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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended MARCH 31, 2001
[ ] 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 5, 2001, 9,693,892 shares of Registrant's common stock, no par value,
were outstanding.
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INTERNATIONAL MICROCOMPUTER SOFTWARE, INC. AND SUBSIDIARIES
INDEX
Page
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PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets at March 31, 2001 and June 30, 2000 3
Condensed Consolidated Statements of Operations for the three and nine months
ended March 31, 2001 and 2000 4
Condensed Consolidated Statements of Cash Flows for the nine months ended
March 31, 2001 and 2000 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes in Securities and Use of Proceeds 19
Item 3. Defaults upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 21
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PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
INTERNATIONAL MICROCOMPUTER SOFTWARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
March 31, 2001 June 30, 2000
-------------- -------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 1,820 $ 1,477
Receivables, less allowances for doubtful
accounts, discounts and returns of $456 and $995 1,178 1,043
Inventories 110 189
Prepaid royalties and licenses 387 760
Other current assets 354 717
-------- --------
Total current assets 3,849 4,186
Furniture and equipment 731 770
Capitalized software development costs 1,455 1,918
Other assets 1,360 1,760
-------- --------
Total assets $ 7,395 $ 8,634
======== ========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Short term borrowings $ 12,360 $ 12,430
Trade accounts payable 2,463 2,514
Accrued and other liabilities 4,494 3,010
Accrued arbitration award 2,835 2,717
Accrued restructuring charges 129 129
Deferred revenue 1,211 2,385
-------- --------
Total current liabilities 23,492 23,185
Long term debt and other obligations 203 302
-------- --------
Total Liabilities 23,695 23,487
Shareholders' deficit:
Common stock, no par value; 300,000,000 authorized;
issued and outstanding 9,693,892 and 9,469,366
shares 28,755 28,271
Accumulated deficit (44,815) (42,834)
Accumulated other comprehensive income 10 (3)
Notes receivable from shareholders (250) (250)
Deferred Compensation -- (37)
-------- --------
Total shareholders' deficit (16,300) (14,853)
-------- --------
Total liabilities and shareholders' deficit $ 7,395 $ 8,634
======== ========
See Notes to Condensed Consolidated Financial Statements
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INTERNATIONAL MICROCOMPUTER SOFTWARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
----------------------- -----------------------
2001 2000 2001 2000
-------- -------- -------- --------
Net revenues $ 3,107 $ 2,968 $ 9,399 $ 14,883
Product costs 720 1,295 2,521 9,560
-------- -------- -------- --------
Gross margin 2,387 1,673 6,878 5,323
Costs and expenses:
Sales and marketing 800 749 1,971 5,034
General and administrative 1,047 1,833 3,029 6,726
Research and development 666 907 2,023 3,399
Restructuring charge -- (326) -- (464)
-------- -------- -------- --------
Total operating expenses 2,513 3,163 7,023 14,695
-------- -------- -------- --------
Operating income (loss) (126) (1,490) (145) (9,372)
Gain on product line sale -- 55 285 1,495
Interest and other expense, net (572) (286) (1,661) (1,810)
Loss on disposal of fixed assets (6) (1,834) (9) (1,834)
Loss on disposal of foreign subsidiaries -- (2,023) -- (2,023)
Settlement of fee agreement -- -- (187) --
Arbitration award -- (9) -- (2,610)
-------- -------- -------- --------
Loss before income taxes (704) (5,587) (1,717) (16,154)
Income tax provision (benefit) (14) 7 (21) 522
-------- -------- -------- --------
Loss before cumulative effect of change in
accounting principle (690) (5,594) (1,696) (16,676)
Cumulative effect of change in accounting
Principle -- -- (285) --
-------- -------- -------- --------
Net loss $ (690) $ (5,594) $ (1,981) $(16,676)
======== ======== ======== ========
Basic and diluted loss per share -
continuing Operations $ (.07) $ (.77) $ (.17) $ (2.34)
Basic and diluted loss per share -
cumulative effect of change in
accounting principle -- -- (.03) --
-------- -------- -------- --------
Basic and diluted net loss per share $ (.07) $ (.77) $ (.20) $ (2.34)
======== ======== ======== ========
Shares used in computing loss
per share 9,694 7,286 9,685 7,136
See Notes to Condensed Consolidated Financial Statements
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INTERNATIONAL MICROCOMPUTER SOFTWARE, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED MARCH 31, 2001 AND 2000
(IN THOUSANDS)
(UNAUDITED)
2001 2000
------- -------
Cash flows from operating activities:
Net cash (used) provided by operating activities $ 561 $(1,891)
------- -------
Cash flows from investing activities:
Proceeds from sale of product line 285 1,555
Purchase of equipment (352) (111)
Acquisition of software development and in-process
technologies -- (131)
Other (6) (4)
------- -------
Net cash provided (used) by investing activities (73) 1,309
------- -------
Cash flows from financing activities:
Credit line repayments -- (820)
Repayments of term loan (20) (750)
Repayment of capital lease obligations (149) (679)
Proceeds from issuance of common stock 11 28
------- -------
Net cash (used) provided by financing activities (158) (2,221)
------- -------
Effect of exchange rate changes on cash and cash equivalents 13 8
------- -------
Net increase (decrease) in cash and cash equivalents 343 (2,795)
Cash and cash equivalents at beginning of period 1,477 3,681
------- -------
Cash and cash equivalents at end of the period $ 1,820 $ 886
======= =======
SUPPLEMENTAL DISCLOSURES OF NON-CASH
FINANCING AND INVESTING ACTIVITIES
Conversion of long-term debt to common stock $ -- $ 500
See Notes to Condensed Consolidated Financial Statements
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INTERNATIONAL MICROCOMPUTER SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The interim condensed consolidated financial statements have been prepared from
the records of International Microcomputer Software, Inc. and Subsidiaries
("IMSI" or the "Company") without audit. In the opinion of management, all
adjustments, which consist only of normal recurring adjustments, necessary to
present fairly the financial position at March 31, 2001 and the results of
operations and cash flows for the three and nine months ended March 31, 2001 and
2000, have been made. The interim condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements and
notes thereto contained in IMSI's Annual Report on Form 10-K for the fiscal year
ended June 30, 2000. The results of operations for the three and nine months
ended March 31, 2001 and 2000 are not necessarily indicative of the results to
be expected for any other interim period or for the full year.
