-----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, GfDmrnIR1uQ/D8+yLyNUGM+HFA0CI3sQ5fed6AKMSOEF/QeRcG/POkW5cqjqsw3H mgeblAaMT8KflD9q1es58A== 0000950149-99-001190.txt : 19990628 0000950149-99-001190.hdr.sgml : 19990628 ACCESSION NUMBER: 0000950149-99-001190 CONFORMED SUBMISSION TYPE: S-3 PUBLIC DOCUMENT COUNT: 4 FILED AS OF DATE: 19990625 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: S-3 SEC ACT: SEC FILE NUMBER: 333-81621 FILM NUMBER: 99652839 BUSINESS ADDRESS: STREET 1: 75 ROWLAND WAY CITY: NOVATO STATE: CA ZIP: 94945 BUSINESS PHONE: 4154543000 MAIL ADDRESS: STREET 1: 1895 EAST FRANCISCO BLVD CITY: SAN RAFAEL STATE: CA ZIP: 94901 S-3 1 FORM S-3 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 25, 1999 REGISTRATION NO. 333- ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------------- FORM S-3 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ---------------------- INTERNATIONAL MICROCOMPUTER SOFTWARE, INC. (Exact name of the Registrant as specified in its charter) CALIFORNIA 94-2862863 (State or other jurisdiction of (I.R.S. employer identification no.) incorporation or organization) 75 ROWLAND WAY NOVATO, CALIFORNIA 94945 (415) 257-3000 (Address and telephone number of the Registrant's principal executive offices) ---------------------- COSTA JOHN CHIEF EXECUTIVE OFFICER INTERNATIONAL MICROCOMPUTER SOFTWARE, INC. 75 ROWLAND WAY, NOVATO, CA 94945 (415) 257-3000 (Name, address and telephone number of the Registrant's agent for service) ---------------------- Copies to: KEVIN KELSO FENWICK & WEST LLP TWO PALO ALTO SQUARE, SUITE 800 PALO ALTO, CALIFORNIA 94306 (650) 494-0600 ---------------------- Approximate date of commencement of proposed sale to the public: From time to time after this Registration Statement becomes effective. If the only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, please check the following box. [ ] If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [X] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ]
CALCULATION OF REGISTRATION FEE - -------------------------------------------------------------------------------------------------------- PROPOSED TITLE OF EACH CLASS OF SHARES OF AMOUNTS TO PROPOSED MAXIMUM MAXIMUM AMOUNT OF COMMON STOCK BE OFFERING PRICE PER AGGREGATE REGISTRATION TO BE REGISTERED REGISTERED(1) SHARE(1) PRICE(1) OFFERING FEE - -------------------------------------------------------------------------------------------------------- common stock, no par value 1,497,190 $5.28125 $7,907,035 $2,199 - --------------------------------------------------------------------------------------------------------
(1) Estimated solely for the purpose of calculating the amount of registration fee pursuant to Rule 457(c) under the Securities Act of 1933, as amended, based on the average of the high and low prices of the common stock on the Nasdaq Stock Market on June 22, 1999. THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT FILES A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SECTION 8(a), MAY DETERMINE. 2 SUBJECT TO COMPLETION, DATED JUNE 25, 1999 - -------------------------------------------------------------------------------- PROSPECTUS - -------------------------------------------------------------------------------- INTERNATIONAL MICROCOMPUTER SOFTWARE, INC. 1,497,190 SHARES OF COMMON STOCK ---------- International Microcomputer Software's common stock currently trades on the Nasdaq Stock Market. Last reported sale price on June 22, 1999 $5.1875 per share. Trading Symbol: IMSI ---------- THE OFFERING The selling stockholders named in this prospectus under the heading "Selling stockholders" are selling all of the shares of common stock offered in this prospectus. International Microcomputer Software, Inc., or "IMSI", will not receive any of the proceeds from the sale of these shares. These shares are being offered on a continuous basis under Rule 415 of the Securities Act of 1933 and will be sold from time to time as described under "Plan of Distribution." IMSI will pay approximately $27,000 in registration expenses. IMSI will not be required to pay any discounts, commissions or selling expenses in connection with this registration. The selling stockholders, and broker-dealers who may participate in sale of the shares covered by this prospectus, may use this prospectus. The shares covered by this prospectus may, if qualified, also be sold pursuant to Rule 144 of the Securities Act or any other applicable exemption. THIS INVESTMENT INVOLVES A HIGH DEGREE OF RISK. PLEASE CAREFULLY CONSIDER THE "RISK FACTORS" BEGINNING ON PAGE 2 OF THIS PROSPECTUS. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. The date of this prospectus is June 25, 1999 ******************************************************************************** THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. ******************************************************************************** 1 3 IN CONNECTION WITH THIS OFFERING, NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS. IF SUCH INFORMATION IS GIVEN OR REPRESENTATIONS MADE, YOU MAY NOT RELY ON SUCH INFORMATION OR REPRESENTATIONS AS HAVING BEEN AUTHORIZED BY US. THIS PROSPECTUS IS NEITHER AN OFFER TO SELL NOR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THOSE REGISTERED HEREBY, NOR IS IT AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY SECURITIES WHERE SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. YOU MAY NOT IMPLY FROM THE DELIVERY OF THIS PROSPECTUS, NOR FROM ANY SALE MADE UNDER THIS PROSPECTUS, THAT OUR AFFAIRS ARE UNCHANGED SINCE THE DATE OF THIS PROSPECTUS OR THAT THE INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT AS OF ANY TIME AFTER THE DATE OF THIS PROSPECTUS. TABLE OF CONTENTS Risk Factors ......................................................... 2 Use of Proceeds ...................................................... 13 Selling Stockholders ................................................. 13 Plan of Distribution ................................................. 15 Where You Can Find More Information .................................. 16 Documents Incorporated by Reference .................................. 17 Legal Matters ........................................................ 17
Unless the context otherwise requires, the terms "we," "our," "us" and "IMSI" refer to International Microcomputer Software, Inc., a California corporation. IMSI We are a provider of productivity software for growing businesses. We distribute our products in more than 60 countries and in 13 languages via retail, direct, and on-line channels. Since our founding in 1982, we have sold more than ten million units worldwide. We offer a broad spectrum of award-winning solutions for growing businesses in the computer-aided design ("CAD"), business applications, visual content and utilities categories. Our headquarters are located in California and we have offices in Canada, France, Germany, Australia, South Africa, Sweden, Japan and the United Kingdom. RISK FACTORS Please carefully consider the specific factors set forth below as well as the other information contained in, or incorporated by reference into, this prospectus before purchasing shares of our common stock. This prospectus contains forward-looking statements that involve risks and uncertainties. Our actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed below. WE EXPECT A LARGE LOSS IN THE FISCAL YEAR ENDED JUNE 30, 1999. We anticipate that IMSI will have a net loss for our fourth fiscal quarter ending June 30, 1999 and will have a net loss for the entire fiscal year. Results for fiscal 2000 will be affected by, among other factors, the timing and the number of new product releases or upgraded versions of existing products, marketing and promotional expenditures in connection with the product releases and the timing of product announcements or introductions by our competitors and the amount of the anticipated restructuring charge described below under the heading "We anticipate a significant restructuring charge in the fourth quarter 1999." 2 4 WE RECENTLY AMENDED OUR BANK LINE OF CREDIT. IMSI has a line of credit agreement with Union Bank under which it can borrow the lesser of $13,500,000 or 80% of eligible accounts receivable, at Union Bank's reference rate plus 1/2 % or LIBOR plus 2%, at IMSI's option. The line of credit agreement requires IMSI to comply with certain financial covenants including maintenance of net worth and working capital requirements. Under the terms of the agreement, all assets not subject to liens of other financial institutions have been pledged as collateral against the line of credit. The credit line expires October 31, 1999. As a result of covenant violations, certain events of default occurred that, among other things, entitle Union Bank to declare all loans and other obligations of IMSI under the line of credit to be immediately due and payable and to commence immediate enforcement and collection actions, except for the agreements described in the next paragraph. On March 5, 1999, IMSI and Union Bank executed a forbearance agreement, in which IMSI agreed to pay down the amount by which IMSI's obligations to Union Bank exceeded the sum permitted to be borrowed in accordance with the agreement such that the remaining over-advance did not exceed $2,250,000. IMSI accordingly paid approximately $1,773,000 of the balance outstanding on the line of credit in March 1999. On April 23, 1999, IMSI and Union Bank entered into agreements amending the credit agreement and related instruments. Subject to IMSI's compliance with the amended agreements, Union Bank waived IMSI's compliance with certain of the covenants contained in the credit agreements with respect to our third and fourth quarters of fiscal 1999, thereby bringing IMSI into compliance as of the fourth quarter of fiscal 1999. Pursuant to the agreement, IMSI paid $1,800,000 of the balance outstanding on the line of credit in May 1999. We used a certain portion of the proceeds that we received from the BayStar financing, described under the heading "Selling Stockholders" below, to make this payment. If we breach the provisions of the credit agreements as amended or violate one or more of the covenants in the amended agreements, Union Bank could declare all loans and the obligations under the agreements to be immediately due and payable and could commence immediate enforcement and collection actions which, could have a material adverse effect on IMSI's business, operating results and financial condition. WE NEED TO RAISE ADDITIONAL FUNDS. We currently anticipate that the available funds and cash flows generated from operations will not be sufficient to meet our anticipated needs for working capital and capital expenditures for the next 12 months. Therefore, we will need to raise additional funds in the near future. As a result of our need for funds and our substantial losses during fiscal 1999 to date, during fiscal 1999 we instituted measures to improve operations and cash flows, including substantial personnel reductions and the initiation of certain cost cutting programs, and we may take further measures, including further personnel reductions, during fiscal 1999 and thereafter. We will need to raise significant new working capital through additional debt or equity financing in order to sustain our operations and fund our operating plans, and to fund business expansion, develop new or enhanced products, respond to competitive pressures or acquire complementary products, businesses or technologies. If we successfully raise additional funds, it is likely that they will be raised through the issuance of equity or convertible debt securities, and thus the percentage of ownership of current stockholders will be reduced, stockholders will experience additional dilution and such securities may have rights, preferences or privileges senior to those of the holders of our common stock. We cannot provide any assurance that additional financing will be available on terms favorable to us, or at all. If adequate funds are not available or are not available on acceptable terms, we may not be able to meet existing obligations, fund expansion, take advantage of unanticipated acquisition opportunities, develop or enhance services or products or respond to competitive pressures. In addition, such inability could have a material adverse effect on our business, operating results and financial condition. Our financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The losses discussed above, and other factors such as our liquidity, raise questions concerning our ability to continue as a going concern. Our financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern. Our continuation as a going concern is dependent upon our ability to obtain additional financing or 3 5 refinancing, to generate sufficient cash flow to meet our obligations on a timely basis, and ultimately to attain successful operations WE EXPERIENCE FLUCTUATIONS IN OUR OPERATING RESULTS. We have experienced, and expect to continue to experience, significant fluctuations in operating results due to a variety of factors. We experienced growth during fiscal 1998, 1997, and 1996. However, during fiscal year 1999, we suffered a significant decline in revenue from $45.6 million in the nine months ended March 31, 1998 to $30.9 million in the nine months ended March 31, 1999. This decline in revenue has resulted in our reporting net losses for the first three quarters of fiscal 1999 with a net loss of $5.4 million in the nine months ended March 31, 1999, compared with a net loss of $1.9 million in the six months ended December 31, 1997. Factors that may cause fluctuations in operating results in the future include, but are not limited to, - market acceptance of our products or those of our competitors; - the 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; - product returns and reserves; - changes in pricing policies by us or our competitors; - projected and actual changes in platforms and technologies; - the accuracy of forecasts of, and fluctuations in, consumer demand; - the extent of third party royalty payments; - the rate of growth of the consumer software market; - fluctuations in foreign exchange rates; - the timing of orders or order cancellation from major customers; - changes or disruptions in the consumer software distribution channels; - the acquisition and successful integration of new businesses, products and technologies; - the timing of any write-offs in connection with such acquisitions; and - economic conditions, both generally and within our industry. We may also be required to pay fees in advance or to guarantee royalties, which may be substantial, or to obtain software licenses from third parties. As a result of these and other factors, our operating results in any given period are inherently difficult to predict. Any significant shortfall in revenues and earnings from the levels expected by securities analysts and stockholders could result in a substantial decline in the trading price of our common stock. While our business has not generally been materially affected by seasonal trends, the seasonality of the European, Asia/Pacific and other international markets could impact our operating results and financial condition in a particular quarter given the significant portion of net revenues contributed by international operations. The markets for our products are also characterized by significant price competition, which may cause our operating results to fluctuate. 