-----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, KSQoepHTCcc/mC6AVmZuGd0twLRretlMQ0FSDd0kicCrUGJ01siY/n8rWawG3wKl vovmvRQcmeJWDI/NojggSw== 0000950149-02-000292.txt : 20020414 0000950149-02-000292.hdr.sgml : 20020414 ACCESSION NUMBER: 0000950149-02-000292 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020214 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: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-15949 FILM NUMBER: 02549509 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 10QSB 1 f79267e10qsb.txt QUARTER REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington D.C. 20549 FORM 10-QSB [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended DECEMBER 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 February 7, 2001, 10,212,328 shares of Registrant's common stock, no par value, were outstanding. INTERNATIONAL MICROCOMPUTER SOFTWARE, INC. AND SUBSIDIARIES INDEX PART I -- FINANCIAL INFORMATION 3 ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 3 CONDENSED CONSOLIDATED BALANCE SHEETS 3 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS 4 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS 5 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 12 PART II - OTHER INFORMATION 25 ITEM 1. LEGAL PROCEEDINGS 25 ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 25 ITEM 3. DEFAULTS UPON SENIOR SECURITIES 25 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 25 ITEM 5. OTHER INFORMATION 25 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 25 SIGNATURES 26 EXHIBIT INDEX 27
2 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)
(UNAUDITED) (RESTATED) ------------ ------------- DECEMBER 31, 2001 JUNE 30, 2001 ------------ ------------- ASSETS Current assets: Cash and cash equivalents: $ 1,183 $ 1,268 Receivables, less allowances for doubtful accounts, discounts and returns of $221 and $182 1,140 1,256 Inventories 299 176 Prepaid royalties and licenses 83 229 Other current assets 328 382 -------- -------- TOTAL CURRENT ASSETS 3,033 3,311 Fixed assets, net 461 600 Capitalized software development costs, net 1,055 1,351 Other assets, net 1,069 1,229 -------- -------- TOTAL ASSETS $ 5,618 $ 6,491 ======== ======== LIABILITIES AND SHAREHOLDERS' DEFICIT Current liabilities: Current portion long-term debt $ 2,188 $ 11,927 Note payable to related party 3,730 -- Trade accounts payable 2,191 2,658 Accrued interest and penalties payable 42 2,293 Accrued and other liabilities 2,684 2,741 Accrued arbitration award-current 119 131 Deferred revenue 1,600 1,378 -------- -------- TOTAL CURRENT LIABILITIES 12,554 21,128 Accrued arbitration award 696 702 Long term debt and other obligations 424 231 -------- -------- TOTAL LIABILITIES 13,674 22,061 Shareholders' deficit: Common stock, no par value; 300,000,000 authorized; Issued and outstanding 10,212,328 and 9,695,740 shares 29,737 29,089 Accumulated deficit (37,789) (44,666) Accumulated other comprehensive income (loss) (4) 7 -------- -------- TOTAL SHAREHOLDERS' DEFICIT (8,056) (15,570) -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $ 5,618 $ 6,491 ======== ========
See Notes to Condensed Consolidated Financial Statements 3 INTERNATIONAL MICROCOMPUTER SOFTWARE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) (Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED DECEMBER 31, DECEMBER 31, -------------------------- ----------------------- 2001 2000 2001 2000 (RESTATED) (RESTATED) ------- ---------- ------- ---------- Net revenues $ 3,656 $ 3,370 $ 6,320 $ 6,630 Product costs 812 851 1,521 1,810 ------- ------- ------- ------- Gross margin 2,844 2,519 4,799 4,820 Costs and expenses: Sales and marketing 811 847 1,509 1,571 General and administrative 1,298 1,145 2,503 2,232 Research and development 566 714 1,208 1,420 ------- ------- ------- ------- Total operating expenses 2,675 2,706 5,220 5,223 ------- ------- ------- ------- Operating income (loss) 169 (187) (421) (403) Gain on product line sale 20 -- 20 285 Interest and other, net (62) (534) (490) (1,089) Gain (loss) on disposition of fixed assets 8 1 1 (3) Distribution to affiliated company (200) -- (200) -- Settlement of fee agreement -- -- -- (187) ------- ------- ------- ------- LOSS BEFORE INCOME TAX AND EXTRAORDINARY ITEM (65) (720) (1,090) (1,397) Income tax provision (benefit) 1 2 3 (6) ------- ------- ------- ------- LOSS BEFORE EXTRAORDINARY ITEM (66) (722) (1,093) (1,391) Extraordinary item - gain on forgiveness of debt 2,243 -- 7,970 -- Cumulative effect of change in accounting principle -- (285) -- (285) ------- ------- ------- ------- ------- ------- ------- ------- NET INCOME (LOSS) $ 2,177 $(1,007) $ 6,877 (1,676) ======= ======= ======= ====== Basic and diluted loss per share before extraordinary item $ (0.01) $ (0.07) $ (0.11) $ (0.14) Basic and diluted earnings (loss) per share -- extraordinary item $ 0.23 $ (0.03) $ 0.82 $ (0.03) Basic and diluted earnings (loss) per share $ 0.22 $ (0.10) $ 0.70 $ (0.17) Shares used in computing earnings (loss) per share information 9,810 9,694 9,760 9,680
See Notes to Condensed Consolidated Financial Statements 4 INTERNATIONAL MICROCOMPUTER SOFTWARE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)
SIX MONTHS ENDED DECEMBER 31, ------------------------- 2001 2000 (RESTATED) ------- --------------- Cash flows from operating activities: Net cash provided by operating activities $ 443 $ 138 ------- ------- Cash flows from investing activities: Proceeds from product line and domain name sales 20 285 Purchase of equipment and furniture (24) (328) Software development costs (10) (40) Acquisition of subsidiary from affiliated company (50) -- Additions to other assets (3) -- ------- ------- Net cash used by investing activities (67) (83) ------- ------- Cash flows from financing activities: Credit line borrowings 141 -- Increase in notes payable -- 95 Repayment of term loans (550) (20) Repayment of capital lease obligations (159) (98) Capital contributions 116 -- Proceeds from issuance of common stock 2 46 ------- ------- Net cash used by financing activities (450) 23 ------- ------- Effect of exchange rate change on cash and cash equivalents (11) 3 Net increase (decrease) in cash and cash equivalents (85) 81 Cash and cash equivalents at beginning of period 1,268 1,775 ------- ------- Cash and cash equivalents at end of the period $ 1,183 $ 1,856 ======= ======= SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES Note payable arising from acquisition of Keynomics $ 150
See Notes to Condensed Consolidated Financial Statements 5 INTERNATIONAL MICROCOMPUTER SOFTWARE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The interim condensed consolidated financial statements have been prepared from the records of International Microcomputer Software, Inc. and Subsidiaries ("IMSI") without audit. In the opinion of management, all adjustments, which consist only of normal recurring adjustments, necessary to present fairly the financial position at December 31, 2001 and the results of operations and cash flows as of and for the three and six months ended December 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 our Annual Report on Form 10-K for the fiscal year ended June 30, 2001. The results of operations for the three and six months ended December 31, 2001 are not necessarily indicative of the results to be expected for any other interim period or for the full year. On October 1, 2001, we acquired 100% of the outstanding shares of Keynomics, Inc. a productivity software company (see Footnote #9). Keynomics was acquired from Digital Creative Development Corporation (DCDC). At the time of the acquisition, the IMSI board of directors was identical to the DCDC board of directors, with the exception of Robert Mayer, a board member of IMSI only. Additionally, Martin Wade served as the Chief Executive Officer and Vincent DeLorenzo served as the Chief Financial Officer of both companies. Consequently, the acquisition has been treated as a transfer between entities under common control. We have restated the financial statements for all prior periods to reflect the acquisition as of the beginning of the periods presented. 2. REALIZATION OF ASSETS The financial statements have been prepared on a basis that contemplates our continuation as a going concern and the realization of assets and liquidation of liabilities in the ordinary course of business. We have an accumulated deficit of $37,789 and negative working capital of $9,521 as of December 31, 2001. Our large accumulated losses and the negative amount of shareholders' equity as of December 31, 2001 make it difficult for us to obtain new debt financing or to obtain equity financing at attractive prices. In addition, it is likely that we will require additional capital, through equity or financing arrangements. 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. 3. SIGNIFICANT CHANGES IN OTHER ASSETS We reached a settlement with Broderbund during the quarter ended December 31, 2001 for the outstanding issues related to our acquisition of OrgPlus from The Learning Company (predecessor of Broderbund). Simultaneously, we entered into an agreement with Human Concepts in which we transferred ownership of OrgPlus in exchange for royalties based on a percentage of their revenues and distribution rights. As a consequence of these agreements, we recorded a new intangible asset, Capitalized Distribution Rights, in the amount of $755,000. The basis for Capitalized Distribution Rights is composed of the following: 6
EFFECT ON CAPITALIZED DESCRIPTION OF TRANSACTION DISTRIBUTION RIGHTS - ------------------------------------------------------------------------------------------------------------------------- Reclassification of remaining basis in OrgPlus from Goodwill and Capitalized Brand $675,000 Agreement to pay advances to Human Concepts for rights to distribute OrgPlus 270,000 Grant to Broderbund of credit against future royalties 250,000 Agreement to pay settlement for all amounts owed (four quarterly payments beginning August 2002) 160,000 Grant to Broderbund of 800,000 names to use for 4 mailings 76,000 Broderbund return of 200,000 shares at $0.26 per share previously issued for the acquisition of OrgPlus (52,000) Release of liabilities on our books to Broderbund and its predecessors (624,000) --------- Total increase in Capitalized Distribution Rights: $ 755,000 =========
Capitalized Distribution Rights are being amortized over a period of 48 months, the initial period of the distribution agreement with Human Concepts. 4. SEGMENT INFORMATION We have four reportable operating segments based on the sales market. Two of these are geographic segments and generate revenues and incur expenses related to the sale of our PC productivity software. The third and forth segments comprise the revenues and expenses related to ArtToday.com, our graphic design Internet subsidiary and to Keynomics our newly acquired business applications subsidiary. The following table details segment information as follows (in thousands):
ARTTODAY NORTH OTHER ELIMIN- .COM KEYNOMICS AMERICA FOREIGN ATIONS TOTAL QUARTER ENDED DECEMBER 31, 2001 - ---------------------------------- ------- --------- ------- ------- ------- ------- Net Revenues-external $ 1,043 $ 587 $ 1,887 $ 139 -- $ 3,656 Operating income (loss) 327 253 (424) 13 -- 169 Identifiable assets 1,394 243 4,254 (123) (150) 5,618 QUARTER ENDED DECEMBER 31, 2000 - ---------------------------------- ------- ----- ------- ----- ------- ------- Net Revenues-external $ 722 $ 136 $ 2,439 $ 73 -- $ 3,370 Operating income (loss) (42) (208) 53 10 -- (187) Identifiable assets 1,125 374 6,832 (12) (151) 8,168 SIX MONTHS ENDED DECEMBER 31, 2001 - ---------------------------------- ------- ----- ------- ----- ------- ------- Net Revenues-external $ 1,930 $ 677 $ 3,432 $ 281 -- $ 6,320 Operating income (loss) 606 4 (1,063) 32 -- (421) Identifiable assets 1,394 243 4,254 (123) (150) 5,618 SIX MONTHS ENDED DECEMBER 31, 2000 Net Revenues-external 1,531 337 4,577 185 -- 6,630 Operating income (loss) 44 (385) (87) 25 -- (403) Identifiable assets 1,125 374 6,832 (12) (151) 8,168
7 5. EARNINGS (LOSS) PER SHARE Earnings (loss) per share are computed by dividing net earnings (loss) by the weighted average number of common shares outstanding for the period. The following table summarizes the weighted average shares outstanding:
THREE MONTHS ENDED 12/31 SIX MONTHS ENDED 12/31 2001 2000 2001 2000 ---------- --------- ---------- ----------- Weighted Average Shares Outstanding 9,809,876 9,693,892 9,760,325 9,680,040 Total Stock Options Outstanding (1) 1,800,162 2,123,271 1,800,162 2,123,271 Less: Stock Options that are out of the money (1,621,492) (2,113,648) (1,621,492) (2,113,648) Total Warrants Outstanding (1) 2,821,791 714,291 2,821,791 714,291 Less: Warrants that are out of the money (2,393,577) (707,105) (2,393,577) (707,105) ---------- --------- ---------- ---------- Diluted Weighted Average Shares Outstanding 10,416,760 9,710,701 10,367,209 9,696,849
(1) A total of 4,621,953 and 2,837,562 potentially dilutive securities for the quarters ending December 31, 2001 and 2000 respectively, have been excluded from the computation of earnings (loss) per share, as their inclusion would be anti-dilutive. 6. COMPREHENSIVE INCOME (LOSS) Comprehensive income includes changes in the balance of items that are reported directly in a separate component of shareholders' equity on the condensed consolidated balance sheets. The reconciliation of net income (loss) to comprehensive income (loss) is as follows.
THREE MONTHS ENDED DECEMBER 31, SIX MONTHS ENDED DECEMBER 31, 2001 2000 (RESTATED) 2001 2000 (RESTATED) ------- --------------- -------- --------------- Net Income (Loss) $ 2,177 $(1,007) 6,877 $(1,676) Foreign currency translation adjustments (16) 1 (12) 4 TOTAL COMPREHENSIVE GAIN (LOSS) $ 2,161 $(1,006) $ 6,865 $(1,672)
7. NEW ACCOUNTING STANDARDS In June 2001, the Financial Accounting Standards Board adopted SFAS No. 142 Goodwill And Intangible Assets. SFAS No. 142 addresses the methods used to amortize intangible assets and to assess impairment of those assets, including goodwill resulting from business combinations accounted for under the purchase method. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001, except for the non-amortization provisions of the statement, which are effective for business combinations completed after June 30, 2001. Included in our assets at December 31, 2001, is goodwill with a net carrying value of $133,000 related to the acquisition of ArtToday.com. OrgPlus goodwill, which was included in this category prior to this quarter, was transferred to capitalized distribution rights in conjunction with the settlement of our software license and distribution agreement with Broderbund and concurrent software assignment, license and distribution agreements with Human Concepts. Upon adoption of SFAS No. 142, we will no longer amortize goodwill related to ArtToday.com, decreasing amortization expense by approximately $81,000 in fiscal 2003. We are required to assess this 8 goodwill for impairment in the year of adoption. We do not expect the adoption of SFAS No. 142 to have a material effect on our financial condition or results of operation. In 2001, the FASB issued SFAS 143, Accounting for Asset Retirement Obligations. SFAS 143 applies to all entities that have legal obligations associated with the retirement of a tangible long-lived asset. SFAS 143 requires that a liability for an asset retirement obligation be recognized if the obligation meets the definition of a liability in FASB Concepts Statement 6, Elements of Financial Statements, and if the amount of the liability can be reasonably estimated. When a retirement obligation is initially recognized, the asset retirement cost is capitalized by increasing the carrying amount of the related long-lived asset by an amount equal to the liability. The initial recording of the obligation should be at fair market value. SFAS 143 is effective for fiscal years beginning after June 15, 2002, but earlier application is encouraged The Company does not expect this statement to have a material effect on its financial statements. In 2001, the FASB issued SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS 144 supersedes SFAS 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of, as well as the provisions of APB Opinion 30, Reporting the Results of Operations -- Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, that address the disposal of a business. SFAS 144 also amends ARB 51, Consolidated Financial Statements, to eliminate the exception to consolidate a subsidiary for which control is likely to be temporary. SFAS 144 carries over the recognition and measurement provisions of SFAS 121, but differs from SFAS 121 in that it provides guidance for estimating future cash flows to test recoverability. SFAS 144 also includes criteria that have to be met for an entity to classify a long-lived asset or asset group as held for sale, and extends the presentation of discontinued operations permitted by Opinion 30 to include disposals of a component of an entity. SFAS 144 is effective for fiscal years beginning after December 15, 2001, except for the disposal provisions, which are immediately effective. We do not expect the adoption of SFAS No. 144 to have a material effect on our financial condition or results of operation. 8. EXTRAORDINARY ITEMS During the fiscal quarter ended December 31, 2001, we recognized $2,243,000 gain from forgiveness of debt. $2,062,000 was related to the forgiveness of a portion of the principal and accrued interest on the Silicon Valley Bank note. $140,000 was related to the forgiveness of amounts payable to Light Work Design and $40,500 was related to the forgiveness of amounts payable to Microsoft. Light Work Design and Microsoft are two unsecured creditors that were owed royalties. In the quarter ended September 30, 2001, we recorded an extraordinary gain of $5,727,000 related to the forgiveness of debt to BayStar Capital and DelRay Technologies. BayStar Capital agreed to settle for 10% of the principal and accrued interest and penalties outstanding. Payments are to be made in four quarterly installments beginning September 30, 2002, with interest accruing at the rate of 8% per annum from August 31, 2001 to the date of the first installment. Thereafter, the interest rate is 12% per annum until the note is paid in full on or before June 30, 2003. DelRay Technologies agreed to a one-time payment of $20,000 as settlement in full of its outstanding claim. These combined transactions resulted into an aggregate forgiveness of debt gain of $7,970,000 for the six-month period ended December 31, 2001. 9. RELATED PARTIES TRANSACTIONS (KEYNOMICS ACQUISITION) On November 29, 2001, we entered into a stock purchase agreement to acquire all issued and outstanding shares of capital stock of Keynomics, a California corporation focused on productivity enhancement 9 software and wholly owned and controlled by DCDC. At the time of the acquisition, the IMSI board of directors was identical to the DCDC board of directors, with the exception of Robert Mayer, a board member of IMSI only. Additionally, Martin Wade served as the Chief Executive Officer and Vincent DeLorenzo served as the Chief Financial Officer of both companies. Consequently, the acquisition has been treated as a transfer between entities under common control. We have restated the financial statements for all prior periods to reflect the acquisition as of the beginning of the periods presented. The boards of directors of IMSI, DCDC and Keynomics approved the transaction. The total aggregate purchase price of Keynomics was $200,000 payable in installments to DCDC. As of December 31, 2001, $50,000 had been paid. This purchase price was based on the determination of the board of directors and management of DCDC, Keynomics and IMSI. The stock purchase agreement also calls for potential payments in the future to DCDC depending on Keynomics' performance. These amounts, payable 60 days after the end of the next three fiscal years, consist of 50% of Keynomics' net operating income, if any, in excess of: - $500,000 in the fiscal year ending June 30, 2003 - $1,000,000 in the fiscal year ending June 30, 2004 - $1,500,000 in the fiscal year ending June 30, 2005 Furthermore, potential payments may be due DCDC if we sell substantially all of the capital stock or substantially all of the assets of Keynomics within six months following the closing of the deal. Such payments would consist of fifty percent of any amount in excess of $1.2 million. As of the date of the purchase, Keynomics had $245,000 of promissory notes outstanding. Subsequent to the execution of the stock purchase agreement, holders of an aggregate $225,000 of the outstanding notes agreed to convert them into 661,765 shares of IMSI's capital stock at $0.34 per share. Gordon Landies, our president, and Paul Jakab, our Chief Operating Officer, received 192,079 and 10,232 shares of IMSI's capital stock, respectively, in exchange for their outstanding promissory notes from Keynomics. Joe Abrams, an IMSI related party, received 287,389 shares in exchange for his outstanding promissory note to Keynomics. Mr. Abrams holds IMSI stock options and warrants, which if exercised, would result in ownership exceeding 5% of the total shares outstanding. The following tables summarize the effect of the acquisition of Keynomics on IMSI's Balance Sheet, Statement of Operations, and Statement of Cash Flows:
DECEMBER 31, 2001 JUNE 30, 2001 ------------------------------------------------------------------------------- BALANCE SHEET (IN THOUSANDS) BEFORE AFTER BEFORE AFTER ACQUISITION KEYNOMICS ACQUISITION ACQUISITION KEYNOMICS ACQUISITION ----------- --------- ----------- ----------- --------- ----------- ASSETS Current assets 2,856 177 3,033 2,875 436 3,311 Long term assets 2,518 67 2,585 3,113 67 3,180 TOTAL ASSETS 5,374 244 5,618 5,988 503 6,491 LIABILITIES AND SHAREHOLDERS' DEFICIT Current Liabilities 12,154 400 12,554 20,354 774 21,128 Long term liabilities 1,067 53 1,120 880 53 933 TOTAL LIABILITIES 13,221 453 13,674 21,234 827 22,061 TOTAL SHAREHOLDERS' DEFICIT (7,847) (209) (8,056) (15,246) (324) (15,570) TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT 5,374 244 5,618 5,988 503 6,491
10
THREE MONTHS ENDED DECEMBER 31, THREE MONTHS ENDED DECEMBER 31, 2001 2000 ----------------------------------------------------------------------------- STATEMENTS OF OPERATIONS (IN THOUSANDS) BEFORE AFTER BEFORE AFTER ACQUISITION KEYNOMICS ACQUISITION ACQUISITION KEYNOMICS ACQUISITION ----------- --------- ----------- ----------- --------- ----------- Net revenues 3,069 587 3,656 3,234 136 3,370 Product costs 803 9 812 845 6 851 Gross margin 2,266 578 2,844 2,389 130 2,519 Total operating expenses 2,350 325 2,675 2,368 338 2,706 Operating income (loss) (84) 253 169 21 (208) (187) Other Income / Expense (230) (4) (234) (533) -- (533) INCOME (LOSS) BEFORE INCOME TAX AND EXTRAORDINARY ITEM (314) 249 (65) (512) (208) (720) Income tax provision (benefit) 1 -- 1 2 -- 2 INCOME (LOSS) BEFORE EXTRAORDINARY ITEM (315) 249 (66) (514) (208) (722) Extraordinary item - gain on forgiveness of debt 2,243 -- 2,243 -- -- -- Cumulative effect of change in accounting principle -- -- -- (285) -- (285) NET INCOME (LOSS) 1,928 249 2,177 (799) (208) (1,007)
SIX MONTHS ENDED DECEMBER 31, SIX MONTHS ENDED DECEMBER 31, 2001 2000 ----------------------------------------------------------------------------- STATEMENTS OF OPERATIONS (IN THOUSANDS) BEFORE AFTER BEFORE AFTER ACQUISITION KEYNOMICS ACQUISITION ACQUISITION KEYNOMICS ACQUISITION ----------- --------- ----------- ----------- --------- ----------- Net revenues 5,643 677 6,320 6,293 337 6,630 Product costs 1,512 9 1,521 1,802 8 1,810 Gross margin 4,131 668 4,799 4,491 329 4,820 Total operating expenses 4,557 663 5,220 4,509 714 5,223 Operating income (loss) (425) 4 (421) (18) (385) (403) Other Income / Expense (664) (5) (669) (994) -- (994) INCOME (LOSS) BEFORE INCOME TAX AND EXTRAORDINARY ITEM (1,089) (1) (1,090) (1,012) (385) (1,397) Income tax provision (benefit) 3 -- 3 (6) -- (6) INCOME (LOSS) BEFORE EXTRAORDINARY ITEM (1,092) (1) (1,093) (1,006) (385) (1,391) Extraordinary item - gain on forgiveness of debt 7,970 -- 7,970 -- -- -- Cumulative effect of change in accounting principle -- -- -- (285) -- (285) NET INCOME (LOSS) 6,878 (1) 6,877 (1,291) (385) (1,676)
11
SIX MONTHS ENDED DECEMBER 31, 2001 SIX MONTHS ENDED DECEMBER 31, 2000 ------------------------------------- ------------------------------------- STATEMENT OF CASH FLOWS (IN THOUSANDS) BEFORE KEYNOMICS AFTER BEFORE KEYNOMICS AFTER ACQUISITION ACQUISITION ACQUISITION ACQUISITION ----------- --------- ----------- ----------- --------- ----------- Net cash provided (used) by operating activities 591 (148) 443 447 (309) 138 Net cash provided (used) by investing activities (61) (6) (67) (24) (59) (83) Net cash provided (used) by financing activities (566) 116 (450) (107) 130 23 Effect of exchange rate change on cash and cash equivalents (11) -- (11) 3 -- 3 Net increase (decrease) in cash and cash equivalents (47) (38) (85) 319 (238) 81 Cash and cash equivalents at beginning of period 1,230 38 1,268 1,477 298 1,775 Cash and cash equivalents at end of the period 1,183 -- 1,183 1,796 60 1,856
