2000 1999 2000 1999 ------------ ------------ ------------ ------------ Net loss $ (5,594) $ (9,692) $ (16,676) $ (15,104) ============ ============ ============ ============ Shares used to compute basic EPS 7,286 6,364 7,136 5,939 Add effect of dilutive securities: Convertible Note 2,250 -- 2,250 -- Warrants 298 30 298 30 Stock options 2,237 914 2,237 690 ------------ ------------ ------------ ------------ Shares used to compute diluted EPS* 12,071 7,308 11,921 6,659 ============ ============ ============ ============
* Not presented, as presentation would be anti-dilutive. 11 12 10. COMPREHENSIVE INCOME (LOSS) Comprehensive income includes changes in the balance of items that are reported directly in a separate component of stockholders' equity on the condensed consolidated balance sheets. The reconciliation of net loss to comprehensive loss is as follows (in thousands):
Three Months Ended March 31, Nine Months EndedMarch 31, ---------------------------- ---------------------------- 2000 1999 2000 1999 ------------ ------------ ------------ ------------ NET LOSS $ (5,594) $ (9,692) $ (16,676) $ (15,104) ============ ============ ============ ============ Other comprehensive (loss) gain Foreign currency translation adjustments 2 (170) 12 29 ------------ ------------ ------------ ------------ Total comprehensive loss $ (5,592) $ (9,862) $ (16,664) $ (15,075) ============ ============ ============ ============
11. DE-LISTING FROM THE NASDAQ SMALL CAP MARKET On November 24, 1999 Nasdaq granted IMSI an exception from the net tangible listing requirement, allowing IMSI to transfer from the Nasdaq National Market to the Nasdaq Small Cap Market, with the symbol IMSIC. IMSI transferred to the Nasdaq Small Cap Market on November 30, 1999. To maintain our listing on the Nasdaq Small Cap Market, IMSI was required to file on or before January 31, 2000 reports evidencing at least $7 million in net tangible assets with the Securities Exchange Commission and Nasdaq. We notified Nasdaq on January 28, 2000 that we were unable to achieve this requirement. On January 31, 2000, IMSI was delisted from the Nadsaq Small Cap Market and began trading on the OTC Bulletin Board. Concurrently, the ticker symbol IMSI was appended with a "C". On February 25, 2000, the ticker symbol IMSI was appended with an "E". On March 28, 2000, IMSI was delisted from the OTC Bulletin Board and began trading on the National Quotation Bureau Pink Sheets, because the Company had failed to file the December 31, 1999 Form 10-Q. Our de-listing by Nasdaq may have an adverse and material effect on the price of IMSI's stock and on the ability of IMSI's shareholders to sell their shares. Securities laws could impose limitations on liquidity of the common stock traded on the Pink Sheets. The de-listing could also adversely affect IMSI's ability to obtain additional debt and/or equity financing and may result in the reduction in the amount and quality of securities analyst and news media coverage of IMSI. De-listing is also a triggering event, allowing the holder of the convertible subordinated note owing to BayStar to declare all sums due and payable, as described in Note 6. IMSI filed the December Form 10-Q on May 10, 2000, and the Company will file the June 30, 1999 Form 10-K/A and September 30,1999 Form 10-Q/A on May 15. With the filing of this March 31, 2000 Form 10-Q, IMSI should be in compliance with SEC and Nasdaq requirements and expects to return to the OTC Bulletin Board before the end of May. 12. POTENTIAL PENALTIES FOR AGREEMENTS RELATING TO REGISTRATION OF SHARES We agreed to file one or more registration statements covering the resale of the shares described in Notes 6 and 7 to the consolidated financial statements in our fiscal 1999 Form 10-K. These agreements included shares issued or issuable with BayStar Capital L.P. ("BayStar"), The Learning Company (now owned by Mattel, Inc., "TLC"), Capital Ventures International ("CVI"), and others. We have filed registration statements pursuant to these agreements. The SEC Division of Corporate Finance has had, and may continue to have, comments related to our 12 13 recent filings. We are working with the SEC to resolve these comments as soon as possible. However, as a result of delays in the effectiveness of the registration statements, we are liable for financial penalties or other payments under the terms of the agreements with TLC and BayStar. The aggregate amount of these penalties or other payments could have a material effect on our financial statements, business, liquidity and results of operations. BayStar The BayStar Note and Warrant Agreement required that IMSI have a registration statement declared effective by September 21, 1999 covering resale of the shares issuable to BayStar. Under the Agreement IMSI is required to pay cash penalties if it failed to effectively file the registration statement. The Company was not able to comply, and, on November 17, 1999, BayStar notified IMSI that the Company was in default under the 9% Subordinated Convertible Note due 2002 because IMSI failed to pay the cash penalties. Because of the default, BayStar