4 6 WE ANTICIPATE A SIGNIFICANT RESTRUCTURING CHARGE DURING THE FOURTH QUARTER OF FISCAL 1999. IMSI is in the process of implementing a company-wide restructuring in response to its fiscal 1999 decline in revenues and net losses. In this regard, we are attempting to reduce the costs associated with our retail operations, to focus on our strongest product franchises, and to discontinue investment in non-strategic products. We plan to move to a more variable cost model and reduce fixed infrastructure. We expect to incur a significant restructuring charge in the current fourth quarter of fiscal year 1999. This charge may include write-downs of inventories and other intangible assets relating to non-strategic products, as well as costs associated with personnel reductions and facilities closures. WE MAY NOT BE PROFITABLE IN THE FACE OF RAPIDLY CHANGING TECHNOLOGY. The markets for our products are characterized by rapidly changing technology, frequent new product introductions and uncertainty due to new and emerging technologies, as well as changes in customer requirements and preferences. Changes in technologies and customer requirements and preferences, product obsolescence and advances in computer software and hardware will require us to develop or acquire new products and to enhance our products in a timely manner at improved price/performance levels in order to remain competitive. The pace of change has recently accelerated due to the Internet, corporate intranets, the introduction of 32-bit operating systems such as Windows 95, Windows 98 and Windows NT 4.0, and new programming languages, such as Java. PC hardware, in particular, is steadily advancing in power and function, facilitating expansion of the market for increasingly complex and flexible software products. This, in turn, has resulted in escalating development costs, longer periods necessary for development of new products and a greater degree of unpredictability in the time necessary to develop products. Due to potential difficulties in the development process, we cannot provide assurance that future products and upgrades will be released in a timely manner or that they will receive market acceptance, if and when released. Despite significant testing by us and by current and potential customers, errors or "bugs" may still be found in new products or upgrades after commencement of commercial shipments, especially when first introduced. Delays in the commencement of commercial shipments of new products or upgrades, as well as the discovery of errors or "bugs" after release, may result in adverse publicity, customer dissatisfaction and delay or loss of product revenues. In addition, such errors or "bugs" could require significant design modification or corrective releases and could result in an increase in product returns. Furthermore, from time to time we and others may announce new products, capabilities or technologies that have the potential to replace or shorten the life cycles of our existing products. We cannot assure that announcement of currently planned or other new products by us or by our competitors will not cause customers to defer purchasing our products existing or cause distributors to return products to us. In addition, rapid changes in the market and increasing numbers of new products available to consumers have increased the degree of consumer acceptance risk with respect to any specific title that we may publish. We expect that this trend will continue and may become more pronounced in the future. Consumer preferences are difficult to predict, and few consumer products achieve sustained market acceptance. We cannot provide assurance that we will be successful in our product development efforts or that we will have the resources required to respond to technological changes or to compete successfully in the future. Delays or difficulties associated with new product introductions or upgrades could have a material adverse effect on our business, operating results and financial condition. In addition, because we expect that the cost of developing and introducing new products will continue to increase, the financial risks associated with new product development will increase as will the risks associated with material delays in the introduction of such new products. If we are unable to develop or acquire new products in a timely manner as revenues decrease from products reaching the end of their natural life cycles, our operating results will be adversely affected. Because of our small size and capital resources relative to some of our competitors, our ability to avoid technological obsolescence through acquisition or development of new products or upgrades of existing products may be more limited than companies with greater funds. WE FACE RISKS IN INITIATING AND EXECUTING OUR INTERNET STRATEGY. Our marketplace has recently experienced a higher emphasis on online and Internet-related services and content tailored for this new delivery vehicle. We have taken and will continue to take steps, at significant cost, to take advantage of opportunities created by the Internet and online networks, and we expect to continue incurring significant additional costs in connection with our Internet infrastructure. These changes include material and costly 5 7 additions to our existing hardware, substantial increase in personnel for experienced web designers, acquisitions and cross licenses to drive traffic to our web sites and a transition to an Internet sales and marketing strategy. We cannot provide any assurance that our Internet strategy will be successful, or that the costs and investments in this area will provide adequate, or any, results. Delivery of software using online services or the Internet will necessitate certain changes in our business and operations including addressing operational challenges such as improving download time for pictures, images and programs, ensuring proper regulation of content quality and developing sophisticated security for transmitting payments. Our failure to adapt to and utilize such technologies and media successfully and in a timely manner could materially and adversely affect our competitive position and our financial results. IMSI depends to some extent and is increasing its dependence on relationships with other online companies. These relationships include, but are not limited to, agreements for anchor tenancy, promotional placements, sponsorships and banner advertisements. Generally, these agreements have terms for up to a year, are not exclusive and do not provide for guaranteed renewal. The risks included in this dependence include: (i) the possibility that a competitor will purchase exclusive rights to attractive space on one or more key sites; (ii) the uncertainty that significant spending on these relationships will increase IMSI's revenues substantially or at all; (iii) the possibility that potential revenue increases resulting from such spending will not occur within the time periods that IMSI is expecting; (iv) the possibility that space on web sites may increase in price or cease to be available on reasonable terms or at all; (v) the possibility that such online companies will be unable to deliver a sufficient number of customer visits or impressions; and (vi) the possibility that such online companies will compete with IMSI for limited online revenues. Any termination of our arrangements with other online companies could have a material adverse effect on IMSI's business, results of operations and financial condition. A key element of our Internet strategy is to generate a high volume of traffic to, and use of, our Website. IMSI's revenues will depend primarily on the number of customers who use our Website to purchase merchandise. Accordingly, the satisfactory performance, reliability and availability of our Website, transaction-processing systems, network infrastructure and delivery and shipping systems are critical to IMSI's operating results, as well as to our reputation and our ability to attract and retain customers and maintain adequate customer service levels. IMSI periodically has experienced minor systems interruptions, including Internet disruptions, which it believes may continue to occur from time to time. Any systems interruptions, including Internet disruptions, that result in the unavailability of our Website or reduced order fulfillment performance would reduce the volume of goods sold, which could have a material adverse effect on IMSI's business, results of operations and financial condition. IMSI is continually enhancing and expanding its transaction-processing systems, network infrastructure, delivery and shipping systems and other technologies to accommodate a substantial increase in the volume of traffic on IMSI's Website. There can be no assurance that IMSI will be successful in these efforts or that IMSI will be able to accurately project the rate or timing of increases, if any, in the use of our Website or timely expand and upgrade our systems and infrastructure to accommodate such increases. There can be no assurance that IMSI's or our suppliers' network will be able to timely achieve or maintain a sufficiently high capacity of data transmission, especially if the customer usage of our Website increases. IMSI's failure to achieve or maintain high capacity data transmission could significantly reduce consumer demand for our services and have a material adverse effect on our business, results of operations and financial condition. WE MAY HAVE DIFFICULTIES SUCCESSFULLY INCORPORATING NEWLY ACQUIRED PRODUCTS AND TECHNOLOGIES INTO OUR BUSINESS. We have acquired businesses, technologies, services, product lines and/or content databases that are complementary to our business in order to broaden our product lines and geographic sales channels. For example, 6 8 during the first quarter of fiscal 1998, we acquired a number of products in the CAD, diagramming and consumer categories from Corel Corporation; entered into a technology licensing agreement with Dragon Systems, a developer of speech recognition products; acquired from Quarterdeck Corporation exclusive worldwide licensing rights to the HiJaak graphics utility products; acquired certain assets of MediaPaq, Inc., including our browser technology; and acquired certain assets of MapLinx, Inc., including a mapping software program. We believe that our future growth will depend, in part, upon the success of our recent and possible future acquisitions. We cannot provide assurances that the anticipated benefits of business combinations and product acquisitions will be realized, or that we will be successful in identifying suitable acquisition opportunities in the future. We may face increased competition for future acquisition opportunities, which may inhibit our ability to consummate suitable acquisitions and increase the costs of completing such acquisitions. Further, we cannot provide assurances that we will be able successfully to integrate acquired technologies, services, product lines or businesses. Acquisitions entail a number of risks, including managing a larger and more geographically disparate business; diversion of management attention; successfully completing development of and marketing acquired products to markets with which we may not be familiar; integrating the acquired products into our product lines; coordinating diverse operating structures, policies and practices; and integrating the employees of the acquired companies into our organization and culture. Our failure to integrate and manage acquired businesses successfully, to retain our employees and to successfully address new markets associated with such acquired businesses would have a material adverse effect on our business, operating results and financial condition. Certain of our acquisitions have involved issuances of equity securities and resulted in various charges and expenses that have adversely affected, and will continue to adversely affect, our operating results and financial condition. Future acquisitions may also result in potential charges that may adversely affect our earnings and may involve the issuance of shares of our stock to owners of acquired businesses, resulting in dilution in the percentage of our stock owned by other stockholders. OUR SUCCESS DEPENDS ON KEY PERSONNEL. We have recently experienced changes in our board of directors and management. As previously reported in a press release and in our quarterly Report on Form 10-Q for the period ended March 31, 1999, IMSI announced the appointment of Costa John, our Chief Financial Officer, as our Chief Executive Officer. Mr. John remains the Chief Financial Officer. Martin Sacks, formerly Chief Executive Officer and President of IMSI, resigned as CEO and President but remains a director and was elected Chairman of the Board. As part of the restructuring of the management team and the Board, Geoffrey Koblick, formerly Chief Operating Officer and Chairman, has retired from both positions, and as a director, but continues to be available as an advisor to IMSI. In addition, Robert Mayer, who continues as executive Vice President of Worldwide Sales and Marketing, has resigned as a director. Our success depends to a significant extent on the performance and continued service of our senior management and certain key employees. We maintain no key person insurance and do not have employment agreements or non-competition agreements with all of our key employees. Competition for highly skilled employees with technical, Internet, management, marketing, sales, product development and other specialized training is intense, and the supply is limited. In particular, we have historically experienced difficulty in attracting highly qualified programmers and software engineers in the U.S. We cannot provide any assurance that we will be successful in attracting, motivating and retaining such personnel. In addition, we cannot provide any assurance that one or more key employees will not leave us or compete against us. Our failure to attract qualified employees or to retain the services of key personnel could materially adversely affect our business, operating results and financial condition. COMPETITION WITHIN DISTRIBUTION CHANNELS MAY ADVERSELY AFFECT OUR BUSINESS. The distribution channels through which consumer software products are sold have been characterized by intense competition and continuing uncertainties, including consolidations