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 our Fiscal 2001 Form 10-K. This quarterly report on Form 10-QSB, 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 our future performance. These future events and future performance involve certain risks and uncertainties including those discussed in the "Other Factors That May Affect Future Operating Results" section of this Form 10-QSB, as well as in our Fiscal 2001 Form 10-K, as filed with the Securities and Exchange Commission ("SEC"). Actual events or our actual future results may differ materially from any forward-looking statements due to such risks and uncertainties. We assume 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. RECENT EVENTS KEYNOMICS ACQUISITION On November 29, 2001, we entered into a stock purchase agreement with DCDC to acquire all issued and outstanding shares of capital stock of Keynomics, a California corporation focused on productivity enhancement software and wholly owned and controlled by DCDC. We pursued this acquisition in order to benefit from the online technology that Keynomics has developed. In addition, we plan on integrating sales and marketing for Keynomics which may result in future cost savings and synergies in corporate sales. Incorporated in April 2000, Keynomics provides ergonomic and key boarding training for Fortune 1000 companies for worker-enhanced safety, productivity and ergonomic compliance improvements. Keynomics currently offers "The KeySoft Performance System" in its server and ASP versions as its core products. The company's mission is to reduce corporate keyboarding costs and risks and provide significant long-term savings through ergonomic and productivity training and awareness. The transaction was accounted for as a transfer between entities under common control. The total aggregate purchase price of Keynomics was $200,000 payable in installments to DCDC. As of December 31, 2001, $50,000 had been paid. The stock purchase agreement also calls for potential payments in the future to DCDC depending on Keynomics' performance. These amounts, payable 60 days after the end of the next three fiscal years, consist of 50% of Keynomics' net operating income, if any, in excess of: 12 - - $500,000 in the fiscal year ending June 30, 2003 - - $1,000,000 in the fiscal year ending June 30, 2004 - - $1,500,000 in the fiscal year ending June 30, 2005 Furthermore, potential payments may be due DCDC if we sell substantially all of the capital stock or substantially all of the assets of Keynomics within six months following the closing of the deal. Such payments would consist of fifty percent of any amount in excess of $1.2 million. As of the date of the purchase, Keynomics had $245,000 of promissory notes outstanding. Subsequent to the execution of the stock purchase agreement, holders of an aggregate $225,000 of the outstanding notes agreed to convert them into 661,765 shares of IMSI's capital stock at $0.34 per share. Gordon Landies, our president, and Paul Jakab, our Chief Operating Officer, received 192,079 and 10,232 shares of IMSI's capital stock, respectively, in exchange for their outstanding promissory notes from Keynomics. Joe Abrams, an IMSI related party, owner of shares of IMSI's capital stock in excess of 5% of the total outstanding also received 287,389 shares in exchange of his outstanding promissory note to Keynomics. BRODERBUND SETTLEMENT On October 31, 2001, we entered into a termination agreement with Broderbund (The Learning Company's successor) whereby we, collectively with Broderbund, terminated the October 1998 software license agreement of Org Plus and all related amendments and released each other from all obligations and liabilities. We agreed to pay Broderbund $160,000 payable in four equal quarterly installments commencing on August 15, 2002 for this settlement. We had previously accrued $400,000 in relation to the dispute. The termination agreement also called for Broderbund to transfer back to us ownership of the 200,000 shares of IMSI's capital stock issued to them pursuant to the January 1999 amendment. Furthermore, we executed two additional agreements with Broderbund on October 31, 2001: - An assignment of copyrights and trademark rights, whereby Broderbund transfers, grants, conveys, assigns and relinquishes to us, exclusively and in perpetuity, all its right, title and interest in the Org Plus product. - A software license and distribution agreement, whereby we grant to Broderbund a three-year, worldwide, non-exclusive license to sell Lumiere, Flow, TurboProject, Hijaak standard and FormTool through direct mail and to OEMs for royalty payments. This agreement also calls for us to grant to Broderbund a perpetual, worldwide, non-exclusive license to the source code of FormTool Express for limited use, as well as the right to email names from our customer database and a perpetual, worldwide, non-exclusive license to PrintMaster content for a limited use. ASSIGNMENT, LICENSE AND DISTRIBUTION AGREEMENTS OF ORG PLUS TO HUMAN CONCEPTS During the month of November 2001, we executed an agreement with Human Concepts (a software republisher), whereby we transferred to Human Concepts ownership of the Org Plus software product in exchange for royalties (Agreement for Assignment of Software). During the same period we also executed a second agreement with Human Concepts (Software License and Distribution Agreement) whereby we licensed from Human Concepts rights to distribute the Org Plus product to end users and resellers in North America, Australia and New Zealand. This contract calls for royalty payments ranging from 25% to 50% of our net revenues to Human Concepts; however, minimum royalties of $30,000 per month for nine months are due starting February 2002. Consequently, upon executing the agreement, we recorded a liability of $270,000 representing the minimum royalties due Human Concepts. In addition, this agreement provides for a buy out clause, whereby this agreement shall 13 terminate if, HC pays IMSI (i) $400,000 at any time from June 30, 2003 to June 30, 2005, and in addition HC has simultaneously bought out the royalty in the Assignment Agreement for an additional $100,000, or (ii) $600,000 at any time from July 1, 2005 to June 30, 2008, or (iii) $900,000 at any time on or after July 1, 2008. HC shall determine, in its sole discretion, if and when to make such payment to IMSI and if such a payment is made by HC this agreement shall terminate on the date such payment is made. 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. DEBT RESTRUCTURING AND MERGER On August 31, 2001, we signed a merger agreement with Digital Creative Development Corporation ("DCDC") a publicly traded company on the Nasdaq OTC Bulletin Board (Nasdaq OTC/BB: DCDCE) pursuant to which we are to issue shares of our common stock totaling 51% of our outstanding shares to DCDC shareholders, in exchange for all the common stock of DCDC and cancellation of a $3.6 million note payable by us to Union Bank of California purchased from Union Bank by DCDC. The merger agreement was approved by all of the directors of DCDC and IMSI. Also, 52% of our outstanding shareholders have agreed to vote in favor of the merger. The merger is subject to formal shareholder approval and other customary conditions. DCDC has yet to file its annual report on form 10-K for the fiscal year ended June 30, 2001. This delay in meeting its filing requirements and the resulting failure to issue a proxy statement and solicit approval of its shareholders for the merger has delayed and could prevent the merger of the two companies. Consequently, it is not known at this time when the merger with DCDC will be consummated. If the merger is not consummated, the companies have agreed that we shall pay DCDC the Union Bank note principal in 72 equal monthly payments of $49,722 plus interest at LIBOR plus 3%. Until the merger is completed or terminated, interest is not accruing on the unpaid balance. Along with the execution of the merger agreement, we are in the process of restructuring our outstanding debt as follows: On October 9, 2001 we signed an agreement with Silicon Valley Bank for a settlement of its existing secured note, which had a balance (including penalties and interest) of approximately $3.2 million. The settlement provides for a new secured promissory note for $1.2 million with 12 monthly payments of $100,000 plus interest at 12% interest per annum beginning October 20, 2001. The first four installments have been paid. - On July 27, 2001, and as subsequently amended on September 24, 2001 and October 5, 2001, IMSI and Imageline agreed on the settlement of a) an arbitration award issued in January 2000 in favor of Imageline; and b) a variety of on going issues between the parties involving the intellectual property rights of Imageline. The agreement, effective September 30, 2001, calls for us to provide Imageline a variety of considerations including the following: - The dismissal of any further appeals of the award (which dismissal occurred on October 11, 2001). - Cash installments over a 12-year period, starting October 2001. These payments are to be made as follows: twelve monthly payments of $11,500 beginning on October 5, 2001; four equal quarterly payments of $78,750 beginning on September 30, 2002 and, 132 monthly payments of $6,500 thereafter. These payments had a net present value at June 30, 2001 of approximately $833,000 assuming a 12% discount rate. - Rights to royalties, licenses, and inventories pertaining to our MasterClips line of products. 14 - A percentage of any net recovery we obtain from indemnification claims we have against third parties associated with the original circumstances leading to the arbitration award. - On July 30, 2001 we entered into an agreement with Baystar wherein Baystar agreed to accept $626,000 as settlement of all obligations due and totaling $6,260,000. Payments are to be made in four quarterly payments beginning September 30, 2002. Interest is to accrue at 8% per annum from August 31, 2001 until the September 2002 payment, and at 12% per annum thereafter until the claim is paid in full on or before June 30, 2003. - We negotiated an agreement with many of our remaining unsecured creditors, which provides for the discounting to 10% of all outstanding amounts owed to them (plus the payment of interest from February 1, 2000 at the rate of 8% per annum). These payments are to be made in quarterly installments beginning August 15, 2002. These unsecured creditors comprise approximately $3,800,000 of debt on our balance sheet. We estimate the total settlement on this debt to be approximately $450,000; and, when settled, we expect to record a gain on forgiveness of debt of approximately $3,350,000. We believe that our planned merger or alternative repayment arrangement with DCDC, along with the reduction in our liabilities under planned and completed settlements, will allow us to become profitable in the future and provide a remedy to our working capital needs. In addition, we will continue to engage in discussions with third parties concerning the sale or license of non-core product lines; the sale or license of part of our assets; and raising additional capital investment through the issuance of stock and short or long term debt financing. RESULTS OF OPERATIONS The following tables sets forth our results of operations for the three and six-month periods ended December 31, 2001 and 2000 in absolute dollars and as a percentage of net revenues. It also details the changes from the prior fiscal year in absolute dollars and in percentages: 15
FISCAL QUARTER ENDED DECEMBER 31, ------------------------------------------------------------------------- 2001 2000 (RESTATED) ----------------------------------------------- --------------------- $ change % change from from as % of $ as % previous previous $ sales of sales year year ------- -------- -------- -------- ------- ------- Net Revenues $ 3,656 100.0% $ 286 8.5% $ 3,370 100.0% Product Cost 812 22.2% (39) -4.6% 851 25.3% GROSS MARGIN 2,844 77.8% 325 12.9% 2,519 74.7% Operating Expenses Sales & Marketing 811 22.2% (36) -4.3% 847 25.1% General & Administrative 1,298 35.5% 153 13.4% 1,145 34.0% Research & Development 566 15.5% (148) -20.7% 714 21.2% TOTAL OPERATING EXPENSES 2,675 73.2% (31) -1.1% 2,706 80.3% OPERATING INCOME 169 4.6% 356 190.4% (187) -5.5% Other Income (Expenses) Interest (expense) (69) -1.9% 465 87.1% (534) -15.8% Interest income 4 0.1% 4 -- Foreign exchange gain (loss) 12 0.3% 12 -- Other Income (Expenses) (9) -0.2% (9) -- Distribution to affiliated company (200) -5.5% (200) -- Gain (loss) on disposal of fixed assets 8 0.2% 7 700.0% 1 0.0% Gain on sales of product line 20 0.5% 20 -- Settlement costs -- 0.0% -- -- TOTAL OTHER EXPENSES (234) -6.4% 299 56.1% (533) -15.8% INCOME (LOSS) BEFORE TAX AND EXTRAORDINARY ITEMS (65) -1.8% 655 91.0% (720) -21.4% Income tax expense (benefit) 1 0.0% (1) -50.0% 2 0.1% LOSS BEFORE EXTRAORDINARY ITEMS (66) -1.8% 656 90.9% (722) -21.4% Cumulative effect of change in accounting principles -- 0.0% 285 100.0% (285) -8.5% Gain from forgiveness of debt 2,243 61.4% 2,243 -- NET INCOME (LOSS) $ 2,177 59.5% $ 3,184 316.2% $(1,007) -29.9%
16
SIX MONTHS ENDED DECEMBER 31, ----------------------------------------------------------------------------- 2001 2000 (RESTATED) ---------------------------------------------- ------------------------ $ change % change from from as % of $ as % of previous previous $ sales sales year year ------ ------- --------- -------- ------- ------- Net Revenues $6,320 100.0% $ (310) -4.7% $ 6,630 100.0% Product Cost 1,521 24.1% (289) 16.0% 1,810 27.3% GROSS MARGIN 4,799 75.9% (21) -0.4% 4,820 72.7% Operating Expenses Sales & Marketing 1,509 23.9% (62) -3.9% 1,571 23.7% General & Administrative 2,503 39.6% 271 12.1% 2,232 33.7% Research & Development 1,208 19.1% (212) -14.9% 1,420 21.4% TOTAL OPERATING EXPENSES 5,220 82.6% (3) -0.1% 5,223 78.8% OPERATING INCOME (421) -6.7% (18) -4.5% (403) -6.1% Other Income (Expenses) Interest (expense) (477) -7.5% 612 56.2% (1,089) -16.4% Interest income 6 0.1% 6 -- Foreign exchange gain (loss) 1 0.0% 1 -- Other Income (Expenses) (20) -0.3% (20) -- Distribution to affiliated company (200) -3.2% (200) -- Gain (loss) on disposal of fixed assets 1 0.0% 4 133.3% (3) 0.0% Gain on sales of product line 20 0.3% (265) -93.0% 285 4.3% Settlement costs -- 187 100.0% (187) -2.8% TOTAL OTHER EXPENSES (669) -10.6% 325 32.7% (994) -15.0% INCOME (LOSS) BEFORE TAX AND EXTRAORDINARY ITEMS (1,090) -17.2% 307 22.0% (1,397) -21.1% Income tax expense (benefit) 3 0.0% 9 150.0% (6) -0.1% LOSS BEFORE EXTRAORDINARY ITEMS (1,093) -17.3% 298 21.4% (1,391) -21.0% Cumulative effect of change in accounting principles -- 285 100.0% (285) -4.3% Gain from forgiveness of debt 7,970 126.1% 7,970 -- 0.0% NET INCOME (LOSS) $ 6,877 108.8% $ 8,553 510.3% $(1,676) -25.3%
17 NET REVENUES Net revenues of each of our principal product categories in dollars and as a percentage of total net revenues for the three and six-month periods ended December 31, 2001 and 2000 are summarized in the following table (in thousands except for percentage amounts):
THREE MONTHS ENDED DECEMBER 31, SIX MONTHS ENDED DECEMBER 31, ------------------------------------------------ ------------------------------------------------- 2001 2000 Changes 2001 2000 Changes -------------- -------------- ------------ -------------- -------------- ------------- $ % $ % $ % $ % $ % $ % ------- --- ------- --- ----- --- ------- --- ------- --- ----- ---- PRECISION DESIGN $ 1,121 31% $ 1,346 40% $(225) -17% $ 1,935 31% $ 2,288 35% $(353) -15% GRAPHIC DESIGN 1,238 34% 1,052 31% 186 18% 2,249 36% 2,576 39% (327) -13% BUSINESS APPLICATION 1,154 32% 693 21% 461 67% 1,961 31% 1,174 18% 787 67% UTILITIES 20 1% 254 8% (234) -92% 48 1% 861 13% (813) -94% OTHER PRODUCTS 132 4% 41 1% 91 221% 143 2% 65 1% 78 120% PROVISION FOR RETURNS AND REBATES NOT YET RECEIVED (9) 0% (16) 0% 7 -44% $ (16) 0% (334) -5% 318 -95% ------- --- ------- --- ----- --- ------- --- ------- --- ----- ---- NET REVENUES $ 3,656 100% $ 3,370 100% $ 286 8% $ 6,320 100% $ 6,630 100% $(310) -5% ======= === ======= === ===== === ======= === ======= === ===== ====
The sales figures provided in this table have been restated to include Keynomics' sales figure into the business application category. Sales of FloorPlan and IMSI's flagship product, TurboCAD, decreased in the three and the six month periods ended December 31, 2001 as compared to the same reporting periods in the previous fiscal year, resulting in an overall decrease in revenues in the precision design category. The inability to adequately fund a strong marketing strategy, the intense competition that characterizes the computer-aided design market and the delays in introducing the new version 8.0 of TurboCAD negatively impacted sales of the precision design category. In the three and six month periods December 31, 2001, revenues in the graphic design category consisted in majority of subscription revenues for graphic content from our wholly owned subsidiary ArtToday.com. When compared to the same periods in the previous fiscal year, ArtToday.com's sales increased in the quarter ended December 31, 2001 from $722,000 to $1,043,000 and from $1,531,000 to $1,930,000 for the six-month period ended December 31, 2001. This increase is the direct result of higher average subscription prices paid by customers as a result of a wider range of subscription choices. Because ArtToday.com's revenues are based on subscriptions, these amounts are initially deferred and then amortized over the subscription periods, which extend up to twelve months. As of December 31, 2001, approximately $1,077,000 of revenue related to ArtToday.com remained deferred. The following table details the amortization schedule of these deferred revenues for the upcoming year: ARTTODAY.COM DEFERRED REVENUES TO BE RECOGNIZED 3RD QUARTER OF FISCAL 2002 $566,000 4TH QUARTER OF FISCAL 2002 $315,000 1ST QUARTER OF FISCAL 2003 $156,000 2ND QUARTER OF FISCAL 2003 $40,000 ---------- TOTAL $1,077,000 ==========
18 The decrease in overall revenues in the graphic design category for the six-month period ended December 31, 2001 is attributable to the steep decline in the revenues from the historically most important revenue producing product line within this category, MasterClips. The significant decrease in Masterclips' revenues was the result of decreased sales from our republisher Vivendi who acquired the rights to the product during the previous fiscal year. The republishing agreement with Vivendi expired according to its own terms and we subsequently released new versions of Masterclips in December 2001. Also, the recent settlement agreement we entered into with Imageline on July 27, 2001, and as subsequently amended on September 24, 2001 and October 5, 2001 allowed us to regain full control over the Masterclips line of products. We intend to continue publishing new versions of Masterclips in the future. Future sales of Masterclips along with the increasing trend of ArtToday.com sales should contribute to higher revenues in the graphic design category in future reporting periods. During the quarter ended December 31, 2001, we acquired Keynomics, a company focused on productivity enhancement software. Sales of Keynomics' products contributed $587,000 to the business application category during this fiscal quarter as compared to $136,000 for the same period in fiscal 2001. Keynomics' increased contribution explains the increase in revenues in this category as compared to the same quarter of the previous fiscal year. Prior to September 30, 2000, our focus had been primarily on our Internet business and our graphic and precision design products, and because we did not spend as much on marketing non-core products as during previous periods, sales of Flow!, FormTool, Maplinx, MasterPublisher, OrgPlus, People Scheduler, Web Business Builder, Hijaak and TurboProject all declined as of December 2000 bringing revenues from the business application category to an all time low. During the six month period ended December 31, 2001, however, demand for some of our non-core products in this category such as Flow! and FormTool increased. This increased demand along with the $340,000 increase in Keynomics' revenues were able to offset the slight decrease in the sales of OrgPlus and further contribute to the overall increase in revenues in the business application category as compared to the same reporting period of the previous fiscal year. The decrease in revenues in the utilities category for the three and six month periods ended December 31, 2001 as compared to the same periods of fiscal 2001 resulted from the sales of Net Accelerator and WinDelete declining during the first two quarters of fiscal 2002. These products have not been updated recently nor have we put much resources into promoting and selling them. Revenues in the other products category for the three and six month periods ended December 31, 2001 were not material and the slight increase over the comparable periods in the previous fiscal year was primarily due to the sales of non-core, third-party products. Net revenues from domestic sales increased by $138,000 or 4% to $3,287,000 and were 90% of total net revenues for the three-month period ended December 31, 2001. This compares to net revenues from domestic sales of $3,149,000, or 93% of total net revenues, for the comparable period in the previous fiscal year. For the six month period ended December 31, 2001, net revenues from domestic sales decreased $437,000 or 7% to $5,653,000 and were 89% of total net revenues. This compares to $6,090,000 or 92% of total net revenues, for the comparable period in the previous fiscal year. Net revenues from international sales increased by $147,000 or 67%, and were $368,000 or 10% of net revenues for the three-month period ended December 31, 2001. This compares to $221,000 or 7% of net revenues for the three months ended December 31, 2000. For the six month period ended December 31, 2001, net revenues from international sales increased $127,000 or 24% to $667,000 and were 11% of total net revenues. This compares to $540,000 or 8% of total net revenues, for the comparable period in the previous fiscal year. 19 Our financial problems were the primary cause of our overall decreased revenues over the six months period ended December 31, 2001 when compared to the same period in the previous fiscal year. We have not been able to implement the kind of effective advertising programs necessary to maintain unit sales volumes, share of the market, and shelf space in distribution. We currently serve the domestic retail and international markets using direct sales methods and republishing agreements. 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. We believe, however, that our decision to reduce our reliance on the retail market has provided some insulation from unfavorable retail conditions, including erosion of margins from competitive marketing and high rates of product returns. PRODUCT COSTS Our product costs include the costs of diskette and CD-ROM duplication, printing of manuals, packaging and fulfillment, freight-in, freight out, license fees, royalties that we pay to third parties based on sales of published 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 and six-month periods ended December 31, 2001 as compared to the same periods from the previous fiscal year was primarily attributable to lower amortization costs. We amortize 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. During the first six months of fiscal 2002, we did not capitalize any new software development costs. Amortization of such costs was $362,000, and $750,000 in the six-month periods ended December 31, 2001 and December 31, 2000, respectively. SALES AND MARKETING Our sales and marketing expenses consist primarily of salaries and benefits of sales and marketing personnel, commissions, advertising, printing and direct mail expenses. Decreased commissions paid to our sales force along with reduced advertising expenses were the primary reasons for the overall decrease in sales and marketing expenses in the three and six months ended December 31, 2001. GENERAL AND ADMINISTRATIVE Our general and administrative expenses consist primarily of the salaries and benefits for employees in the legal, finance, accounting, human resources, information systems and operations departments and fees to our professional advisors. For the six-month period ended December 31, 2001 a one time charge of $211,000 relating to issuance of warrants to outside consultants, totaling 785,000 warrants with an average exercise price of $0.27 and terms of three to ten years, combined with the severance cost of $60,000 payable to one of our former executives were the primary causes of the increase in general and administrative expense. For the three months ended December 31, 2001, outside consulting fees increased by approximately $25,000. RESEARCH AND DEVELOPMENT Our research and development expenses consist primarily of salaries and benefits for research and development employees and payments to independent contractors. Research and development costs decreased in the three and six-month periods ended December 31, 2001 as compared to the same reporting periods in the previous fiscal year. This decrease is mainly due to lower payroll charges and 20 outside consulting fees relating to the Design.Net division, which was spun off effective October 1, 2001, and to the decrease in the number of products under development. The steady ratio as a percentage of net revenues reflects our commitment to sustain our investment in research and development for our core products as well as for our subsidiaries by maintaining strong relationships with our development team in Russia. INTEREST AND OTHER, NET Interest and other expenses, net, include interest and penalties on debt instruments, foreign currency transaction gains and losses, and other non-recurring items. The following table summarizes the components of interest and other, net for the three and six-month periods ended December 31, 2001 and 2000:
FISCAL QUARTER ENDED DECEMBER 31, --------------------------------- 2001 2000 (RESTATED) --------- ---------------- $ $ --------- ---------------- INTEREST AND OTHER, NET Interest (expense) $ (69) $ (398) Interest income 4 -- Foreign exchange gain (loss) 12 -- Penalties -- (136) Other (expense) income (9) -- ----- ------- TOTAL $ (62) $ (534) ====== =======
SIX MONTHS ENDED DECEMBER 31, --------------------------------- 2001 2000 (RESTATED) --------- ---------------- $ $ --------- ---------------- INTEREST AND OTHER, NET Interest (expense) $(322) $ (817) Interest related to warrants issued (65) -- Interest income 6 -- Foreign exchange gain (loss) 1 -- Penalties (90) (272) Other (expense) income (20) -- ----- ------- TOTAL $(490) $(1,089) ===== =======