converted $507,767 of the Note and accrued interest into 253,884 shares of IMSI common stock at $2 per share on December 2, 1999. IMSI has accrued the penalties for both quarters ending December 31, 1999 and March 31, 2000. TLC In January 1999, IMSI and TLC agreed to amend the terms of the Org Plus agreement to allow IMSI to settle the $1.8 million cash obligation by the issuance of 200,000 shares of IMSI's common stock. In April 1999, IMSI and TLC agreed that if TLC sells any shares within 30 days following the effectiveness of a registration statement covering the 200,000 shares issued to TLC, IMSI will pay TLC the difference between the sales price and $8.50 per share, such payment to be made either in cash or by issuing shares based on the average share price during the thirty day protection period, at IMSI's option. In September 1999, IMSI and TLC orally agreed that, in consideration for 300,000 shares and the waiver of a $200,000 receivable due from TLC, TLC would not terminate the April agreement nor seek to reinstate the $1.8 million cash obligation and that TLC would deem any claim that it may have for additional shares to be satisfied. No written agreement was executed and no shares have been delivered. In view of the length of time that has passed since TLC and IMSI reached a verbal agreement, during which time IMSI's stock price has fallen and TLC's current shares remain unregistered, it is unlikely that TLC will continue to accept 300,000 shares in satisfaction of all claims. The nature of the claims that TLC might assert based on the agreements described above, and the resolution of these potential claims, is highly speculative. Based on the terms of the April agreement, no penalties have been incurred. The price protection feature of the April agreement is contingent and a charge will be taken at the time the contingency is resolved. IMSI is attempting to reach a negotiated settlement with BayStar and TLC, including negotiations for the issuance of additional shares of common stock. There can be no assurance that such negotiations will be successful. See Notes 6 and 7 to the consolidated financial statements in our Fiscal 1999 Form 10-K. CVI On March 1, 2000, IMSI agreed to settle its price protection adjustment obligations to CVI with the issuance of 2,062,363 additional shares. Under this agreement, IMSI has no further obligation to issue any additional adjustment shares or other consideration to CVI and is relieved of making any further payments to CVI in connection with its failure to obtain the effectiveness 13 14 of the respective registration statement. Since this resolution provides CVI with fewer shares than it was entitled to under the original price protection agreement, no additional charge was required to be booked. Zedcor The May 1999 amendments to the Zedcor Fee Agreement provide for the issuance of additional shares if the average market price of IMSI stock is less than $8 per share three days before the effective date of the registration of the shares. This price protection applies only to the 190,797 shares issued for the (i) conversion of the note balance into 150,321 shares, and (ii) the issuance of the additional 40,476 shares under the May amendments to the Zedcor Fee Agreement. In the third quarter of fiscal year 2000, a verbal agreement was reached stipulating that IMSI would issue to the former Zedcor shareholders an additional 185,005 shares, the maximum number of additional shares to which they were entitled under the price protection, in settlement of all claims. Written execution of this agreement is awaiting final approval of the banks and creditors, who have already indicated that approval will be granted. Because IMSI was not contractually obligated to offer the price protection under the Zedcor Fee Agreement, it will recognize a charge equal to 185,005 shares times the market price of IMSI stock on the date of the execution of the settlement agreement. 13. ADVERSE AWARD IN IMAGELINE ARBITRATION On January 14, 2000, Imageline, Inc. received a $2.6 million arbitration award against IMSI for intellectual property violations and attorneys fees. The award is comprised of $1.2 million in actual damages, $1.2 in punitive damages and $.2 million in attorneys' fees. IMSI is appealing the award in the federal district court in Richmond, VA. See Note 17 to IMSI's consolidated financial statements contained in IMSI's Annual Report on Form 10-K for the fiscal year ended June 30, 1999. In April, IMSI and Imageline initiated negotiations to settle the award. The proposed settlement includes a cash payment of $170,000 upon execution of the agreement, three subsequent payments of $75,000, a consulting agreement, warrants, payment of legal fees and royalties on certain sales of Masterclips. While IMSI and Imageline appear to be close to agreement, there can be no assurance that the Company will successfully settle this matter. 