and financial difficulties of certain distributors and resellers, the emergence of new resellers such as general mass merchandisers and superstores, the development of new channels such as the Internet and the desire of large customers such as retail chains and corporate users to purchase directly from software developers. Competition for access to distribution channels and for retail shelf space is intense. We have no long-term distribution agreements with any reseller. We cannot provide any assurance that our distributors and retailers will continue to purchase our products or provide our products with adequate levels of shelf space and promotional support or that we will be able to distribute our products effectively through new distribution channels. Our distributors and retailers carry competing product lines, and there is substantial pressure from distributors and retailers to obtain marketing and promotional funds, price 7 9 discounts and favorable return policies in connection with access to shelf space, in-store promotions and sales of products, which has an adverse impact on our net revenues and profitability. In addition, consolidation among the companies within our distribution channels has reduced the number of available distributors, which has increased the competition for shelf-space. We cannot provide any assurance that these pressures will not continue or increase. We allow distributors to return products in exchange for new products or for credit towards future purchases as part of stock balancing programs. In addition, we provide price protection to our distributors when we reduce the price of our products. End users may return products through dealers and distributors within a reasonable period from the date of purchase for a full refund, and retailers may return older versions of products. Various distributors and resellers may have different return policies. Substantial product returns occur when we introduce upgrades and new versions of products or when distributors or resellers overestimate demand. We anticipate that product returns in future periods will continue to be adversely affected by product update cycles, new product releases and software quality. We establish allowances based on estimated future returns of products after considering various factors, and accordingly, if the level of actual returns exceeds our estimates, it could have a material adverse impact on our operating results and financial condition. While we attempt to monitor channel inventories and provide appropriate reserves, actual product returns may differ from our reserve estimates, and such differences could be material to our operating results and financial condition. We manufacture our products based upon estimated future sales, and accordingly, if the level of actual orders of products falls short of management's estimates, inventory levels could be excessive, which could add to inventory write-offs and have an adverse impact on our business, operating results and financial condition. WE DEPEND ON A LIMITED NUMBER OF DISTRIBUTORS AND RETAILERS FOR A SUBSTANTIAL AMOUNT OF REVENUES. Sales to a limited number of distributors and retailers have constituted and are expected to continue to constitute a substantial amount of our revenues. Sales to our two largest distributors during the nine months ending March 31, 1999 accounted for approximately 36% of net revenues for that period. Sales to our two largest distributors during fiscal 1998 and fiscal 1997 accounted for 33% and 23% of our revenues, respectively. Arrangements with our distributors and retailers may generally be terminated at any time by the distributor or retailer. While we are currently attempting to negotiate direct sales relationships with the major retailers, there is no guarantee we will be able to reduce our reliance on distributors either quickly or at all. The loss of a significant reduction in sales due to the inability to collect receivables from, or any other adverse change in our relationship with, any of our principal distributors or retailers, or principal accounts sold through such distributors, could materially adversely affect our operating results and financial condition. In addition, sales of our products are typically made on credit with terms that vary depending upon the customer and the nature of the product. Our distributors and retailers compete in a volatile industry and are subject to the risk of bankruptcy or other business failure, and certain distributors and retailers have experienced difficulties. Although we maintain a reserve for uncollectible receivables, we cannot provide any assurance that our reserve will prove to be sufficient or that the difficulties for these or additional distributors and retailers will not continue, which could have an adverse effect on our business, operating results and financial condition. OUR SUCCESS DEPENDS ON THE SUCCESS OF A FEW PRODUCT LINES. During the nine months ended March 31, 1999, 45% of our total net revenues were derived from sales of our business applications, 10% of our net revenues were derived from sales of our utilities, and 36% of our net revenues were derived from sales of our visual content products. During fiscal 1998, 43% of our net revenues were derived from sales of our business applications, 19% of our net revenues were derived from sales of our utilities, and 29% of our net revenues were derived from sales of our visual content products. During fiscal 1997, 34% of our net revenues were derived from sales of our business applications, 11% of our net revenues were derived from sales of our utilities, and 46% of our net revenues were derived from sales of our visual content products. Specifically, the TurboCAD product line (a part of the the business applications category) accounted for approximately 19% of our net revenues during the nine months ended March 31, 1999, 21% of our net revenues during fiscal 1998, and 22% of our net revenues during fiscal 1997. Additionally, the ClipArt product line (a part of the visual content category) accounted for approximately 38% of our net revenues during the nine months ended March 31, 1999, 29% of our net revenues during fiscal 1998, and 46% of our net revenues during fiscal 1997. These were the leading product lines in their respective categories and, although we publish a broad range of products, these product lines are expected to continue to account for a material percentage of net revenues in 8 10 fiscal 1999 and thereafter. Accordingly, our future operating results will depend, in part, on continued and expanded market acceptance of these product lines, as well as our ability to continue to enhance these product lines and to introduce new products. We cannot provide any assurance that sales levels of any of these product lines will increase or be sustained, especially in light of increased competition in the marketplace. Any circumstances adversely affecting sales of these product lines, including such factors as product life cycles, market acceptance, product performance and reliability, reputation, price competition and the availability of third-party applications, could have a material adverse effect on our business, operating results and financial condition. The failure of additions to these product lines to achieve market acceptance could also have a material adverse effect on our business, operating results and financial condition. OUR INTELLECTUAL PROPERTY MAY BE VULNERABLE. As the number of software products in the industry increases and the functionality of these products further overlaps, software developers and publishers may increasingly become subject to infringement claims. From time to time, we have received, and may receive in the future, notice of claims of infringement of other parties' proprietary rights. Although we investigate claims and respond as we deem appropriate, we cannot provide any assurance that infringement or invalidity claims (or claims for indemnification resulting from infringement claims) will not be asserted or prosecuted against us. Irrespective of the validity or the successful assertion of such claims, we would incur significant costs and diversion of resources with respect to the defense of such claims, which could have a material adverse effect on our business, operating results and financial condition. If any valid claims or actions were asserted against us, we might seek to obtain a license under a third-party's intellectual property rights. We cannot provide any assurance, however, that under such circumstances a license would be available on commercially reasonable terms, or at all. We provide our products to end users under non-exclusive licenses, which generally are non-transferable and have a perpetual term. We make source code available for certain of our products. The provision of source code may increase the likelihood of misappropriation or other misuse of our intellectual property. We license all of our products pursuant to shrink-wrap licenses that are not signed by licensees and therefore may be unenforceable under the laws of certain jurisdictions. OUR MARKETPLACE IS INTENSELY COMPETITIVE AND RAPIDLY CHANGING AND WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY IN THE FUTURE. The PC productivity software industry is highly competitive and is characterized by rapid changes in technology and customer requirements. Important factors in the market include product features and functionality, quality and performance, reliability, brand recognition, ease of understanding and operation, advertising and dealer merchandising, access to distribution channels and retail shelf space, marketing, pricing and availability and quality of support services. We face competition from a large number of sources. There has been a consolidation among competitors in the market for our products, and many of our current and potential competitors have larger technical staffs, more established and larger marketing and sales organizations, significantly greater financial resources and greater name recognition and better access to consumers than we do. Our relatively small size could adversely affect our ability to compete with larger companies for sales to dealers, distributors and retail outlets, to obtain shelf space for our products in retail outlets and to acquire products from third parties, who may desire to have their products sold or published by larger entities. The rapid pace of technological change constantly creates new opportunities for existing and new competitors and can quickly render existing technologies less valuable. It also requires us to enhance our existing products and to offer new products on a timely basis. We have limited resources and therefore must restrict our product development efforts to a relatively small number of projects. We compete with other software companies in our efforts to acquire products or companies and to publish software developed by third parties. The competition to publish software developed by third parties is primarily on the basis of brand-name reputation, the terms offered to software developers and the ability to market new products. Each of our major products competes with one or more products from one or more major independent software vendors. For example: - TurboCAD competes with AutoCAD from Autodesk Inc. and IntelliCAD from Visio Corporation. 9 11 - WinDelete competes with Uninstaller from CyberMedia Inc., CleanSweep and Norton Uninstaller from Symantec Corporation. - MasterClips competes with ClickArt from Broderbund Software Inc., MegaGallery from Corel Corporation, Holy Cow! from Macmillan Digital Publishing USA and Art Explosion from Nova Development. - VoiceDirect competes with various speech recognition products from IBM, Dragon Systems, Inc., Kurzweil and Lernout & Hauspie. - Net Accelerator competes with SurfExpress from Connectix, Speed Surfer from Kissco and Net.jet from Peak Technologies. - FloorPlan competes with Home Architect from Cendant Corporation, Home Design Suite from Autodesk, Dream Home Designer from Alpha Software Corporation and Home Design 3D from Expert Software, Inc. - TurboProject competes with Microsoft Project. Our strategy has been to develop productivity and utility applications that do not compete directly with applications or features included in operating systems and applications suites offered by major software vendors such as Microsoft, Lotus Development Corp. and Corel. However, such software vendors may in the future choose to expand the scope and functionality of their products to support some or all of the features currently offered by certain of our products, which could adversely affect demand for our products. In particular, Microsoft has periodically added utility features (e.g. disk compression utilities and desk-top facing features) to its Windows operating systems that were previously only supported by third-party vendors and that materially reduced demand for third-party utility products. In addition, Microsoft's Windows 98 contains features for the automatic updating of Windows 98 (including third party device drivers) and many Microsoft applications via the Internet, which could adversely impact sales of our Update Now! product. Windows 98 also contains the latest version of Microsoft's Internet Explorer which handles the caching of Web pages more efficiently. This feature may adversely impact sales of our Net Accelerator product family. The software industry has limited barriers to entry, and the availability of personal computers with continuously expanding capabilities, at progressively lower prices, contributes to the ease of market entry. We believe that competition in the industry will continue to intensify as a number of software companies extend their product lines into additional product categories and as additional competitors enter the market. In addition, widespread use of the Internet has reduced barriers to entry in the software market by allowing software developers to distribute their products online without relying on access to traditional distribution networks. As a result of the proliferation of competing software developers, an increasingly large number of products are competing for limited shelf space. There can be no assurance that our products will achieve and/or sustain market acceptance and generate significant levels of revenues in subsequent quarters or that we will have the resources required to compete successfully in the future. OUR DEPENDENCE ON THIRD PARTY DEVELOPERS COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS. Our business strategy has historically depended in part on our relationships with third-party developers, who provide products that expand the functionality of our software. Many of these licenses require payment of royalties based on the number of products sold. In other cases, we may be required to pay substantial up-front royalties and development fees to software developers before