Interest and other expense, net, decreased substantially in the six-month period ended December 31, 2001, as compared to the same reporting period in fiscal 2001. This decrease is mainly the result of our debt restructuring and the plan of merger we signed with DCDC on August 31, 2001. We did not accrue penalties on the Baystar note after August 2001, and interest expenses of 8% per annum on the new negotiated balance of the Baystar is substantially reduced as compared to the same period from the previous year. We saved on the interest previously paid to Union Bank of California since the note was acquired by DCDC. The merger agreement provides that the note is not to bear interest except in the event of the termination of the plan of merger GAIN ON SALES OF PRODUCT LINE During the second quarter of fiscal 2002 we sold the rights to the Visual Cadd software product to TriTools Partners, a California company, for $20,000. The entire amount of the sale was recorded as a gain since the product had a zero book value at the time of the transaction. This was the only transaction involving a gain or loss on sales of product line during the six-month period ended December 31, 2001. 21 During the six-month period ended December 31, 2000, we collected the remaining $200,000 pertaining to the sale of the Easy Language line of product and recognized that amount as a one-time gain on product line sale. During the same period, ArtToday.com sold the domain name "Caboodles" for $85,000 and recorded a one-time gain for the same amount. EXTRAORDINARY ITEM - GAIN ON FORGIVENESS OF DEBT During the fiscal quarter ended December 31, 2001, we recognized $2,243,000 gain from forgiveness of debt. $2,062,000 was related to the forgiveness of a portion of the principal and accrued interest on the Silicon Valley Bank note. $140,000 was related to the forgiveness of amounts payable to Light Work Design and $40,500 was related to the forgiveness of amounts payable to Microsoft. Light Work Design and Microsoft are two unsecured creditors that were owed royalties. In the quarter ended September 30, 2001, we recorded an extraordinary gain of $5,727,000 related to the forgiveness of debt to BayStar Capital and DelRay Technologies. BayStar Capital agreed to settle for 10% of the principal and accrued interest and penalties outstanding. Payments are to be made in four quarterly installments beginning September 30, 2002, with interest accruing at the rate of 8% per annum from August 31, 2001 to the date of the first installment. Thereafter, the interest rate is 12% per annum until the note is paid in full on or before June 30, 2003. DelRay Technologies agreed to a one-time payment of $20,000 as settlement in full of its outstanding claim. These combined transactions resulted into an aggregate forgiveness of debt gain of $7,970,000 for the six-month period ended December 31, 2001. No similar transactions occurred in the same reporting periods of the previous fiscal year. SETTLEMENT COSTS We recorded a charge of $187,490 during the fiscal quarter ended September 30, 2000 relating to the issuance of 185,005 shares of common stock in July 2000 as a settlement of the ArtToday.com Fee Agreement. We had no similar transactions neither in the current or previous quarters of fiscal 2002. PROVISION FOR INCOME TAXES We did not record a tax benefit in the quarter ending December 31, 2001 for domestic tax losses because of the uncertainty of realization. We adhere 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 December 31, 2001, we had $1,183,000 in cash and cash equivalents. This represents an $85,000 decline from the $1,268,000 balance at June 30, 2001. Working capital at December 31, 2001 was a negative $9,521,000. This represents an improvement over the negative working capital at June 30, 2001 of $17,817,000. The improvement in working capital over the past six-month period is mainly the result of the decline in current liabilities following our restructuring of debt. The slight decline in cash and cash equivalents from June 30, 2001 resulted mainly from payments we made to meet our obligations to financial creditors and payments we made to acquire Keynomics in part offset by net positive cash of $443,000 generated by our operating activities. 22 We had a net income of $6.9 million during the first six months of fiscal 2002. Excluding one-time non-cash items of approximately $8.0 million representing the gain from the forgiveness of debt, we would have had a net loss in excess of $1 million. Despite this loss, our operating activities generated cash of $443,000. The main items that helped reconcile this loss to the net cash provided by operating activities during the six-month period ended December 31, 2001 included depreciation and amortization expenses of $713,000, increases of accrued interest expenses of $267,000 and a non cash charge of $345,000 related to warrants issued to outside consultants and other third parties. Our investing activities during the six months ended December 31, 2001 consumed $67,000 in cash used mainly in acquiring Keynomics. Our financing activities consumed net cash of $450,000 for the six-month period ended December 31, 2001. During this period, we decreased our obligation to Union Bank by $350,000 bringing the balance of all amounts due to the bank to $3,580,000. Subsequent to these payments and pursuant to our merger agreement with DCDC, DCDC acquired the Union Bank's note in August 2001. Also during the same period of fiscal 2002, we made payments relating to capital lease obligations of $159,000, we repaid $200,000 to Silicon Valley Bank pursuant to the new $1.2 million secured promissory note. A net borrowing of $141,000 that Keynomics secured during the six-month period ended December 31, 2001 partially offset all these payments. If we fail to raise additional capital, the negative working capital position could have a material adverse effect on our liquidity in the future. The financial statements have been prepared on a basis that contemplates our 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 $37.8 million and negative working capital of $9.5 million at December 31, 2001. We also lack sustained profitability for our recent history. All these issues raise substantial doubt about our ability to be a going concern for a reasonable period of time and the auditors' report on our financial statements filed within our fiscal 2001 Form 10-K reflects such doubt. 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. Our continued existence is dependent on our ability to complete the debt restructuring and obtain additional financing sufficient to allow us to meet our obligations as they become due and to achieve profitable operations. Historically, we financed our working capital and capital expenditure requirements primarily from retained earnings, short-term and long-term bank borrowings, capitalized leases and sales of common stock. We will require additional working capital to meet our ongoing operating expenses, to develop new products, and to properly conduct business activities. We believe that our relationships with DCDC, along with the reduction in our liabilities under planned and completed settlements, will allow us to continue as a going concern, become profitable in the future, and remedy our working capital needs. In addition, we will continue to engage in discussions with third parties concerning the sale or licensing of product lines; the sale or licensing of part of our assets; and raising additional capital investment through the issuance of stock and short or long term debt financing. The forecast period of time through which the our financial resources will be adequate to support working capital and capital expenditure requirements is a forward-looking statement that involves risks and uncertainties, and actual results could vary. The factors described in "Risk Factors", as filed in our fiscal 2001 Form 10-K, will affect future capital requirements and the adequacy of available funds. We 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. Failure to raise capital when needed will have a material adverse effect on our business, operating results, financial condition and ability to continue as a going concern. 23 We have no material commitments for future capital expenditures or material long-term debt at December 31, 2001 except as previously disclosed under the heading "Debt restructuring and Merger" regarding long term obligations to Silicon Valley Bank, Imageline, Baystar Capital and other unsecured creditors. OTHER FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS Other factors that may cause fluctuations of, or a continuing decline in, operating results in the future include the market factors and competitive factors described in our Fiscal 2001 Form 10-K, under "Future Performance and Additional Risk Factors." Factors that may affect operating results in the future include, but are not limited to: - Market acceptance of our products or those of our competitors - Timing of introductions of new products and new versions of existing products - Expenses relating to the development and promotion of such new products and new version introductions - Intense price competition and numerous end-user rebates - Projected and actual changes in platforms and technologies - Accuracy of forecasts of, and fluctuations in, consumer demand - Extent of third party royalty payments - Rate of growth of the consumer software and Internet markets - Timing of orders or order cancellation from major customers - Changes or disruptions in the consumer software distribution channels - Failure of a proper integration of Keynomics' operations - Economic conditions, both generally and within the software or Internet industries 24 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Not Applicable ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS Not Applicable ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not Applicable ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not Applicable ITEM 5. OTHER INFORMATION Not Applicable ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K See Exhibits 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: 02/14/2002, INTERNATIONAL MICROCOMPUTER SOFTWARE, INC. By: /s/ Martin Wade, III Martin Wade, III Director , Chief Executive Officer & Chief Financial Officer By: /s/ Gordon Landies Gordon Landies President 26 INTERNATIONAL MICROCOMPUTER SOFTWARE, INC. 2001 FORM 10-QSB QUARTERLY REPORT EXHIBIT INDEX
EXHIBIT NUMBER EXHIBIT TITLE PAGE - ------- ------------- ---- 2.1 Keynomics Stock Purchase Agreement 28 10.1 Broderbund Termination Agreement 58 10.2 Broderbund Assignment of Copyrights and Trademark Rights 61 10.3 Human Concepts Agreement for Assignment of Software 71 10.4 Human Concepts Software License and Distribution Agreement 78
27 EX-2.1 3 f79267ex2-1.txt STOCK PURCHASE AGREEMENT EXHIBIT 2.1 STOCK PURCHASE AGREEMENT This Stock Purchase Agreement (the "Agreement") is made and entered into as of the 29th day of November, 2001 by Digital Creative Development Corporation (the "Shareholder") and International Microcomputer Software, Inc. (IMSI), a California corporation having its principal place of business at 75 Rowland Way, Novato CA 94945 (the "Purchaser"). WITNESSETH: WHEREAS, the Shareholder owns and desires to sell, assign and convey to Purchaser all of the issued and outstanding shares of capital stock of Keynomics, Inc., a California corporation with its principal place of business at Novato, CA 94945 (the "Company"), which company is 100% owned and controlled by the Shareholder; and WHEREAS, the Purchaser desires to purchase and acquire all of the issued and outstanding shares of capital stock of the Company from the Shareholder on and subject to the terms and conditions of this Agreement. WHEREAS, the parties desire, from and after the Closing, that the acquisition provided herein shall be effective as of October 1, 2001 (the "Effective Date"). WHEREAS, this Agreement and the transactions contemplated hereby have been approved by the Boards of Directors of each of the Shareholder, Purchaser and the Company. NOW, THEREFORE, in consideration of the respective representations and warranties hereinafter set forth and of the mutual covenants and agreements contained herein, the parties hereto agree as follows: ARTICLE I DEFINITIONS As used herein, the following terms shall have the following meanings: 1.1 "Assets" shall mean, collectively, all of the following: (a) all cash of the Company on hand, in any bank, money market account, mutual fund, unit investment trust, and all certificates of deposit, letters of credit in favor of the Company and all other readily marketable securities or other cash equivalents of the Company; 28 (b) all accounts receivable, notes receivable and other rights to receive payments from customers of the Company, all as described in Schedule 1.1(b) hereto (the "Receivables"); (c) all equipment, vehicles, furniture and fixtures, and all other fixed assets owned or leased by the Company, constituting all such items necessary for the continued operation of the Company's business, as described on Schedule 1.1(c) hereto (the "Fixed Assets"); (d) all rights and benefits under all contracts, agreements, leases, licenses, purchase commitments and sales orders to which the Company is a party (collectively, the "Contracts"), constituting all such Contracts which are necessary or beneficial to the operation of the Company's business, all as set forth on Schedule 1.1(d) hereto; (e) all patents, patent rights, copyrights, trademarks, trademark rights, trade names, trade name rights and patent, copyright or trademark applications, which the Company owns, all set forth on Schedule 1.1(e) annexed hereto, and all ideas, know-how, trade secrets, inventions, technology, designs and any other proprietary rights which the Company owns; (f) any and all other assets of the Company not described above and included on the Balance Sheet (as hereinafter defined). 1.2 "Balance Sheet" shall mean the consolidated balance sheet of the Company at October 1, 2001 included as part of the Financial Statements (as hereinafter defined). 1.3 "Closing Date" shall mean November 30, 2001, the date on which the Closing (as hereinafter defined) is to occur. 1.4 "Financial Statements" shall mean the unaudited consolidated balance sheet of the Company at October 1, 2001 and the unaudited consolidated income statement of the Company prepared on an accrual basis for the period from inception to October 1, 2001, attached as Schedule 4.10. 1.5 "Seller Shares" shall mean all of the issued and outstanding shares of capital stock, without par value, of the Company. ARTICLE II SALE AND PURCHASE 2.1 Sale and Purchase of Seller Shares. Subject to the provisions and conditions contained herein, the Shareholder hereby agrees to sell, transfer, assign, convey and deliver to Purchaser, and Purchaser hereby agrees to purchase and accept from the Shareholder, all of its right, title 29 and interest in and to the Seller Shares, free and clear of any liens, pledges, security interests, claims or encumbrances of any kind. 2.2 The purchase price (the "Purchase Price") payable by Purchaser for the Seller Shares shall be calculated and paid as follows in U.S. dollars: (a) The total aggregate purchase price for the Seller Shares shall be equal to $450,000 (the "Purchase Price"). Purchaser shall pay the Purchase Price to Shareholder as follows: (i) $50,000 shall be paid in cash on the Closing Date; (ii) $150,000 shall be paid in equal monthly installments of $25,000 per month for 6 months with the first payment being 35 days after the Closing Date and each additional installment being made on the monthly anniversary of the first payment; (iii) $100,000 shall be deemed to be paid by crediting against the Purchase Price the payments made to Shareholder by Purchaser in October and November 2001; and (iv) $150,000 shall be deemed to be paid by offsetting against the Purchase Price certain payments from the Company to Shareholder made between the Effective Date and Closing. (b) Should Purchaser sell all or substantially all of the outstanding capital stock of the Company or all or substantially all of the assets of the Company in a transaction in which the stockholders of the Company or Purchaser immediately prior to such transaction hold less than 15% of the equity interests in the surviving or resulting entity of such transaction ("Sale"), within six months following the Closing, the Purchaser and Shareholder will split 50/50 the net amount of the portion of the purchase price in such transaction that exceeds the sum of $1,200,000; provided, however, that a transfer to Purchaser, or an entity under common control of Purchaser, shall not be deemed a sale for purposes of this section. (c) The Purchaser will pay to Shareholder, sixty (60) days after the end of the Company's fiscal year for each of the next three fiscal years, fifty percent (50%) of the amount of the Company's net operating income, if any, in excess of: (i) $500,000 in the fiscal year 7/1/02 to 6/30/03; (ii) $1 million in the fiscal year 7/1/03 to 6/30/04; and (iii) $1.5 million in the fiscal year 7/1/04 to 6/30/05 (collectively the "Earn-Out Amount"). This paragraph shall become void and of no further effect upon any subsequent Sale of Company by Purchaser. (d) Should Purchaser have a claim against Shareholder at any time for breach of any of the representations, warranties or covenants hereunder, that would be subject to indemnification under Article VIII below, Purchaser shall be entitled to offset the amount of such claim against the Earn-Out Amount and/or against any proceeds from the sale of the Company that may be due to Shareholder as provided in subsection (c) above. 30 2.3 Stock Options and Warrants. Upon the Closing (as hereinafter defined in Section 3.1 of this Agreement), Shareholder represents and warrants that the only capital stock outstanding shall be the Seller Shares, and that there will be no options, warrants, convertible securities, or other rights to purchase shares of the Company's capital stock, whether vested or unvested, outstanding. 2.4 Outstanding Promissory Notes in the Company. The Company has certain outstanding Promissory Notes (among others) as set forth on Schedule 2.3 hereto. The Company will negotiate an extension of the maturity date of the Promissory Notes to April 30, 2002 prior to Closing, and the obtaining of such extension shall be a condition to the obligation of Purchaser to close this transaction. ARTICLE III CLOSING; CONDITIONS TO CLOSING; DELIVERIES 3.1 Closing. The closing of this transaction (the "Closing") shall be held on the Closing Date at or about 11:00 A.M., Pacific Standard Time, at the offices of Purchaser, or at such other time and place upon which the parties shall agree. Conditions to Purchaser's Obligation. Purchaser's obligation hereunder to purchase and pay for the Seller Shares is subject to the satisfaction, on or before the Closing Date, of the following conditions, any of which may be waived, in whole or in part, by Purchaser in its sole discretion, and the Shareholder shall use its best efforts to cause such conditions to be fulfilled: Representations and Warranties Correct; Performance of Covenants; Satisfaction of Conditions. The representations and warranties of the Shareholder contained in this Agreement (including the Exhibits and Schedules hereto) and those otherwise made in writing by or on behalf of the Shareholder in connection with the transactions contemplated by this Agreement shall be true, complete and accurate both when made and on and as of the Closing Date as though such representations and warranties were made at and as of such date, and the Shareholder shall have delivered to Purchaser a certificate signed by their respective authorized agents and dated the Closing Date, to such effect. The Shareholder shall have duly and properly performed, complied with, satisfied and observed each of their covenants, agreements, conditions to closing and obligations contained in this Agreement to be performed, complied with, satisfied and observed on or before the Closing Date, and the Shareholder shall have delivered to Purchaser a certificate signed by their respective authorized agents, dated the Closing Date, to such effect. Purchase Permitted by Applicable Laws. The purchase of and payment for the Seller Shares to be purchased by Purchaser hereunder shall not be prohibited by any applicable law or governmental regulation and shall not 31 subject Purchaser to any tax, penalty, liability or other onerous condition under or pursuant to any applicable law or governmental regulation. Proceedings: Receipt of Documents. All corporate and other proceedings taken or required to be taken by the Shareholder in connection with the transactions contemplated hereby and all documents incident thereto shall have been taken and shall be satisfactory in form and substance to Purchaser and its counsel, and Purchaser shall have received all such information and such counterpart originals or certified or other copies of such documents as Purchaser may reasonably request. Delivery of Documents. The Shareholder shall have delivered, or caused to be delivered, to Purchaser the following: corporate and tax good standing certificates of the Company from the respective jurisdictions in which the Company is incorporated or transacts business; the Seller Shares, with duly executed stock powers and all other documents and signatures necessary or appropriate for their transfer to Purchaser free and clear by delivery; certified copies of the Certificate of Incorporation and By-Laws of the Company; all other consents, agreements, schedules, documents and exhibits required by this Agreement to be delivered, or reasonably requested by Purchaser, at or before the Closing. No Adverse Decision. There shall be no action, suit, investigation or proceeding pending or threatened by or before any court, arbitrator or administrative or governmental body which seeks to restrain, enjoin, prevent the consummation of or otherwise affect the transactions contemplated by this Agreement or questions the validity or legality of any such transactions or seeks to recover damages or to obtain other relief in connection with any such transactions. No Adverse Change. Since September 30, 2001, through and including the Closing Date, the Company shall not have suffered any adverse change (whether or not such change is described in the Exhibits or Schedules hereto or any supplement to the Exhibits or Schedules) in its business, affairs, prospects, financial condition, working capital, assets, liabilities (absolute, accrued, contingent or otherwise), reserves or operations, and the Shareholder shall have delivered to Purchaser a certificate signed by its President and Chief Financial Officer and the President and Chief Financial Officer of the Company, and dated the Closing Date, to such effect. Securities Law Compliance. All actions and steps necessary to assure compliance with applicable Federal and state securities laws in connection with the lawful sale of the Seller Shares pursuant to this Agreement, shall have been duly obtained and shall be effective on and as of the Closing. Approvals and Consents. The Shareholder shall have duly obtained all authorizations, consents, rulings, approvals, licenses, franchises, permits and certificates, or exemptions therefrom, by or of all governmental authorities and non-governmental administrative or regulatory agencies, domestic or foreign, having jurisdiction over the parties hereto, their respective assets, this Agreement, the Seller Shares or the transactions contemplated hereby, including, without limitation, the consents of all third parties pursuant to existing agreements or instruments by which the Company or any of the Shareholder may be bound, which are required for the execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby, at no cost or other adverse consequence to Purchaser, and all thereof shall be in full force and effect at the time of Closing, and the Shareholder shall have each delivered to Purchaser a certificate signed by their respective authorized agents and dated the Closing Date, to such effect. 32 The Company shall have negotiated an extension of the maturity date of the Promissory Notes to April 30, 2002. Conditions to the Obligation of the Shareholder. Shareholder's obligations to consummate the transactions contemplated hereby are subject to the fulfillment of the following conditions on or prior to the Closing Date, any of which may be waived, in whole or in part, by the Shareholder in its sole discretion, and Purchaser shall use its best efforts to cause such conditions to be fulfilled: Representations and Warranties Correct; Performance. The representations and warranties of Purchaser in this Agreement shall be true, complete and accurate when made and on and as of the Closing Date, as though such representations and warranties were made at and as of such date. Purchaser shall have duly and properly performed, complied with, satisfied and observed each of its covenants, agreements, conditions to closing and obligations contained in this Agreement to be performed, complied with, satisfied and observed on or before the Closing Date. Purchase Permitted by Applicable Laws. The purchase of and payment for the Seller Shares shall not be prohibited by any applicable law or governmental regulation. Delivery of Purchase Price. Purchaser shall have delivered that portion of the Purchase Price due for the Seller Shares as hereinabove contemplated. Proceedings; Receipt of Documents. All corporate and other proceedings taken or required to be taken by Purchaser in connection with the transactions contemplated hereby and all documents incident thereto shall have been taken and shall be satisfactory in form and substance to the Shareholder and their counsel, and the Shareholder shall have received all such information and such counterpart originals or certified or other copies of such documents as they may reasonably request. No Adverse Decision. There shall be no action, suit, investigation or proceeding pending or threatened by or before any court, arbitrator or administrative or governmental body which seeks to restrain, enjoin, prevent the consummation of or otherwise affect the transactions contemplated by this Agreement or questions the validity or legality of any such transactions or seeks to recover damages or to obtain other relief in connection with any such transactions. Securities Law Compliance. All actions and steps necessary to assure compliance with applicable Federal and state securities laws in connection with the lawful sale of the Seller Shares pursuant to this Agreement, shall have been duly obtained and shall be effective on and as of the Closing. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDER The Shareholder, jointly and severally, represents and warrants to Purchaser as follows: 4.1 Organization and Good Standing. Each of Shareholder and the Company is a corporation duly organized, validly existing and in good standing under the laws of the State of California 33 and is in good standing as a foreign corporation in each other jurisdiction where the properties owned, leased or operated or the business conducted by it requires such qualification. Each of the Shareholder and the Company has all necessary power and authority to conduct its business in the manner in which such business is currently being conducted and to own and use its assets in the manner in which such assets are currently owned and used. 4.2 Authority. The Shareholder has full authority to execute and to perform this Agreement in accordance with its terms; the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby does not and will not result in a breach, violation or default or give rise to an event which with the giving of notice or after the passage of time, or both, would result in a breach, violation or default of any of the terms or provisions of the Company's Certificate of Incorporation, By-Laws or of any indenture, agreement, contract, judgment, decree or other instrument or restriction to which the Company or the Shareholder are a party or by which the Company, the Shareholder, the Seller Shares or any of its assets may be bound or affected; the execution and delivery of this Agreement have been and, as of the Closing Date, the consummation of the transactions contemplated hereby will have been, duly authorized, and no authorization or approval, whether of the stockholders or directors of the Company or of governmental bodies or otherwise, will be necessary in order to enable the Shareholder to enter into and perform same; and this Agreement constitutes a valid and binding obligation enforceable against the Shareholder in accordance with its terms. 4.3 Capitalization. The authorized capital stock of the Company consists of 50,000,000 shares of common stock, no par value, of which 3,150,000 shares are issued and outstanding, and 10,000,000 shares of preferred stock, of which no shares are issued and outstanding. All of the aforesaid issued and outstanding shares of the Company have been duly authorized and validly issued and are fully paid and non-assessable. Schedule 4.3(a) attached hereto sets forth a true and complete history of the issuance and cancellation, where applicable, of all the shares of capital stock of the Company and the share certificates evidencing same, which have heretofore been issued by the Company. Except as set forth on Schedule 4.3(b), there are no outstanding preemptive, conversion or other rights, options, warrants, puts, calls or agreements or commitments, whether written or oral, granted or issued by or binding upon any of the Shareholder or the Company for the purchase or acquisition of any shares of the Company's capital stock, including, without limitation, the Seller Shares, or obligating the Company to issue, deliver, sell, repurchase or redeem or cause to be issued, delivered, sold, repurchased or 34 redeemed any of its shares of capital stock. The Company does not hold any equity interest in any other entity. There are no voting trusts, proxies or other agreements or understandings with respect to the voting stock of the Company. 4.4 Subsidiaries. The Company has no subsidiaries, foreign or domestic. 4.5 Title to Assets (a) The Company has good and marketable title to all of its Assets; and (b) Except as described in Schedule 4.5 annexed hereto, none of such Assets, the Seller Shares, or the use thereof: (i) is subject to any easements or restrictions or to any mortgages, liens, pledges, charges, security interests, encumbrances or encroachments, or to any rights of others of any kind or nature whatsoever, (ii) encroaches or infringes on the property or rights of another or (iii) contravenes any applicable law or ordinance or any other administrative regulation or violates any restrictive covenant or any provision of law. There are no agreements or arrangements between the Company or the Shareholder and any third person, which have any effect upon the Company's title to or other rights respecting the Assets or the Seller Shares. 4.6 Condition of Property. All of the Assets are suitable for the purposes for which they are used, are in good operating condition and in reasonable repair, free from any known defects, except for (i) normal wear and tear and such minor defects as do not interfere with the continued use thereof or (ii) defects as set forth on Schedule 4.6 annexed hereto. 