2. REALIZATION OF ASSETS
The financial statements have been prepared on a basis that contemplates IMSI's
continuation as a going concern and the realization of assets and liquidation of
liabilities in the ordinary course of business. The Company has an accumulated
deficit of $44,815,000 and negative working capital of $19,643,000 at March 31,
2001. In January 2000, IMSI ceased interest and principal payments on all
borrowings, debt or other interest bearing obligations, with the exception of
monthly interest payments to Union Bank of California on the non-revolving
reducing loan. Accordingly, the Company is in default of various covenants of
these agreements. Since February 18, 2000, the Company has operated under a
standstill agreement with its creditors that continues so long as IMSI
demonstrates progress in achieving a debt settlement acceptable to the
creditors. On May 4, 2001, IMSI presented a plan to Union Bank of California for
paying off its obligation, which was accepted contingent on IMSI attaining
forbearance or settlement agreements with its other creditors. The plan requires
an initial payment of $500,000, monthly payments of $150,000 beginning May 2001,
and quarterly payments of the Company's cash balance in excess of $1,000,000
through December 31, 2001. The Company's financial forecasts for this period
reflect the ability to make the required payments out of cash provided by
operations. There can be no assurance that IMSI will be successful in achieving
the goals set by the repayment plan and attaining agreements with its other
creditors. The uncertainty regarding the outcome of these matters raise
substantial doubt about IMSI's ability to remain a going concern for a
reasonable period of time. The financial statements do not include any
adjustments relating to the recoverability or classification of assets or the
amounts and classification of liabilities that might result from the outcome of
this uncertainty.
Management believes the combination of the last 15 months' actions and
initiatives is returning IMSI to profitability. However, IMSI acknowledges that
it is very unlikely that the Company can internally generate sufficient funds to
resolve its debt obligations in the foreseeable future. The Company's creditors
have stated that they will not extend the standstill period indefinitely, and
that IMSI must make every effort to resolve the situation.
Therefore, IMSI's continuation as a going concern depends upon the continued
forbearance of the creditors or the Company's ability to obtain adequate funds
to settle the debt. In March 2001, IMSI received new a proposal from independent
investors that included the possible purchase of a majority percentage of IMSI
stock conditioned upon an agreement by the Company's creditors to settle debt at
a discount. The proposal remains active, but has not been finalized pending an
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agreed-upon level of capital being raised. Although it has been unsuccessful
thus far in raising additional capital, IMSI continues to produce interest in
the investment community, and attracts proposals for investment from viable
sources. However, it is doubtful that an investment will be consummated within
fiscal year 2001.
3. REVENUE RECOGNITION
Revenue is recognized when earned and the Company applies 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 months. Revenue from hybrid products is allocated
to the underlying components based on the ratio of the value of each component
to the total price and each portion is recognized accordingly. Non-refundable
advanced payments received under license agreements are recognized as revenue
when the customer accepts the delivered software. Revenue from software licensed
to developers, including royalties earned in excess of non-refundable advanced
payments, is recorded as the developers ship products containing the licensed
software. Revenue from minimum guaranteed royalties in republishing agreements
is recognized ratably over the term of the agreement. Royalties in excess of the
guaranteed minimums are recognized when collected. Costs related to
post-contract customer support, which are minimal and include limited telephone
support and online maintenance for certain products, are accrued. Sales to
distributors permit limited rights of return upon termination or when a product
is defective. Reserves for returns, price discounts and rebates are estimated
using historical averages and a consideration of open return requests, channel
inventories, recent product sell-through activity and market conditions.