14. CHANGES IN BUSINESS, MANAGEMENT AND THE BOARD OF DIRECTORS On February 15, 2000, Geoffrey Koblick was named president, chief executive officer, chief financial officer and a member of the IMSI's board of directors. Geoffrey Koblick, who founded IMSI in 1983, stepped down as chief operating officer and chairman of the board in May of 1999. Geoffrey Koblick replaced Costa John, who served as president, chief executive officer and chief financial officer. In addition, Mark Boyer, a principal in ROI capital, one of IMSI's largest shareholders, was also appointed to the board of directors. IMSI's other directors, Costa John, Bill Lane, Abe Ostovsky and Lisa Crane resigned on February 15, 2000. See Form 8-K dated February 15, 2000. On February 17, 2000, Jeffrey Morgan joined IMSI as chief financial officer, assuming the responsibilities of that position from Geoffrey Koblick. 14 15 15. ESTABLISHMENT OF CREDITORS' COMMITTEE On February 18, 2000, under the guidance of CMA Business Credit Services, IMSI held a formally noticed general meeting of its creditors. At this meeting the creditors elected a committee to represent creditor interests. The committee agreed to give IMSI a 120 day stand-still period to prepare and present a plan to the creditors for paying off its debts. We are currently in the process of preparing this plan. In conjunction with these actions, we have ceased interest and principal payments on all borrowings, debt or other interest bearing obligations, with the exception of monthly interest payments to Union Bank of California on the outstanding line of credit. Accordingly, we are in default on various covenants of these agreements. 16. CLOSING OF EUROPEAN SUBSIDIARIES On January 28, 2000, IMSI announced that it is exiting the retail software business. As a result, IMSI began closing its German office and liquidating its European subsidiaries. In the first quarter of fiscal year 2000, the Company closed the United Kingdom and French office. Although IMSI has ceased our European operations, the liquidation process, which is proceeding according to the legal requirements of the respective countries, may take up to one year to complete. Upon appointment of the liquidators, the liquidators assumed control of the European subsidiaries, and, therefore, IMSI is no longer consolidating these subsidiaries within its financial statements. For the six months ended December 31, 1999, revenue from Europe was $3,078,000 and the operating loss was $54,000. For the three months ended March 31, 2000, the revenues and operating result were not material. The loss on the disposition of foreign subsidiaries as a result of liquidating the Company's European subsidiaries is $2,023,000. Once the liquidation is complete, future sales of IMSI's products in Europe will occur through third parties paying the Company primarily on a royalty basis. 17. SUBSEQUENT EVENTS Software License Agreements In March, IMSI executed an agreement to license the object code and source code of the Company's TurboProject and Flow programs for $350,000. The license is worldwide, perpetual and non-exclusive. IMSI did not complete the delivery of all necessary program documentation until May and, therefore, did not recognize the revenues in March but in May. As of the date of this Form 10-Q, IMSI has received $175,000 and expects to receive the remaining $175,000 before month-end. In April, IMSI entered into a similar agreement with another firm to license the object code and source code of the Company's Lumiere program for $120,000. IMSI completed delivery of all documentation and received full payment in April. 15 16 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following information should be read in conjunction with the consolidated financial statements and the notes thereto and in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations in IMSI's Fiscal 1999 Form 10-K. This quarterly report on Form 10-Q, and in particular this "Management's Discussion and Analysis of Financial Condition and Results of Operations," may contain forward-looking statements regarding future events or the future performance of IMSI. These future events involve certain risks and uncertainties including those discussed in the "Other Factors That May Affect Future Operating Results" section of this Form 10-Q, as well as in IMSI's Fiscal 1999 Form 10-K, as filed with the Securities and Exchange Commission ("SEC"). Actual events or the actual future results of IMSI may differ materially from any forward-looking statements due to such risks and uncertainties. IMSI assumes no obligation to update these forward-looking statements to reflect actual results or changes in factors or assumptions affecting such forward-looking statements. This analysis is not intended to serve as a basis for projection of future events. RESULTS OF OPERATIONS IMSI reported a net loss of $5,594,000 or ($.77) per share for the quarter ended March 31, 2000 and a net loss of $16,676,000, or ($2.34) per share for the nine months ended March 31, 2000. This compares to a net loss of $9,692,000 or ($1.52) per share for the quarter ended March 31, 1999 and a net loss of $15,104,000 or ($2.54) per share for the nine months ended March 31, 1999. We reported an operating loss of $1,490,000 and $9,372,000 for the three and nine months ending