4.7 Intellectual Property. (a) For the purposes of this Agreement, the following terms have the following definitions: "Intellectual Property" means any or all of the following and all rights in, arising out of, or associated therewith: (i) all United States international and foreign patents and applications therefore and all reissues, divisions, renewals, extensions, provisionals, continuations and continuations-on-part thereof; (ii) all inventions (whether or not patentable or patented), invention disclosures, improvements, trade secrets, proprietary information, know-how, technology, technical data and customer lists; (iii) all copyrights, copyrights registrations and applications therefore and all other rights corresponding thereto throughout the world; (iv) all industrial designs and any registrations and applications therefore throughout the world; (v) all trade names, logos, common law trademarks and service marks; (vi) all trademark and service mark registrations and applications therefore and all goodwill associated therewith throughout the world; (vii) all domain names, uniform resource locators and other Internet or similar 35 addresses or identifiers; (viii) all databases and data collections and all rights therein throughout the world; (ix) all computer software including all source code, object code, firmware, development tools, files, records, data, all media on which any of the foregoing is recorded; (x) any similar, corresponding or equivalent rights to any of the foregoing; and (xi) all documentation relating to any of the foregoing. "Company Intellectual Property shall mean any Intellectual Property that (i) is owned by, (ii) is exclusively licensed to, or (iii) was developed or created by the Company. "Registered Intellectual Property" shall mean all United States, international and foreign: (i) patents and patent applications (including provisional applications); (ii) registered trademarks or service marks, applications to register trademarks or service marks, intent-to-use applications, or other registrations or applications related to trademarks or service marks; (iii) registered copyrights and applications for copyright registration; (iv) domain name registrations and other registrations, subscriptions and memberships related to the Internet; and (v) any other Company Intellectual Property that is subject of an application, certificate, filing, registration or other document issued by, filed with, or recorded by any state, regulatory, standards, government or other public or private legal authority. (b) Schedule 4.7(b) lists all Registered Intellectual Property owned by, or filed in the name of, the Company and lists (i) any proceedings or actions before any court, tribunal (including the United States Patent and Trademark Office) or equivalent authority anywhere in the world related to any of the Company Registered Intellectual Property. (c) Each item of Company Intellectual Property is free and clear of all liens, claims and encumbrances. The Company (i) is the exclusive owner of and has all the rights to use exclusively all Company Intellectual Property used in connection with the operation or conduct of the Company's business, including the sale of any products or technology or the provision of any services by the Company, and (ii) owns exclusively and has good title to all copyrighted works that are Company products and other works of authorship that the Company otherwise purports to own. (d) To the extent that any Intellectual Property (including any software or other products or materials of the Company) has been developed or created by any person other than the Company for which the Company has, directly or indirectly, paid, the Company has a written agreement with such person with respect thereto and the Company thereby has obtained ownership of, and is the exclusive owner of, all such Intellectual Property. To the extent the 36 Company has acquired any Intellectual Property from a third party, to the maximum extent provided for by, and in accordance with, applicable laws and regulations, the Company has recorded each such assignment with the relevant authorities. No person other than the Company has ownership rights to improvements made by the Company in Intellectual Property which has been licensed to the Company. (e) The operation of the business of the Company as such business is currently conducted or is reasonably contemplated to be conducted does not, and the Company has not received notice that the operation of the business of the Company as such is currently conducted (including, without limitation, products, technology or services currently under development and the design, development, manufacture, use, import and sale of the products, technology and services of the company), infringes or misappropriates the Intellectual Property of any person, violate the rights of any person or entity, constitute unfair competition or trade practices under the laws of any jurisdiction, or violate the laws or regulations of any jurisdiction. There are neither contracts, licenses, nor agreements between the Company on one hand and any other person on the other with respect to Company Intellectual Property under which there is any dispute known to the Company regarding the scope of such agreement or performance under such agreement. To the Company's knowledge, no person is infringing or misappropriating any Company Intellectual Property. To the Company's knowledge, the Company has not used or accessed the content or materials of any third party in a manner that violates any laws or regulations or misappropriates or infringes the Intellectual Property of such third party. (f) Neither this Agreement nor the transactions contemplated by this Agreement, including the assignment by operation of law or otherwise of any contracts or agreements to which the Company is a party, will result in Purchaser granting to any third party any right to or with respect to any Intellectual Property owned by, or licensed to, either of them, or will result in Purchaser being bound by, or subject to, any non-compete or other restriction on the operation or scope of its business. (g) Except as described in Schedule 1.1(e), there are no inventions, licenses, patents, patent applications, trademarks, copyrights, trademark or copyright applications or registrations, pending or existing, relating to the products owned by or registered in the name of the Company; and the inventions, patents, licenses, trademarks, trade names, any copyrights, existing or pending, listed in Schedule 1.1(e) hereto are all such items necessary for the present conduct of the Company's business. 37 4.8 Compliance With Law. The Company is not in violation of any laws, governmental orders, rules or regulations to which the Company or any of its properties or businesses is subject. 4.9 Agreement. Annexed hereto as Schedule 4.9 is a true and complete list of all material contracts, instruments, commitments, and agreements, whether oral or written, excluding routine subscription agreements with customers, presently in effect to which the Company or any of the Shareholder is a party or to which the Company, any of the Shareholder or any of its respective properties, the Seller Shares or the Assets is subject, including, without limitation, the following: (a) any plan or contract or arrangement, oral or written, providing for employment or consulting services, bonuses, commissions, pensions, stock purchase or stock option or other stock rights, deferred compensation, retirement or severance payments, profit sharing, or the like; (b) any instrument or arrangement evidencing or relating in any way to (i) indebtedness for borrowed money by way of direct loan, purchase money obligation, conditional sale, lease purchase arrangement, guarantee or otherwise, (ii) confession of judgment or agreed judgment, (iii) liens, encumbrances or security interests, (iv) guaranties or indemnification or (v) investments in any person; (c) any contract containing provisions limiting the freedom of the Company to engage in any business, compete in any line of business or market any particular type of product, in any geographic area or with or to any person; (d) any license, sublicense, lease or sublease agreement, whether as licensor, sublicensor, licensee, sublicensee, lessor, sublessor, lessee, sublessee or otherwise, or any agreements with dealers, vendors, customers, suppliers, sales representatives, any governmental entity, fund or university, or any agents, marketing representatives, brokers or distributors; (e) any joint venture contract, arrangement, or other agreement involving a sharing of profit or expenses, or any joint or other technology development, cooperation, or exchange contract or arrangement; (f) agreements providing for disposition of the business or any assets or shares of the capital stock of the Company; agreements of merger or consolidation to which the Company are a party; or any letters of intent with respect to the foregoing; (g) contracts requiring the performance of consulting services, software development or modification or other services; (h) any agreement of indemnification or guaranty; 38 (i) any agreement, contract or commitment relating to capital expenditures and involving future payments in excess of $5,000; and (j) any agreement, contract or commitment relating to the disposition or acquisition of assets or any interest in any business enterprise outside the ordinary course of the Company's business. Each such agreement is a valid and subsisting agreement and in full force and effect, all payments due to or from the Company thereunder have been made, there are no disputes or suits or actions at law or otherwise pending or threatened thereunder, and such agreements are the only agreements or arrangements of this nature. True, complete, and correct copies of each such agreement have been supplied to Purchaser prior to the date hereof. 4.10 Financial Statements. Attached hereto as Schedule 4.10 is a copy of the financial statements, as certified, on a joint and several basis, by the Company's President and Chief Financial Officer, and the Shareholder as true and correct in all material respects. The Financial Statements have been prepared on a consistent basis in accordance with generally accepted accounting principles, consistently applied, and fairly present the consolidated financial position and results of operations of the Company for the periods covered thereby. The books and records respectively maintained by the Company upon which the Financial Statements are based are true and correct in all respects and accurately reflect the business of the Company. Except to the extent reflected or reserved against in the Balance Sheet, the Company has no liability of any nature, whether absolute, accrued, contingent or otherwise and whether due or to become due, including, without limitation, any liability for taxes for any period prior to such date. Except as described in detail on Schedule 4.10, since September 30, 2001, the Company has not taken any of the actions referred to in Article VII of this Agreement. 4.11 Litigation. There are no actions, suits, proceedings or investigations (including any purportedly on behalf of the Company) pending or threatened against or affecting the business or properties of the Company whether at law or in equity or admiralty or before or by any governmental department, commission, board, agency, court or instrumentality, domestic or foreign; nor is the Company operating under, subject to, in violation of or in default with respect to, any judgment, order, writ, injunction or degree of any court or other governmental department, commission, board, agency or instrumentality, domestic or foreign. No inquiries have been made directly to the Company by any governmental agency which might form the basis of any such action, suit, proceeding or investigation, or which might require the Company to undertake a course of action that would involve any expense. No present or former employee of the Company has made any filing with the Equal Employment Opportunity Commission or 39 any governmental agency, asserting any claim based on alleged race, gender (including, without limitation, sexual harassment), age or other type of discrimination by the Company. 4.12 No Undisclosed Liabilities. The Company does not have any liability, indebtedness, obligation, expense, claim, deficiency, guaranty or endorsement of any type, whether accrued, absolute, contingent, matured, unmatured or other which has not been reflected in the Financial Statements. 4.13 Employee Matters and Benefit Plans. (a) Schedule 4.13(a) annexed hereto sets forth a true and complete list, as of the date of this Agreement, of all of the persons who are employed by the Company, together with their current compensation, fringe benefits and bonuses paid or to be paid or the methods of computing such compensation and bonuses, for the current fiscal year. Except as set forth on Schedule 4.13(a) annexed hereto, no such employee is employed by the Company under a written contract of employment, nor since September 30, 2001 has the Company incurred any outstanding liability for payment of wages, vacation pay (whether accrued or otherwise), salaries, bonuses, pensions or contributions under any labor or employment contract, whether oral or written, or by reason of any past practices with respect to such employees based upon or accruing with respect to services of present or former employees of the Company. (b) SCHEDULE 4.13(b) CONTAINS A COMPLETE AND ACCURATE LIST OF EACH PLAN, PROGRAM, POLICY, PRACTICE, CONTRACT, AGREEMENT OR OTHER ARRANGEMENT PROVIDING FOR EMPLOYMENT, COMPENSATION, RETIREMENT, DEFERRED COMPENSATION, LOANS, SEVERANCE, SEPARATION, RELOCATION, REPATRIATION, EXPATRIATION, VISAS, WORK PERMITS, TERMINATION PAY, PERFORMANCE AWARDS, BONUS, INCENTIVE, STOCK OPTION, STOCK PURCHASE, STOCK BONUS, PHANTOM STOCK, STOCK APPRECIATION RIGHT, SUPPLEMENTAL RETIREMENT, FRINGE BENEFITS, CAFETERIA BENEFITS, OR OTHER BENEFITS, WHETHER WRITTEN OR UNWRITTEN, INCLUDING, WITHOUT LIMITATION, EACH "EMPLOYEE BENEFIT PLAN" WITHIN THE MEANING OF SECTION 3(3) OF THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED ("ERISA") WHICH IS OR HAS BEEN SPONSORED, MAINTAINED, CONTRIBUTED TO, OR REQUIRED TO BE CONTRIBUTED TO BY COMPANY, ANY SUBSIDIARY OF COMPANY AND, WITH RESPECT TO ANY SUCH PLANS WHICH ARE SUBJECT TO INTERNAL REVENUE CODE (THE "CODE") SECTION 401(a), ANY TRADE OR BUSINESS (WHETHER OR NOT INCORPORATED) WHICH IS OR, AT ANY RELEVANT TIME, WAS TREATED AS A SINGLE EMPLOYER WITH THE COMPANY WITHIN THE MEANING OF SECTION 414(b), (c),(m) OR (o) OF THE CODE, (AN "ERISA AFFILIATE") FOR THE BENEFIT OF ANY PERSON WHO PERFORMS OR WHO HAS PERFORMED SERVICES FOR COMPANY OR WITH RESPECT TO WHICH COMPANY, ANY SUBSIDIARY, OR ERISA AFFILIATE HAS OR MAY HAVE ANY LIABILITY (INCLUDING, WITHOUT LIMITATION, CONTINGENT LIABILITY) OR OBLIGATION (COLLECTIVELY, THE "COMPANY EMPLOYEE PLANS"). SCHEDULE 2.22 SEPARATELY LISTS EACH COMPANY EMPLOYEE PLAN THAT HAS BEEN ADOPTED OR MAINTAINED BY THE COMPANY, WHETHER FORMALLY OR INFORMALLY, FOR THE BENEFIT OF EMPLOYEES OUTSIDE THE UNITED STATES ("COMPANY INTERNATIONAL EMPLOYEE PLANS"). (c) THE COMPANY HAS FURNISHED TO PURCHASER TRUE AND COMPLETE COPIES OF DOCUMENTS EMBODYING EACH OF THE COMPANY EMPLOYEE PLANS AND RELATED PLAN DOCUMENTS, INCLUDING (WITHOUT LIMITATION) TRUST DOCUMENTS, GROUP ANNUITY CONTRACTS, PLAN AMENDMENTS, INSURANCE POLICIES OR CONTRACTS, PARTICIPANT AGREEMENTS, EMPLOYEE BOOKLETS, ADMINISTRATIVE SERVICE AGREEMENTS, SUMMARY PLAN DESCRIPTIONS, COMPLIANCE AND NONDISCRIMINATION TESTS FOR THE LAST THREE PLAN YEARS, STANDARD COBRA FORMS AND RELATED NOTICES, REGISTRATION STATEMENTS AND PROSPECTUSES, AND, TO THE EXTENT STILL IN ITS POSSESSION, ANY MATERIAL EMPLOYEE COMMUNICATIONS RELATING THERETO. WITH RESPECT TO EACH COMPANY EMPLOYEE PLAN THAT IS SUBJECT TO ERISA REPORTING REQUIREMENTS, THE COMPANY HAS PROVIDED COPIES OF THE FORM 5500 REPORTS 40 FILED FOR THE LAST FIVE PLAN YEARS. THE COMPANY HAS FURNISHED PURCHASER WITH THE MOST RECENT INTERNAL REVENUE SERVICE DETERMINATION OR OPINION LETTER ISSUED WITH RESPECT TO EACH SUCH COMPANY EMPLOYEE PLAN, AND NOTHING HAS OCCURRED SINCE THE ISSUANCE OF EACH SUCH LETTER THAT COULD REASONABLY BE EXPECTED TO CAUSE THE LOSS OF THE TAX-QUALIFIED STATUS OF ANY COMPANY EMPLOYEE PLAN SUBJECT TO CODE. 41 SECTION 401(a). (d) EACH COMPANY EMPLOYEE PLAN HAS BEEN ADMINISTERED IN ACCORDANCE WITH ITS TERMS AND IN COMPLIANCE WITH THE REQUIREMENTS PRESCRIBED BY ANY AND ALL STATUTES, RULES AND REGULATIONS (INCLUDING ERISA AND THE CODE), EXCEPT AS WOULD NOT HAVE, IN THE AGGREGATE, A MATERIAL ADVERSE EFFECT, AND THE COMPANY AND EACH SUBSIDIARY OR ERISA AFFILIATE HAVE PERFORMED ALL MATERIAL OBLIGATIONS REQUIRED TO BE PERFORMED BY THEM UNDER, ARE NOT IN MATERIAL RESPECT IN DEFAULT UNDER OR VIOLATION OF AND HAVE NO KNOWLEDGE OF ANY MATERIAL DEFAULT OR VIOLATION BY ANY OTHER PARTY TO, ANY OF THE COMPANY EMPLOYEE PLANS; (ii) ANY COMPANY EMPLOYEE PLAN INTENDED TO BE QUALIFIED UNDER SECTION 401(a) OF THE CODE HAS EITHER OBTAINED FROM THE INTERNAL REVENUE SERVICE A FAVORABLE DETERMINATION LETTER AS TO ITS QUALIFIED STATUS UNDER THE CODE, INCLUDING ALL AMENDMENTS TO THE CODE WHICH ARE CURRENTLY EFFECTIVE, OR HAS TIME REMAINING TO APPLY UNDER APPLICABLE TREASURY REGULATIONS OR INTERNAL REVENUE SERVICE PRONOUNCEMENTS FOR A DETERMINATION OR OPINION LETTER AND TO MAKE ANY AMENDMENTS NECESSARY TO OBTAIN A FAVORABLE DETERMINATION OR OPINION LETTER; (iii) NONE OF THE COMPANY EMPLOYEE PLANS PROMISES OR PROVIDES RETIREE MEDICAL OR OTHER RETIREE WELFARE BENEFITS TO ANY PERSON; (iv) THERE HAS BEEN NO "PROHIBITED TRANSACTION," AS SUCH TERM IS DEFINED IN SECTION 406 OF ERISA OR SECTION 4975 OF THE CODE, WITH RESPECT TO ANY COMPANY EMPLOYEE PLAN; (v) NONE OF THE COMPANY, ANY SUBSIDIARY OR ANY ERISA AFFILIATE IS SUBJECT TO ANY LIABILITY OR PENALTY UNDER SECTIONS 4976 THROUGH 4980 OF THE CODE OR TITLE I OF ERISA WITH RESPECT TO ANY COMPANY EMPLOYEE PLAN; (vi) ALL CONTRIBUTIONS REQUIRED TO BE MADE BY THE COMPANY, ANY SUBSIDIARY OR ERISA AFFILIATE TO ANY COMPANY EMPLOYEE PLAN HAVE BEEN PAID OR ACCRUED; (vii) WITH RESPECT TO EACH COMPANY EMPLOYEE PLAN, NO "REPORTABLE EVENT" WITHIN THE MEANING OF SECTION 4043 OF ERISA (EXCLUDING ANY SUCH EVENT FOR WHICH THE THIRTY (30) DAY NOTICE REQUIREMENT HAS BEEN WAIVED UNDER THE REGULATIONS TO SECTION 4043 OF ERISA) NOR ANY EVENT DESCRIBED IN SECTION 4062, 4063 OR 4041 OR ERISA HAS OCCURRED; (VIII) EACH COMPANY EMPLOYEE PLAN SUBJECT TO ERISA, HAS PREPARED IN GOOD FAITH AND TIMELY FILED ALL REQUISITE GOVERNMENTAL REPORTS (WHICH WERE TRUE AND CORRECT AS OF THE DATE FILED) AND HAS PROPERLY AND TIMELY FILED AND DISTRIBUTED OR POSTED ALL NOTICES AND REPORTS TO EMPLOYEES REQUIRED TO BE FILED, DISTRIBUTED OR POSTED WITH RESPECT TO EACH SUCH COMPANY EMPLOYEE PLAN; (ix) NO SUIT, ADMINISTRATIVE PROCEEDING, ACTION OR OTHER LITIGATION HAS BEEN BROUGHT, OR TO THE KNOWLEDGE OF THE COMPANY IS THREATENED, AGAINST OR WITH RESPECT TO ANY SUCH COMPANY EMPLOYEE PLAN, INCLUDING ANY AUDIT OR INQUIRY BY THE INTERNAL REVENUE SERVICE OR UNITED STATES DEPARTMENT OF LABOR; AND (x) THERE HAS BEEN NO AMENDMENT TO, WRITTEN INTERPRETATION OR ANNOUNCEMENT BY COMPANY, ANY SUBSIDIARY OR ERISA AFFILIATE WHICH WOULD MATERIALLY INCREASE THE EXPENSE OF MAINTAINING ANY COMPANY EMPLOYEE PLAN ABOVE THE LEVEL OF EXPENSE INCURRED WITH RESPECT TO THAT PLAN FOR THE MOST RECENT FISCAL YEAR INCLUDED IN COMPANY'S FINANCIAL STATEMENTS. (e) NONE OF THE COMPANY, ANY SUBSIDIARY OR ANY ERISA AFFILIATE HAS EVER MAINTAINED, ESTABLISHED, SPONSORED, PARTICIPATED IN, CONTRIBUTED TO, OR IS OBLIGATED TO CONTRIBUTE TO, OR OTHERWISE INCURRED ANY OBLIGATION OR LIABILITY (INCLUDING, WITHOUT LIMITATION, ANY CONTINGENT LIABILITY) UNDER ANY "MULTIEMPLOYER PLAN" (AS DEFINED IN SECTION 3(37) OF ERISA) OR TO ANY "PENSION PLAN" (AS DEFINED IN SECTION 3(2) OF ERISA) SUBJECT TO TITLE IV OF ERISA OR SECTION 412 OF THE CODE. NONE OF THE COMPANY, ANY SUBSIDIARY OR ANY ERISA AFFILIATE HAS ANY ACTUAL OR POTENTIAL WITHDRAWAL LIABILITY (INCLUDING, WITHOUT LIMITATION, ANY CONTINGENT LIABILITY) FOR ANY COMPLETE OR PARTIAL WITHDRAWAL (AS DEFINED IN SECTIONS 4203 AND 4205 OF ERISA) FROM ANY MULTIEMPLOYER PLAN. (f) WITH RESPECT TO EACH COMPANY EMPLOYEE PLAN, THE COMPANY HAS COMPLIED WITH (i) THE APPLICABLE HEALTH CARE CONTINUATION AND NOTICE PROVISIONS OF THE CONSOLIDATED OMNIBUS BUDGET RECONCILIATION ACT OF 1985 ("COBRA") AND THE REGULATIONS THEREUNDER OR ANY STATE LAW GOVERNING HEALTH CARE COVERAGE EXTENSION OR CONTINUATION; (ii) THE APPLICABLE REQUIREMENTS OF THE FAMILY AND MEDICAL LEAVE ACT OF 1993 AND THE REGULATIONS THEREUNDER; (iii) THE APPLICABLE REQUIREMENTS OF THE HEALTH INSURANCE PORTABILITY AND ACCOUNTABILITY ACT OF 1996 ("HIPAA"); AND (IV) THE APPLICABLE REQUIREMENTS OF THE CANCER RIGHTS ACT OF 1998, EXCEPT TO THE EXTENT THAT SUCH FAILURE TO COMPLY WOULD NOT IN THE AGGREGATE HAVE A MATERIAL ADVERSE EFFECT. THE COMPANY HAS NO MATERIAL UNSATISFIED OBLIGATIONS TO ANY EMPLOYEES, FORMER EMPLOYEES, OR QUALIFIED BENEFICIARIES PURSUANT TO COBRA, HIPAA, OR ANY STATE LAW GOVERNING HEALTH CARE COVERAGE EXTENSION OR CONTINUATION. (g) THE CONSUMMATION OF THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT WILL NOT (i) ENTITLE ANY CURRENT OR FORMER EMPLOYEE OR OTHER SERVICE PROVIDER OF THE COMPANY, ANY SUBSIDIARY OR ANY ERISA AFFILIATE TO SEVERANCE BENEFITS OR ANY OTHER PAYMENT (INCLUDING, WITHOUT LIMITATION, UNEMPLOYMENT COMPENSATION, GOLDEN PARACHUTE, BONUS OR BENEFITS UNDER ANY COMPANY EMPLOYEE PLAN), EXCEPT AS 42 EXPRESSLY PROVIDED IN THIS AGREEMENT OR (ii) ACCELERATE THE TIME OF PAYMENT OR VESTING OF ANY SUCH BENEFITS OR INCREASE THE AMOUNT OF COMPENSATION DUE ANY SUCH EMPLOYEE OR SERVICE PROVIDER. NO BENEFIT PAYABLE OR WHICH MAY BECOME PAYABLE BY THE COMPANY PURSUANT TO ANY COMPANY EMPLOYEE PLAN OR AS A RESULT OF OR ARISING UNDER THIS AGREEMENT SHALL CONSTITUTE AN "EXCESS PARACHUTE PAYMENT" (AS DEFINED IN SECTION 280G(b)(1) OF THE CODE) WHICH IS SUBJECT TO THE IMPOSITION OF AN EXCISE TAX UNDER SECTION 4999 OF THE CODE OR THE DEDUCTION FOR WHICH WOULD BE DISALLOWED BY REASON OF SECTION 280G OF THE CODE. EACH COMPANY EMPLOYEE PLAN CAN BE AMENDED, TERMINATED OR OTHERWISE DISCONTINUED AFTER THE EFFECTIVE TIME IN ACCORDANCE WITH ITS TERMS, WITHOUT MATERIAL LIABILITY TO ACQUIRER OR COMPANY (OTHER THAN ORDINARY ADMINISTRATION EXPENSES TYPICALLY INCURRED IN A TERMINATION EVENT). (h) THE COMPANY IS IN COMPLIANCE WITH ALL CURRENTLY APPLICABLE LAWS AND REGULATIONS RESPECTING TERMS AND CONDITIONS OF EMPLOYMENT INCLUDING, WITHOUT LIMITATION, APPLICANT AND EMPLOYEE BACKGROUND CHECKING, IMMIGRATION LAWS, DISCRIMINATION LAWS, VERIFICATION OF EMPLOYMENT ELIGIBILITY, EMPLOYEE LEAVE LAWS, CLASSIFICATION OF WORKERS AS EMPLOYEES AND INDEPENDENT CONTRACTORS, WAGE AND HOUR LAWS, AND OCCUPATIONAL SAFETY AND HEALTH LAWS, EXCEPT FOR SUCH NONCOMPLIANCE THAT NEITHER HAS, NOR REASONABLY WOULD BE EXPECTED TO HAVE, A MATERIAL ADVERSE EFFECT ON THE COMPANY. THERE ARE NO PROCEEDINGS PENDING OR, TO THE COMPANY'S KNOWLEDGE, REASONABLY EXPECTED OR THREATENED, BETWEEN THE COMPANY, ON THE ONE HAND, AND ANY OR ALL OF ITS CURRENT OR FORMER EMPLOYEES, ON THE OTHER HAND, INCLUDING, BUT NOT LIMITED TO, ANY CLAIMS FOR ACTUAL OR ALLEGED HARASSMENT OR DISCRIMINATION BASED ON RACE, NATIONAL ORIGIN, AGE, SEX, SEXUAL ORIENTATION, RELIGION, DISABILITY, OR SIMILAR TORTIOUS CONDUCT, BREACH OF CONTRACT, WRONGFUL TERMINATION, DEFAMATION, INTENTIONAL OR NEGLIGENT INFLICTION OF EMOTIONAL DISTRESS, INTERFERENCE WITH CONTRACT OR INTERFERENCE WITH ACTUAL OR PROSPECTIVE ECONOMIC DISADVANTAGE. THERE ARE NO CLAIMS PENDING, OR, TO THE COMPANY'S KNOWLEDGE, REASONABLY EXPECTED OR THREATENED, AGAINST COMPANY UNDER ANY WORKERS' COMPENSATION OR LONG-TERM DISABILITY PLAN OR POLICY. THE COMPANY HAS NO MATERIAL UNSATISFIED OBLIGATIONS TO ANY EMPLOYEES, FORMER EMPLOYEES, OR QUALIFIED BENEFICIARIES PURSUANT TO COBRA, HIPAA, OR ANY STATE LAW GOVERNING HEALTH CARE COVERAGE EXTENSION OR CONTINUATION. THE COMPANY IS NOT A PARTY TO ANY COLLECTIVE BARGAINING AGREEMENT OR OTHER LABOR UNION CONTRACT, NOR DOES THE COMPANY KNOW OF ANY ACTIVITIES OR PROCEEDINGS OF ANY LABOR UNION TO ORGANIZE ITS EMPLOYEES. THE COMPANY HAS PROVIDED ALL EMPLOYEES WITH ALL WAGES, BENEFITS, RELOCATION BENEFITS, STOCK OPTIONS, BONUSES AND INCENTIVES, AND ALL OTHER COMPENSATION THAT BECAME DUE AND PAYABLE THROUGH THE DATE OF THIS AGREEMENT. 4.14 Taxes. The Company has filed, or caused to be filed, with all appropriate governmental agencies all required tax and information returns and have paid, caused to be paid or accrued all taxes (including, without limitation, all income, franchise, sales, excise and use taxes), assessments, charges, penalties and interest shown to be due and payable. The Company has no liability, contingent or otherwise, for any taxes, assessments, charges, penalties or interest, other than amounts adequately reserved for. The Company has not received directly or indirectly notice of, nor is it otherwise aware of an audit or examination; the Company is not a party directly or indirectly to any action or proceeding by any governmental authority for assessment or collection of taxes, charges, penalties or interest; nor has any claim for assessment and collection been asserted against the Company directly or indirectly; nor has the Company executed a waiver of any statute of limitations with respect thereto. The Company has paid, or caused to be paid, or adequately reserved for, all applicable corporate franchise taxes, unemployment taxes, payroll taxes, social security taxes, occupation taxes, ad valorem taxes, property taxes, excise taxes and imposts, sales and use taxes, and all other taxes of every kind, 43 character or description required to be paid to the date hereof, and have received no notices and is not otherwise aware, of any deficiencies, adjustments or changes in assessments with respect to any such taxes. The Company has duly filed, or caused to be filed, all reports or returns relating to or covering any such taxes or other charges which are due or required to be filed at the date hereof and no extensions of time are in effect for the assessment of deficiencies for such taxes in respect of any fiscal period. The Company is not aware of any basis for the assertion of any claim relating or attributable to taxes, which, if adversely determined, would result in any lien on the assets of the Company. The Company is not a party to a tax sharing or allocation agreement nor does the Company owe any amount under any such agreement. The Company's tax basis in its assets for purposes of determining its future amortization, depreciation and other federal income tax deductions is accurately reflected on the Company's tax books and records. 