4. INVENTORIES
Inventories, consisting primarily of CD-ROMs, 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, 2001 June 30, 2000
-------------- -------------
Raw materials $ 202 $ 386
Finished goods 168 114
----- -----
370 500
Reserves for obsolescence (260) (311)
----- -----
Net Inventory $ 110 $ 189
===== =====
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5. SEGMENT INFORMATION
IMSI has three reportable operating segments based on sales markets. Two
geographic segments generate revenues and incur expenses related to the sale of
the Company's PC productivity software. The third segment comprises the revenues
and expenses related to ArtToday.com (formerly Zedcor, Inc.) the Company's
graphic design Internet subsidiary that was purchased in October 1998. The
following table details segment information (in thousands):
Quarter Ended March 31, 2001 ArtToday.com North America Other Foreign Eliminations Total
-----------------------------------
Net Revenues-external 778 2,269 60 -- 3,107
-internal -- -- -- -- --
Loss before taxes (35) (630) (39) -- (704)
Income tax expense (benefit) -- (16) 2 -- (14)
Loss before accounting change (35) (614) (41) -- (690)
Identifiable assets 2,324 6,453 205 (1,587) 7,395
Quarter Ended March 31, 2000
-----------------------------------
Net Revenues-external 840 1,948 180 -- 2,968
-internal -- -- -- -- --
Income (loss) before taxes 194 (5,629) (152) -- (5,587)
Income tax expense -- -- 7 -- 7
Net Income (loss) 194 (5,629) (159) -- (5,594)
Nine Months Ended March 31, 2001
-----------------------------------
Net Revenues-external 2,309 6,845 245 -- 9,399
-internal -- -- -- -- --
Income (loss) before taxes 107 (1,808) (16) -- (1,717)
Income tax benefit -- (11) (10) -- (21)
Income (loss) before accounting change 107 (1,797) (6) -- (1,696)
Identifiable assets 2,324 6,453 205 (1,587) 7,395
Nine Months Ended March 31, 2000
-----------------------------------
Net Revenues-external 2,147 8,028 4,709 -- 14,884
-internal -- 712 -- (712) --
Income (loss) before taxes (24) (16,191) 61 -- (16,154)
Income tax expense -- 503 19 -- 522
Net Income (loss) (24) (16,694) 42 -- (16,676)
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6. BASIC AND DILUTED EARNINGS PER SHARE
The weighted average numbers of shares outstanding (denominator) used to
calculate basic earnings per share are reconciled to the numbers of shares used
in calculating diluted earnings per share as follows:
Three Months Ended March 31, Nine Months Ended March 31,
---------------------------- ---------------------------
2001 2000 2001 2000
---- ---- ---- ----
Shares used to compute basic EPS 9,693,892 7,286,000 9,684,590 7,136,000
Add effect of dilutive securities:
Convertible Note 241,964 2,250,000 241,964 2,250,000
Warrants 1,124,291 298,000 1,124,291 298,000
Stock options 2,142,855 2,237,000 2,142,855 2,237,000
---------- ---------- ---------- ----------
Shares used to compute diluted EPS 13,203,002(1) 12,071,000(1) 13,193,700(1) 11,921,000(1)
========== ========== ========== ==========
(1) Not presented as inclusion of potentially dilutive securities would be
anti-dilutive.
7. COMPREHENSIVE INCOME (LOSS)
Comprehensive income includes changes in the balance of items that are reported
directly in a separate component of stockholders' equity on the condensed
consolidated balance sheets. The reconciliation of net loss to comprehensive
loss is as follows.
Three Months Ended March 31, Nine Months Ended March 31,
---------------------------- ---------------------------
2001 2000 2001 2000
---------- ----------- ---------- ----------
Net Loss $ (690) $ (5,594) $ (1,981) $(16,676)
Other comprehensive gain:
Foreign currency translation
adjustments 10 2 13 12
-------- -------- -------- --------
Total comprehensive loss $ (680) $ (5,592) $ (1,968) $(16,664)
======== ======== ======== ========
8. CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
In the second quarter of fiscal 2001, the Company adopted the provisions of
Emerging Issues Task Force Issue 00-27 ("EITF 00-27") "Application of EITF Issue
98-5, `Convertible Securities with Beneficial Conversion Features or
Contingently Adjustable Conversion Ratios,' to Certain Convertible
Instruments."" EITF 00-27 is effective for transactions with a commitment date
of November 16, 2000 forward, except for the provisions relative to embedded
conversion features of certain instruments that are effective for any such
instruments issued since May 20, 1999. EITF 00-27 requires companies to measure
the beneficial conversion feature using an effective conversion price.
Consequently, the conversion option embedded in a convertible instrument issued
with a detachable instrument, such as a warrant, may have intrinsic value even
if the conversion option is at-the-money or out-of-money at the commitment date.
In May 1999, IMSI issued a convertible debt instrument to BayStar Capital that
included an embedded beneficial conversion feature as determined under EITF
00-27. The result of applying EITF 00-27 to this instrument resulted in the
reporting of a cumulative effect of change in accounting principle in the amount
of $285,000 in the quarter ended December 31, 2000.
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9. CONTINGENCIES
During the quarter ended December 31, 2000, Imageline, Inc. alleged that during
the past year IMSI had committed additional infringements of Imageline's
copyrights. Imageline has neither taken any formal legal action to date with
respect to these allegations, nor has it set out with specificity the exact
nature of these alleged infringements. IMSI believes that these additional
claims are without merit, and if Imageline institutes legal action with respect
to them, intends to vigorously defend against them.
During the quarter ended March 31, 2001, the Company continued to have extensive
communications with Imageline in an attempt to reach an equitable settlement
with respect to all issues between the companies, but no final settlement has
been agreed to. Imageline, Inc. has refused to agree to a postponement of the
time within which IMSI had to file an appeal in the 9th Circuit Court of Appeals
of a decision by a Northern District of California Court, which affirmed the
original arbitration award. As a result, on April 16th, IMSI filed an opening
brief seeking to overturn the District Court decision.
