-----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, Lpodb9ArVtvzxJcwH9EE+UlySDikRQpV8jJ4QxmBUVv/rEImZijZzvU0gCJGUDcq SNlSmB7XoE6ip4oYu+r7RQ== 0001144204-02-001709.txt : 20021227 0001144204-02-001709.hdr.sgml : 20021227 20021227085236 ACCESSION NUMBER: 0001144204-02-001709 CONFORMED SUBMISSION TYPE: 10QSB/A PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20021227 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTERNATIONAL MICROCOMPUTER SOFTWARE INC /CA/ CENTRAL INDEX KEY: 0000814929 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 942862863 STATE OF INCORPORATION: CA FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10QSB/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-15949 FILM NUMBER: 02869494 BUSINESS ADDRESS: STREET 1: 75 ROWLAND WAY CITY: NOVATO STATE: CA ZIP: 94945 BUSINESS PHONE: 4158784000 MAIL ADDRESS: STREET 1: 1895 EAST FRANCISCO BLVD CITY: SAN RAFAEL STATE: CA ZIP: 94901 10QSB/A 1 doc1.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington D.C. 20549 FORM 10-QSB/A [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarter ended DECEMBER 31, 2001 ----------------- [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------------- ------------ Commission File Number 0-15949 INTERNATIONAL MICROCOMPUTER SOFTWARE, INC. (Exact name of registrant as specified in its charter) California 94-2862863 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) identification No.) 75 Rowland Way, Novato, CA 94945 (Address of principal executive offices) (Zip code) (415) 878-4000 (Registrant's telephone number including area code) Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. YES NO X - As of December 27, 2002, 22,794,232 shares of Registrant's common stock, no par value, were outstanding. INTERNATIONAL MICROCOMPUTER SOFTWARE, INC. AND SUBSIDIARIES INDEX Explanatory Note This filing on Form 10-QSB/A is amending our original Form 10-QSB for the interim period ended December 31, 2001 as filed with the Securities and Exchange Commission on February 14, 2002. In consideration of further interpretive guidance, we are restating our interim condensed financial statements for the same period to account for our acquisition of Keynomics, Inc., as disclosed in Notes 1, 8 and 10 to the financial statements, using fair values as compared to the previous accounting which accounted for the transaction as a transfer between entities under common control. This Quarterly Report on Form 10-QSB/A does not reflect events occurring after the filing of the registrant's Quarterly Report on Form 10-QSB for the fiscal quarter ended December 31, 2001, or modify or update those disclosures, except as discussed above.
PART I - FINANCIAL INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . 3 CONDENSED CONSOLIDATED BALANCE SHEETS. . . . . . . . . . . . . . . . . . . . . . . . . . . 3 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS and COMPREHENSIVE INCOME. . . . . . . . . . 4 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS. . . . . . . . . . . . . . . . . . . . . . 5 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . . . . 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. 17 ITEM 3. CONTROLS AND PROCEDURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 PART II - OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 ITEM 1. LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. . . . . . . . . . . . . . . . . . . . . . 34 ITEM 3. DEFAULTS UPON SENIOR SECURITIES. . . . . . . . . . . . . . . . . . . . . . . . . . . 34 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. . . . . . . . . . . . . . . . . 34 ITEM 5. OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . 34 SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 EXHIBIT 99.1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 EXHIBIT 99.2. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 EXHIBIT 99.3. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 EXHIBIT 99.4. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
2 PART I - FINANCIAL INFORMATION ------------------------------ ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS INTERNATIONAL MICROCOMPUTER SOFTWARE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except per share amounts)