4.15 Absence of Changes. Except as set forth on Schedule 4.15 attached hereto, since September 30, 2001, the Company has been operated in the ordinary course and there has not been: (a) any declaration, setting aside or payment of any dividend or other distribution of any assets of any kind whatsoever with respect to any shares of the capital stock of the Company or any direct or indirect redemption, purchase or other acquisition of any such shares of the capital stock of the Company or any issuance of securities or any rights whatsoever to acquire securities; (b) any difficulty with its labor relations adversely affecting the business of the Company; (c) any license, sale, transfer, pledge, lien, security interest, mortgage or other disposition of any tangible or intangible assets; (d) any write-down or write-up of the value of any asset of the Company or any portion thereof; (e) any change in the accounting methods or practices followed by the Company, in depreciation or amortization policies or rates theretofore adopted by the Company; (f) any single capital expenditure or commitment therefor by the Company in excess of $10,000, or such capital expenditures in the aggregate in excess of $25,000, for additions to property, plant or equipment of the Company; (g) any changes in the manner in which the Company extends discounts or credits or otherwise deals with customers, vendors, suppliers, distributors or sales representatives; 44 (h) any agreement or commitment relating to the sale by the Company of any fixed assets; (i) any outstanding contract or commitment which will result in any loss to the Company upon completion of performance thereof, or any outstanding contract, bid or sale or service proposal quoting prices which will not result in a normal profit in the ordinary course of business; (j) any grant by the Company or any of the Shareholder of any power of attorney (whether revocable or irrevocable) to any person that is or may hereafter be in force for any purpose whatsoever; (k) any amendment or termination of any material contract, agreement or license to which the Company is a party or by which it or its assets is bound; (l) commencement or notice or threat of commencement of any lawsuit or proceeding against or investigation of the Company or its affairs, or any reasonable basis for any of the foregoing; (m) notice of any claim or potential claim of ownership by a third party of any intellectual property rights of the Company or of infringement by the Company of any third party's intellectual property rights; (n) the creation of any lien of record or guarantee, or any investment in any person; or (o) any commitment to do any of the acts or things specified in items (a) though (n) of this Section 4.15. 4.16 Insurance. The Company maintains adequate insurance against all ordinary and insurable risks with respect to all property, real, personal and mixed, owned or leased by it. Schedule 4.16 annexed hereto contains a complete list of all policies of insurance held by the Company, showing for each policy (i) the owner, (ii) the coverage, (iii) the amount of premium properly allocable thereto, (iv) the name of the insurer, (v) the termination date of the policy and (vi) all claims made thereunder. All such policies are in full force and effect, all premiums with respect thereto covering all periods up to and including the Closing Date have been paid, and no notice of cancellation or termination has been received with respect to any such policy. The Company has not failed to give any notice or present any claim thereunder in a due and timely fashion. 4.17 Brokers. There has been no broker or finder involved in any manner in the negotiations leading up to the execution of this Agreement or the consummation of any transactions 45 contemplated hereby, and the Shareholder, jointly and severally, agree to indemnify Purchaser and the Company against and hold Purchaser and the Company harmless from any claim made by any party for a broker's or finder's fee or other similar payment based upon any agreements, arrangements or understanding made by the Shareholder. 4.18 Transactions with Affiliates. Except as described in Schedule 4.18 or other Schedules annexed hereto, there are no loans, leases, royalty agreements, employment contracts or any other agreement or arrangement, oral or written, between the Company, on the one hand, and any past or present stockholder, officer, employee, consultant or director of the Company or any of the Shareholder (or any member of the immediate family of such stockholder, officer, employee, consultant, director or Shareholder), on the other hand. 4.19 No Untrue Representation or Warranty. No representation or warranty made by the Shareholder contained in this Agreement or any attachment, statement, schedule, exhibit, certificate or instrument furnished or to be furnished to Purchaser by the Shareholder pursuant hereto, or otherwise furnished in writing by the Shareholder in, connection with the transactions contemplated hereby, contains or will contain any untrue statement of a material fact, or omits or will omit to state any material fact necessary to make the statements contained herein or therein not misleading. 4.20 Restrictions on Business Activities. There is no agreement (non-compete or otherwise), commitment, judgment, injunction, order or decree to which the Company is a party or otherwise binding on the Company which has or reasonably could be expected to have the effect of prohibiting or impairing any business practice of the Company, any acquisition of property (tangible or intangible) by the Company or the conduct of business by the Company. Without limiting the foregoing, the Company has not entered into any agreement under which the Company is restricted from selling, licensing or otherwise distributing any of its products to any class of customers, in any geographic area, during any period of time or in any segment of the market. 4.21 Governmental Authorizations and Licenses. The Company possesses all material consents, licenses, permits, grants or other authorizations issued to the Company by a governmental entity pursuant to which the Company currently operates or holds any interest in any of its properties or which is required for the operation of its business or the holding of such interest therein, and all such consents, licenses, permits, grants and authorizations are in full 46 force and effect and constitute all authorizations required to permit the Company to operate or conduct its business. ARTICLE V REPRESENTATIONS AND WARRANTIES OF PURCHASER Purchaser represents and warrants to the Company and the Shareholder as follows: 5.1 Organization and Good Standing. Purchaser is a corporation duly organized, validly existing and in good standing under the laws of the State of California and is in good standing as a foreign corporation in each other jurisdiction where the properties owned, leased or operated or the business conducted by it requires such qualification. 5.2 Corporate Authority. Purchaser has full authority to execute and to perform this Agreement in accordance with its terms; the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby does not and will not result in a breach, violation or default or give rise to an event which, with the giving of notice or after the passage of time, would result in a breach, violation or default of any of the terms or provisions of Purchaser's Certificate of Incorporation, By-Laws or of any indenture, agreement, judgment, decree or other instrument or restriction to which Purchaser is a party or by which Purchaser or any of its assets may be bound or affected; the execution and delivery of this Agreement have been and, as of the Closing Date, the consummation of the transactions contemplated hereby will have been, duly authorized, and no authorization or approval, whether of the stockholders or directors of Purchaser or of governmental bodies or otherwise, will be necessary to enable the Purchaser to enter into and perform same; and this Agreement constitutes a valid and binding obligation enforceable against Purchaser in accordance with its terms. 5.3 Compliance With Law. Purchaser is not in violation of any laws, governmental orders, rules or regulations to which the Company or any of its properties or businesses is subject. 5.4 Insurance. Purchaser maintains adequate insurance against all ordinary and insurable risks with respect to all property, real, personal and mixed, owned or leased by it. All such policies are in full force and effect, all premiums with respect thereto covering all periods up to and including the Closing Date have been paid, and no notice of cancellation or termination has been received with respect to any such policy. Purchaser has not failed to give any notice or present any claim thereunder in a due and timely fashion. 47 5.5 Brokers. There has been no broker or finder involved in any manner in the negotiations leading up to the execution of this Agreement or the consummation of any transactions contemplated hereby, and Purchaser agrees to indemnify the Shareholder against and hold the Shareholder harmless from any claim made by any party for a broker's or finder's fee or other similar payment based upon any agreements, arrangements or understanding made by Purchaser. 5.6 No Untrue Representation or Warranty. No representation or warranty made by Purchaser contained in this Agreement or any attachment, statement, schedule, exhibit, certificate or instrument furnished or to be furnished to the Company or the Shareholder by Purchaser pursuant hereto, or otherwise furnished in writing by Purchaser in connection with the transactions contemplated hereby, contains or will contain any untrue statement of a material fact, or omits or will omit to state any material fact necessary to make the statements contained herein or therein not misleading. ARTICLE VI COVENANTS 6.1 Further Assurances. Each of the parties hereto agree that, at any time after the Closing Date, upon the request of the other, they will do, execute, acknowledge and deliver, or will cause to be done, executed, acknowledged and delivered, all such further acknowledgments, deeds, assignments, bills of sale, transfers, conveyances, instruments, consents and assurances as may reasonably be required for the better assuring and confirming to the other, its successors and assigns, absolute ownership to the respective shares to be sold hereunder. 6.2 Cooperation. The parties shall cooperate with each other fully with respect to actions required or requested to be undertaken with respect to tax audits, administrative actions or proceedings, litigation and any other matters that may occur after the Closing Date, and each party shall maintain and make available to the other party upon request all corporate, tax and other records reasonably required or requested in connection with such matters. 6.3 Publicity. The parties hereto agree that no publicity release or announcement concerning the transactions contemplated hereby shall be issued without the advance approval of the form and substance thereof by the parties, except as may be required by law, rule or regulation. ARTICLE VII CONDUCT OF BUSINESS PENDING THE CLOSING 48 Between the date hereof and the Closing, and except as otherwise expressly consented to in writing in advance or approved in writing in advance by Purchaser: 7.1 Regular Course of Business. The Shareholder shall cause the Company to carry on its business diligently and substantially in the same manner as heretofore conducted, and shall not permit it to institute any new methods of management, accounting or operation or engage in any transaction or activity, enter into any agreement or make any commitment, except in the usual and ordinary course of business and consistent with past practice as limited by the more restrictive provisions of this Agreement, where applicable, or as otherwise specifically contemplated by this Agreement and not in violation thereof. 7.2 Certain Changes. Except as permitted by this Agreement, without the prior written consent of Purchaser, the Shareholder will not permit the Company to: (a) Borrow or agree to borrow any funds or incur, or assume or become subject to, whether directly or by way of guarantee or otherwise, any material obligation or liability (absolute or contingent); (b) Pay, discharge or satisfy any material claim, liability or obligation (absolute, accrued, contingent or otherwise), other than the payment, discharge or satisfaction in the ordinary course of business and consistent with past practice of liabilities or obligations reflected or reserved against in the Balance Sheet or thereafter incurred in accordance with this Agreement; (c) Prepay any obligation having a fixed maturity of more than 90 days from the date such obligation was issued or incurred; (d) Permit or allow any of its material property or assets (real, personal or mixed, tangible or intangible) to be subjected to any lien; (e) Cancel any material debts or waive any claims or rights or sell, transfer, or otherwise dispose of any of its properties or assets; (f) Grant any material increase in the compensation of officers or employees, institute or amend any sales compensation plan, severance plan or other arrangement for its officers or employees, or enter into any plan or agreement with respect thereto; (g) Make any capital expenditures or commitments for additions to or replacement of property, plant, equipment or intangible capital assets; (h) Pay, loan or advance any material amount to, or sell, transfer or lease any material properties or assets to, or enter into any agreement or arrange with, any of its employees, officers 49 or directors or any affiliate thereof, except for directors fees and compensation to employees, officers or directors at rates not exceeding the rates of compensation set forth in Schedule 4.13(a); (i) Adopt or amend any employee benefit plan, program, policy or arrangement (including without limitation any amendment which accelerates vesting under any such employee benefit plan, program, policy or arrangement), or enter into any employment contract, extend any employment offer, pay or agree to pay any special bonus or special remuneration to any director, employee, or consultant, or increase the salaries or wage rates of its employees; (j) Issue, or grant any options with respect to the issuance of, any shares of its capital stock, or purchase shares of capital stock or make any equity investment in, or agree to purchase or make any equity investment in, any other entity, corporate or otherwise; (k) Fail to pay or otherwise satisfy its monetary obligations as they become due, except such as are being contested in good faith; (l) Declare, set aside or pay any dividend or other distribution of any assets of any kind whatsoever with respect to any shares of the capital stock of the Company, or redeem, purchase or otherwise acquire, directly or indirectly, any shares of the capital stock of the Company; or (m) Agree, whether in writing or otherwise, to do any of the foregoing. 7.3 Contracts. The Shareholder shall not permit the Company to enter into any contract or commitment, or purchase any supplies or services or sell any assets, except normal contracts or commitments for the purchase of, and normal purchases of, supplies or services made in the usual and ordinary course of business, consistent with the past practice of the Company, and not in violation of any other more restrictive provision of this Article VII. In addition, and not in limitation of the foregoing, the Company to take any actions to modify or amend any of the documents comprising Assets without the express prior written consent of Purchaser. 7.4 Insurance; Property. The Shareholder will cause the Company to maintain adequate insurance against all ordinary and insurable risks with respect to all property, real, personal and mixed, owned or leased by them; and all such property shall be used, operated, maintained and repaired in a careful and reasonably efficient manner. 7.5 No Default. The Shareholder shall not to do any act or omit to do any act, which will cause a breach of any contract or commitment of the Company or any subsidiary or which would cause the breach of any representation, warranty or covenant made hereunder. 50 7.6 Compliance With Laws. The Shareholder will cause the Company to comply with all laws applicable to it and its properties, operations, business and employees. 7.7 Tax Returns. The Shareholder will cause the Company to prepare and file all federal, state, local and foreign tax returns and amendments thereto required to be filed. Purchaser shall have a reasonable opportunity to review each such return and amendment prior to the filing thereof. 7.8 Maintain Books. The Shareholder will cause the Company to maintain its books, accounts and records in accordance with generally accepted accounting principals applied on a basis consistent with prior years. 7.9 Consents and Waivers Without Any Condition. The Shareholder shall not make or permit the Company to make any agreement or understanding, not earlier approved in writing by Purchaser, as a condition for obtaining any consent or waiver contemplated by Section 3.2(h) of this Agreement. ARTICLE VIII SURVIVAL: INDEMNIFICATION 8.1 Survival of Representations and Warranties. The representations and warranties made by the Shareholder in this Agreement shall survive and remain in effect following the Closing Date. 8.2 Indemnity For Claims Against Purchaser. The Shareholder hereby agrees to indemnify and hold Purchaser harmless from and against the following: (a) Any and all liabilities, losses damages, claims, costs and reasonable expenses suffered by Purchaser (whether awarded against Purchaser or paid by Purchaser in settlement of a claim as provided in Section 8.3 or otherwise suffered), resulting from any misrepresentation, breach or inaccuracy of any warranty, or non-fulfillment of any covenant, condition or agreement on the part of the Shareholder contained in this Agreement or in any statement, attachment, schedule, exhibit or certificate furnished or to be furnished by the Shareholder to Purchaser pursuant hereto or in connection with the transactions contemplated hereby; and (b) Any and all actions, suits, proceedings, demands, assessments or judgments, costs and reasonable expenses (including reasonable attorneys' fees') incident to any of the foregoing. 8.3 Indemnity For Claims Against the Shareholder. Purchaser hereby agrees to indemnify and hold the Shareholder harmless from and against the following: 51 (a) Any and all liabilities, losses damages, claims, costs and reasonable expenses suffered by the Shareholder (whether awarded against them or paid by them in settlement of a claim as provided in Section 8.4 or otherwise suffered), resulting from any misrepresentation, breach of any warranty, or non-fulfillment of any covenant, condition or agreement on the part of Purchaser contained in this Agreement or in any statement, attachment, schedule, exhibit or certificate furnished or to be furnished by Purchaser to the Shareholder pursuant hereto or in connection with the transactions contemplated hereby; and (b) Any and all actions, suits, proceedings, demands, assessments or judgments, costs and reasonable expenses (including reasonable attorneys' fees') incident to any of the foregoing. 8.4 Notice of Claim, Assumption of Defense and Settlement of Claims. Purchaser (the "Indemnitee") shall promptly give notice (an "Indemnification Notice") in accordance with Section 10.1 hereof to the Shareholder (the "Indemnitor") after Indemnitee shall have knowledge of any demands, claims, actions or causes of action (singly, a "Claim" and hereinafter referred to collectively, as "Claims") which might give rise to a Claim by the Indemnitee against the Indemnitor for indemnification under Section 8.2 above, stating the nature and basis of said Claim and the amount thereof, to the extent known. A failure to give notice hereunder shall not relieve the Indemnitor from any obligation hereunder unless such failure to give notice shall materially and adversely affect the Indemnitor' ability to defend the Claim. After the delivery of an Indemnification Notice certifying that the Indemnitee has incurred or had asserted against it or them any liabilities, claims, losses, damages, costs or expenses for which indemnity may he sought in accordance with the terms of this Article VIII (the "Damages"), the Indemnitee shall make a claim in an amount equal to the incurred Damages or asserted Damages, as the case may be (which, in the case of any asserted Damages shall include the Indemnitee's reasonably estimated cost of the defense thereof, hereinafter the "Estimated Defense Costs"), and the Indemnitor shall promptly reimburse the Indemnitee for the Damages for which the Indemnitee has incurred and not been indemnified. In the event the amount of such Damages are not promptly reimbursed by the Indemnitor as aforesaid, the amount of such unreimbursed Damages shall accrue interest at a rate equal to two percent (2%) above the applicable prime rate of Citibank, N.A. With respect to any third party Claims made subsequent to the Closing Date, the following procedures shall be observed: Promptly after delivery of an Indemnification Notice in respect of a Claim, the Indemnitor may elect, by written notice to the Indemnitee, to undertake the defense thereof with counsel reasonably satisfactory to the Indemnitee and at the sole cost and expense of the Indemnitor. Failure by the Indemnitor to notify the Indemnitee of their election to defend any such action within 20 days after notice thereof shall have been given, shall be deemed a waiver by the Indemnitor of its right to defend and settle such action. If the Indemnitor assumes the defense of any such Claim, its obligations hereunder as to such Claim shall be limited to taking all steps necessary in the defense or settlement of such Claim and to holding the Indemnitee harmless from and against any and all losses, damages, expenses and liabilities awarded in any such 52 proceeding or arising out of any settlement approved by the Indemnitor or any judgment in connection with such Claim. The Indemnitor shall not, in the defense of any such Claim, consent to the entry of any judgment (except with the prior written consent of the Indemnitee) or enter into any settlement (except with the prior written consent of the Indemnitee) which does not include as an unconditional term thereof the giving by the claimant or the plaintiff to the Indemnitee of a complete release from all liability in respect of such Claim. If the Indemnitor do not assume the defense of a Claim, the Indemnitee may defend against or settle such Claim in such manner as they may deem appropriate, and the Indemnitor shall promptly reimburse the Indemnitee for all expenses, legal or otherwise, incurred by the Indemnitee in connection with the defense against and settlement of such Claim, as and when the same shall be incurred by them. If no settlement of such Claim is made, the Indemnitor shall promptly reimburse the Indemnitee for or, at their option, pay the amount of any judgment rendered with respect to such Claim and all expenses, legal or otherwise, incurred by the Indemnitee in the defense against such Claim. Right to Set Off. Notwithstanding anything to the contrary set forth in this Agreement or any Exhibit hereto, in the event that the Indemnitee shall have a Claim against the Shareholder for which it has not been fully and completely indemnified as contemplated above, the Indemnitee shall have the right to set off the amount of such Claim against the Shareholder against any amounts due to the Shareholder hereunder. Remedies Cumulative. The remedies provided to the parties hereto herein shall be cumulative and shall not preclude Indemnitee from asserting any other rights or seeking any other remedies against an Indemnitor or his respective heirs, successors or assigns. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent or subsequent assertion or employment of any other appropriate right or remedy. ARTICLE IX TERMINATION AND ABANDONMENT 9.1 Methods of Termination. The transactions contemplated herein may be terminated and/or abandoned at any time, but not later than the Closing: (a) By mutual written agreement of Purchaser and the Shareholder; (b) By Purchaser or the Shareholder, if the Closing shall not have occurred on or prior to November 30, 2001; (c) By Purchaser or Shareholder, if there shall be a final nonappealable order of a federal or state court in effect preventing consummation of the sale, or there shall be any statute, rule, regulation or order enacted, promulgated or issued or deemed applicable to the sale by any governmental entity that would make consummation of the sale illegal; 53 (d) By Purchaser if the Company shall have suffered since September 30, 2001 any adverse change (whether or not such change is described in the Schedules hereto or any supplement to the Schedules) in its business, affairs, prospects, financial condition, working capital, assets, liabilities (absolute, accrued, contingent or otherwise), reserves or operations; or (e) By Purchaser if it is not in material breach of its obligations under this Agreement and there has been a breach of any representation, warranty, covenant or agreement contained in this Agreement on the part of the Shareholder and such breach has not been cured within five (5) days after written notice to the Shareholder (provided that no cure period shall be required for a breach which by its nature cannot be cured). 9.2 Procedure upon Termination. In the event of termination and abandonment pursuant to Section 9.1 hereof, written notice thereof shall forthwith be given to the other parties hereto and the transactions contemplated by this Agreement shall be terminated and/or abandoned, without further action by Purchaser or the Shareholder. If the transactions contemplated by this Agreement are terminated/or abandoned as provided herein, each party will redeliver all documents, work papers and other material of any other party relating to the transactions contemplated hereby, whether so obtained before or after the execution hereof, to the party furnishing the same. No party hereto who shall have satisfied in full all of the obligations of such party under this Agreement which were to have been satisfied by such party prior to the Closing and who shall have not breached any representation, warranty, covenant or agreement of such party contained in this Agreement shall have any liability or further obligation to any other party to this Agreement. ARTICLE X GENERAL PROVISIONS 10.1 Notices. All notices, requests, demands and other communications hereunder shall be in writing and shall be delivered personally, sent by telex or facsimile transmission or sent by certified, registered or express mail, postage prepaid. Any such notice shall be deemed given when so delivered personally or when sent by facsimile transmission or, if mailed by certified or registered mail, ten (10) days after the date of deposit in the United States mail, postage prepaid, if addressed: in the case of the Shareholder: 54 DCDC Attn: CEO 67 Irving Place North, 4th Floor New York, N.Y. 10003 212-387-7700 FAX: 212-388-9897 (b) in the case of Purchaser to: IMSI Attn: General Counsel 75 Rowland Way, Novato, CA 94945 415-878-4000 FAX: 415-897-2544 Or to such other address or to such other person as Purchaser or the Shareholder shall have last designated by written notice given as herein provided. 10.2 Modification. This Agreement and the Exhibits and Schedules annexed hereto contain the entire agreement between the parties hereto and there are no agreements, warranties or representations that are not set forth herein. All prior negotiations, representations, warranties, agreements and understandings are superseded hereby. This Agreement may not be modified or amended except by an instrument in writing duly signed by or on behalf of the parties hereto and dated on or subsequent to the date hereof. 10.3 Governing Law and Dispute Resolution. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of California applicable to agreements made and to be performed entirely within the State. The Shareholder hereby irrevocably consent to the jurisdiction of any California State or Federal court located in Marin County, California over any action or proceeding arising out of any dispute between the Shareholder and Purchaser, and irrevocably agree, in this regard, not to commence any action or proceeding arising out of any dispute between the Shareholder and Purchaser in any other jurisdiction. The Shareholder further irrevocably consents to the service of process in any such action or proceeding by the mailing of a copy of such process to it at the address set forth above. 10.4 Binding Effect; Assignment. This Agreement shall be binding upon the parties and inure to the benefit of the successors and assigns of the respective parties hereto; provided, however, that this Agreement and any and all rights hereunder may not be assigned by the Shareholder without the prior written consent of Purchaser, which may be withheld for any reason. 