In March 2001 the Company filed a complaint for unspecified damages for breach
of contract and indemnity against Xoom.com Inc., a Delaware Corporation, NBC
Internet Inc., a Delaware Corporation, and various unnamed parties to recover
damages resulting from the adverse Imageline arbitration ruling. The complaint
alleges that Xoom breached its license agreement with ArtToday.com, by: a)
providing ArtToday.com with a clip-art collection for which it did not have the
necessary rights, title, and interest; b) providing ArtToday.com with a clip-art
collections that was not free from claims of intellectual property rights of
others; and c) failing to defend, indemnify, and hold the Company harmless from
claims, losses, damages, costs, and expenses which arose out of the clip art
collection supplied by the defendants. The complaint further alleges that the
liability of the Company to Imageline resulted from the active omissions and
fault of the defendants and as such, the defendants are obligated to indemnify
for all losses sustained by the Company.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following information should be read in conjunction with the consolidated
financial statements and the notes thereto and in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations in
IMSI's Fiscal 2000 Form 10-K. This quarterly report on Form 10-Q, and in
particular this "Management's Discussion and Analysis of Financial Condition and
Results of Operations," contain forward-looking statements regarding future
events or the future performance of IMSI that involve certain risks and
uncertainties. Statements such as "anticipates", "foresees", "expects", "will",
"it is hoped", and other similar words and phrases indicate forward-looking
statements. Actual events or the actual future results of IMSI may differ
materially from any such forward-looking statements. 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
BACKGROUND OF FINANCIAL POSITION
In June 1999 IMSI announced a restructuring plan that was intended to end the
large losses and restore profitable operations. This plan included the
outsourcing of operations, consolidation of facilities, reduction of personnel
and the divestiture of non-core products. In January 2000, IMSI announced it was
taking more drastic actions to resolve the Company's very serious financial
problems. During fiscal 2000, IMSI accomplished the announced changes to reduce
costs. The
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Company was successful in selling products from non-core product lines to
generate cash. In August 1999, IMSI sold the rights to the Easy Language product
line for $1,700,000, and, in March 2000, the Company sold the rights to People
Scheduler for $55,000. In March 2000, IMSI executed republishing agreements with
firms in Europe and the United States to manufacture and sell IMSI products. As
part of these agreements, IMSI received $300,000 in guarantees, which the
Company is recognizing over the term of the agreements. These efforts have
helped to stabilize the Company's situation and result in a cash balance of
$1,820,000 at March 31, 2001.
Internet presence has been a key component of IMSI's business strategy since
restructuring. The Company maintains brand name recognition, evidenced by more
than 50% of visitors to the IMSI web site arriving as a result of a keyword
search by company name during the quarter ended March 31, 2001. Additionally,
approximately half of all visitors to the TurboCAD.com website located it
utilizing a keyword search by the product name. Unique visitors to the combined
sites of IMSI have increased approximately 25% since September 1, 2000, and
total monthly visits have increased approximately 160% during the same time
period. IMSI's wholly owned subsidiary, ArtToday.com, continues to achieve a
very high level of unique visitors each month, and registered its two-millionth
customer in March 2001.
TurboCAD Version 7, released in November 2000, continued to provide the largest
segment of IMSI's product revenues, contributing approximately $790,000 in sales
for the quarter ended March 31, 2001. Following the success of TurboCAD version
7.0, the Company launched its latest version of FloorPlan in March 2001. IMSI
continues to develop its products with Internet integration, and believes that
the technology in TurboCAD, in concert with Design.net and FloorPlan, will
provide the foundation for continued expansion in the precision design segment.
During the last month of the quarter ended March 31, 2001, IMSI announced the
addition of two new sales divisions: education and government. These divisions
will focus on expanding IMSI's retail sales, providing an increased user base
and brand loyalty among students and government agencies. The Company has had a
better than expected response to its marketing efforts, and foresees higher
average orders through site licensing into these markets.
RESULTS OF OPERATIONS
IMSI reported a net loss of $690,000 or ($0.07) per share for the quarter ended
March 31, 2001 and a net loss of $1,981,000 or ($0.20) for the nine months ended
March 31, 2001. This compares to a net loss of $5,594,000 or ($0.77) 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. The Company reported an
operating loss of $126,000 and $145,000 for the three and nine months ended
March 31, 2001, respectively. This compares to an operating loss of $1,490,000
and $9,372,000 for the three and nine months ended March 31, 2000.
NET REVENUES
Despite IMSI's financial problems, the Company achieved a sales increase of 5%
for the quarter ended March 31, 2001 as compared to the same period in the prior
fiscal year. This increase is due primarily to strong sales of TurboCAD version
7, which was released in November 2000, and the release of OrgPlus version 3.5
in the beginning of March 2001.
Net revenues for the three-month and nine-month periods ended March 31, 2001
were $3,107,000 and $9,399,000, respectively. This compares to net revenues of
$2,968,000 and $14,883,000 for the same periods in the previous fiscal year.
This change represents an increase in net revenues of approximately 5% for the
three-month period, and a decrease of approximately 37% for the nine-month
period. The decrease in sales was due to the Company's major change in strategy,
which was announced in January 2000. Management made the strategic decision to
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exit the retail software business, liquidate the Company's European and South
African subsidiaries, and consolidate domestic operations to reduce operating
losses and focus on Internet strategy. IMSI terminated all existing distributor
agreements and immediately ceased to support the retail business. As a result,
sales of all products decreased.
The following table summarizes product revenues in absolute dollars and as a
percentage of total net revenues for each of IMSI's principal product categories
for the periods indicated (dollars in thousands):
THREE MONTHS ENDED MARCH 31, NINE MONTHS ENDED MARCH 31,
------------------------------------------------ ----------------------------------------------
2001 2000 2001 2000
------------------------------------------------ ----------------------------------------------
$ % $ % $ % $ %
------------------------------------------------ ----------------------------------------------
PRECISION DESIGN $ 1,306 42% $ 592 20% $ 3,594 38% $ 4,703 32%
GRAPHIC DESIGN 1,082 35% 1,223 41% 3,658 39% 5,757 39%
BUSINESS APPLICATION 582 19% 471 16% 1,418 15% 4,265 29%
UTILITIES 33 1% 548 18% 894 10% 3,033 20%
OTHER PRODUCTS 152 5% 85 3% 217 2% 984 7%
PROVISION FOR RETURNS
AND REBATES NOT YET
RECEIVED $ (48) (2%) $ 48 2% $ (382) (4%) $ (3,857) (26%)
------------------------------------------------ ---------------------------------------------
NET REVENUES $ 3,107 100% $ 2,968 100% $ 9,399 100% $ 14,884 100%
================================================ =============================================
Product category revenues are shown gross of 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, which could cause actual results to differ materially
from estimates.