the commercial viability of their products has been tested. Failure of such products to achieve commercial success could result in substantial charges against our earnings. Licenses from third parties for several of our products have limited terms and are non-exclusive. We cannot provide any assurance that these third-party software licenses for current products or for new products will continue to be available on commercially reasonable terms, or that the software will be appropriately supported, maintained or enhanced by the licensors. The loss of licenses to, or the inability to support, maintain and enhance, any such software, could result in increased costs, or in delays or reductions in product shipments until equivalent software could be developed, identified, licensed and integrated, which would have a material adverse effect on our business, operating results and financial condition. In addition, because talented development personnel are in high 10 12 demand, we cannot provide any assurance that independent developers, including those who have developed products for us in the past, will be able to provide development support to us in the future. If sales of software utilizing third-party technology increase disproportionately, operating income as a percent of revenue may be below historical levels due to third-party royalty obligations. THERE ARE RISKS ASSOCIATED WITH OUR USE OF DEVELOPMENT TEAMS OUTSIDE THE UNITED STATES. Most program coding and quality testing of our products are performed using contract programmers in development centers in various locations in Russia, Ukraine, India, and several other countries. Although the cost of programmers outside of the United States is significantly lower than the cost of programmers available to us domestically, our reliance on such programmers presents a number of risks. Due to the geographic distance between our engineering management personnel in California and the contract programmers overseas, it is more difficult for us to manage, oversee and control the programming process. In addition, cultural and language differences make coordination of our United States management and overseas programming efforts more difficult. While our agreement with the entity through which we compensate these programmers provides that we own the code developed by the programmers, the location of the source code outside the United States may make it more difficult for us to ensure that access to our source code is adequately restricted. Given our reliance on programmers outside the United States, our business, operating results and financial condition would be materially adversely affected if we were to lose the services of these programmers. Although we would likely be able to locate alternative programmers within the United States or in other countries to the extent that the overseas programmers were no longer available, the costs associated with such alternative programmers could significantly increase our operating expenses. WE FACE DIFFICULTIES IN MANAGING CHANGE. In recent years, we have experienced changes in our operations that have placed significant demands on our administrative, operational and financial resources. The growth in our Internet customer base and expansion of our Internet product families, together with our acquisition of other businesses and their employees, have challenged and are expected to continue to challenge our management and operations, including our sales, marketing, customer support, research and development and finance and administrative operations. In order to address certain of these challenges, we need to upgrade elements of our information systems. We cannot provide any assurance that we will successfully overcome difficulties with such upgrades in a timely manner, which could adversely affect our ability to continue to manage the growth of our operations. Our future performance will depend in part on our ability to manage change successfully, in both our domestic and our international operations, and to adapt our operational and financial control systems, if necessary, to respond to changes in our business and to facilitate the integration of acquired businesses with our operations. The failure of our management to effectively respond to and manage growth could have a material adverse effect on our business, operating results and financial condition. WE FACE RISKS ASSOCIATED WITH OUR INTERNATIONAL OPERATIONS. For the nine months ended March 31, 1999, net revenues from international sales were $9,392,000 or 30% of net revenues. International sales represented 33% of revenues for the nine months ended March 31, 1999, 30% of our revenues during fiscal 1998, and 41% of our revenues during fiscal 1997. We expect that international sales will account for an increasing portion of our revenues in the future. Most of our international revenues are denominated in foreign currencies. Consequently, a decrease in the value of a relevant foreign currency in relation to the U.S. dollar can adversely affect our net revenues. Further, a decrease in the value of a relevant foreign currency in relation to the U.S. dollar occurring after prices and before receipt of payment by us would have an adverse effect on our results of operations. Additionally, we may be materially and adversely affected by increases in duty rates, exchange or price controls, changes in tariffs, difficulties managing accounts receivable, longer collection cycles, repatriation restrictions or other restrictions on foreign currencies. Our international operations are subject to certain other risks common to international operations, including without limitation, difficulties managing foreign operations, the timely and successful launch of foreign products, government regulations, import and export restrictions, changes in international tax laws, political instability and, in certain jurisdictions, reduced protection for our intellectual property rights. We have committed and continue to commit significant time and development resources to customizing certain of our products for selected international markets and to developing international sales and support channels. We cannot provide any assurance that our efforts to develop products for targeted international markets or to develop additional international sales and support channels will be successful. The 11 13 failure of such efforts, which can entail considerable expense, could have a material adverse effect on our business, operating results and financial condition. Although IMSI believes that the risks associated with transactions in foreign currencies are mitigated by diversified exposure to multiple currencies, IMSI's operating results may be affected by the risks customarily associated with international operations, including a devaluation of the U.S. dollar, increases in duty rates, exchange or price controls, longer collection cycles, government regulations, political instability, and changes in international tax laws. WE HAVE REGISTERED A SIGNIFICANT NUMBER OF SHARES FOR POSSIBLE PUBLIC RESALE. On June 8th, 1999, we filed a registration statement covering the possible resale from time to time of approximately 1,100, 857 outstanding shares of common stock held by, and approximately 1,223,966 shares that may be issued in the future to, the selling stockholders named in that registration statement. This registration statement covers possible resale of approximately 842,794 outstanding shares held by, and approximately 654,396 shares that may be issued in the future to, the selling stockholders named in this prospectus. The outstanding shares covered by these two registration statements represent approximately 11% of the currently outstanding shares. Sales of the shares covered by these registration statements could adversely affect the market price of our common stock. DIRECTORS AND OFFICERS BENEFICIALLY OWN A SIGNIFICANT PERCENTAGE OF OUR SHARES. As of the date of this prospectus, the present directors and executive officers of IMSI and their respective affiliates, in the aggregate, beneficially owned approximately 14% of our outstanding common stock. As a result, these stockholders will possess significant influence over us. Such influence may have the effect of delaying or preventing a change in control, impeding a merger, consolidation, takeover or other business combination involving IMSI or discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of us. OUR RELIANCE ON OUTSOURCING COULD MATERIALLY ADVERSELY AFFECT OUR OPERATING RESULTS. We outsource most of the production of our products, which primarily involves duplication of various media and the printing of user manuals and packaging materials. So long as it remains economically advantageous to do so, we intend to continue, and possibly to increase, outsourcing in the future. Although we believe that we have adequate alternative suppliers of such services, the loss of a supplier or our inability to perform contract services could materially adversely affect our operating results. OUR COMMON STOCK PRICE IS HIGHLY VOLATILE AND IS SUBJECT TO WIDE FLUCTUATIONS. The market price of our common stock is highly volatile and could be subject to wide fluctuations in response to factors such as actual or anticipated variations in our operating results, announcements of technological innovations, new products or services introduced by us or our competitors, changes in financial estimates by securities analysts, conditions and trends in the software market, general market conditions and other factors. Historically, the trading volume of the common stock has been very small and the market for the common stock has been materially less liquid than that of most other publicly traded companies. Significant sales of common stock could have an adverse effect on the market price of the common stock. Further, the stock markets, and in particular the Nasdaq Stock Market, have experienced extreme price and volume fluctuations that have particularly affected the market prices of equity securities of many technology companies and that often have been unrelated or disproportionate to the operating performance of such companies. The trading prices of many technology companies' stocks are at or near historical highs and reflect price to earnings ratios substantially above historical levels. We cannot provide any assurance that these trading prices and price to earnings ratios will be sustained. These broad market factors may adversely affect the market price of our common stock. These market fluctuations, as well as general economic, political and market conditions such as recessions, interest rates or international currency fluctuations, may adversely affect the market price of the common stock. 12 14 YEAR 2000 ISSUES COULD AFFECT OUR BUSINESS. We recognize the need to ensure that our operations will not be adversely impacted by Year 2000 software failures. Software failures due to processing errors potentially arising from calculations using the Year 2000 date are a known risk. We have established procedures for evaluating and managing the risks and costs associated with this problem, and, as part of the general upgrade of our information systems, we are putting in place systems which will be Year 2000 compliant. IMSI has initiated a Year 2000 Compliance Plan that addresses three types of systems that must be Year 2000 compliant. Products: IMSI's software products have been undergoing Year 2000 Compliance testing since January 1998. Approximately 85% of our currently supported products have been verified as Year 2000 Compliant; the remaining products are expected to be verified as compliant by June 1999. IT SYSTEMS: We have identified all internal data processing and networking systems that we believe are at risk from the Year 2000 problem and we are currently reviewing the manufacturer's Year 2000 Compliance statement for each system. Any systems that are determined to be non-compliant will be upgraded or replaced. Internal testing will be initiated for any missing critical system for which the manufacturer's Year 2000 Compliance statement is not adequate to ensure the reliability of the system. All IT systems will be verified as Year 2000 Compliant by July 1999. In addition, no new IT systems will be implemented without first ensuring that they are Year 2000 Compliant. NON-IT-SYSTEMS: We have identified a wide range of general computing and facilities systems that must be verified as Year 2000 Compliant. The majority of these systems will be upgraded or replaced as necessary during normal maintenance if they are not compliant. The manufacturer's Year 2000 Compliance statements are currently under review for the remaining systems and will be upgraded or replaced if necessary. Because new systems are continually being integrated into IMSI, the effort to ensure Year 2000 Compliance for these systems is an ongoing effort. We have communicated with others with whom we do significant business to determine their Year 2000 compliance readiness and the extent to which IMSI is vulnerable to any third party Year 2000 issues. However, there can be no guarantee that the systems of other companies on which our systems rely will be timely converted, or that a failure to convert by another company, or a conversion that is incompatible with our systems, would not have a material adverse effect on IMSI, results of operations and our financial condition. USE OF PROCEEDS Except in the event that warrants are exercised for cash (in which case we would receive proceeds from the exercise) rather than being net exercised, we will not receive any proceeds from the sale of the common stock by the selling stockholders. If shares of common stock are issued upon conversion of the Convertible Note described below, then while we will not receive proceeds from the issuance of such shares, we will not have to use proceeds to repay the Convertible Note to the extent of any principal and interest converted into common stock. DIVIDEND POLICY The Company has not paid any cash dividends on its capital stock to date. The Company currently anticipates that it will retain any future earnings for use in its business and does not anticipate paying any cash dividends in the foreseeable future. The Company's bank credit agreement prohibits the Company from declaring or paying any cash dividends SELLING STOCKHOLDERS We are registering the shares of common stock pursuant to the following agreements: (1) an agreement between BayStar Capital, L.P. and IMSI dated May 24, 1998 (the "BayStar Capital Agreement"); 13 15 (2) a Stock Transfer Agreement between Americ Disc U.S.A. - California Inc. and IMSI dated April 5, 1999 (the "Stock Transfer Agreement"); and (3) a Fee Agreement between Software Syndicate, Inc. and IMSI dated June 7, 1999 (the "Fee Agreement"). BayStar Capital Agreement. On May 24, 1999, IMSI entered into a securities purchase agreement and related agreements with BayStar