55 10.5 Counterparts. This Agreement may be executed simultaneously in any number of counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. 10.6 Paragraph Headings. The paragraph headings in this Agreement are for convenience of reference only and shall not be deemed to alter or affect any provision hereof. 10.7 Transaction Expenses. Notwithstanding anything else in this Agreement to the contrary, the parties hereto shall each be responsible for the payment of (and shall indemnify and hold the Company and other parties hereto harmless against) any and all of its, his or her own expenses, including without limitation the fees and expenses of counsel, accountants and other advisers, arising out of or relating directly or indirectly to the transactions contemplated by this Agreement, whether or not such transactions are consummated in whole or in part. 10.8 Waiver. The waiver of one breach or default hereunder shall not constitute the waiver of any other or subsequent breach or default. 10.9 No Agency. This Agreement shall not constitute any party the legal representative or agent of the other, nor shall any party have the right or authority to assume, create, or incur any liability or any obligation of any kind, express or implied, against or in the name of or on behalf of the other party. 10.10 Entire Agreement. This Agreement sets forth the entire understanding of the Parties hereto relating to the subject matter hereof and thereof and supersedes all prior agreements and understanding among or between any of the Parties relating to the subject matter hereof. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement the day and date first above written. SHAREHOLDER PURCHASER DIGITAL CREATIVE MANAGEMENT INTERNATIONAL MICROCOMPUTER CORPORATION SOFTWARE, INC. By: /s/ Vincent De Lorenzo By: /s/ Martin R. Wade III Name: Vincent De Lorenzo Name: Martin R. Wade III Title: CFO Title: CEO 56 LIST OF SCHEDULES 1.1(b) Receivables 1.1(c) Fixed Assets 1.1(d) Contracts 1.1(e) Intellectual Property 2.3 Certain of Company Promissory Notes 4.3(a) Stock Transaction History of the Company 4.3(b) Outstanding Stock Options of the Company 4.5 Objections to Marketable Title of Assets 4.6 Property Defects 4.7(b) Registered Intellectual Property 4.9 Contracts 4.10 Financial Statements of the Company 4.13(a) Employees and Salaries 4.13(b) Employee Benefit Plans 4.14 Taxes 4.15 Changes in Business and Financial Condition 4.16 Insurance Policies 4.18 Transactions with Affiliates of the Company 57 EX-10.1 4 f79267ex10-1.txt TERMINATION AGREEMENT EXHIBIT 10.1 TERMINATION AGREEMENT THIS TERMINATION AGREEMENT (this "AGREEMENT") is made and entered into as of October 31, 2001 (the "EFFECTIVE DATE") by and between Broderbund Properties LLC, ("Broderbund") with offices at 500 Redwood Boulevard, Novato, California 94947 and International Microcomputer Software Inc. ("IMSI"), a California corporation, with offices at 75 Rowland Way, Novato, California 94949. RECITALS WHEREAS, IMSI entered into a Software License Agreement (the "IMSI LICENSE AGREEMENT") dated October 2, 1998, whereby IMSI was granted certain rights to publish, use, distribute and sublicense the Org Plus software program; WHEREAS, IMSI failed to make $1.8 million in payments under the License Agreement (the "ORG PLUS LICENSE FEE"); WHEREAS, IMSI entered into a Fee Agreement dated as of January 21, 1999 (the "FEE AGREEMENT"), whereby IMSI agreed, inter alia, to issue to BRODERBUND's predecessor in interest 200,000 common shares of IMSI (the "IMSI SHARES"), and to register such shares, in satisfaction of its obligation to pay the Org Plus License Fee; WHEREAS, BRODERBUND's predecessor in interest and IMSI entered into a letter agreement dated April 9, 1999 (the "CONSENT LETTER") whereby BRODERBUND's predecessor in interest became obligated to pay $200,000 to IMSI upon the delivery by IMSI of certain computer software source code; WHEREAS, BRODERBUND and IMSI are entering into a Software License and Distribution Agreement of even date herewith (the "PRODUCT LICENSE") whereby IMSI is granting BRODERBUND certain rights in various software programs and other items; WHEREAS, BRODERBUND and IMSI are entering into an Assignment of Copyrights and Trademark Rights of even date herewith (the "ASSIGNMENT AGREEMENT") whereby BRODERBUND is assigning certain rights in the Org Plus software program to IMSI; WHEREAS, BRODERBUND and IMSI desire to terminate the IMSI License Agreement and the Fee Agreement, and release each other from all further obligations and liability thereunder, according to the terms set forth herein. NOW, THEREFORE, in consideration of the mutual promises and covenants contained herein, BRODERBUND and IMSI agree as follows: 1. Subject to the conditions set forth below, BRODERBUND and IMSI hereby terminate the IMSI License Agreement and the Fee Agreement as of the date hereof, and hereafter such agreements are null and of no further force and effect and all rights and obligations of BRODERBUND and IMSI thereunder shall terminate including without limitation IMSI's obligation to pay the Org Plus License Fee; provided, however, that the provisions of Section 4.1 58 (Support) of the IMSI License Agreement shall survive such termination in addition to those Sections specified in Section 5.6. Execution of the Software License and Distribution Agreement, dated October 31, 2001, and the Assignment Agreement dated October 31, 2001 are both a condition precedent to the effectiveness of this Agreement and the rights conveyed herein. 2. BRODERBUND shall transfer ownership of the IMSI Shares to IMSI as soon as reasonably possible after the effective date of this Agreement. 3. IMSI hereby releases BRODERBUND, and any of its parent, subsidiary and affiliate companies (each a "BRODERBUND AFFILIATE"), and all directors, officers, employees and agents of BRODERBUND and all BRODERBUND Affiliates, from any claim it has or may have, now known or later discovered, against such persons for any amount under the Consent Letter or in any way related to the Source Code License and Distribution Agreement between BRODERBUND's predecessor in interest and Microsoft Corporation dated as of April 2, 1999. IMSI knowingly and voluntarily expressly waives all rights it has or may have under California Civil Code Section 1542, which provides as follows: "A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR," or under any similar law or rule of any other jurisdiction with respect to the foregoing release. IMSI understands and acknowledges the significance and consequences of waiving the provisions and benefits of Section 1542, and IMSI specifically intends to waive both known and unknown claims under this provision as well as under any similar federal or common law principle. 4. IMSI shall pay BRODERBUND $160,000 in four equal quarterly installments, commencing on the same date (currently August 15, 2002) and continuing on the dates that payments are made by IMSI to its unsecured creditors pursuant to IMSI's agreement with CMA Business Credit Services, Northern California Division of San Leandro, CA. BRODERBUND shall be paid interest on the unpaid balance of this amount at 8% from February 1, 2000 to August 15, 2002, and at 12% interest thereafter until paid, the same as other creditors to receive payment under the agreement with CMA. This $160,000 shall constitute payment in full of any and all payment obligations IMSI has had, has, or may have with respect to any and all business relationships existing between the parties prior to the effective date of this Agreement, and both parties hereby agree to mutually release and forever discharge the other from any claims, liabilities, damages, expenses, fees, indemnification obligations, or any other amounts which either of them may owe the other relating to any such business relationships. In entering into this agreement and making this release, both parties expressly waive the provisions of Section 1542 of the California Civil Code which provides as follows: "A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM, MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR," 59 or under any similar law or rule of any other jurisdiction with respect to the foregoing release. Each party understands and acknowledges the significance and consequences of waiving the provisions and benefits of Section 1542, and each specifically intends to waive both known and unknown claims under this provision as well as under any similar federal or common law principle. 5. Neither party shall have the right under any agreement with the other or any affiliate of the other entered into prior to the Effective Date to audit the books or records of the other or its affiliates, whether for purposes of royalty calculations or otherwise. Any provision to the contrary contained in any such agreement is hereby null and of no further force or effect. 6. This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof and the transactions contemplated hereby, and, except as specifically provided for herein, supersedes all previous oral and written agreements and all contemporaneous oral negotiations, commitments, writings and understandings. This Agreement shall be governed under the laws of the State of California. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. BRODERBUND PROPERTIES LLC. INTERNATIONAL MICROCOMPUTER SOFTWARE, INC. By: /s/ Andrew Freedman By: /s/ Gordon Landies Name: /s/ Andrew Freedman Name: /s/ Gordon Landies Its: CFO Its: President 60 EX-10.2 5 f79267ex10-2.txt ASSIGNMENT OF COPYRIGHTS & TRADEMARK RIGHTS EXHIBIT 10.2 ASSIGNMENT OF COPYRIGHTS AND TRADEMARK RIGHTS THIS ASSIGNMENT OF COPYRIGHTS AND TRADEMARKS (this "AGREEMENT") dated as of October 31, 2001 (the "EFFECTIVE DATE"), is entered into by and between Broderbund Properties LLC ("BRODERBUND"), with offices located at 500 Redwood Boulevard, Novato, California 94947 and International Microcomputer, Inc. ("ASSIGNEE"), a California corporation with offices located at 75 Rowland Way, Novato, California 94945. RECITALS WHEREAS, Broderbund is the owner of a certain software program which a predecessor in interest of Broderbund's had developed, marketed, distributed and sold under the name "Org Plus"; and WHEREAS, Assignee desires to acquire from Broderbund all rights, title and interest in such software program and trademarks related thereto so that Assignee may market, distribute and sell such software program; and WHEREAS, Broderbund desires to assign such rights to Assignee in exchange for certain licenses to Assignee's products and other consideration; NOW THEREFORE, in consideration of the mutual covenants contained herein, the parties hereto agree as follows: 1. DEFINITIONS. The following capitalized terms shall have the respective meaning set forth below when used herein: "ASSIGNED AGREEMENTS" means the contracts set forth in Exhibit A attached hereto. "CODE" means computer programming code. Except as otherwise specified, Code shall include both object code and source code. "COPYRIGHT INTERESTS" means the interests Broderbund or affiliate of Broderbund owns, or has the right to assign, in copyrights in and to the Products (other than the Generic Code), together with any other copyright interests accruing by reason of international copyright conventions and any moral rights pertaining thereto, including the right to sue for, settle, or release any past, present, or future infringement thereof. "DOCUMENTATION" means written materials (and machine-readable text subject to display and printout) that directly relate to and/or describe particular Code. "EXISTING LICENSES" means the end-user license agreements between Broderbund and its end-user customers, which relate solely to copies of the Products that have already been fully delivered and installed. "GENERIC CODE" means the Code consisting of subroutines, if any, that are currently part of the Product and used by Broderbund, its affiliates or third parties in other products or for other purposes. "OTHER INTERESTS" means the interests, other than the Copyright Interests and the Trademark Interests, that Broderbund or any predecessor or affiliate of Broderbund owns or have the right to assign in (a) any idea, design, concept, technique, invention, discovery, or improvement, whether or not patentable, but including patents, patent applications, trade secrets, and know-how, that are embodied in or evidenced by the Products (excluding Generic Code) or required to be used or practiced in order to exercise the rights and licenses granted hereunder; and (b) pictorial, graphic, or audio/visual works, including icons, screens, characters, data formats, and reports created as a result of execution of the Products (excluding Generic Code), whether such pictorial, graphic, or audio/visual works are created by use of the Products alone or with other programming or through other means. "PRODUCT(S)" means the forms of Code and Documentation listed in Exhibit B attached hereto. 61 "PURCHASE PRICE" has the meaning ascribed thereto in Section 6.1 hereof. "REGISTERED USER DATABASE" means the database of the names and other information respecting registered users of the Product distributed by Broderbund. "TRADEMARK INTERESTS" means the interests Broderbund or any predecessor or affiliate of Broderbund owns, or have the right to assign, in the United States and foreign registered and common law trademarks and service marks set forth in Exhibit C attached hereto, together with all other trademark or service mark interests accruing by reason of international trademark conventions, accompanied by the goodwill of all business connected with the use of and symbolized by such marks including the right to sue for, settle, or release any past, present, or future infringement thereof or unfair competition involving the same. 2. CONVEYANCE OF RIGHTS. 2.1 Copyright Interests. Subject to the payment of the Purchase Price and the other terms and conditions set forth herein, Broderbund, for itself and its affiliates, hereby transfers, grants, conveys, assigns, and relinquishes exclusively to Assignee, in perpetuity, all of Broderbund's and its predecessors' and affiliates' right, title, and interest in and to the Copyright Interests. 2.2 Trademark Interests. Subject to the payment of the Purchase Price and the other terms and conditions set forth herein, Broderbund, for itself and its affiliates, hereby transfers, grants, conveys, assigns, and relinquishes exclusively to Assignee, in perpetuity, all of Broderbund's and its predecessors' and affiliates' right, title, and interest in and to the Trademark Interests. Broderbund further transfers and assigns the right to file for and obtain registrations of the Trademark Interests anywhere in the world with the right to base priority on Broderbund's first date of use or on any application and/or registration being assigned herein. Except as permitted under Article 5 hereof, Broderbund covenants not to use or display the Trademark Interests anywhere in the world except by authorization of Assignee, and further covenants not to contest or challenge the validity of the Trademark Interests, any applicable registrations thereof or the ownership of the Trademark Interests by Assignee. 2.3 License to Other Interests. As of the Effective Date, Broderbund, to the extent of its right and power to do so, grants Assignee a worldwide, nonexclusive, irrevocable, royalty-free, and assignable right and license, together with the right to grant sublicenses, in and to the Other Interests, as necessary for Assignee (or any person or entity acting with Assignee or under its authority) to use, execute, copy, display, and perform and to distribute, license, and sublicense internally and externally the Products. 2.4 License to Generic Code. As of the Effective Date, Broderbund, to the extent of its right and power to do so, grants Assignee a worldwide, nonexclusive, irrevocable, royalty-free, and assignable right and license in and to the Generic Code, as necessary for Assignee (or any person or entity acting with Assignee or under its authority) to use, execute, copy, display, and perform and to distribute, license, and sublicense internally and externally the Products. 2.5 Existing Contracts. Assignee agrees to cooperate with Broderbund, at Broderbund's expense, to assist Broderbund in performing any obligations remaining under any Existing Licenses. 3. ASSIGNMENT OF AGREEMENTS. 3.1 Condition of Assigned Agreements. Broderbund represents and warrants, to the best of its knowledge, that (a) Assignee has simultaneously been furnished true and complete copies of the Assigned Agreements, (b) the Assigned Agreements are in full force and effect without material amendment or waiver, and (c) there is and has been no act, event, or circumstance that, with the lapse of time or the giving of notice as required, constitutes a material breach or default under the terms of the Assigned Agreements. 3.2 Assignment and Assumption. Broderbund hereby assigns, transfers, and conveys all rights and obligations under the Assigned Agreements to Assignee, and Assignee assumes the obligation for performance of the terms of the Assigned Agreements. Assignee shall perform the Assigned Agreements in accordance with their terms, and shall make 62 all payments, if any, that become due and payable thereunder after the Effective Date. Assignee shall have no right to any amounts previously paid to Broderbund under any Assigned Agreement. 3.3 Support. Each party shall be responsible to support the Products that it distributes. 4. DELIVERY AND ASSISTANCE. 4.1 Products. Assignee acknowledges that it is already in possession of a master disk of the Products in the form delivered to Assignee under a Software License Agreement between Assignee and Broderbund's predecessor in interest dated as of October 2, 1998. 4.2 User Lists. Broderbund hereby transfers the Registered User Database to Assignee which Assignee may use for purposes of marketing, distribution and sale of the Products. 4.3 Cooperation. Broderbund shall provide reasonable cooperation to Assignee (at Assignee's expense) to effect the transfer of ownership of the Copyright Interests and Trademark Interests to Assignee. 4.4 Further Assurances. Each party hereto agrees that upon the other party's reasonable request (and expense) it shall execute and deliver such further conveyance agreements, and take such further action, as may be necessary or desirable to evidence more fully the transactions described in this Agreement. Broderbund agrees to provide Assignee (at Assignee's expense) reasonable cooperation with respect to Assignee's filings for copyright and trademark protection respecting the rights assigned hereunder. Notwithstanding the foregoing, Assignee will bear all expenses (including attorney's fees) associated with any filings for copyright and trademark protection. 5. RESERVATION OF RIGHTS AND LICENSES BY Broderbund. 5.1 Products. Broderbund hereby reserves and retains for its and its affiliates' own benefit, and Assignee confirms upon Broderbund, the nonexclusive, irrevocable, royalty-free right and license under the Copyright Interests, Trademark Interests and Other Interests to make and use copies of the Products only for purposes of sublicensing such copies, in object code form only, pursuant to the warranty provision(s) of the Existing Licenses. Such rights and licenses shall be perpetual. Nothing contained in this Section 5.1 shall be construed to allow Broderbund to copy, manufacture, distribute or sell the Products to any person other than existing customers. 5.2 Archival Copies. Broderbund may make and retain additional but no more than 25 copies of the Products for nonproductive archival purposes. 6. ASSIGNEE'S OBLIGATIONS; OTHER OBLIGATIONS 6.1 Assignee's Obligations. In consideration of the rights conveyed to Assignee hereunder, Assignee shall execute the Software License and Distribution Agreement, attached as Exhibit E dated October 31, 2001 and the Termination Agreement attached as Exhibit F dated October 31, 2001. The execution of these agreements is a condition precedent to the effectiveness of this Agreement and the rights conveyed herein. 6.2 Other Obligation. As further consideration for the rights conveyed and obligations assumed pursuant to this Agreement, each of the parties hereby agrees to mutually release and forever discharge the other from any claims, liabilities, damages, expenses, fees, indemnification obligations, or any other amounts which either of them may owe the other relating to litigation between Imageline, Inc. and Assignee. In entering into this agreement and making this release, both parties expressly waive the provisions of Section 1542 of the California Civil Code which provides as follows: "A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him, must have materially affected his settlement with the debtor." Each party understands and acknowledges the significance and consequences of waiving the provisions and benefits of Section 1542, and 63 each specifically intends to waive both known and unknown claims under this provision as well as under any similar federal or common law principle. 7. REPRESENTATION AND WARRANTIES; LIMITATIONS; INDEMNIFICATION. 7.1 Representations and Warranties. Broderbund represents and warrants that (a) to the knowledge of Broderbund, the Copyright Interests, the Trademark Interests, and the Other Interests, as heretofore exercised in connection with Broderbund's business, do not infringe the rights of any other person or entity; (b) to the knowledge of Broderbund, no claim of any such infringement or violation has been threatened or asserted, and no such claim is pending against Broderbund, its affiliates, or its end-user customers; (c) Broderbund has not entered into any agreement (other than the Assigned Agreements), license (other than the Existing Licenses), release, or order that currently or in the future will restrict the right of Broderbund or Assignee to exploit the Products in any way; and (d) the execution, delivery, and performance of this Agreement by Broderbund do not and will not violate any security agreement, indenture, order, or other instrument to which Broderbund is a party or by which it or any of its assets is bound. 7.2 No Warranty. Notwithstanding anything to the contrary contained herein, Broderbund makes no representation or warranty that it (a) owns or holds rights in any Trademark Interests, Other Interests or the Registered User Database or (b) owns or holds rights in any goodwill of any business connected with the use of and symbolized by any Trademark Interests or Other Interests; provided, however, that Broderbund hereby confirms to Assignee that it is not aware, and knows of no reason that it should be aware, of any action or threatened action which contests Broderbund's ownership of the Copyright Interests, the Trademark Interests, the Other Interests or the Registered User Database. 7.3 Disclaimer. EXCEPT AS EXPRESSLY PROVIDED IN THIS AGREEMENT, Broderbund MAKES NO REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, WITH RESPECT TO THE PRODUCTS, COPYRIGHT INTERESTS, TRADEMARK INTERESTS, OTHER INTERESTS OR THE REGISTERED USER DATABASE, INCLUDING, BUT NOT LIMITED TO, ANY IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. THE LIABILITY OF EITHER PARTY TO THE OTHER UNDER ALL OF THE PROVISIONS OF THIS AGREEMENT (OTHER THAN THE LIABILITY OF BRODERBUND TO ASSIGNEE UNDER SECTIONS 7.1 (a)) SHALL BE LIMITED TO DIRECT DAMAGES AND, EXCEPT AS PROVIDED IN THIS SECTION, SHALL NOT EXCEED$100,000. IN NO EVENT WILL EITHER PARTY BE RESPONSIBLE TO THE OTHER FOR INCIDENTAL, SPECIAL OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS) EVEN IF THE OTHER PARTY HAS PREVIOUSLY BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. 8. INDEMNIFICATION. 8.1 Broderbund Indemnification. Broderbund agrees to indemnify and hold harmless Assignee, its successors and assigns, including any subsidiary, officer, director, employee, agent, contractor, licensee, or customer, from and against any loss, liability, claim, or damage (including court costs and reasonable attorney fees) sustained by it or them as a result of (a) a claim or allegation that the Products (excluding any trademarks, service marks or logos included therein) infringe the registered copyright or trademark of any third party or (b) the breach of any representation, warranty or agreement of Broderbund made herein. If such a claim arises, or in either party's judgment is likely to arise, Assignee agrees to allow Broderbund, at Broderbund's option, to procure the right to permit the continued exercise of such rights in the Product or to replace, re-label, or modify them without material change so they become non-infringing. Broderbund shall have no obligation under the foregoing obligation with respect to any claim of infringement based upon Assignee's, IMSI's or any licensee's or purchaser's modification of the Products or their combination, operation; or use with programs or equipment. 8.2 Assignee Indemnification. Assignee shall indemnify and hold harmless Broderbund, its successors and assigns, including any subsidiary, officer, director, employee, agent, contractor, licensee, or customer, from and against any loss, liability, claim, or damage (including court costs and reasonable attorney fees) sustained by it or them as a result of the (a) marketing or servicing by Assignee of the Product and (b) breach of any representation, warranty or agreement of Assignee made herein. 64 8.3 Litigation. With respect to any claims falling within the scope of the foregoing indemnifications: (a) each party agrees to notify the other promptly of and keep the other fully advised with respect to such claims and the progress of any suits in which the other party is not participating; (b) the indemnifying party shall have the right to defend any suit instituted against the indemnified party; (c) the indemnifying party shall have the right to participate, at its expense, in the defense of a claim or suit made or filed against the indemnified party; and (d) a party participating in or assuming the defense of a claim or suit against the other party shall not settle such claim or suit without the prior written approval of the other party, which approval will not be unreasonably withheld or delayed. 8.4 Indemnification Limits. Neither party shall be required to make any indemnification payment pursuant to this Section 8 until such time as the total amount of all damages that have been directly suffered or incurred by such party exceeds US $25,000. Each party's indemnification obligations set forth herein shall terminate two (2) years after the Effective Date and neither party shall be required to indemnify the other for any amount accrued after such period. 9. NOTICES. Notices permitted or required under this Agreement shall be sent to the addresses set forth below and shall be sent by hand delivery, by facsimile followed with written confirmation sent by mail, by overnight courier or by registered or certified mail, return receipt requested. Notices shall be deemed to have been given on the date actually received if sent by hand delivery or overnight courier, on the date sent if sent by facsimile, or three (3) days after mailing if sent by registered or certified mail. If to Broderbund: If to Assignee: Broderbund, Inc. IMSI 500 Redwood Boulevard 75 Rowland Way Novato, California 94947 Novato, California 94945 Attention: Vice President, Legal Affairs Telephone: (415) 878-4000 Telephone: (415) 382-4400 Facsimile: (415) 897-2544 Facsimile: (415) 382-4411 10. DISPUTE RESOLUTION. Intentionally omitted. 11. MISCELLANEOUS. 