Revenues in the precision design category increased by $714,000, or 121%, to
$1,306,000 for the three-month period ended March 31, 2001, compared to the same
period in fiscal year 2000. For the nine-month period ended March 31, 2001,
precision design sales declined by $1,109,000, or 24%, to $3,594,000 compared to
the same period in fiscal year 2000. The increase of the three month period
ended March 31, 2001 compared to the same period in the prior fiscal year was
due to continued strong sales of TurboCAD, and the sales momentum generated by
the recent upgrade launch in November 2000. To achieve these increases IMSI
utilizes direct marketing. The Company expects that its direct marketing efforts
will attract new users, continue to maintain brand loyalty, and provide strong
upgrade sales to its existing users. The decline in sales for the nine months
ended March 31, 2001 as compared to the same period for the prior year is due to
IMSI's decision to exit the retail market and utilize direct marketing and
republishing in January 2000.
For the three and nine-month periods ended March 31, 2001, revenue in the
graphic design category decreased by $141,000 or 12% and $2,099,000 or 36%
respectively from the comparable periods in fiscal year 2000. The decline in
this category is due to decreased revenues from IMSI's primary product within
this category, MasterClips, in line with the Company's restructuring decision to
focus on core precision design products. IMSI now distributes its royalty-free
Masterclips images through a licensing agreement with Vivendi (formerly Havas
Interactive). Under the terms of this agreement, Vivendi has rights to
manufacture, sell, and distribute MasterClips exclusively in a worldwide
territory excluding Japan, and pays a percentage of its revenue to IMSI. Vivendi
has and continues to make advance cash payments to the Company that are recouped
against the percentage of revenues due IMSI, as sales are realized.
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On January 14, 2000, an arbitration ruling against IMSI pertaining to a dispute
with Imageline, Inc required IMSI to discontinue manufacturing and distributing
all Masterclips products containing Imageline, Inc images. This arbitration
ruling, combined with a continuing increase in competitive product offerings and
discount pricing in the visual content market, contributed to the falloff in
MasterClips sales. Revenues from IMSI's wholly owned subsidiary, ArtToday.com
are included in this category. Because ArtToday.com's revenues are based on
subscriptions, these amounts are initially deferred and then amortized over the
subscription period, generally 12 months. ArtToday.com contributed to sales with
$778,000 in net revenue during the quarter ended March 31, 2001 and $2,309,000
over the nine-month period ended March 31, 2001 as compared to $840,000 and
$2,147,000 during the same periods of the previous fiscal year.
Revenues in the business applications category increased by $111,000 or 24% and
decreased by $2,847,000 or 67% respectively in the three-month and nine-month
periods ended March 31, 2001 as compared to the same periods in fiscal year
2000. Sales of Flow!, FormTool, MasterPublisher, OrgPlus, Hijaak and
TurboProject contribute to this category. Maplinx was included in this category
in previous quarters; however, IMSI no longer sells this product. During the
fiscal quarter ended March 31, 2001, approximately 60% of revenues in this
category are attributable to OrgPlus, which IMSI continues to sell and develop
through an agreement with Human Concepts. This agreement allows IMSI to purchase
finished goods from Human Concepts at a substantial discount as a distributor.
IMSI also receives royalties from Human Concepts on all sales of OrgPlus,
including the sales from Human Concepts to IMSI. Human Concepts is owned in its
entirety by Mr. Martin Sacks, a former officer and board member of IMSI. At the
present time, Mr. Sacks owns 320,925 of the outstanding shares of IMSI. The
Company has liabilities on its balance sheet at March 31, 2001 payable to Martin
Sacks under a severance agreement that has not been signed by Mr. Sacks. In
March 2001 version 3.5 of OrgPlus was released, and generated close to $125,000
of gross sales revenue for the month, which represented approximately 21% of the
revenues in this category for the quarter. For the three-months ended March 31,
2001 approximately 22% of the revenues in this category were derived from sales
of Hijaak.
As outlined in IMSI's restructuring plan, the Company is no longer focusing its
marketing efforts on non-core products, which make up 4 of the 6 total products
in this category. However, IMSI plans to continue develop and support OrgPlus
and Hijaak, which maintain strong sales for this category.
For the three month period ended March 31, 2001, revenues in the utilities
category decreased by $515,000 or 94% as compared to the same period in fiscal
2000. For the nine-month period ended March 31, 2001, revenues in this category
decreased by $2,139,000 or 71% when compared to the same period ended March 31,
2000. This substantial decrease for the nine-months period is mainly due to the
discontinuance of Year 2000 Now, which was not a relevant product to consumers
subsequent to December 1999. Other products in this category are non-core, for
which IMSI has discontinued sales and development. Recognition of deferred
revenues from UpdateNow was the only source of revenue for this category in
Fiscal Year 2001. The deferred revenues recognized from past sales of this
product continue to decrease and will be completely recognized by July 31, 2001.
Revenues in the other category increased by $67,000, or 79% and decreased by
$767,000 or 78% respectively for the three-month and nine-month periods ended
March 31, 2001 as compared to the same period in fiscal year 2000. Rental of
IMSI's customer lists provided the majority of revenue for this category.