March 31, 2000, respectively. This compares to an operating loss of $6,231,000 and $13,983,000 for the three and nine months ended March 31, 1999. NET REVENUES Net revenues for the three month and nine month periods ended March 31, 2000 were $2,968,000 and $14,884,000, respectively. This compares to net revenues of $7,281,000 and $30,902,000 for the same periods in the previous fiscal year. This change represents a decrease in net revenues of 59% and 52% for the three and nine months periods, respectively. Sales have continued to decline since IMSI reported net revenues of $16,738,000 for the quarter ending June 30, 1998. Due to the rapid and continuing decline of IMSI's retail software sales, we announced on January 28, 2000 that we would be exiting the retail software business. Because our sales revenue no longer supported the existing level of overhead, we discontinued our European operations and consolidated our domestic and Canadian offices into our facilities in Novato, California and Tucson, Arizona. We will continue to sell software by direct mail and electronic download for as long as these sales generate net cash. Also, we have executed and are continuing to pursue repackaging agreements, non-exclusive sales of source code and licensing arrangements to grow revenues. IMSI's longer term strategy is to derive a majority of the Company's future revenues from our precision design and graphic design websites. 16 17 Product revenues in absolute dollars and as a percentage of total revenues for each of IMSI's principal product categories were as follows (in thousands):
Three Months Ended March 31, Nine Months Ended March 31, ------------------------------------------- -------------------------------------------- 2000 1999 2000 1999 ------------------- -------------------- -------------------- -------------------- $ % $ % $ % $ % -------- -------- -------- -------- -------- -------- -------- -------- Precision Design 592 20% 4,398 60% 4,703 32% 8,376 27% Graphic Design 1,223 41% 2,334 32% 5,757 39% 8,950 29% Business Applications 471 16% 568 8% 4,265 29% 11,665 38% Utilities 548 18% 688 9% 3,033 20% 3,635 12% Other Products 85 3% 150 2% 984 7% 2,944 10% Sales Reserves 48 2% (857) -12% (3,857) -26% (4,668) -15% -------- -------- -------- -------- -------- -------- -------- -------- Net Revenues $ 2,968 100% $ 7,281 100% $ 14,884 100% $ 30,902 100% ======== ======== ======== ======== ======== ======== ======== ========
Product category revenues are shown gross without sales reserves recorded in the respective periods for returns, price discounts and rebates. Sales reserves are based on estimates of future activity and by their nature are subject to certain risks and uncertainties. In the past these risks and uncertainties have caused actual results to differ materially from estimates. Since IMSI is no longer selling product to channel resellers, the risks and uncertainties for IMSI related to future returns, price discounts and rebates are significantly reduced. Net revenues in all categories for both the three months ended and nine months ended March 31, 2000 declined from the revenues in the same periods last year. The declines reflect IMSI's decision, in January, to exit the retail software business and end all relations with the Company' channel resellers. While the Company is now attempting to rebuild these sales through licensing and republishing agreements, these efforts had no impact on third quarter 2000 sales revenues. Net revenues in the precision design category decreased for the three-month period ended March 31, 2000 by $3,806,000 or 87% from the comparable period in fiscal 1999. The decline is due to a decrease in TurboCad and Floorplan sales as explained above. However, pursuant to IMSI's strategy of supporting its precision design line of product and growing its internet business, net revenues in this category should increase substantially during the next quarter and the next fiscal year with the release of newer versions of TurboCad and FloorPlan. For the three-month period ended March 31, 2000, net revenue in the graphic design category decreased by $1,111,000 or 48% from the comparable period in fiscal year 1999. The decline in this category is due to a decrease in the sales of the primary product within this category, MasterClips. In February, IMSI ceased all sales of MasterClips to comply with the court's ruling to uphold the Imageline Arbitration judgement. ArtToday, contributed net revenue of $840,000 within this category during the quarter ended March 31, 2000. Revenues in the business applications category decreased by $97,000 or 17% in the three-month period ended March 31, 2000 as compared to the same period in fiscal year 1999. TurboProject and HiJaak sales decreased compared to the same period for the prior fiscal year. Moreover, consistent with IMSI's restructuring plan, a number of other non-core products within this category were not upgraded or actively marketed contributing to the decline in revenue. For the three month period ended March 31, 2000, revenues in the utilities category decreased by $140,000 or 20% as compared