Capital, L.P. ("BayStar"). Under the terms of the agreement, we issued to BayStar a three year $5,000,000 principal amount 9% Senior Subordinated Convertible Note (the "Convertible Note") due May 24, 2002, which is convertible, at BayStar's option, into shares of common stock at any time at an initial conversion price of $7.5964 per share (which is 115% of the market price of the common stock on the closing date of the transaction, which was $6.604 (the "Closing Price")). This conversion price is subject to adjustment if IMSI issues or sells stock for consideration per share that is less than the conversion price in certain transactions. Additionally, on the 12 month anniversary of the Closing Date, if the market price of the common stock is lower than the Closing Price, then the conversion price will be adjusted to the greater of i) 115% of the average of the Closing Bid Prices of the common stock for the twenty (20) trading days immediately preceding the reset date and (ii) 70% of the Closing Price. We will pay interest on the principal outstanding from time to time under this note, at the rate of 9% per annum, payable quarterly in arrears in cash. BayStar also acquired a warrant to purchase 250,000 shares of common stock at an initial exercise price of $7.5946. We may be required to issue additional shares depending on the occurrence of certain events, including the failure to make timely interest payments on the Convertible Note. In particular, in lieu of any late interest payment we may be required to issue shares of common stock to BayStar equal to 200% of the amount of the late interest payment multiplied by the average closing price of the common stock on the date prior to payment. Furthermore, we may need to issue additional shares to prevent dilution resulting from stock splits, stock dividends or similar transactions. IMSI agreed to register the shares issued or issuable pursuant to these agreements. Stock Transfer Agreement. On April 5, 1999, IMSI entered into a stock transfer agreement with Americ Disc U.S.A. - California, Inc. ("Americ") to satisfy a $700,000 debt we owed Americ for an outstanding balance of accounts receivable. In settlement of this debt, we issued to Americ 63,987 shares of common stock. The shares were priced at the 30 day Average Closing Price of $10.93958 (the "Market Price"). We may be required to issue additional shares if at the time this registration becomes effective, the average closing price for the 30 day period prior to this is less than $10.93958%. However, the total number shares issued to Americ Disc under the Stock Transfer Agreement will not exceed 87,500 shares which is calculated by dividing $700,000 by a share price of $8.00. Additionally, Americ acquired warrants to purchase 13,000 shares of common stock at 130% of the Market Price for a period of four years. IMSI agreed to register those shares for resale. Fee Agreement. On June 7, 1999, IMSI entered into a fee agreement with Software Syndicate, Inc. ("SSI") to satisfy a $151,826 debt we owed SSI under the terms of various software license agreements between IMSI and SSI. In settlement of this debt, we issued to SSI 21,690 shares of common stock. The shares were priced at $7.00 and on the closing date the closing price of the common stock was $6.125. IMSI agreed to register those shares for resale. The following table sets forth information with respect to the selling stockholders and the shares of the common stock that are beneficially owned by the selling shareholders (the "shares"). Except as described above, none of the selling stockholders has, or within the past three years has had, any position, office or other material relationship with us or any of our predecessors or affiliates. The selling stockholders may from time to time offer and sell any or all of their shares pursuant to this prospectus. Because the selling stockholders are not obligated to sell shares of common stock, and because selling stockholders may also acquire publicly traded shares of our common stock, we cannot estimate how many shares of common stock each selling stockholder will beneficially own after this offering
Shares of Common Stock Beneficially Owned (1) Prior to the Offering and Being Offered ---------------------- Name Number Percent - ---- ------ ------- BayStar Capital, L.P.(2) 1,375,000 17.8%
14 16
Shares of Common Stock Beneficially Owned (1) Prior to the Offering and Being Offered ---------------------- Name Number Percent - ---- ------ ------- Americ Disc U.S.A. - California Inc.(3) 100,500 1.3% Software Syndicate, Inc. 21,690 less than 1%
(1) Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. The rules also provide that beneficial ownership includes shares of common stock, underlying options, warrants and convertible securities that can be exercised or converted within 60 days. To that extent, the number of shares underlying the convertible securities presented in the following table may not represent the actual beneficial ownership from time to time of selling shareholders in accordance with those rules because of any adjustable rate of conversion. Unless otherwise indicated below, the persons and entities named in the table have sole voting and sole investment power with respect to all shares beneficially owned. (2) These shares include the 757,117 shares initially issued, and up to 617,883 additional shares that may be issued to BayStar under the BayStar Capital Agreement. Does not include any additional shares that may become issuable to BayStar by virtue of any late interest payments whereby BayStar elects to have us issue additional shares in lieu of a late interest payment. Note that under the BayStar Capital Agreement, BayStar is not permitted to convert the Convertible Note or exercise their warrants to the extent that such conversion or exercise would result in BayStar possessing ownership or more than 4.99% of our common stock. (3) These shares include the 63,987 shares initially issued, and up to 36,513 additional shares that may be issued to Americ Disc under the Stock Transfer Agreement. PLAN OF DISTRIBUTION We have filed a Registration Statement of which this prospectus forms a part pursuant to registration rights we granted to the selling stockholders pursuant to (1) the BayStar Capital Agreement; (2) the Stock Transfer Agreement; and (3) the Fee Agreement. To IMSI's knowledge, no selling stockholder has entered into any agreement, arrangement or understanding with any particular broker or market maker with respect to the shares of common stock offered hereby, nor does IMSI know the identity of the brokers or market makers that will participate in the sale of the shares. As used in this prospectus, the term "selling stockholders" includes donees and pledgees selling shares received from a named selling stockholder after the date of this prospectus. Who May Sell; How Much; Applicable Restrictions. The selling stockholders may from time to time offer the shares of common stock through brokers, dealers or agents who may receive compensation in the form of discounts, concessions or commissions from the selling stockholders and/or the purchasers of the shares of common stock for whom they may act as agent. In effecting sales, broker-dealers that are engaged by the selling stockholders may arrange for other broker-dealers to participate. The selling stockholders and any such brokers, dealers or agents who participate in the distribution of the shares of common stock may be deemed to be "underwriters," and any profits on the sale of the shares of common stock by them and any discounts, commissions or concessions received by any such brokers, dealers or agents might be deemed to be underwriting discounts and commissions under the Securities Act. To the extent the selling stockholders may be deemed to be underwriters, the selling stockholders may be subject to certain statutory liabilities of, including but not limited to, Sections 11, 12 and 17 of the Securities Act and Rule 10b-5 under the Exchange Act. To our knowledge, there are currently no plans, arrangements or understandings between any selling stockholders and any broker, dealer, agent or underwriter regarding the sale of the shares of common stock by the selling stockholders. Manner of Sales and Applicable Restrictions. The selling stockholders will act independently of IMSI in making decisions with respect to the timing, manner and size of each sale. Such sales may be made over the Nasdaq Stock Market or otherwise, at then prevailing market prices, at prices related to prevailing market prices or at negotiated prices. The shares of common stock may be sold according to one or more of the following methods: (a) a block trade in which the broker or dealer so engaged will attempt to sell the shares of common stock as agent but may position and resell a portion of the block as principal to facilitate the transaction; (b) purchases by a broker or dealer as principal and resale by such broker or dealer for its account pursuant to this prospectus; 15 17 (c) an over-the-counter distribution in accordance with the Nasdaq rules; (d) ordinary brokerage transactions and transactions in which the broker solicits purchasers; (e) privately negotiated transactions. Certain persons participating in this offering may engage in transactions that stabilize, maintain or otherwise affect the price of our common stock, including the entry of stabilizing bids or syndicate covering transactions or the imposition of penalty bids. The selling stockholders and any other person participating in such distribution will be subject to applicable provisions of the Exchange Act and the rules and regulations thereunder including, without limitation, Regulation M (which regulation may limit the timing of purchases and sales of any of the shares of common stock by the selling stockholders and any other such person). The anti-manipulation rules under the Exchange Act may apply to sales of shares of common stock in the market and to the activities of the selling stockholders and their affiliates. Furthermore, Regulation M of the Exchange Act may restrict the ability of any person engaged in the distribution of the shares of common stock to engage in market-making activities with respect to the particular shares of common stock being distributed for a period of up to five business days prior to the commencement of such distribution. All of the foregoing may affect the marketability of the shares of common stock and the ability of any person or entity to engage in market-making activities with respect to the shares of common stock. Rules 101 and 102 of Regulation M under the Exchange Act, among other things, generally prohibit certain participants in a distribution from bidding for or purchasing for an account in which the participant has a beneficial interest, any of the securities that are the subject of the distribution. Rule 104 of Regulation M governs bids and purchases made to stabilize the price of a security in connection with a distribution of the security. Hedging and Other Certain Transactions with Broker-Dealers. In connection with distributions of the shares of common stock or otherwise, the selling stockholders may enter into hedging transactions with broker-dealers. In connection with such transactions, broker-dealers may engage in short sales of the shares of common stock registered hereunder in the course of hedging the positions they assume with selling stockholders. The selling stockholders may also sell shares of common stock short and redeliver the shares of common stock to close out such short positions. The selling stockholders may also enter into option or other transactions with broker-dealers which require the delivery to the broker-dealer of the shares of common stock registered hereunder, which the broker-dealer may resell or otherwise transfer pursuant to this prospectus. Selling stockholders may also loan or pledge the shares of common stock registered hereunder to a broker-dealer and the broker-dealer may sell the shares of common stock so loaned or, upon a default, the broker-dealer may effect sales of the pledged shares of common stock pursuant to this prospectus. Expenses Associated With Registration. We have agreed to pay the expenses of registering the shares of common stock under the Securities Act, including registration and filing fees, printing expenses, administrative expenses and certain legal and accounting fees. Each of the selling stockholders will bear its pro rata share of all discounts, commissions or other amounts payable to underwriters, dealers or agents as well as fees and disbursements for legal counsel retained by any such selling stockholder. Indemnification. Under the terms of the BayStar Capital Agreement, the Americ Stock Transfer Agreement, and the Software Syndicate Fee Agreement, we have agreed to indemnify each of the parties to the agreements and certain other persons against certain liabilities in connection with the offering of the shares of common stock, including liabilities arising under the Securities Act. Prospectus Updates; Suspension of this Offering. At any time a particular offer of the shares of common stock is made, a revised prospectus or prospectus supplement, if required, will be distributed. Such prospectus supplement or post-effective amendment will be filed with the SEC to reflect the disclosure of required additional information with respect to the distribution of the shares of common stock. Under the terms of the BayStar Capital Agreement, the Americ Stock Transfer Agreement, and the Software Syndicate Fee Agreement, upon the occurrence of any event known to our executive officers as a result of which this prospectus is known by our executive officers to include an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then 16 18 existing, the parties have each agreed not to trade shares of common stock from the time the selling stockholder receives notice from IMSI of such an event until such party receives a prospectus supplement or amendment. Upon the occurrence of such an event, a prospectus supplement or post-effective amendment, if required, will be distributed to the parties. WHERE YOU CAN FIND MORE INFORMATION We are subject to the informational requirements of the Securities Exchange Act of 1934 and, in accordance therewith, we file reports and other information with the Securities and Exchange Commission. Reports, registration statements, proxy and information statements, and other information that we have filed can be inspected and copied at the public reference facilities maintained by the SEC at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, as well as the regional offices of the SEC located at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661, and Seven World Trade Center, Suite 1300, New York, New York 10048. You may obtain copies of such material from the Public Reference Section of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549 at rates prescribed by the SEC. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains a World Wide Web site that contains reports, proxy and information statements, and other information that is filed electronically with the SEC. This Web site can be accessed at http://www.sec.gov. Our common stock is listed on the Nasdaq Stock Market and reports, proxy statements and other information concerning IMSI may be inspected at the offices of the National Association of Securities Dealers, Inc., 9513 Key West Avenue, Rockville, Maryland 20850. We have filed with the SEC a registration statement on Form S-3 (together with all amendments and exhibits thereto, the "Registration Statement") under the Securities Act with respect to the common stock offered hereby. This prospectus does not contain all of the information set forth in the Registration Statement and its exhibits and schedules, certain parts of which are omitted in accordance with the rules and regulations of the SEC. For further information with respect to us and our common stock, please refer to the Registration Statement and its exhibits and schedules. Statements contained in this prospectus as to the contents of any contract or other document are not necessarily complete and, in each instance, reference is made to the copy of such contract or document filed as an exhibit to the Registration Statement. Each such statement is qualified in all respects by such reference. Copies of the Registration Statement, including exhibits thereto, may be inspected without charge at the SEC's principal office in Washington, D.C., and you may obtain copies from this office upon payment of the fees prescribed by the SEC. We will furnish without charge to each person, including any beneficial owner, to whom a copy of this prospectus is delivered, upon such person's written or oral request, a copy of any and all of the information that has been incorporated by reference into this prospectus (other than exhibits to such documents, unless such exhibits are specifically incorporated by reference herein as well). Requests for such copies should be directed to Susan Wisor at (415) 878-4244. DOCUMENTS INCORPORATED BY REFERENCE The following documents that we have filed with the SEC are incorporated by reference into this prospectus: (a) the Registration Statement and the exhibits and schedules filed therewith; (b) our annual report on Form 10-K for the fiscal year ended June 30, 1998, as amended; provided, however, that the financial statements and the report of our independent auditor that is included in the Form 10-K will not be incorporated by reference until an appropriate consent of our independent auditor is filed by amendment as part of the Registration Statement of which this prospectus is a part; (c) all other reports filed pursuant to Section 13(a) or 15(d) of the Exchange Act since June 30, 1998, including: (1) our quarterly reports on Form 10-Q for the fiscal quarters ended September 30, 1998, December 31, 1998, and March 31, 1999; and (2) our Proxy Statement on Form DEF 14A filed on December 29, 1998, as revised on Form DEFR 14 A filed on December 30, 1998; 17 19 (d) all other information that we file with the SEC pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this prospectus and prior to the termination of this offering; (e) our Report on Form 8-K filed on April 26, 1999; and (f) our Report on Form 8-K filed on May 12, 1999. Any statement incorporated herein shall be deemed to be modified or superseded for the purposes of this prospectus and the Registration Statement to the extent that a statement contained herein or in any other subsequently filed document that is or is deemed to be incorporated by reference herein modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this prospectus and the Registration Statement. LEGAL MATTERS The validity of the issuance of the shares of common stock offered hereby will be passed upon for us by our in-house counsel, Joelle Ryssemus-Reilly. 18 20 ================================================================================ INTERNATIONAL MICROCOMPUTER SOFTWARE, INC. 1,497,190 Shares of Common Stock -------------------- PROSPECTUS -------------------- ================================================================================ 21 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The estimated expenses to be paid by the Registrant in connection with this offering are as follows: Securities and Exchange Commission registration fee $ 2,199 Accounting fees and expenses $10,000 Legal fees and expenses $10,000 Miscellaneous $ 5,000 ------- Total $27,199 =======
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Section 317 of the California Corporations Code provides that a corporation shall have the power to indemnify any person who was or is a party or is threatened to be made a party to any proceeding (other than an action by or in the right of the corporation to procure a judgment in its favor) by reason of the fact that the person is or was an agent of the corporation, against expenses, judgments, fines, settlements, and other amounts actually and reasonably incurred in connection with the proceeding if that person acted in good faith and in a manner the person reasonably believed to be in the best interests of the corporation and, in the case of a criminal proceeding, had no reasonable cause to believe the conduct of the person was unlawful. The termination of any proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent shall not, of itself, create a presumption that the person did not act in good faith and in a manner which the person reasonably believed to be in the best interests of the corporation or that the person had reasonable cause to believe that the person's conduct was unlawful. Section 5 of Article II of IMSI's By-laws, provides as follows: Section 5. INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS. (a) Authorization. The corporation may indemnify any director, officer, agent or employee as to those liabilities and on those terms and conditions as are specified in Section 317 of the General Corporation Law. In any event, the corporation shall have the right to purchase and maintain insurance on behalf of any such persons whether or not the corporation would have the power to indemnify such person again the liability insured against. (b) Indemnification. To the fullest extent permissible under Section 317 of the General Corporation Law, the corporation shall indemnify its directors and officers against all expenses, judgments, fines, settlements and other amounts actually and reasonably incurred by them in connection with any proceeding, including an action by or in the right of the corporation, by reason of the fact that such person is or was a director, officer employee or other agent of the corporation, or is or was serving at the request of the corporation as a director, officer, trustee, employee or agent of another corporation, at the request of the corporation as a director, officer, trustee, employee or agent of another corporation, or of a partnership, joining venture, trust or other enterprise (including service with respect to employee benefit plans), or was a director, officer, employee or agent of a foreign or domestic corporation which was a predecessor corporation of the corporation or of another enterprise at the request of the predecessor corporation. To the fullest extent permissible under Section 317 of the General Corporation Law, expenses incurred by a director or officer seeking indemnification under this By-law in defending any proceeding shall be advanced by the corporation as they are incurred upon receipt by the corporation of an undertaking by or on behalf of the director or officer to repay such amount if it shall ultimately be determined that the director or officer is not entitled to be indemnified by the corporation for those expenses. The rights granted by this By-law are contractual in nature and, as such, may not be altered with respects to any present or former director or officer without the written consent of that person. (c) Procedure. Upon written request to the Board of Directors by a person seeking indemnification under this By-law, the Board shall promptly determine in accordance with II-1 22 Section 317(e) of the General Corporation Law whether the applicable standard of conduct has been met and, if so, the Board shall authorize indemnification. If the Board cannot authorize indemnification because the number of directors who are parties to the proceeding with respect to which indemnification is sought prevents the formation of a quorum of directors who are not parties to the proceeding, then, upon written request by the person seeking indemnification, independent legal counsel (by means of a written opinion obtained at the corporation's expense) or the corporation's stockholders shall determine whether the applicable standard of conduct has been met and, if so, shall authorize indemnification. (d) Definitions. The term "proceeding" means any threatened, pending or completed action or proceeding, whether civil, criminal, administrative or investigative. The term "expenses" includes, without limitation, attorneys' fees and any expenses of establishing a right to indemnification. ITEM 16. EXHIBITS. The following exhibits are filed herewith or incorporated by reference herein: 4.1 -- A Securities Purchase Agreement between IMSI and BayStar Capital dated May 24, 1999** 4.2 -- A Convertible Note Agreement between IMSI and BayStar Capital dated May 24, 1999** 4.3 -- A Registration Rights Agreement between IMSI and BayStar Capital dated May 24, 1999** 4.4 -- A Warrant Agreement between IMSI and BayStar Capital dated May 24, 1999** 4.5 -- Stock Transfer Agreement between Americ Disc U.S.A. - California Inc. and IMSI dated April 5th, 1999 4.6 -- Fee Agreement between Software Syndicate, Inc. and IMSI dated June 7, 1999 5.1 -- Opinion of Counsel regarding the legality of common stock. 23.1 -- Independent Auditors' Consent.* 23.2 -- Consent of Counsel (included in Exhibit 5.1). 24.1 -- Power of Attorney (see page II-5). - --------------------------- * To be filed by amendment. ** Incorporated by reference to exhibits filed with IMSI's Report on Form 8-K filed June 2, 1999. ITEM 17. UNDERTAKINGS. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions described under Item 15 above, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned Registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this Registration Statement: (i) to include any prospectus required by Section 10(a)(3) of the Securities Act of 1933 (the "Securities Act"); (ii) to reflect in the prospectus any facts or events arising after the effective date of the Registration Statement (or the most recent post-effective amendment thereof) which, individually or in the II-2 23 aggregate, represent a fundamental change in the information in the Registration Statement; and (iii) to include any material information with respect to the plan of distribution not previously disclosed in the Registration Statement or any material change to such information in the Registration Statement; provided, however, that (i) and (ii) do not apply if the information required to be included in a post-effective amendment thereby is contained in periodic reports filed by the Registrant pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act") that are incorporated by reference in the Registration Statement. (2) That, for the purpose of determining any liability under the Securities Act, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (4) That, for purposes of determining any liability under the Securities Act, each filing of the Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the Exchange Act that is incorporated by reference in this Registration Statement shall be deemed to be a new Registration Statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-3 24 SIGNATURES Pursuant to the requirements of the Securities Act, the Registrant certifies that it has reasonable grounds to believe that it meets all for the requirements for filing on Form S-3 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Novato, State of California, on the ___ day of June, 1999. INTERNATIONAL MICROCOMPUTER SOFTWARE, INC. By: --------------------------------------- Costa John, CEO POWER OF ATTORNEY KNOW ALL BY THESE PRESENTS that each individual whose signature appears below constitutes and appoints Costa John and Martin Sacks, and each of them, his attorneys-in-fact, and agents, each with the power of substitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement, and to sign any registration statement for the same offering covered by this Registration Statement that is to be effective upon filing pursuant to Rule 462(b) promulgated under the Securities Act of 1933, and all post-effective amendments thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or his or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- PRINCIPAL EXECUTIVE OFFICER, FINANCIAL AND ACCOUNTING OFFICER: - -------------------------------- Costa John Chief Executive Officer, June ___, 1999 Chief Financial Officer (Principal Financial and Accounting Officer) DIRECTORS: - -------------------------------- Martin Sacks Chairman of the Board June ___, 1999 - -------------------------------- Charles Federman Director June ___, 1999 - -------------------------------- Abe Ostrovsky Director June ___, 1999 - -------------------------------- William H. Lane III Director June____, 1999
II-4 25 EXHIBIT INDEX
EXHIBIT NUMBER EXHIBIT TITLE ------ ------------- 4.1 A Securities Purchase Agreement between IMSI and BayStar Capital dated May 24, 1999**. 4.2 A Convertible Note Agreement between IMSI and BayStar Capital dated May 24, 1999** 4.3 A Registration Rights Agreement between IMSI and BayStar Capital dated May 24, 1999** 4.4 A Warrant Agreement between IMSI and BayStar Capital dated May 24, 1999** 4.5 Stock Transfer Agreement between Americ Disc U.S.A. - California Inc. and IMSI dated April 5, 1999 4.6 Fee Agreement between Software Syndicate, Inc. and IMSI dated June 7, 1999 5.1 Opinion of Counsel regarding the legality of common stock 23.1 Independent Auditors' Consent* 23.2 Consent of Counsel (included in Exhibit 5.1) 24.1 Power of Attorney (see page II-5)