Companies that are not competitors of IMSI rent these lists for specific mailing
and ESD advertising campaigns. Third-party administrators manage the campaigns
and bar any direct access to the customer lists by rentees.
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The continuing trend of intense price competition also adversely affected sales
in most product categories. This trend had particular impact in
consumer-oriented software products such as FloorPlan and the Utilities
products.
Low barriers to entry, intense price competition, and continuing business
consolidations characterize the consumer software industry. Any one of these
factors may adversely affect revenues in the future. IMSI management believes
that its decision to reduce its reliance on the retail market has provided
insulation from unfavorable retail conditions, including erosion of margins from
competitive marketing and high rates of product returns. The Company continues
to be cognizant of competitive forces, and believes that its focus on Internet
design solutions will provide a solid foundation for future growth.
IMSI currently serves the domestic retail and international markets using
republishing agreements. These agreements may include such features as advance
and minimum guaranteed monthly payments against which royalties are recouped,
exclusive sales territories, and an agreement by IMSI to continue development
and localization for each product into the future.
To that extent, the Company granted to ValuSoft the exclusive rights to
reproduce and distribute its products in North America in exchange for royalty
payments based on net sales of these products. The agreement also provides for
minimum guaranteed royalty payments. Internationally, IMSI executed similar
exclusive republishing agreements. The Company granted the exclusive rights to
manufacture and distribute its products to ABSoft in France and French speaking
countries; MicroBasic in Germany, Austria and Switzerland; and MediaGold in all
other European countries, the Middle East and Africa. All of these international
republishing agreements call for royalty payments based on net sales with
minimum guaranteed payments.
IMSI alleges that MicroBasic, its German republisher, is in default under the
terms of the republishing agreement dated March 3, 2000, for failure to make
minimum royalty payments. MicroBasic notified IMSI on March 27, 2001 that it was
terminating the agreement and ceasing distribution of IMSI's products, and would
not fulfill its minimum payment obligations. It also stated that no legal action
will be sought against the Company for damages, but future liabilities from
retail returns will be the responsibility of IMSI. The Company may take legal
action against MicroBasic to recover guaranteed payments. Alternative
distribution partnerships for the German, Austrian, and Swiss markets will be
aggressively pursued in the future.
Revenues from domestic sales increased slightly to $2,799,000, or 89% of
revenues, for the three month period ended March 31, 2001, from $2,788,000 or
94% of revenues, for the comparable period in the previous fiscal year.
Revenues from international sales increased by $176,000, or 198% and were
$356,000, or 11% of net revenues for the three-month period ended March 31,
2001, compared to $180,000, or 6% of net revenues for the three months ended
March 31, 2000.
IMSI's international revenues in the three-month period ended March 31, 2001
were comprised of revenues from the Australian subsidiary, royalties received
from the international publishers, and sales to international customers. The
increase in the international revenues is due to IMSI's efforts to rebuild its
international sales after last fiscal year's shift in the revenue mix which was
the result of the Company's decision in January 2000 to close down its European
and South African subsidiaries. The liquidation of these subsidiaries resulted
in a loss of $2,023,000 from the write-off of the inter-company receivables and
investments in subsidiaries that the Company believes are not recoverable. This
loss was reflected in the Company's fiscal 2000 financial results.
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With the liquidation of the Company's European and South African subsidiaries,
the risks associated with transactions in foreign currencies have been
substantially reduced. Nonetheless, IMSI's operating results may be affected by
the risks customarily associated with international operations, including a
devaluation of the U.S. dollar, increases in duty rates, exchange or price
controls, longer collection cycles, government regulations, political
instability and changes in international tax laws.
PRODUCT COSTS
For the three months ended March 31, 2001, product costs decreased by $575,000
to $720,000 as compared to the same period in 2000. As a percentage of revenue,
product costs decreased from 44% to 23%, when compared to the same period in the
previous fiscal year. For the nine months ended March 31, 2001 product costs
decreased by $7,039,000 from $9,560,000 or 64% of net revenues to $2,521,000 or
27% of net revenues.
Product costs include the costs of CD-ROM duplication, printing of manuals,
packaging and fulfillment, freight-in, license fees, royalties that IMSI pays to
third parties based on sales of software, and amortization of capitalized
software acquisition and development costs. Costs associated with the return of
products, such as refurbishment and the write down in value of returned goods
are also included in product costs. The decrease in product costs in absolute
dollars and as a percentage of net revenues in the three-month and nine-month
periods ended March 31, 2001 was the result of the Company's change in strategy
with regard to the distribution channels. Direct costs associated with
materials, labor and warehousing were substantially reduced since IMSI has
shifted the manufacturing and distribution of a material portion of its sales to
republishers.
IMSI amortizes capitalized software development costs and license fees on a
product-by-product basis. The amortization for each product is the greater of
the amount computed using (a) the ratio of current gross revenues to the total
of current and anticipated future gross revenues for the product or (b) the
economic life of such product. Generally, capitalized software development costs
are amortized over a maximum of 18 to 36 months, and license fees are amortized
over a maximum of 36 months. For the nine-month period ended March 31, 2001,
amortization of non-advanced fees and amortization of capitalized software were
$547,000 and $459,000 respectively.