11.1 Entire Agreement. This Agreement contains the entire understanding of the parties hereto relating to the Products, supersedes any prior written or oral agreement or understandings between the parties with respect to the Products, and cannot be changed or terminated orally. This Agreement may be amended only by a writing signed by the parties hereto. 11.2 Assignment. This Agreement may be freely assigned by either party. 11.3 Enforceability. The invalidity or unenforceability of any provision of this Agreement will not affect the validity or enforceability of any other provision of this Agreement. 11.4 Independent Contractors. Broderbund and Licensee shall perform their duties pursuant to this Agreement as independent contractors. Nothing in this Agreement shall be construed to create a joint venture, 65 partnership or other joint relationship between Broderbund and Assignee. Neither party shall have the ability to incur any obligation on behalf of the other party. 11.5 Successors. All rights and obligations arising out of this Agreement shall inure to the benefit of, and be binding on and enforceable by the parties and their respective successors and permitted assigns. 11.6 Governing Law. This Agreement and its validity, construction and performance shall be governed in all respects by the internal laws of the State of California and all claims and/or lawsuits in connection with agreement must be brought in San Francisco, California. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first set forth above. BRODERBUND PROPERTIES LLC INTERNATIONAL MICROCOMPUTER, INC. By: /s/ Gordon Landies By: /s/ Andrew Freedman Its: President Its: CFO 66 EXHIBIT A ASSIGNED AGREEMENTS 1. Source Code License and Distribution Agreement between Broderbund's predecessor in interest and Microsoft Corporation dated April 2, 1999. 2. Apple Computer Desktop Services Site-License Agreement between Banner Blue Corporation and Apple Computer, Inc. dated March 14, 1991. 67 EXHIBIT B PRODUCT Org Plus software product and related documentation as delivered to IMSI under the Software License Agreement between IMSI and the Learning Company Properties Inc. dated as of October 2, 1998. The Product does not include any upgrades, updates, new versions, work in progress or network versions thereof, or other modifications thereto, owned by Broderbund or any third party, including without limitation any modifications developed by IMSI (each a "DERIVATIVE PROGRAM"). Broderbund hereby confirms to Assignee that Broderbund has granted no rights in any Derivative Program to any third party other than under the Existing Licenses and the Assigned Agreements. 68 EXHIBIT C Registered Users 69 EXHIBIT D TRADEMARKS "ORG PLUS" 70 EX-10.3 6 f79267ex10-3.txt AGREEMENT FOR ASSIGNMENT OF SOFTWARE EXHIBIT 10.3 AGREEMENT FOR ASSIGNMENT OF SOFTWARE This Agreement for Purchase of Software (this "Agreement"), dated for reference purposes as of November _8__, 2001, is entered into between HumanConcepts, LLC, a California limited liability company ("HC"), and International Microcomputer Software, Inc., a California corporation ("IMSI"). Background A. IMSI has acquired, or proposes to acquire, ownership of the software known as "OrgPlus," the trademark "OrgPlus" and associated goodwill, and the documentation, URL and customer records relating to the software. B. Under the terms and conditions of this Agreement, effective upon IMSI's acquisition of ownership of such items, IMSI will transfer ownership of such items to HC. Agreement Based upon the above Background, and the mutual covenants below, the parties agree as follows: 1. DEFINITIONS. As used in this Agreement, the following terms shall have the following meanings: 1.1 "Customer Records" means lists and databases containing the names and other information concerning end-users and resellers of the Software. 1.2 "Documentation" means the user instructions and manuals relating to the Software, whether in printed or machine-readable form. 1.3 "Proprietary Rights" means proprietary or intellectual property rights of any nature, in all jurisdictions and countries, including but not limited to rights under copyright, moral rights, patent, trademark, and trade secret laws. 1.4 "Software" means the software product known as "OrgPlus" (including OrgPlus Standard, OrgPlus Professional, and all other versions of such software product), and all modifications, enhancements, and updates to such software product that IMSI owns. 1.5 "Trademark" means the trademarks "Org Plus," "OrgPlus," any and all registrations relating to those marks, together with the goodwill of the business relating to the use of such marks and the rights to sue for, settle, or release any past, present or future infringement thereof. 1.6. "URL" means the URL "orgplus.com" and any other URLs owned by IMSI containing the term "orgplus." 2. EFFECTIVE DATE. This Agreement will become effective as of the date IMSI notifies HC that this Agreement has become effective, by sending to HC a signed copy of the Notification of Effectiveness of Agreement form attached to this Agreement, in accordance with the notice procedure specified in Section 8. of this Agreement. The date this Agreement becomes effective shall be referred to in this Agreement as the "Effective Date." IMSI agrees to use commercially reasonable efforts to obtain as soon as practicable the ownership rights necessary to allow this Agreement to become effective. Notwithstanding the above, this 71 Agreement shall not become effective if IMSI has not sent the Notification of Effectiveness of Agreement form to HC by December 15, 2001. 3. PURCHASE AND SALE OF SOFTWARE, TRADEMARK AND DOCUMENTATION. 3.1 Purchase and Sale. IMSI hereby sells, assigns, and transfers to HC, and HC hereby acquires from IMSI, all right, title and interest in and to the Software, the Trademark, the Documentation, the URL, and the Customer Records (collectively, the "Assets"), and all Proprietary Rights relating to all of the Assets. 3.2 Consideration. As full consideration for the sale of the Assets to HC, HC has entered into the Software License and Distribution Agreement attached hereto (the "License Agreement"), which will become effective as of the Effective Date of this Agreement. 3.3 Deliveries. On the Effective Date, IMSI shall deliver the following to HC: (i) all Customer Records, (ii) all registrations and other documents relating to the URL and the Trademark. Upon signature of this Agreement, HC shall deliver to IMSI a signed copy of the License Agreement. 3.4 Additional Documents. IMSI agrees to execute such deeds, bills of sale, assignments, titles, and other documents as HC shall reasonably request from time to time to evidence and effect the assignment and transfer of the Assets to HC. IMSI agrees to perform such further acts as may be necessary to carry out the intent of this Agreement. 3.5 Assumption of Liabilities. It is expressly understood and agreed that HC assumes no obligations or liabilities of IMSI or any third party of any nature, including but not limited to (a) any obligations that IMSI may have to existing end-users or resellers of the Software, and (b) any liability for claims for property damage or infringement of the Proprietary Rights of any third party, and (c) IMSI's liabilities for its accounts payable, income, sales, franchise, or other taxes, or any liabilities resulting from claims, actions, suits or proceedings arising out of or relating to the Assets prior to the Effective Date, for all of which IMSI shall remain exclusively responsible. IMSI shall pay any sales tax imposed in connection with the sale of the Assets to HC under this Agreement. 4. ROYALTIES PAYABLE BY HC. 4.1 Royalties. As royalties in consideration for IMSI's transfer of ownership of the Software to HC, subject to Section 4.5, HC will pay IMSI the following percentage of HC's Net Revenue for Software distributed by HC during each year of this Agreement to persons other than IMSI (or any successor to or assignee of IMSI): (i) ten percent (10%) of the total Net Revenue for such year, up to $1.5 million in Net Revenue, and (ii) five percent (5%) of the Net Revenue for such year, in excess of $1.5 million. For these purposes, "years" shall be based on yearly anniversaries of the Effective Date of this Agreement. The term "Net Revenue" means the total price at which orders for Software are invoiced to customers, excluding shipping charges, taxes, insurance, and any other charges not constituting a part of the price of the Software, and excluding credits and returns. 4.2 Timing of Payments. All royalties required to be paid by HC pursuant to this Agreement shall be paid on a monthly basis, by the 20th day of each month, based upon distribution of Software during the prior month. Along with each royalty payment made, HC will provide IMSI with a report indicating the distributions on which the royalty payment is based, and such other information as IMSI shall reasonably request relating to the calculation of royalties. 4.3 Audit Right. IMSI shall have the right, at its own expense and at any reasonable time or times (but not more than once in any calendar year), to cause a third party independent auditor reasonably acceptable to HC to inspect and audit the books and records of HC that pertain to this Agreement in order 72 to verify the royalties paid under this Agreement. The audit shall be conducted at the expense of IMSI, but if any such audit reveals an underpayment of royalties by HC of ten percent (10%) or more for any month, then HC shall promptly reimburse IMSI for the reasonable costs of the audit. 4.4 Late Payments. Any royalties that are required to be paid by HC pursuant to this Agreement that are not paid within the specified time will be subject to a finance charge of 0.5% per month until paid, or the maximum permitted by law, whichever is less. 4.5 Termination of Royalty Obligation. HC's obligation to pay royalties to IMSI under Section 4.1 shall be terminated by HC on the date after June 30, 2003 that , in addition to royalties owed by HC to IMSI under this Agreement, HC pays IMSI $100,000 and HC has bought out the Software License and Distribution Agreement entered into between the parties, pursuant to Section 10.4 of that Agreement. HC shall determine, in its sole discretion, if and when to make such payment to IMSI and if such a payment is made by HC, no royalties shall be owed by HC on Net Revenue for Software distributed by HC after the date such payment is made. 5. REPRESENTATIONS OF IMSI. IMSI represents and warrants to HC that, as of the Effective Date: 5.1 Organization and Good Standing. IMSI is a corporation duly organized, validly existing and in good standing under the laws of the State of California. 5.2 Validity of Sale and Transfer. The execution and delivery of this Agreement and the sale, transfer and other actions contemplated by this Agreement have been duly authorized by the board of directors and shareholders of IMSI, which are the only authorizations on its part required under applicable law or by IMSI's articles of incorporation or bylaws. IMSI has the corporate power to consummate the transactions contemplated by this Agreement, and such execution, delivery, transfer and other actions contemplated by this Agreement will not constitute a violation of applicable law, or conflict with, constitute a default under, or result in a breach or violation of any agreement to which IMSI is a party, or constitute a violation of any order, writ, injunction, decree, statute, rule, or regulation applicable to IMSI. This Agreement constitutes the valid and binding obligation of IMSI enforceable in accordance with its terms, except as such enforcement may be limited by applicable bankruptcy and insolvency laws and laws affecting creditor's rights generally. 5.3 Title to Assets. IMSI is the legal owner of the Assets, and has good and marketable title to, and the absolute power and right to sell, assign, transfer and deliver the Assets, free and clear of all liens, pledges, mortgages, security interests, conditional sales contracts, or other encumbrances or charges of any kind and nature whatsoever. 5.4 Litigation. There is no dispute, claim, action, suit, proceeding, arbitration or governmental investigation, either administrative or judicial, pending or to the knowledge of IMSI threatened against or related to the Assets. 5.5 Infringement of Proprietary Rights. None of the Assets infringe or interfere with the Proprietary Rights of any third party, and IMSI has not received any notice alleging that any of the Assets infringes or interferes with the Proprietary Rights of any third party. To the knowledge of IMSI, no third party has infringed upon or misappropriated the Proprietary Rights relating to any of the Assets. 5.6 Third Party and Government Consents. No consents, approvals, waivers or authorizations of third parties or governments or governmental agencies are necessary for the consummation of the transactions contemplated by this Agreement. 6. Representations of HC. HC represents and warrants to IMSI that, as of the Effective Date: 73 6.1 Organization and Good Standing. HC is a limited liability company duly organized, validly existing and in good standing under the laws of the State of California. 6.2 Validity of Sale and Transfer. The execution and delivery of this Agreement and the purchase, transfer and other actions contemplated by this Agreement have been duly authorized by the managers of HC, which is the only authorization on its part required under applicable law or by HC's operating agreement. HC has the power to consummate the transactions contemplated by this Agreement, and such execution, delivery, transfer and other actions contemplated by this Agreement will not constitute a violation of applicable law, or conflict with, constitute a default under, or result in a breach or violation of any agreement to which HC is a party, or constitute a violation of any order, writ, injunction, decree, statute, rule, or regulation applicable to HC. This Agreement constitutes the valid and binding obligation of HC enforceable in accordance with its terms, except as such enforcement may be limited by applicable bankruptcy and insolvency laws and laws affecting creditor's rights generally. 7. Indemnification. 7.1 Indemnification by IMSI. IMSI shall defend, indemnify and save HC, and HC's officers, directors, agents, and affiliates, harmless from and against any and all claims, liabilities, losses, damages, costs, and expenses (including reasonable attorney fees) they may incur, arising out of or relating to: (a) any and all debts, liabilities and obligations of, or claims against, IMSI not expressly assumed by HC under this Agreement; and (b) the breach or alleged breach of any covenant, representation, or warranty made by IMSI in this Agreement. 7.2 Indemnification by HC. HC shall defend, indemnify and save IMSI, and IMSI's officers, directors, agents, and affiliates, harmless from and against any and all claims, liabilities, losses, damages, costs, and expenses (including reasonable attorney fees) they may incur, arising out of or relating to: (a) any and all debts, liabilities and obligations of IMSI expressly assumed by HC under this Agreement; and (b) the breach or alleged breach of any covenant, representation, or warranty made by HC in this Agreement. 7.3 Conditions of Indemnification. (a) Promptly after any service of process by any third person in any litigation in respect to which indemnity may be sought from another party (the "Indemnifying Party") pursuant to this section, the party so served (the "Indemnified Party") shall notify the Indemnifying Party of the commencement of the proceeding. In such instance, the Indemnifying Party shall have the right, but not the obligation, to assume and control the defense of the claim or action with counsel of its choice reasonably satisfactory to the Indemnified Party. The Indemnifying Party shall notify the Indemnified Party in writing of its decision to assume control of the litigation promptly but in no event later than fifteen (15) days after the Indemnified Party has given notice thereof to the Indemnifying Party. (b) If the Indemnifying Party elects to assume the defense of the third party claim in accordance with (a) above, the Indemnifying Party shall conduct such defense actively and diligently in order to preserve its rights under this section. Neither the Indemnified Party nor the Indemnifying Party in such instance shall consent to the entry of any judgment or enter into any settlement with respect to the third party claim without the prior written consent of the other party, which shall not be withheld unreasonably. If the Indemnifying 74 Party assumes the defense of the third party claim, the Indemnified Party may retain separate co-counsel at its sole cost and expense and may in such manner participate in such defense. The Indemnified Party shall in any event cooperate in the defense of the claim at the expense of the Indemnifying Party. (c) If the Indemnifying Party elects not to assume the defense of the litigation in accordance with (a) above, the Indemnified Party may defend against and consent to the entry of any judgment or enter into any settlement with respect to the claim or action in any manner it reasonably deems appropriate. The Indemnifying Party in such instance shall reimburse the Indemnified Party promptly and periodically for the costs of defending the third party claim (including but not limited to reasonable attorneys' fees and expenses), and shall, to the fullest extent provided in this section, remain responsible and indemnify the Indemnified Party for any adverse consequences to the Indemnified Party resulting from, arising out of, or otherwise relating to such claim. (d) Notwithstanding anything to the contrary in this Agreement, no delay on the part of the Indemnified Party in notifying the Indemnifying Party shall relieve the Indemnifying Party from any obligation under this section unless (and then solely to the extent that) the Indemnifying Party is thereby prejudiced. 8. General Provisions. 8.1 Assignment; Binding Effect. Neither party may assign this Agreement without the prior written consent of the other party, except that HC and IMSI may assign its rights under this Agreement to any successor to its business relating to the Assets. This Agreement shall be binding upon and shall inure to the benefit of the parties and their respective heirs, executors, administrators, legal representatives, successors and permitted assigns. 8.2 Severability. If the application of any provision of this Agreement shall be held to be invalid or unenforceable by any court of competent jurisdiction, then (i) such provision shall be automatically reformed so that it is enforceable to the maximum extent permitted, and (ii) the validity and enforceability of other provisions of this Agreement shall not in any way be affected or impaired thereby. 8.3 Governing Law and Disputes. Except for that body of law governing choice of law, this Agreement shall be governed by, and construed in accordance with, the internal laws of the State of California. Any suit or claim arising out of or relating to this Agreement shall be brought only in a court located in Marin County, California, and the parties irrevocably submit to the personal and subject matter jurisdiction of such courts, and agree that service of process may be effected in the manner notices are to be given under this Agreement. The prevailing party in any suit or proceeding relating to this Agreement shall be awarded costs and their reasonable attorney fees. 8.4 Amendment and Waiver. This Agreement may be modified or amended only by an instrument in writing, signed by an authorized officer or representative of each party. No party shall be deemed to have waived any provision of this Agreement unless by a written instrument signed by an officer of such party. A waiver by any party of any term or condition of this Agreement, in any one instance, shall not be deemed or construed to be a waiver of any other term or condition or any subsequent breach thereof. 8.5 Section Headings. The section headings of this Agreement are solely for convenience and shall not be considered in its interpretation. 8.6 Entire Agreement. This Agreement, together with the License Agreement, contains the entire integrated agreement between the parties with respect to its subject matter, and supersedes all prior negotiations, representations or agreements, whether written or oral, relating to that subject matter. 75 8.7 Expenses of the Transaction. Each party shall pay its own expenses incidental to the preparation of this Agreement and the consummation of the transactions contemplated hereby. 8.8 Notices. All notices required or permitted by this Agreement to be given to a party shall be in writing and shall be deemed given (i) upon personal delivery to such party, or (ii) three (3) days after being deposited in the mail, sent registered or certified, addressed to a party at its address appearing below (or to such other address as a party may specify in a notice complying with this provision), or (iii) upon transmission by facsimile to the numbers shown below, with confirmation of successful transmission: If to HC: HumanConcepts, LLC 2 Sunnyside Ave. #G Mill Valley, CA 94941 Attention: Martin Sacks Fax Number: 415-381-2964 If to IMSI: International Microcomputer Software, Inc. 75 Rowland Way Novato, CA 94945 Attention: Gordon Landies Fax Number: 415-897-2544 8.9 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one instrument. 76 Signatures In order to bind the parties to this Agreement for Assignment of Software, the parties or their authorized representatives, have signed below. HUMANCONCEPTS, LLC INTERNATIONAL MICROCOMPUTER SOFTWARE, INC. By: /s/ Martin Sacks By: /s/ Gordon Landies Martin Sacks, Manager Gordon Landies, President NOTIFICATION OF EFFECTIVENESS OF AGREEMENT TO: HumanConcepts, LLC FROM: International Microcomputer Software, Inc. ("IMSI") RE: Agreement for Purchase of Software (the "Agreement") This is to notify you, in accordance with Section 2 of the Agreement, that the Agreement shall become effective as of the date this notice is deemed given pursuant to Section 8 of the Agreement. INTERNATIONAL MICROCOMPUTER SOFTWARE, INC. By _______________________________ Gordon Landies, President 77 EX-10.4 7 f79267ex10-4.txt SOFTWARE LICENSE & DISTRIBUTION AGREEMENT EXHIBIT 10.4 SOFTWARE LICENSE AND DISTRIBUTION AGREEMENT This Software License and Distribution Agreement (this "Agreement"), dated for reference purposes as of November 1, 2001, is entered into between HumanConcepts, LLC, a California limited liability company ("HC"), and International Microcomputer Software, Inc., a California corporation ("IMSI"). Background A. IMSI has acquired, or proposes to acquire, ownership of the software known as "OrgPlus," the trademark "OrgPlus" and associated goodwill, and the documentation, URL and customer records relating to the software. B. IMSI and HC have entered into an Agreement for Purchase of Software (the "Purchase Agreement"), pursuant to which IMSI will transfer ownership of such items to HC. C. Under the terms and conditions of this Agreement, effective if and when the Purchase Agreement becomes effective, and upon IMSI's payment of an advance against royalties and other amounts owed by IMSI to HC, HC will grant IMSI certain licenses to distribute the software and documentation. D. This Agreement will supersede the existing agreement between the parties pursuant to which IMSI has granted HC a license to distribute the software. Agreement Based upon the above Background and the mutual covenants below, the parties agree as follows: 1. DEFINITIONS. 1.1 "Documentation" means the printed user instructions and manuals relating to the Software as may be provided by HC to IMSI from time to time. 1.2 "End User" means any person or entity that uses the Software itself and not for resale or redistribution. 1.3 "Licenses" means, collectively, the licenses granted by HC to IMSI pursuant to Sections 3.1, 3.2, and 3.5 of this Agreement. 1.4 "Net Revenue" means the total price at which an order for Software is invoiced to a customer, excluding shipping charges, taxes, insurance, and any other charges not constituting a part of the price of the Software, and excluding product credits and returns. 1.5. "OEM" means a person or entity who distributes the Software bundled with other hardware and/or software. 1.6 "Professional Version" means the "professional" version of the Software, with enhanced features over the Standard Version, that has been distributed under the name "OrgPlus Professional." 1.7 "Reseller" means a person or entity, other than an OEM or a Software Developer, who acquires the Software for further distribution to End Users or other resellers (other than OEMs or Software Developers). 1.8 "Service Reseller" means a person or entity who acquires the Software for further distribution accompanied by significant additional services, such as training services, integration services, or general consulting services, or who provides products, development or marketing services to HC, or who sells affinity products offered together with or separately from OrgPlus; provided, however that "Service Reseller" does not include Software Developers. 1.9 "Software" means the software product known as "OrgPlus" (consisting of OrgPlus Standard and OrgPlus Professional), and all modifications, enhancements, and updates to such software product that HC has 78 developed and released as of the Effective Date, and that HC may provide to IMSI from time to time after the Effective Date pursuant to the terms of this Agreement. 1.10 "Software Developer" means a person or entity who develops software for sale or license to its customers. 1.11 "Standard Version" means the "standard" version of the Software, that has been distributed under the name "OrgPlus Standard." 1.12 "Territory" means North America (Canada and U.S.), Australia and New Zealand. 1.13 "Trademarks" means the trademarks "OrgPlus," "OrgPlus Standard" and "OrgPlus Professional." 2. EFFECTIVE DATE; SUPERSEDES EXISTING AGREEMENT. This Agreement will become effective as of the date all of the following have occurred: (i) the Assignment Agreement has become effective, and (ii) IMSI has paid HC the first $30,000 Advance provided for in Section 7.1 of this Agreement. The date this Agreement becomes effective shall be referred to in this Agreement as the "Effective Date." When this Agreement becomes effective, the Existing Agreement shall terminate and be superseded by this Agreement. Notwithstanding the above, all payment obligations that have accrued under the Existing Agreement shall survive such termination. 3. LICENSES. 3.1 Grant Of License to Standard Version. Subject to the terms and conditions of this Agreement, HC grants to IMSI, and IMSI accepts from HC, a license to copy the Standard Version and to distribute the Standard Version to End-Users and Resellers in the Territory, in packaging based upon artwork furnished by HC. 3.2 Grant Of License to Professional Version. Subject to the terms and conditions of this Agreement, HC grants to IMSI, and IMSI accepts from HC, the right to purchase copies of the Professional Version from HC, and to distribute such copies of the Professional Version to End-Users and Resellers in the Territory. 3.3 Exclusivity. Subject to Section 3.4 below, for a period of four (4) years after the Effective Date, the Licenses granted to IMSI pursuant to Sections 3.1 and 3.2 above shall be exclusive with respect to distribution of the Software to Resellers in the Territory. Notwithstanding the above, the Licenses shall be non-exclusive with respect to distribution of the Software to Service Resellers. Except as specifically provided above, the Licenses shall be non-exclusive. At the end of such four (4)-year period, if the Licenses remain in effect at that time, the Licenses shall become fully non-exclusive. 