* To be filed by amendment. ** Incorporated by reference to exhibits filed with IMSI's Report on Form 8-K filed June 2, 1999. EX-4.5 2 STOCK TRANSFER AGREEMENT DATED 4/5/1999 1 EXHIBIT 4.5 STOCK TRANSFER AGREEMENT This STOCK TRANSFER AGREEMENT (the "Agreement") dated as of 5th April 1999, by and between International Microcomputer Software, Inc. a California corporation ("IMSI"), and Americ Disc USA-California Inc., a California corporation ("Americ Disc"). WHEREAS, IMSI and AMERIC DISC now desire to set forth certain terms and provisions with respect to the payment by IMSI of $700,000 (the "Obligation") of that certain sum of money owed: NOW, THEREFORE in consideration of the foregoing and for other good and valuable consideration (the receipt and sufficiency of which are hereby acknowledged), the parties hereto hereby agree as follows: 1. Payment of the Obligation. The Obligation shall be satisfied in full by compliance by IMSI with the terms and provisions of this Agreement. 2. Issuance of the Shares and Warrants. As soon as reasonably practicable after execution of this Agreement, but in no event later then April 9th 1999, IMSI will issue to AMERIC DISC a number of shares of IMSI's no par value Common Stock (the "Common Stock"), equal to the result of the amount of the Obligation divided by the average closing price per share of the Common Stock for the thirty day period prior to the date hereof (the "Market Price"). The shares of Common Stock to be issued to AMERIC DISC shall be referred to herein as the "Shares." If, at the time the registration statement including the Shares (the "Registration Statement") is declared effective under the Securities Act of 1933 (the "1933 Act"), and, as applicable, California securities law, (the "Effective Date") the average closing price per share of the Common Stock for the thirty day period prior to the Effective Date is less than the Market Price, the number of Shares issued to AMERIC DISC shall be increased to an amount such that the total number of Shares is equal to the result of the amount of the Obligation divided by the average closing price per share of Common Stock for the thirty day period prior to the Effective Date (the "Adjusted Market Price"). Notwithstanding the foregoing, the total number of shares of Common Stock issued to AMERIC DISC shall not exceed the result of the amount of the Obligation divided by $8.00. When hereinafter used herein, the term Market Price shall refer to the Market Price, Adjusted Market Price, or $8.00, as the case may be, in accordance herewith. AMERIC DISC shall also receive warrants to purchase 13,000 shares of Common Stock at 130% of the Market Price for a period of four years from the date of execution of this Agreement. 2 3. Sale. a. Sale. IMSI acknowledges that AMERIC DISC intends to sell the Shares upon the Effective Date, and that AMERIC DISC is not an affiliate of IMSI. The Shares may be sold by one or more of the following means of distribution (subject to the provisions of this Agreement): (a) a block trade in which the broker-dealer so engaged will attempt to sell Shares as agent, but may position and resell a portion of the block as principal to facilitate the transaction; (b) purchases by a broker-dealer as principal and resale by such broker-dealer for its own account; (c) an over-the-counter distribution in accordance with the rules of Nasdaq; (d) ordinary brokerage transactions and transactions in which the broker solicits purchasers; and (e) in privately negotiated transactions. 4. Representations, Warranties and Covenants of IMSI. IMSI represents and warrants to and covenants with AMERIC DISC as follows: a. Registration. IMSI shall use its reasonable best efforts to cause the Shares to be registered (or to be issued pursuant to a then-effective registration statement) on Form S-3 (or successor form) promulgated by the Securities and Exchange Commission ("SEC") under the 1933 Act, as soon as reasonably practicable after the Closing, but in no event later then May 10th 1999. IMSI will diligently pursue the registration until it is declared effective. b. At the Effective Date, the time of effectiveness of any post-effective amendment to the Registration Statement, the time any prospectus related to the Registration Statement ("Prospectus") is first filed with the SEC, the time any supplement to or amendment of the Prospectus is filed with the SEC and at any time any document filed under the Securities and Exchange Act of 1934 (the "Exchange Act") is filed, the Registration Statement and the Prospectus and any amendments thereof and supplements thereto will be in compliance with all applicable provisions of the 1933 Act, the Exchange Act, the respective rules and regulations promulgated thereunder (referred to herein as the "Regulations") and California securities law, and all of the same will not contain an untrue statement of a material fact and will not omit to state any material fact required to be stated therein or necessary in order to make the statements therein not misleading. c. As of the Effective Date, the Shares will not be restricted securities, will be freely tradeable by AMERIC DISC and may be sold by AMERIC DISC without restriction. d. The Shares, when issued and delivered in accordance with this Agreement, will be duly and validly issued and outstanding, fully paid and non-assessable and will not have been issued in violation of any preemptive rights. e. If at any time when a Prospectus is required to be delivered under the Securities Act any event shall occur as a result of which the Prospectus as then 2 3 amended or supplemented, in the judgment of IMSI or AMERIC DISC, includes an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, or if it shall be necessary at any time to amend or supplement the Prospectus or Registration Statement to comply with the 1933 Act or the Regulations, or to file under the Exchange Act so as to comply therewith any document incorporated by reference in the Registration Statement or the Prospectus or in any amendment thereof or supplement thereto, (i) IMSI will notify AMERIC DISC promptly and prepare and file with the SEC an appropriate amendment or supplement (in form and substance satisfactory to AMERIC DISC) which will correct such statement or omission or which will effect such compliance and will use its best efforts to have any amendment or supplement to the Registration Statement declared effective by the SEC as soon as possible and (ii) AMERIC DISC shall suspend trading in the Shares until (A) such amendment or supplement to the Prospectus has been filed or (B) any amendment to the Registration Statement has been declared effective by the SEC. The foregoing shall in no way imply or impose a duty or obligation on the part of AMERIC DISC to review or in any way be involved in the preparation of any securities related document or filing of IMSI. f. IMSI will pay all fees and expenses with respect to the preparation and filing of the Registration Statement and the registration of the Shares. 5. Indemnification. a. IMSI agrees to indemnify and hold harmless AMERIC DISC, against any and all losses, liabilities, claims, damages and expenses incurred (including but not limited to attorneys' fees), to which it may become subject, insofar as such losses, liabilities, claims, damages or expenses (or actions in respect thereof) arise out of any untrue statement of a material fact contained in the Registration Statement, as originally filed or any amendment thereof, or the Prospectus, or in any supplement thereto or amendment thereof, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; provided, however, that IMSI shall not be liable to AMERIC DISC for any such losses, liabilities, claims, damages or expenses which arise out of or are based upon an untrue statement or alleged untrue statement or omission or alleged omission contained or made in the Registration Statement or the Prospectus or any amendment thereof or Supplement thereto in reliance upon and in conformity with information furnished in writing to IMSI by AMERIC DISC. b. Promptly after AMERIC DISC becomes aware of the commencement of any action or claim against it for which it seeks indemnification, AMERIC DISC shall notify IMSI in writing of the commencement thereof. In case any such action or claim is brought against AMERIC DISC, and it notifies IMSI of the commencement thereof, IMSI will be entitled to participate therein and, to the extent it may elect by written notice delivered to AMERIC DISC promptly after receiving the 3 4 aforesaid notice from AMERIC DISC, to assume the defense thereof using counsel reasonably acceptable to AMERIC DISC. Notwithstanding the foregoing, AMERIC DISC shall have the right to employ its own counsel in any such case, but the fees and expenses of such counsel shall be at the expense of AMERIC DISC unless (i) the employment of such counsel shall have been authorized in writing by IMSI in connection with the defense of such action, (ii) IMSI shall not have employed reasonably acceptable counsel to have charge of the defense of such action within a reasonable time after notice of commencement of the action, or (iii) AMERIC DISC shall have reasonably concluded that there may be defenses available to it or them which are different from or additional to those available to IMSI (in which case IMSI shall not have the right to direct the defense of such action on behalf of AMERIC DISC), in any of which events such fees and expenses shall be borne by IMSI. Anything in this subsection to the contrary notwithstanding, if IMSI should elect to assume the defense of a claim or action, IMSI shall not be liable for any settlement of any claim or action effected without its written consent: provided, however, that such consent was not unreasonably withheld. 6. Entire Agreement. This Agreement constitutes the entire agreement between the parties hereto with respect to the subject matter hereof and supersedes all prior written agreements and negotiations and oral understandings, if any, with respect thereto. This Agreement may not be amended or supplemented except by an instrument in writing signed by each of the parties hereto. 7. Notices. All notices, requests and other communications hereunder shall be in writing and delivered in person or by registered or certified mail (postage prepaid, return receipt requested), overnight courier or facsimile, addressed as follows: if to AMERIC DISC, to: ATTN: Controller 4700 Enterprise Way Saliida, CA 95356 With a copy to: ATTN: VP Finance Americ Disc Inc. 2525 Canadren Drummondville, QC J2C 7W2 if to IMSI, to: International Microcomputer Software, Inc. 75 Rowland Way Novato, CA 94945 Attn: Legal Department Telephone: (415) 878-4000 Facsimile: (415) 893-9860 4 5 The address of a party, for the purposes of this Section 7, may be changed by giving written notice to the other party of such change in the manner provided herein for giving notice. All notices, requests, demands and other communications hereunder shall be deemed to have been duly given: at the time delivered by hand, if personally delivered; five calendar days after mailing, if sent by registered or certified mail; the next business clay after timely delivery to the courier, if sent by overnight courier; and when receipt is acknowledged, if sent by facsimile transmission (except that a notice of change of address shall not be deemed to have been given until actually received by the addressee). 8. Governing Law. This Agreement shall be construed in accordance with and governed by the laws of California, without regard to the conflicts of law principles thereof. 9. Investment Representations. AMERIC DISC represents and warrants that, subject to its intent to sell the shares as set forth in paragraph 3 hereof, it is acquiring the Shares for its own account, for the purpose of investment and not with a view to, or resale in connection with, any distribution thereof; that AMERIC DISC has had access to all information regarding IMSI and its present business, assets, liabilities and financial condition, that AMERIC DISC reasonably considers important in making the decision to acquire the Shares under this Agreement; and that AMERIC DISC understands that the Shares, when initially issued, may be restricted securities and may not be sold except pursuant to the Registration Statement, some other registration statement, or pursuant to an applicable exemption from federal and state registration requirements. 10. Opinion of Counsel. On or before the date the Securities are issued to AMERIC DISC, IMSI shall provide AMERIC DISC with an opinion of counsel, addressed to and for the exclusive benefit of AMERIC DISC, that as of the Effective Date, the Shares will not be restricted securities, will be freely tradable and may be sold by AMERIC DISC without restriction. IN WITNESS WHEREOF, the undersigned have duly executed this Agreement as of the date first set forth above. AMERIC DISC USA-CALIFORNIA INC. INTERNATIONAL MICROCOMPUTER SOFTWARE, INC. By: _________________________ By: ______________________________ Name: Marcel Claude Raymond Name: Kenneth Fineman VP Finance Title: Chief Financial Officer 5 EX-4.6 3 FEE AGREEMENT DATED 6/7/1999 1 EXHIBIT 4.6 FEE AGREEMENT This FEE AGREEMENT (the "AGREEMENT") dated as of 7 June 1999, is made by and between International Microcomputer Software, Inc. a California corporation ("IMSI"), and Software Syndicate, Inc. ("SSI"). WHEREAS, IMSI currently owes SSI an amount equal to $151,826.00 (the "FEES") pursuant to a Software License Agreement between IMSI and SSI (the "ORIGINAL AGREEMENT"), and WHEREAS, IMSI and SSI now desire to set forth certain terms and provisions with respect to the payment by IMSI of the Fees: NOW, THEREFORE in consideration of the foregoing and for other good and valuable consideration (the receipt and sufficiency of which are hereby acknowledged), the parties hereto hereby agree as follows: 1. Payment of the Fees. Notwithstanding anything to the contrary in the License Agreement with respect to the form and timing of payment of the Fees, the obligations to pay the Fees shall the satisfied in full by compliance by IMSI with the terms and provisions of this Agreement. 2. Issuance of the Shares. As soon as reasonably practicable after execution of this Agreement, IMSI will issue to SSI 21,690 shares of IMSI's Common Stock (the "COMMON STOCK"), no par value (collectively, the "SHARES") based on a Seven dollar ($7.00) per share issuance. 