SALES AND MARKETING
Sales and marketing expenses for the three months ended March 31, 2001 increased
by $51,000 or 7% to $800,000 as compared to the same period in the previous
fiscal year. Sales and marketing expenses for the nine months ending March 31,
2001 decreased by $3,063,000 or 61% to $1,971,000 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, 2001,
were 26% and 21%, respectively, as compared with 26% and 34%, respectively, for
the previous fiscal year. Sales and marketing expenses consist primarily of
salaries and benefits of sales and marketing personnel, commissions, printing
and direct mail expenses. The slight increase in sales and marketing expenses
for the fiscal quarter just ended as compared to the same quarter of the
previous year was attributable to the increased direct marketing expenses
necessary to support the increased level of direct sales achieved during this
fiscal quarter as compared to the three-months ended March 31, 2000. IMSI's exit
from the retail business explains the large savings on sales and marketing
expenses incurred during the nine-month period ended March 31, 2001 as compared
to the same period of the previous fiscal year. The decrease in dollar and
percentage amounts is particularly due to a reduction in marketing expenses.
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GENERAL AND ADMINISTRATIVE
General and administrative expenses for the three and nine month periods ending
March 31, 2001 decreased by $786,000 or 43% to $1,047,000 and $3,697,000 or 55%
to $3,029,000, respectively, as compared to the same periods in the previous
fiscal year. As a percentage of net revenues, general and administrative
expenses for the three and nine-month periods ended March 31, 2001, were 34% and
32%, respectively. This compares to 62% and 45%, respectively, for the previous
fiscal year.
IMSI's general and administrative expenses consist primarily of the salaries and
benefits for employees in the legal, finance, accounting, human resources,
information systems and executive departments and fees to IMSI's legal and
professional advisors. Other amounts, such as rent and utilities, are allocated
based on the proportion of each department's payroll to gross company payroll.
The decrease in general and administrative expenses reflects IMSI's continuous
efforts to reduce expenses and improve profitability. These expenses were
substantially reduced during fiscal year 2000 when the Company consolidated its
operations in a downsizing effort that included employee layoffs and facility
closure in February 2000.
RESEARCH AND DEVELOPMENT
Research and development expenses for the three months ended March 31, 2001
decreased $241,000, or 27%, to $666,000; and, for the nine months ending March
31, 2001, decreased $1,376,000 or 40% to $2,023,000 when compared with the same
period in the previous fiscal year. As a percentage of net revenues, research
and development expenses for the three and nine-month periods ending March 31,
2001, were 21% and 22%, respectively, as compared with 31% and 23%,
respectively, for the previous fiscal year.
IMSI's research and development expenses consist primarily of salaries and
benefits for research and development employees and payments to independent
contractors mainly the product development team in Russia. The decrease in
absolute dollar amounts spent on research and development reflects cost
containment efforts related to the decrease in the number of products under
development as part of the streamlining of IMSI's product offerings. The steady
ratio of research and development expenses as a percentage of net revenues over
the nine-month periods ended March 31, 2000 and March 31, 2001 reflects the
Company's commitment to invest in research and development for its core
products, for its Internet subsidiary, ArtToday.com, and its new internet
division Design.net.
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, increased from $286,000 to $572,000 for the three month period
ended March 31, 2001 as compared to the same period of the previous fiscal year.
This increase is the result of additional penalties and interest the Company
accrued for as the result of the defaults of the BayStar and Silicon Valley Bank
obligations. For the nine-months ended March 31, 2001, other expense, net,
decreased from $1,810,000 to $1,661,000 from the previous fiscal year. Other
expense, net for the quarter ending March 31, 2001 includes $135,000 in
penalties owed to Bay Star related to registration requirements in the share
purchase agreements, $39,000 statutory interest to Imageline, Inc. relating to
the arbitration ruling and $342,000 of interest on short term borrowing to Union
Bank of California, Silicon Valley Bank and BayStar Capital and $13,000 of
lease-related interest.
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PROVISION FOR INCOME TAXES
IMSI has not recorded any tax benefit for its domestic tax losses because of the
uncertainty of realization. The Company adheres to Statement of Financial
Accounting Standards No. 109 "Accounting for Income Taxes," which requires an
asset and liability approach to financial accounting and reporting for income
taxes. Valuation allowances are established when necessary to reduce deferred
tax assets to the amount expected to be realized.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2001, IMSI had $1,820,000 in cash and cash equivalents, an
increase of $343,000 from the cash and cash equivalents balance of $1,477,000 at
June 30, 2000. Working capital declined by $644,000 from a negative $18,999,000
at June 30, 2000 to a negative $19,643,000 at March 31, 2001.
Despite the Company's loss from continuing operations of $1,981,000 for the nine
months ending March 31, 2001, operating activities generated net cash of
$561,000 during this period. The largest single item attributable to this
difference is the increase in accrued liabilities, predominantly unpaid interest
and penalties of $1,090,000. These penalties and interest are derived from
IMSI's notes payable to Union Bank of California, Silicon Valley Bank, and
Baystar, as well as the award against IMSI in the Imageline arbitration. IMSI
continues to pay only interest on its former Non-Revolving Line of Credit with
Union Bank without significant reduction in principal amounts.
Depreciation and amortization expense of $1,247,000, in conjunction with a
$631,000 decrease in prepaid royalties contributed the largest amount to the
remaining difference between cash provided by operations and the net loss for
the nine months. These amounts were partially offset by the recognition of
deferred revenues during the nine months of $1,174,000.
IMSI's investing activities during the nine months ended March 31, 2001 consumed
$73,000 of cash. The $285,000 of cash generated by the sale of domain names and
products was offset by $352,000 of capital expenditures, primarily by
ArtToday.com. These expenditures were made to purchase computers and related
equipment and to complete leasehold improvements at the new offices of
ArtToday.com. The Company expects that this investment in resources will support
the anticipated growth of ArtToday.com.