3.4 Loss of Exclusivity. HC's Licenses shall become fully non-exclusive if IMSI does not pay HC a total of at least $500,000 (including Advances and royalties) during any year under this Agreement. For purposes of this Section, the first year shall begin on the Effective Date and shall end on December 31, 2002, and subsequent years shall be calendar years. Notwithstanding the above, if royalties paid by IMSI during any year, based on its distribution of Software, are less than $500,000, then IMSI shall have the right to pay the difference to HC within thirty (30) days after the end of the year in order to avoid loss of exclusivity. Any amounts paid by IMSI to HC in order to avoid loss of exclusivity shall be non-refundable and, even if such amounts exceed royalties actually owed by IMSI, shall not operate as credits toward future royalties or any other amounts that may be owed by IMSI to HC under this Agreement. 3.5 Documentation and Artwork License. Subject to the terms and conditions of this Agreement, HC grants to IMSI, and IMSI accepts from HC, (i) a non-exclusive license to copy the Documentation and to distribute the Documentation to End-Users and Resellers in the Territory along with each copy of the Software that IMSI distributes, and (ii) a non-exclusive license to use the artwork furnished by HC to produce packaging for the Standard Version and to produce the Documentation. 3.6 License Restrictions. (a) No Distribution Outside Territory. IMSI shall not distribute the Software outside the Territory, or distribute the Software to customers inside the Territory who IMSI has reason to know intend to re- 79 distribute the Software to customers outside the Territory. (b) No Distribution to OEMs or Software Developers. IMSI shall not distribute the Software to OEMs or Software Developers without the prior written consent of HC, which consent may be granted, withheld, or conditioned by HC in its sole discretion. (c) Assignment, Transfer, and Sublicensing. IMSI shall not have the right to assign or transfer any of its License rights, or to sublicense any of its License rights except as follows: (i) IMSI shall be entitled to grant its Resellers the right to distribute copies of the Software obtained from IMSI in accordance with the terms of this Agreement. (ii) IMSI shall be permitted to assign its License rights in connection with any assignment of this Agreement specifically permitted by the terms of Section 12.2 below. (d) No Reverse Engineering, Modification, Etc. IMSI shall not have the right to copy the Professional Version. IMSI shall not modify, translate, or adapt the Software, or decompile, disassemble, reverse engineer or otherwise attempt to develop source code for the Software, or permit anyone under IMSI's control to do so. (e) Use of Current Versions. IMSI shall distribute only the most current versions of the Software and Documentation furnished by HC from time to time, and shall use only the most current version of the artwork furnished by HC from time to time. 3.7 Ownership. HC shall continue to own all proprietary rights in the Software, Documentation, Trademarks and artwork, and IMSI will not acquire any rights to the Software, Documentation, Trademarks or artwork except the Licenses specifically provided for in this Agreement. 4. OBLIGATIONS OF IMSI 4.1 Marketing Efforts. IMSI agrees to use commercially reasonable efforts to market, promote and distribute the Software. IMSI will cooperate with HC to develop marketing strategies and programs to support distribution of the Software. Notwithstanding the above, except as expressly set forth in this Agreement, IMSI will have sole control over the methods of marketing, promotion and distribution of the Software. 4.2 Quality. IMSI will maintain high standards of quality in connection with its marketing, promotion and distribution of the Software pursuant to this Agreement. 4.3 End User Licenses. IMSI agrees to distribute, and to cause its Resellers to distribute, copies of the Standard Version to End Users only pursuant to license agreements provided by HC from time to time. IMSI agrees to distribute, and to cause its Resellers to distribute, copies of the Professional Version to End Users only pursuant to the license agreements contained in HC's packaging for the Professional Version. 4.4 Registration. IMSI will require each End User to register the software. 4.5 Serial Numbers. IMSI will adhere to HC's serial number system for the Standard Version, by placing a unique serial number on the CD-ROM label for each copy of the Standard Version produced by IMSI, in accordance with HC's numbering system. IMSI will keep such records relating to such serial numbers, and the distribution of such copies, as HC may reasonably request, and provide such records to HC upon request from time to time. 4.6 Packaging. IMSI will distribute the Professional Version only in the original packaging in which HC supplies the Professional Version to IMSI, and IMSI will not alter or modify such packaging. IMSI will distribute the Standard Version only in packaging produced using artwork furnished by HC, and IMSI will not alter or modify such artwork. 80 4.7 Resellers. IMSI agrees to ensure that Resellers to whom IMSI distributes the Software comply with the terms and conditions of this Agreement. 4.8 Copyright Notice. IMSI will not remove or alter HC's copyright notice included in HC's master copy of the Standard Version or HC's artwork supplied to IMSI. 4.9 Use of Trademarks. IMSI will distribute the Software only under the Trademarks, or other trademarks established by HC for the Software from time to time. Notwithstanding the above, IMSI is authorized to identify itself as the distributor of the Software for HC in the Territory by affixing a notice to that effect to the packages containing the Software or in its promotional materials. It is expressly agreed that the ownership and all right, title and interest in and to the trademarks, trade names, patents, copyrights or other proprietary rights relating to the Software are and shall remain vested solely in HC. All use by IMSI of HC's trademarks shall inure exclusively to the benefit of HC and HC shall retain the exclusive right to apply for and obtain registration of such trademarks in all jurisdictions. IMSI shall, and hereby does assign to HC any and all proprietary interests it may obtain under the law of any jurisdiction in the Territory in the names and/or trademarks or words associated with HC or the Software, due to use or registration by IMSI of such names, trademarks or words in the Territory. 4.10 Enforcement of Proprietary Rights. IMSI will promptly notify HC of any suspected infringement by any third party of HC's copyrights, patents, trademarks, or other proprietary rights relating to the Software, of which IMSI becomes aware. IMSI shall promptly take such actions as may be reasonably necessary to enforce such rights and curtail such infringement. If IMSI fails to do so within a reasonable time, HC shall be entitled to demand that IMSI do so, or to take over such efforts itself. If, under the terms of this Agreement, either HC or IMSI brings an action against any third party for infringement of HC's proprietary rights relating to the Software, then (a) the party bringing the action shall bear the costs and expenses of such action, (b) the other party will cooperate in such action at the expense of the party bringing the action, and (c) the party bringing the action shall be entitled to retain any award of damages for such infringement. 5. OBLIGATIONS OF HC. 5.1 Delivery of Master. HC will deliver to IMSI a master copy of the Standard Version, for IMSI's use in making copies of the Standard Version. HC will deliver to IMSI the artwork for IMSI's use in producing the Standard Version packaging and the Documentation. 5.2 Fill Orders. HC agrees to use commercially reasonable efforts to deliver to IMSI, on a timely basis, copies of the Professional Version pursuant to all orders accepted by HC. 5.3 Upgrades. HC agrees to develop and release upgrades to the Software on at least an annual basis, and to continue to provide versions of the Software that run on PCs. HC agrees to provide IMSI with all versions of the Software that HC may develop and release that have fewer features than the Standard Version, and such versions shall be included in the term "Standard Version" under this Agreement. 5.4 Marketing Program. HC will cooperate with IMSI to develop marketing strategies and programs to support distribution of the Software. 5.5 Customer Support. HC will provide End-Users who acquire the Software from IMSI or IMSI's Resellers, with a reasonable level of technical support. 6. ORDERS AND PRICES FOR PROFESSIONAL VERSION. 6.1 Order Procedure. All of IMSI's purchase orders for copies of the Professional Version shall be in writing and shall be subject to and governed by the provisions of this Agreement. Orders shall by signed by an authorized representative of IMSI, and shall specify quantity, requested delivery dates and shipping instructions. In the event of any conflict between the provisions of this Agreement and IMSI's purchase order, the provisions of this Agreement shall control. No additional or supplemental term contained in IMSI's purchase orders shall be applicable unless approved by HC in writing. 81 6.2 Prices; Payment. For each copy of the Professional Version shipped by HC to IMSI, IMSI shall pay HC the direct material and labor cost incurred by HC to produce such copy plus two dollars ($2.00). HC shall invoice IMSI for such amounts and IMSI will pay such invoices within forty-five (45) days of receipt. Any such amounts not paid by IMSI by such date will be subject to a finance charge of .5% per month until paid. In addition to any other remedies permitted by law or this Agreement, if any undisputed amount owed by IMSI to HC under this Agreement (whether royalties or copy purchase prices) remains unpaid after forty-five (45) days, HC may refuse to ship any outstanding order and/or require IMSI to make payment in full at the time any subsequent order is placed and/or delivered. In addition, HC may require IMSI to make payment in full at the time any subsequent order is placed and/or delivered, or to prepay for orders if IMSI becomes insolvent; makes an assignment for the benefit of creditors; has a receiver appointed; files a petition of bankruptcy; or a petition of bankruptcy is filed against IMSI. 6.3 Additional Charges. HC's prices are F.O.B. point of shipment and are exclusive of shipping and handling charges, insurance, duties, excise taxes, and all other taxes of any kind, whether foreign or domestic. All of such charges and taxes shall be paid by IMSI (other than HC's taxes based upon HC's income) and, if paid by HC, shall be invoiced to and paid by IMSI. 6.4 Delay. HC shall not be liable for loss or damage caused by delay or inability to fill or complete orders. 7. PAYMENTS AND REPORTS. 7.1 Advances on Royalties. IMSI will pay to HC thirty thousand dollars ($30,000) per month, for nine (9) months (or a total of $270,000), as advances on the royalties IMSI is required to pay HC pursuant to this Agreement ("Advances"). The first Advance payment shall be made by IMSI on the Effective Date of this Agreement (and is a condition to this Agreement becoming effective). Each subsequent Advance payment shall be made 20 days after the end of each calendar month along with royalty payments made by IMSI pursuant to this Agreement. The first reporting period will be the first full month after the Effective Date. Such Advances shall be non-refundable. Notwithstanding the payment provisions below, at the time each royalty payment is scheduled to be made by IMSI, the royalty amount required to be paid by IMSI shall be the total cumulative royalties owed by IMSI at the time such payment is required to be made, minus the sum of (i) the total Advances made by IMSI and (ii) the total royalties previously paid by IMSI under this Agreement. 7.2 Royalties on Standard Version. As royalties, for each copy of the Standard Version that IMSI distributes to End-Users or Resellers, IMSI shall pay to HC the greater of (i) twenty-five percent (25%) of IMSI's the Net Revenue from such copy, or (ii) $30.00. In the event that adjustments are made by HC to the suggested retail price of the Standard Version, then the minimum per copy royalty shall be adjusted on a pro rata basis. 7.3 Royalties on Professional Version. As royalties, for each copy of the Professional Version that IMSI distributes to End-Users or Resellers, IMSI shall pay to HC the greater of (i) fifty percent (50%) of the Net Revenue for such copy, or (ii) thirty percent (30%) of HC's then-current suggested retail price for that version of the Professional Version. The parties acknowledge that HC may establish different suggested retail prices for different versions of the Professional Version based upon number of boxes enabled in such version. In the event that adjustments are made to the suggested retail price of the Professional Version, then the minimum per copy royalty shall be adjusted on a pro rata basis. 7.4 Royalties on Distribution to OEMs or Software Developers. Notwithstanding the provisions of Sections 7.2 and 7.3 above, unless otherwise agreed in writing by the parties, for each copy of the Software that IMSI distributes to an OEM or a Software Developer (which may be made only with the prior written consent of HC as provided in Section 3.5(b) above), IMSI shall pay to HC fifty percent (50%) of the Net Revenue from such copy. 7.6 Timing of Payments. All royalties required to be paid by IMSI pursuant to this Agreement shall be paid on a monthly basis, by the 20th day of each calendar month, based upon distribution of Software during the prior month. Along with each royalty payment made, IMSI will provide HC with a report indicating the distributions on which the royalty payment is based, and such other information as the other party shall reasonably request relating to the calculation of royalties. IMSI shall grant HC access to sales reports and inventory on hand provided by Ingram or its other distributors. 7.7 Audit Right. HC shall have the right, at its own expense and at any reasonable time or times (but not more than once in any calendar year), to cause a third party independent auditor reasonably acceptable to IMSI to inspect and audit the books and records of IMSI that pertain to this Agreement in order to verify the royalties paid 82 under this Agreement. The audit shall be conducted at the expense of HC, but if any such audit reveals an underpayment of royalties by IMSI of ten percent (10%) or more for any month, then IMSI shall promptly reimburse HC for the reasonable costs of the audit. 7.8 Late Payments. Any amounts that are required to be paid by IMSI pursuant to this Agreement that are not paid within the specified time will be subject to a finance charge of .5% per month until paid, or the maximum permitted by law, whichever is less. 8. WARRANTY; LIMITATION OF LIABILITY. 8.1 Disclaimer of Warranties. THE SOFTWARE AND DOCUMENTATION ARE PROVIDED TO IMSI "AS IS" WITH NO WARRANTIES, EXPRESS OR IMPLIED. HC SPECIFICALLY DISCLAIMS ALL EXPRESS AND IMPLIED WARRANTIES INCLUDING BUT NOT LIMITED TO WARRANTIES OF NON-INFRINGEMENT OF THIRD PARTY RIGHTS, MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. IN PARTICULAR, THE COMPANY DOES NOT WARRANT THAT THE SOFTWARE WILL BE ERROR-FREE OR WILL OPERATE WITHOUT INTERRUPTION. 8.2 Limitation of Liability. IN NO EVENT AND UNDER NO LEGAL THEORY, WHETHER TORT, CONTRACT, STATUTORY, OR OTHERWISE, SHALL HC OR ITS AFFILIATES OR AGENTS BE LIABLE FOR ANY LOST PROFITS OR ANY INCIDENTAL, SPECIAL OR CONSEQUENTIAL DAMAGES IN CONNECTION WITH OR ARISING OUT OF THIS AGREEMENT OR THE EXISTENCE, FURNISHING, FUNCTIONING, OR IMSI'S OR ANY THIRD PARTY'S USE OF THE SOFTWARE OR DOCUMENTATION. IN NO EVENT SHALL THE AGGREGATE LIABILITY OF HC UNDER THIS AGREEMENT EXCEED THE DIFFERENCE BETWEEN (A) THE ACTUAL AMOUNT PAID BY IMSI TO HC UNDER THIS AGREEMENT, AND (B) THE ACTUAL AMOUNT PAID BY HC TO IMSI UNDER THIS AGREEMENT. 9. CONFIDENTIAL INFORMATION. 9.1 Definition. Confidential information means: the Software source code, nonpublic financial information concerning either party; either party's research and development, new product or marketing plans, unless and until publicly announced; and any other information designated as confidential by a party in writing. 9.2 Protection. Each party agrees to use reasonable efforts, and at least the same care that it uses to protect its own confidential information of like importance, to prevent unauthorized dissemination or disclosure of the other party's confidential information during and after the term of this Agreement. 9.3 Exceptions. The confidentiality obligation set forth in Section 9.2 will not apply to any information that: becomes known to the general public without fault or breach of any nondisclosure obligation; the disclosing party customarily provides to others without restriction on disclosure; or the receiving party obtains from a third party without breach of a nondisclosure obligation and without restriction on disclosure. 10. TERM AND TERMINATION. 10.1 Term. This Agreement shall continue indefinitely unless and until terminated according to the provisions below. 10.2 For Cause. Either party may terminate this Agreement upon written notice to the other party if the other party commits a material breach of this Agreement and such breach continues uncorrected for a period of thirty (30) days after notice in writing thereof to such other party. Material breaches shall include, but are not limited to, breaches of a financial term, territory, or infringement of copyright or trademarks. Either party may terminate this Agreement upon written notice to the other party, without giving the other party the opportunity to cure the breach, if (i) the other party fails to make a royalty payment under this Agreement when due, and such party has on at least three (3) prior occasions failed to make a royalty payment under this Agreement within thirty (30) days after such payment was due, or (ii) the other party breaches any material term of this Agreement and has been guilty of substantially the same breach on at least three (3) prior occasions. A royalty payment shall be deemed to have been made for these purposes on the date it is postmarked if sent by mail, or the date the wire transfer was initiated if sent by wire transfer. 10.3 Failure to Pay Minimum Royalties. HC may terminate this Agreement upon written notice to IMSI, if 83 IMSI does not pay HC a total of at least $250,000 (including Advances and royalties) during any year under this Agreement. For purposes of this Section, the first year shall begin on the Effective Date and shall end on December 31, 2002, and subsequent years shall be calendar years. Notwithstanding the above, if royalties paid by IMSI during any year, based on its distribution of Software, are less than $250,000, then IMSI shall have the right to pay the difference to HC within thirty (30) days after the end of the year in order to avoid termination of this Agreement; accordingly, any notice of termination sent by HC pursuant to this Section shall not be effective unless (i) it is given prior to the date 30 days after the end of a year, and IMSI fails to pay the difference by the end of such 30-day period, or (ii) it is given more than 30 days after the end of a year and IMSI has failed to pay HC a total of at least $250,000 during such year or within 30 days after the end of such year. Any amounts paid by IMSI to HC in order to avoid termination of this Agreement shall be non-refundable and, even if such amounts exceed royalties actually owed by IMSI, shall not operate as credits toward future royalties or any other amounts that may be owed by IMSI to HC under this Agreement. 10.4 Buy-Out by HC. This Agreement shall terminate if, HC pays IMSI (i) $400,000 at any time from June 30, 2003 to June 30, 2005, and in addition HC has simultaneously bought out the royalty in the Assignment Agreement for an additional $100,000, or (ii) $600,000 at any time from July 1, 2005 to June 30, 2008, or (iii) $900,000 at any time on or after July 1, 2008. HC shall determine, in its sole discretion, if and when to make such payment to IMSI and if such a payment is made by HC this Agreement shall terminate on the date such payment is made. 11. EFFECT OF TERMINATION; PROCEDURE UPON TERMINATION. 11.1 Effect of Termination. Upon termination of this Agreement: (a) Payment Obligations. IMSI's obligation to pay additional Advances to HC shall terminate. Notwithstanding the above, each party's obligations to make payments to the other, which had accrued prior to termination, shall continue. IMSI shall continue to be obligated to make payments for any Software purchased and/or distributed by IMSI after termination, if and to the extent permitted pursuant to paragraphs (c) and (d) below. (b) Licenses Terminate. Except as specifically provided in paragraphs (c) and (d) below, all Licenses granted in this Agreement to IMSI will terminate, and IMSI will have no further rights to copy or distribute the Software. (c) Processing Accepted Orders for Professional Version. HC may, but shall not be required to, process and complete orders for the Professional Version received from IMSI and accepted by HC prior to the date of termination. If HC ships such copies of the Professional Version to IMSI, IMSI shall have the right to distribute such copies pursuant to the terms and conditions of this Agreement for a period of ninety (90) days after the date of termination. (d) Existing Inventory of Software. If, on the effective date of termination of this Agreement, IMSI has copies of the Software in IMSI's inventory (in finished form, complete with packaging), then IMSI shall notify HC of the quantity and description, and shall offer to sell and send any or all of such copies to HC. In the case of the Professional Version, the price to be paid by HC would be the price IMSI paid HC for such copies. In the case of the Standard Version, the price to be paid by HC would be IMSI's actual direct labor and material cost for the production of such copies. If HC declines to purchase all of such copies, or fails to notify IMSI within thirty (30) days after such notice whether or not HC wishes to purchase such copies, then IMSI shall be entitled to continue to distribute such copies, pursuant to the terms and conditions of this Agreement, for up to ninety (90) days after termination of this Agreement. (e) End Users. Any license to use the Software granted in good faith to End Users will continue in full force and effect; (f) Survival. Any provision of this Agreement that is of a continuing nature shall survive such termination; (g) Return of Materials. IMSI will return to HC the master copy of the Standard Version, all Documentation relating to the Software, the artwork furnished by HC, and all copies of such materials. (h) Information. IMSI will provide to HC all contact and sales information on Resellers of the 84 Software, such that HC may continue to sell the Software and Resellers may continue to purchase the Software without interruption. 12. GENERAL PROVISIONS. 12.1 Independent Contractor. IMSI and HC are, and at all times shall remain, independent contractors as to each other, and neither shall be deemed to be the agent of the other. No joint venture, partnership, agency or other relationship shall be created or implied by this Agreement. Except as otherwise specifically provided in this Agreement, each party shall bear their own expenses, liabilities, costs, and the like. 12.2 Assignment. Either party may assign this Agreement to any person who acquires all or substantially all of the assets of such party, whether by merger or by sale of assets, provided such assignee agrees to assume the assignor's duties and liabilities under this Agreement. Except as provided above, IMSI may not assign this Agreement without the prior written consent of HC, which consent HC shall not unreasonably withhold. HC shall be entitled to assign this Agreement to any person who acquires ownership of the Software from HC. IMSI shall be entitled to assign this Agreement to any company that purchases IMSI or substantially all assets from IMSI. 12.3 Binding Effect. This Agreement shall be binding upon and shall inure to the benefit of the parties, their successors and permitted assigns. 12.4 Severability. If the application of any provision of this Agreement shall be held to be invalid or unenforceable by any court of competent jurisdiction, then the validity and enforceability of other provisions of this Agreement shall not in any way be affected or impaired thereby. 12.3 Governing Law and Disputes. Except for that body of law governing choice of law, this Agreement shall be governed by, and construed in accordance with, the internal laws of the State of California. Any suit or claim arising out of or relating to this Agreement shall be brought only in a court located in Marin County, California, and the parties irrevocably submit to the personal and subject matter jurisdiction of such courts, and agree that service of process may be effected in the manner notices are to be given under this Agreement. The prevailing party in any suit or proceeding relating to this Agreement shall be awarded costs and their reasonable attorney fees. 12.6 Amendment, This Agreement may be modified or amended only by an instrument in writing, signed by an authorized officer or representative of each party. 12.7 Notices. All notices required or permitted by this Agreement to be given to a party shall be in writing and shall be deemed given (i) upon personal delivery to such party, or (ii) three (3) days after being deposited in the mail, sent registered or certified, addressed to a party at its address appearing below (or to such other address as a party may specify in a notice complying with this provision), or (iii) upon transmission by facsimile to the numbers shown below, with confirmation of successful transmission: If to HC: HumanConcepts, LLC 2 Sunnyside Ave. #G Mill Valley, CA 94941 Attention: M. Sacks Fax Number: 415-381-2964 If to IMSI: International Microcomputer Software, Inc. 75 Rowland Way Novato, CA 94945 Attention: Gordon Landies Fax Number: 415-897-2544 12.8 Section Headings. The article and section headings of this Agreement are solely for convenience and shall not be considered in its interpretation. 12.9 Force Majeure. If the performance of any obligation under this Agreement (except payment of money) by either party is prevented, restricted, or delayed by reason of fire, accident, casualty, strikes, labor 85 disputes, inability to procure raw materials or supplies, or any other act or condition beyond the reasonable control of a party, the party so affected, upon giving notice to the other party, shall be excused from such performance to the extent of and for the duration of such prevention, restriction or interference. 12.10 Waiver. A waiver by either party of any term or condition of this Agreement, in any one instance, shall not be deemed or construed to be a waiver of any other term or condition or any subsequent breach thereof. 12.11 Entire Agreement, This instrument contains the entire integrated agreement between the parties with respect to its subject matter, and supersedes all prior negotiations, representations or agreements, whether written or oral. 12.12 Legal Fees. The parties agree to share the legal fees incurred in connection with the preparation of this Agreement through the date this Agreement is signed. Signatures In order to bind the parties to this Software License and Distribution Agreement, the parties or their authorized representatives, have signed below. HUMANCONCEPTS, LLC INTERNATIONAL MICROCOMPUTER SOFTWARE, INC. By: /s/ Martin Sacks By: /s/ Gordon Landies Martin Sacks, Manager Gordon Landies, President 86 -----END PRIVACY-ENHANCED MESSAGE-----