to the same period in fiscal 1999. In the United States particularly, intense price competition and rebate programs have negatively impacted these 17 18 consumer oriented software products. Consistent with IMSI's restructuring plan, the utilities products are also not being updated or actively marketed. Revenues in the other products category decreased by $65,000 or 43% for the three month period ended March 31, 2000 as compared to the same period in fiscal year 1999. The decrease was primarily due to the discontinuation of products within this category. For the three month period ended March 31, 2000 net revenues from domestic sales were $2,788,000. This is a decrease of $2,871,000 or 50.7% from net domestic sales revenues of $5,659,000 during the same period in the previous year. During the third quarter of fiscal year 2000, net revenues from domestic sales climbed to 93.9% of total net revenues as compared to 77.8% of total net revenues for the comparable period in the previous fiscal year. This increase reflects the Company's decision in January to discontinue all European and South African operations. Net revenues from international sales declined by $1,442,000 or 88.9% to $180,000 for the three month period ended March 31, 2000. For this quarter, net revenues from international sales were only 6.1% of total net sales. This is a substantial decline from last year when net revenues from international sales were 22.3 % of total net revenues. Australia accounted for all of IMSI's international net revenues in the three-month period ended March 31, 2000. As a result of our decision in January 2000 to liquidate our European operations, we are no longer consolidating our European subsidiaries. This change resulted in a loss of $2,023,000 from the write off of inter-company receivables and investment in subsidiaries. See Note 8 to the condensed consolidated financial statement for segment information. With the liquidation of the Company's European subsidiaries, the risks associated with transactions in foreign currencies have been substantially reduced. Nonetheless, our operating results may be affected by the risks customarily associated with international operations, including changes in the value of the dollar versus other currencies, increases in duty rates, exchange or price controls, longer collection cycles, government regulations, political instability and changes in international tax laws. In the second quarter of fiscal 2000, TechData terminated its distribution agreement with IMSI as a result of a disagreement over payment terms. The Company's distributorship agreement with TechData allowed for product returns upon termination. In December 1999 and January 2000, the Company received total returns of approximately $522,000. IMSI's agreement with TechData required us to accept returns of the products in TechData's inventory at the price paid by TechData less any subsequent returns or credits, provided that the products have been unopened and are in their original factory sealed packages. To date, we have credited TechData for only $25,000 of valid returns because IMSI believes the remainder of the product inventory returned by TechData did not meet these conditions. TechData has contested our right to refuse the balance of the returns. IMSI's receivable balance from TechData as of March 31, 2000 was approximately $650,000, and the Company has reserved all of this receivable as a bad debt. The Company is currently in negotiations with TechData to resolve this issue. We do not anticipate paying a cash refund to TechData for returned product. 18 19 PRODUCT COSTS For the three months ended March 31, 2000, product costs decreased $3,695,000 to $1,295,000 as compared to $4,990,000 for the same period in 1999. The reduction in product costs is associated with the decrease in sales. As a percentage of revenue, product costs decreased from 68.5 % to 43.6%, when compared to the same period in the previous fiscal year. This reflects in part the reduction in fixed product costs generated by the closing of the Company's Vacaville distribution center and the associated termination of employees. In addition the recognition of deferred revenues during the quarter ended March 31, 2000 were a greater proportion of total revenues than during the same quarter last year. Similarly, ArtToday accounted for a greater share of revenues this quarter, and their cost of sales is lower than the parent Company's. Product costs include royalty fees and the amortization of capitalized software and license fees. IMSI amortizes capitalized software development costs and license fees on a product-by-product basis. The amortization for each product is the greater of the amount computed using (a) the ratio of current gross revenues to the total of current and anticipated future gross revenues for the product or (b) the economic life of such product. Generally, capitalized software development costs are amortized over a maximum of 18 to 36 months, and license fees are amortized over a maximum of 36 months. . SALES AND MARKETING Sales and marketing expenses for the three months ending