The Company's financing activities used net cash of $159,000 during the
nine-month period ended March 31, 2001. The majority of cash expended in this
category relates to payments for capital lease obligations. IMSI also paid down
the bank's non-revolving reducing loan (the former credit line) by $20,000.
The loans with Union Bank were due on September 30, 1999. A balance of
$4,580,000 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 could have a materially adverse
effect on IMSI's ability to continue as a going concern.
The financial statements have been prepared on a basis that contemplates IMSI's
continuation as a going concern and the realization of the Company's assets and
liquidation of IMSI's liabilities in the ordinary course of business. The
Company had an accumulated deficit of $44.8 million at March 31, 2001. IMSI is
also in default of various loan covenants. These matters, among others, raise
substantial doubt about IMSI's ability to remain a going concern for a
reasonable period of time. The financial statements do not include any
adjustments relating to the recoverability or classification of assets or the
amounts and classification of liabilities that might result from the
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outcome of this uncertainty. IMSI's continued existence is dependent on its
ability to obtain additional financing sufficient to allow it to meet its
obligations as they become due and to achieve profitable operations. See Note 2
to the condensed consolidated financial statements, "Realization of Assets."
IMSI will require additional working capital to meet its ongoing operating
expenses, to continue its technological development, to develop new products,
and to conduct other activities. Historically, IMSI has financed its working
capital and capital expenditure requirements primarily from retained earnings,
short-term and long-term bank borrowings, capitalized leases and sales of common
stock. During fiscal year 2000, IMSI relied primarily on the collection of
receivables and sales of non-core product lines to fund operations. During
fiscal year 2001, the Company has generated all cash necessary for daily
operations and interest payments on its senior debt, but inadequate to
substantially reduce past obligations. A more aggressive cost containment plan
beginning in May 2001 should provide funds for senior debt repayment. The major
elements of the plan include reductions of 20-45% in executive compensation,
salary reductions for non-executive employees of up to 10%, and significant
curbing of consulting expenses.
The forecast period of time through which the Company's financial resources will
be adequate to support working capital and capital expenditure requirements is a
forward-looking statement that involves risks and uncertainties, and actual
results could vary. IMSI can provide no assurance that needed financing will be
available. Furthermore, any additional equity financing, if available, may be
dilutive to shareholders, and debt financing, if available, may involve
restrictive covenants. If IMSI fails to raise capital when needed, then lack of
capital will have a materially adverse effect on IMSI's business, operating
results, financial condition and ability to continue as a going concern.
IMSI had no material commitments for capital expenditures as of March 31, 2001.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
IMSI is exposed to the impact of interest rates and, to a very minor degree,
foreign currency fluctuations. IMSI's objective in managing 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 overall borrowing
costs. IMSI's major market risk exposure is changing interest rates in the
United States, which would change interest expense on the non-revolving,
reducing loan. IMSI does not hedge foreign currency risk.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
During the quarter ended December 31, 2000, Imageline, Inc. alleged that during
the past year IMSI had committed additional infringements of Imageline's
copyrights. Imageline has neither taken any formal legal action to date with
respect to these allegations, nor has it set out with specificity the exact
nature of these alleged infringements. IMSI believes that these additional
claims are without merit, and if Imageline institutes legal action with respect
to them, intends to vigorously defend against them.
During the quarter ended March 31, 2001, the Company continued to have extensive
communications with Imageline in an attempt to reach an equitable settlement
with respect to all issues between the companies, but no final settlement has
been agreed to. Imageline, Inc. has refused to agree to a postponement of the
time within which IMSI had to file an appeal in the 9th Circuit Court of Appeals
of a decision by a Northern District of California Court, which affirmed the
original arbitration award. As a result, on April 16th, IMSI filed an opening
brief seeking to overturn the District Court decision.
In March 2001 the Company filed a complaint for unspecified damages for breach
of contract and indemnity against Xoom.com Inc., a Delaware Corporation, NBC
Internet Inc., a Delaware Corporation, and various unnamed parties to recover
damages resulting from the adverse Imageline arbitration ruling. The complaint
alleges that Xoom breached its license agreement with ArtToday.com, by: a)
providing ArtToday.com with a clip-art collection for which it did not have the
necessary rights, title, and interest; b) providing ArtToday.com with a clip-art
collections that was not free from claims of intellectual property rights of
others; and c) failing to defend, indemnify, and hold the Company harmless from
claims, losses, damages, costs, and expenses which arose out of the clip art
collection supplied by the defendants. The complaint further alleges that the
liability of the Company to Imageline resulted from the active omissions and
fault of the defendants and as such, the defendants are obligated to indemnify
for all losses sustained by the Company.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
IMSI is in default of the Company's non-revolving reducing loan to Union Bank of
California, the three year subordinated loan facility with Silicon Valley Bank
and the subordinated note with BayStar Capital L.P. See Note 4 to the
consolidated financial statements, in the Fiscal 2000 form 10-K. As of March 31,
2001, the principle amounts outstanding on these securities were: Union Bank of
California, $4,580,000; Silicon Valley Bank, $2,500,000; and Baystar Capital,
$4,500,000.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
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ITEM 5. OTHER INFORMATION
No information pursuant to Item 5 for the quarter ended March 31, 2001.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS
No report on Form 8-K was filed during the quarter ended March 31, 2001.
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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 14, 2001 INTERNATIONAL MICROCOMPUTER SOFTWARE, INC.
By: /s/ GEOFFREY KOBLICK
--------------------------------------
Geoffrey Koblick
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ JEFFREY MORGAN
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Jeffrey Morgan
Chief Financial Officer
(Principal Accounting Officer)
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