3. Representations, Warranties and Covenants of IMSI. IMSI represents and warrants to and covenants with SSI as follows: a. Registration. IMSI has represented to SSI that it anticipates filing a Registration Statement in the near future. IMSI shall use its reasonable best efforts to cause the resale of the shares of IMSI Common Stock that are issuable pursuant to this Fee Agreement to be registered on a registration statement (or to be issued pursuant to a then-effective registration statement) on Form S-3 (or successor form) (the "REGISTRATION STATEMENT") promulgated by the Securities and Exchange Commission (the "SEC") under the 1933 Act, as amended, as soon as reasonably practicable after the Closing. b. IMSI will use its reasonable best efforts to have the Registration Statement declared effective and to keep such Registration Statement effective for a period of up to three months. c. At the date the Registration Statement becomes effective under the Securities Act (the "EFFECTIVE DATE") or the time of effectiveness of any post-effective amendment to the Registration Statement, at the time the Prospectus is first filed with the Commission pursuant to SEC Rule 424 (b) of the Regulations (if a Rule 424 (b) filing is required), at the time any supplement to or amendment of the Prospectus is filed with the Commission under the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"), the 1 2 Registration Statement and the Prospectus and any amendments thereof and supplements thereto complied or will comply in all material respects with the applicable provisions of the Securities Act and the Regulations or the Exchange Act and the respective rules and regulations thereunder and do not or will not contain an untrue statement of a material fact and do not or will not omit to state any material fact required to be stated therein or necessary in order to make the statements therein (i) in the case of the Registration Statement, not misleading and (ii) in the case of the Prospectus, in the light of the circumstances under which they were made, not misleading. d. The Shares, when issued and delivered in accordance with this Agreement, will be duly and validly issued and outstanding, fully paid and non-assessable and will not have been issued in violation of any preemptive rights. e. If at any time when a Prospectus relating to the Shares is required to be delivered under the Securities Act any event shall occur as a result of which the Prospectus as then amended or supplemented, in the judgment of IMSI or SSI, includes an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, or if it shall be necessary at any time to amend or supplement the Prospectus or Registration Statement to comply with the Securities Act and the rules and regulations promulgated thereunder, or to file under the Exchange Act so as to comply therewith any document incorporated by reference in the Registration Statement or the Prospectus or in any amendment thereof or supplement thereto, (i) IMSI will notify SSI promptly and prepare and file with the SEC an appropriate amendment or supplement which will correct such statement or omission or which will effect such compliance and will use its best efforts to have any amendment to the Registration Statement declared effective by the SEC as soon as possible and (ii) SSI shall suspend trading in the Shares until (A) such amendment or supplement to the Prospectus has been filed or (B) any amendment to the Registration Statement has been declared effective by the SEC. f. IMSI shall use its reasonable best efforts to register or qualify the Shares under applicable blue sky laws and to cause the Shares to be listed on any exchange that IMSI shares of common stock are listed. g. IMSI will pay all fees and expenses with respect to the preparation and filing of the Registration Statement and the registration of the Shares. h. Upon execution of this Agreement, SSI releases and forever discharges payment of the Fees pursuant to the terms and conditions of the Original Agreement. 4. Indemnification. a. IMSI agrees to indemnify and hold harmless SSI and its affiliates, against any and all losses, liabilities, claims, damages and expenses incurred (including but not limited to attorneys' fees), to which it may become subject under the Securities Act, the Exchange Act or otherwise, insofar as such losses, liabilities, claims, damages or expenses (or actions in respect thereof) arise solely out of any untrue statement of a material fact contained in the Registration 2 3 Statement, as originally filed or any amendment thereof, or the Prospectus, or in any supplement thereto or amendment thereof, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; provided, however, that IMSI shall not be liable to SSI for any such losses, liabilities, claims, damages or expenses which arise out of or are based upon an untrue statement or alleged untrue statement or omission or alleged omission contained or made in the Registration Statement or the Prospectus or any amendment thereof or Supplement thereto in reliance upon and in conformity with information furnished to IMSI by SSI in writing for inclusion therein. b. Promptly after receipt by any indemnified party under subsection a. above of notice of the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against the indemnifying party under such subsection, notify the party against whom indemnification is to be sought in writing of the commencement thereof. In case any such action is brought against any indemnified party, and it notifies the indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate therein and, to the extent it may elect by written notice delivered to the indemnified party promptly after receiving the aforesaid notice from such indemnified party, to assume the defense thereof with counsel reasonably acceptable to the indemnified parties. Notwithstanding the foregoing, the indemnified party or parties shall have the right to employ its own counsel in any such case, but the fees and expenses of such counsel shall be at the expense of such indemnified party unless (i) the employment of such counsel shall have been authorized in writing by the indemnifying party in connection with the defense of such action, (ii) the indemnifying party shall not have employed counsel to have charge of the defense of such action within a reasonable time after notice of commencement of the action, or (iii) such indemnified party shall have reasonably concluded that there may be defenses available to it or them which are different from or additional to those available to the indemnifying party (in which case the indemnifying party shall not have the right to direct the defense of such action on behalf of the indemnified party or parties), in any of which events such fees and expenses shall be borne by the indemnifying party. Anything in this subsection to the contrary notwithstanding, the indemnifying party shall not be liable for any settlement of any claim or action effected without its written consent; provided, however, that such consent was not unreasonably withheld. c. In order to provide for just and equitable contribution in circumstances in which the indemnity agreement provided for in this Section 4 is for any reason held to be unenforceable although applicable in accordance with its terms, the indemnifying parties shall contribute to the aggregate losses, liabilities, claims, damages and expenses of the nature contemplated by such indemnity agreement incurred by the indemnified party, in such proportion as is appropriate to reflect the relative fault of and benefits to each indemnifying party and each indemnified party in connection with the statements or omissions that resulted in such losses, claims, damages, liabilities or expenses, as well as any other relevant equitable considerations. The relative fault of each indemnifying party and indemnified party shall be determined by reference to, among other things, whether the action in question, including any untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact, has been made by, or relates to information supplied by, such indemnifying party or indemnified party, and the parties' relative intent, access to information and opportunity to correct or prevent 3 4 such action. The parties hereto agree that it would not be just or equitable if contribution pursuant to this Section 4 were determined by pro rata allocation or by any other method of allocation that does not take account of the equitable considerations referred to above. Notwithstanding the foregoing, no person guilty of fraudulent misrepresentation (within the meaning of Section 11 (f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. Notwithstanding any term or condition to the contrary, the liability of any holder pursuant to this Section 4 shall be limited to the net proceeds received by such holder as a result of the sale giving rise to the liability. 5. Entire Agreement. This Agreement and the License Agreement (to the extent not inconsistent herewith) constitute the entire agreement between the parties hereto with respect to the subject matter hereof and supersede all prior written agreements and negotiations and oral understandings, if any, with respect thereto. This Agreement may not be amended or supplemented except by an instrument in writing signed by each of the parties hereto. 6. Notices. All notices, requests and other communications hereunder shall be in writing and delivered in person or by registered or certified mail (postage prepaid, return receipt requested), overnight courier or facsimile, addressed as follows: if to SSI, to: Anatoly Tikhman 45 Live Oak Lane Hillsborough, CA 94010 if to IMSI, to: International Microcomputer Software, Inc. 75 Rowland Way Novato, CA 94945 Attn: Legal Department Telephone: (415) 878-4209 Facsimile: (415) 893-9860 The address of a party, for the purposes of this Section 6, may be changed by giving written notice to the other party of such change in the manner provided herein for giving notice. All notices, requests, demands and other communications hereunder shall be deemed to have been duly given: at the time delivered by hand, if personally delivered; five calendar days mailing, if sent by registered or certified mail; the next business clay after timely delivery to the courier, if sent by overnight courier; and when receipt is acknowledged, if sent by facsimile transmission (except that a notice of change of address shall not be deemed to have been given until actually received by the addressee). 8. Governing Law. This Agreement shall be construed in accordance with and governed by the laws of California, without regard to the conflicts of law principles thereof. 4 5 9. Investment Representations. SSI represents and warrants that it is acquiring the Shares for its own account, for the purpose of investment and not with a view to, or resale in connection with, any distribution thereof other than in compliance with applicable law; that SSI has had access to all information regarding IMSI and its present business, assets, liabilities and financial condition, that SSI reasonably considers important in making the decision to acquire the Shares under this Agreement; and that SSI understands that the Shares are restricted securities and may not be sold except pursuant to the Registration Statement, some other registration statement, or pursuant to an applicable exemption from federal and state registration requirements. IN WITNESS WHEREOF, the undersigned have duly executed this Agreement as of the date first set forth above. Software Syndicate, Inc. INTERNATIONAL MICROCOMPUTER SOFTWARE, INC. By: _________________________ By: ______________________________ Name: Anatoly Tikhman Name: Costa John Title: President Title: Chief Executive Officer 5 EX-5.1 4 OPINION OF COUNSEL 1 EXHIBIT 5.1 June 24, 1999 International Microcomputer Software, Inc. 75 Rowland Way Novato, CA 94945 Gentlemen/Ladies: At your request, I have examined the Registration Statement on Form S-3 (the "Registration Statement") to be filed by International Microcomputer Software, Inc. ("you" or the "Company") with the Securities and Exchange Commission (the "Commission") on or about June 24, 1999 in connection with the registration under the Securities Act of 1933, as amended, of an aggregate of 1,497,190 shares of your common stock (the "Stock"), including 842,794 shares that are presently issued and outstanding and 654,396 shares that my be issued in the future pursuant to one or more of the agreements described in the Registration Statement (the "Selling Stockholders"). In rendering this opinion, I have made such investigations of law and have examined such matters of fact as I have deemed necessary of appropriate for purposes of rendering the opinions provided herein, including without limitation the following: (1) the Registration Statement, together with the Exhibits filed as a part thereof; (2) the Prospectus prepared in connection with the Registration Statement; (3) the minutes of meetings and actions by written consent of the stockholders and Board of Directors that are contained in your minute books; (4) the Company's stock records (including records regarding the number of your issued and outstanding shares of capital stock as of the date of this letter, and a list of option and warrant holders respecting your capital and of any rights to purchase capital stock as of the date of this letter); and (5) the various agreements referenced in the Registration Statement under the caption "Selling Stockholders." In my examination of documents for purposes of this opinion, I have assumed, and express no opinion as to the genuineness of all signatures on original documents, the authenticity and completeness of all documents submitted to me as originals, the conformity to originals and completeness of all documents submitted to me as copies, the 2 legal capacity of all natural persons executing the same, the lack of any undisclosed terminations, modifications, waivers or amendments to any documents reviewed by me and the due authorization, execution and delivery of all documents where due authorization, execution and delivery are prerequisites to the effectiveness thereof. As to matters of fact relevant to this opinion, I have relied upon my examination of the documents referred to above and have assumed the current accuracy and completeness of the information obtained from public officials and records. I have made no independent investigation or other attempt to verify the accuracy of any such information or to determine the existence or non-existance of any other factual matters; however, I am not aware of any facts that would cause me to believe that the opinion expressed herein is not accurate. I am admitted to practice law in the State of California, and I express no opinion herein with respect to the application or effect of the laws of any jurisdiction other than the existing laws of the United States of America and the State of California. Based on the foregoing, it is my opinion that the outstanding shares of Stock to be sold by the Selling Stockholders pursuant to the Registration Statement are legally issued, fully paid and nonassessable, and that the additional shares of Stock, when issued and paid for in accordance with the terms of the applicable agreements referenced in the Registration Statement, will be legally issued, fully paid and nonassessable. I consent to the use of this opinion as an exhibit to the Registration Statement and further consent to all references to me, if any, in the Registration Statement, the Prospectus constituting a part thereof and any amendments thereto. This opinion speaks only as of its date and I assume no obligation to update this opinion should circumstances change after the date thereof. This opinion is intended solely for the your use as an exhibit to the Registration Statement for the purpose of the above sale of the Stock and is not to be relied upon for any other purpose. Very truly yours, By: /s/ Joelle Ryssemus-Reilly --------------------------- Joelle Ryssemus-Reilly In-House Counsel -----END PRIVACY-ENHANCED MESSAGE-----