March 31, 2000 decreased $3,563,000 or 82.6% to $749,000 as compared to the same period in the previous fiscal year. Sales and marketing expenses for the nine months ending March 31, 2000 decreased $10,368,000 or 67.3% to $5,034,000 as compared to the same period in the previous fiscal year. As a percentage of net revenues, sales and marketing expenses for the three and nine month periods ending March 31, 2000, were 25.2% and 33.8%, respectively, as compared with 59.2% and 49.8%, respectively, for the previous fiscal year. The decrease in dollar and percentage amounts is primarily due to a reduction in advertising, marketing staff, merchandisers, corporate sales representatives and other sales overhead expenses. Sales and marketing expenses should continue to decline in future periods as a result of the Company's exit from the retail software business. GENERAL AND ADMINISTRATIVE General and administrative expenses for the three months ending March 31, 2000 decreased $368,000 or 16.7% to $1,833,000. For the nine months ending March 31, 2000, general and administrative expenses increased $984,000 or 17.1% to $6,726,000 compared to the same period in the previous fiscal year. The increase in the nine month period ended March 31, 2000 is due primarily to increased professional fees and legal expenses incurred in connection with our restructuring, the restatement of financial results, the Imageline arbitration and efforts to achieve effectiveness of our registration statements. This increase in general and administrative expenses also reflects higher accruals for bad debt expense associated with our exit from the retail software market. General and administrative expenses for the three and nine month periods ending March 31, 2000, were 61.8% and 45.2 %, respectively, of net revenues. This compares with 30.2% and 18.6%, respectively, for the previous fiscal year. The large increases in general and administrative expenses as a percent of net revenue is primarily attributable to a lower net revenue base and the fixed nature of these expenses. Our wholly owned Internet subsidiary, ArtToday, had operating expenses of $478,000 that included general and administrative expense 19 20 of $266,000. Due to employee layoffs and facility closures at IMSI in February 2000, general and administrative expenses declined significantly. RESEARCH AND DEVELOPMENT Research and development expenses for the three months ended March 31, 2000 decreased $1,102,000 or 54.9% to $907,000. For the nine months ending March 31, 2000, research and development expenses decreased $3,069,000 or 47.4% to $3,399,000. As a percentage of net revenues, research and development expenses for the three and nine month periods ending March 31, 2000, were 30.6% and 22.8%, respectively, as compared with 27.6% and 20.9%, respectively, for the previous fiscal year. The reduction in absolute amounts reflects the cost containment efforts, including a reduction in headcount, and the reduction in the number of products under development as part of the streamlining of IMSI's product offerings. The increase as a percentage of net revenues reflects the need to maintain a core research and development resource to implement IMSI's Internet strategy. OTHER EXPENSE, NET Other expense, net, which consists of interest expense on short and long-term borrowings, financing penalties, and net gains or losses on foreign currency transactions, decreased from $492,000 to $286,000 for the three month period ended March 31, 2000 compared to the same period of the previous fiscal year. For the nine months ended March 31, 2000, other expense, net, increased from $1,197,000 to $1,810,000 from the previous fiscal year. Other expense, net for the quarter ending March 31, 2000 includes $135,000 in penalties owed to Bay Star related to registration requirements in the share purchase agreements. See Note 12 to the Condensed Consolidated Financial Statements. LOSS ON DISPOSITION OF FIXED ASSETS During the nine months ended March 31, 2000, IMSI has undergone closure of facilities and significant personnel reductions. Consequently, a large percentage of the furniture and equipment are now surplus and will be liquidated. Additionally, building improvements have been abandoned and written off. PROVISION FOR INCOME TAXES IMSI did not record a tax benefit in the three or nine month periods ending March 31, 2000 for our domestic tax losses because of the uncertainty of realization. Our effective tax rate was 40.8% for the three month period and (0.2)% for the nine month period ending March 31, 1999. We adhere to Statement of Financial Accounting Standards (SFAS) No. 109 "Accounting for Income Taxes," which requires an asset and liability approach to financial accounting and reporting for income taxes. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. For the three months ended March 31, 2000, IMSI had income tax expense of $7,000 at its Australian subsidiary. For the nine months ended March 31, 2000, IMSI has written-off all deferred tax benefits because of the uncertainty of the realization of any benefit as the Company continues to experience losses. LIQUIDITY AND CAPITAL RESOURCES As of March 31, 2000, we had $886,000 in cash and cash equivalents, a decline of $2,795,000 from our cash and cash equivalents balance of $3,681,000 at June 30, 1999. Working capital declined by $17,762,000 from a negative $1,227,000 at June 30, 1999 to a negative $18,989,000 at March 31, 2000. Despite our net loss of $16,676,000 for the nine months ending March 31, 2000, operating activities used net cash of only $1,891,000 during this period. The lower amount is primarily due to the collection of accounts receivable, reduction in inventories, advance payments on republishing agreements and income tax refunds. In February, the Company received an additional $335,000 in income tax refunds bringing the total for the year to $3.7 million. 20 21 Our investing activities during the nine months ended March 31, 2000, generated net cash of $1,309,000. Sales of non-core product lines provided $1,555,000, and purchases of equipment and technology consumed $246,000. Our financing activities used net cash of $2,221,000 for the nine-month period ended March 31, 2000. In addition to making capital lease obligation payments, we repaid Union Bank's $750,000 term loan and paid down the bank's non-revolving reducing loan to us (our former credit line) by $820,000. The loans with Union Bank were due on September 30, 1999. A balance of $4,600,000 on the non-revolving reducing loan remains unpaid. Under the terms of the loan agreement, Union Bank can declare the loan to be immediately due and payable and can commence immediate enforcement and collection actions. Enforcement and collection actions by Union Bank would have a material adverse effect on IMSI's ability to continue as a going concern. We will require additional working capital to meet our ongoing operating expenses, to execute our continued transition to the Internet, to develop new products, and to conduct other activities. We believe that our existing cash and cash equivalents will be insufficient to satisfy IMSI's working capital and capital expenditure requirements over the next 12 months. The large accumulated losses of IMSI and the negative shareholder's equity of $14,693,000 as of March 31, 2000 will make it difficult for IMSI to obtain new debt or equity financing. See Note 2 to the condensed consolidated financial statements concerning realization of assets and basis of presentation. To a large extent, IMSI planned to meet its working capital needs in the current fiscal year through the sale or license of the rights to its non-core products. In August 1999, IMSI sold the rights to the Easy Language product for $1.7, and, in January 2000, the Company sold PeopleScheduler for $55,000. IMSI has engaged in, and will continue to engage in, discussions with third parties concerning the sale or licensing of remaining non-core product lines. The sale or licensing of the rights to these products is consistent with our strategy of focusing on our core products while transitioning to the Internet. This strategy also includes reducing our costs through manufacturing and warehouse outsourcing, facilities consolidation, and personnel reductions. No assurance can be given that we will be successful in these efforts. Under the guidance of CMA Business Credit Services, on February 18, 2000 IMSI held a formally noticed general meeting of its creditors. At this meeting a committee was elected to represent creditor interests. The committee agreed to give IMSI a 120 day stand-still period to prepare and present a plan to the creditors for paying off its debts Our forecast period of time through which our financial resources will be adequate to support our working capital and capital expenditure requirements is a forward-looking statement that involves risks and uncertainties, and actual results could vary. The factors described in "Risk Factors", here and in our Fiscal 1999 Form 10-K, will affect our future capital requirements and the adequacy of our available funds. No assurance can be given that needed financing will be available on terms attractive to us, or at all. Furthermore, any additional equity financing, if available, may be dilutive to shareholders, and debt financing, if available, may involve restrictive covenants. If IMSI fails to raise capital when needed, then lack of capital will hamper our ability to continue as a going concern. IMSI had no material commitments for capital expenditures as of March 31, 2000. 21 22 IMSI's international revenues are generally denominated in the foreign currencies of IMSI's subsidiaries. Consequently, a decrease in the value of a relevant foreign currency in relation to the U.S. dollar can adversely affect IMSI's net revenues. Further, a decrease in the value of a relevant foreign currency in relation to the U.S. dollar occurring after sale and before receipt of payment by IMSI would have an adverse effect on IMSI's results of operations and cash flows. IMSI had a $8,000 and $29,000 foreign exchange gain, in the nine months periods ending March 31, 2000 and 1999, respectively. OTHER FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS For further discussion please refer to the subheading "Future Performance and Additional Risk Factors" in the Fiscal 1999 Form 10-K. OPERATING RESULTS REFLECT CONTINUED LOSSES IN THE THIRD QUARTER OF FISCAL 2000. IMSI continues to experience deteriorating operating results due to a variety of factors. The following table shows IMSI's operating income (loss) and net INCOME (LOSS) for the periods presented (in thousands), as restated:
OPERATING NET INCOME QUARTER ENDING INCOME (LOSS) (LOSS) - -------------- ------------ ------------ Fiscal 1998 September 30 $ (4,668) $ (3,114) December 31 2,140 1,220 March 31 1,894 1,000 June 30 720 524 ------------ ------------ $ 86 $ (370) ============ ============ Fiscal 1999 September 30 $ (1,483) $ (1,106) December 31 (6,103) (4,274) March 31 (6,231) (9,692) June 30 (10,073) (11,894) ============ ============ $ (23,890) $ (26,966) ============ ============ Fiscal 2000 September 30 $ (2,814) $ (1,853) December 31 (5,069) (7,376) March 31 (1,490) (5,594)
We experienced growth during fiscal 1997 and earlier years. However, starting in fiscal year 1998, our operating results began to steadily worsen. While the Company substantially reduced the operating loss in the third quarter, IMSI continues to lose money in fiscal year 2000. The trend of continued losses raises the question of our ability to continue as a going concern. Factors that may cause fluctuations of, or a continuing decline in, operating results in the future include the market factors and competitive factors described at page 23 in our Fiscal 1999 Form 10-K, under "Future Performance and Additional Risk Factors." 22 23 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK IMSI is exposed to the impact of interest rate and, to a very minor degree, foreign currency fluctuations. IMSI's objective in managing its exposure to interest rate changes and foreign currency fluctuations is to limit the impact of interest rate changes on earnings and cash flow and to lower its overall borrowing costs. IMSI's major market risk exposure is changing interest rates in the United States, which would change interest expense on our non-revolving, reducing loan. IMSI does not hedge foreign currency risk. 23 24 PART II - OTHER INFORMATION ITEM 1. Legal Proceedings On April 23, 1998 IMSI began arbitration proceedings against Imageline, Inc. ("Imageline") before the American Arbitration Association in San Francisco, California. IMSI requested that all matters within the scope of the agreements between Imageline and IMSI be resolved by arbitration, including a dispute in which Imageline sued Mindscape, Inc. for alleged copyright infringement, for which IMSI may be required to indemnify Mindscape, in whole or in part. IMSI further requested that the arbitration decide the rights and liabilities of the parties, and the validity of the copyrights under which Imageline asserted its claims against IMSI. IMSI also requested compensatory damages and attorney's fees. On August 12, 1999 Imageline filed a counterclaim in the arbitration, alleging breach by IMSI of an agreement between the parties, including unauthorized sublicensing, and instituting arbitration proceedings without notice and opportunity to cure. Imageline requested liquidated damages, alleged to be more than $200,000, compensatory damages of at least $500,000, punitive damages, legal fees, interest and costs. On January 14, 2000, Imageline received a $2.6 million arbitration award against IMSI for intellectual property violations. IMSI is appealing the award in the federal district court in Richmond, VA and is also conducting negotiations to settle the award for a lesser amount. ITEM 2. Changes in Securities and Use of Proceeds Not Applicable ITEM 3. Defaults upon Senior Securities We are in default of our non-revolving reducing loan to Union Bank of California and our subordinated convertible notes to BayStar Capital L.P. and Silicon Valley Bank. See Note 6 to the condensed consolidated financial statements, at page 8 above. ITEM 4. Submission of Matters to a Vote of Security Holders Not Applicable ITEM 5. Other Information On January 31, 2000, IMSI was delisted form the Nadsaq Small Cap Market. See Note 11 to the condensed consolidated financial statements, at page 11 above. ITEM 6. Exhibits and Reports on Form 8-K Exhibits 27.1 Financial Data Schedule No report on Form 8-K was filed during the quarter ended March 31, 2000. 24 25 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DATE: May 16, 2000 INTERNATIONAL MICROCOMPUTER SOFTWARE, INC. By: /S/ GEOFFREY KOBLICK ------------------------------------- Geoffrey Koblick President and Chief Executive Officer (Principal Executive Officer) By: /S/ JEFFREY MORGAN ------------------------------------- Jeffrey Morgan Chief Financial Officer (Principal Accounting Officer) 25 EX-27.1 2 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS DEC-31-2000 JAN-01-2000 MAR-31-2000 886 0 6,602 6,157 204 3,442 6,029 5,305 8,133 22,431 0 0 0 28,059 (42,752) 8,133 2,968 2,901 242 1,295 3,163 0 643 (5,587) 7 (5,594) 0 0 0 (5,594) (.77) (.77)
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