------------ ------------- December 31, June 30, 2001 2001 ------------ ------------- (Unaudited) (Restated) ------------ ------------- (Restated) ASSETS Current assets: Cash and cash equivalents: $ 1,183 $ 1,230 Receivables, less allowances for doubtful accounts, discounts and returns of $221 and $182 1,140 940 Inventories 310 113 Prepaid royalties and licenses 83 229 Other current assets 325 362 ------------ ------------- Total current assets 3,041 2,874 Fixed assets, net 461 580 Capitalized software development costs, net 1,284 1,305 Other assets, net 1,247 1,229 ----------- ------------- Total assets $ 6,033 $ 5,988 =========== ============= LIABILITIES AND SHAREHOLDERS' DEFICIT Current liabilities: Current portion long-term debt $ 2,188 $ 11,682 Note payable to related party 3,730 -- Trade accounts payable 2,191 2,353 Accrued interest and penalties payable 42 2,293 Accrued and other liabilities 2,669 2,717 Accrued arbitration award-current 119 131 Deferred revenue 1,600 1,178 ----------- ------------- Total current liabilities 12,539 20,354 Accrued arbitration award 696 702 Long term debt and other obligations 371 179 ------------ ------------- Total liabilities 13,606 21,235 Shareholders' deficit: Common stock, no par value; 300,000,000 authorized; Issued and outstanding 10,212,328 and 9,695,740 shares 29,286 28,754 Accumulated deficit (36,855) (44,008) Accumulated other comprehensive income (loss) (4) 7 ------------ ------------- Total shareholders' deficit ($7,573) ($15,247) ------------ ------------- Total liabilities and shareholders' deficit $ 6,033 $ 5,988 ============ =============
See Notes to Condensed Consolidated Financial Statements 3 INTERNATIONAL MICROCOMPUTER SOFTWARE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (In thousands, except per share amounts) (Unaudited)
Three Months Ended Six Months Ended December 31, December 31, ----------------------- ------------------------ 2001 2000 2001 2000 (Restated) (Restated) (Restated) (Restated) ----------------------- ------------------------ Net revenues $ 3,149 $ 3,234 $ 5,724 $ 6,292 Product costs 809 845 1,518 1,810 ------------------------ ------------------------ Gross margin 2,340 2,389 4,206 4,491 Costs and expenses: Sales and marketing 668 654 1,193 1,171 General and administrative 1,246 1,030 2,319 1,982 Research and development 537 684 1,145 1,357 ------------------------ ------------------------ Total operating expenses 2,451 2,368 4,657 4,510 ------------------------ ------------------------ Operating income (loss) (111) 21 (451) (19) Gain on product line sale 20 -- 20 285 Interest and other, net (61) (534) (466) (1,08) Gain (loss) on disposition of fixed assets 8 1 1 (4) Other income 104 -- 79 -- Gain on extinguishment of debt 2,243 -- 7,970 -- Settlement of fee agreement -- -- -- (187) ------------------------ ------------------------ Income (Loss) before income tax and cumulative effect of change in accounting principle 2,203 (512) 7,153 (1,012) Income tax provision (benefit) 1 2 3 (6) ------------------------ ------------------------ Income (Loss) before cumulative effect of change in accounting principle 2,202 (514) 7,150 (1,006) Cumulative effect of change in accounting principle -- (285) -- (285) ------------------------ ------------------------ ------------------------ ------------------------ Net income (loss) $ 2,202 $ (799) $ 7,150 $ (1,291) ======================== ======================== Other comprehensive income (loss), net of tax: Foreign currency translation, net of tax (16) 1 (12) 4 Other comprehensive income (loss), net of tax $ 2,186 $ (798) $ 7,138 $ (1,287) ======================== ======================== Basic earnings (loss) per share $ 0.22 $ (0.08) $ 0.73 $ (0.13) Diluted earnings (loss) per share $ 0.21 $ (0.08) $ 0.68 $ (0.13) Shares used in computing basic earnings (loss) per share information 9,810 9,694 9,860 9,680 Shares used in computing diluted earnings (loss) per share information 10,417 9,694 10,467 9,680
See Notes to Condensed Consolidated Financial Statements 4 INTERNATIONAL MICROCOMPUTER SOFTWARE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)
Six Months Ended December 31, ----------------------------- 2001 2000 (Restated) (Restated) ------------- -------------- Cash flows from operating activities: Net cash provided by operating activities $ 733 $ 447 Cash flows from investing activities: Proceeds from product line and domain name sales 20 285 Purchase of equipment and furniture (24) (309) Software development costs (5) -- Acquisition of subsidiary from affiliated company (266) -- Other (3) -- ------------- -------------- Net cash used by investing activities (278) (24) ------------- -------------- Cash flows from financing activities: Credit line borrowings 65 -- Increase in notes payable 150 -- Repayment of term loans (550) (20) Repayment of capital lease obligations (158) (98) Proceeds from issuance of common stock 2 11 ------------- -------------- Net cash used by financing activities (491) (107) ------------- -------------- Effect of exchange rate change on cash and cash equivalents (11) 3 Net increase (decrease) in cash and cash equivalents (47) 319 Cash and cash equivalents at beginning of period 1,230 1,477 ------------- -------------- Cash and cash equivalents at end of the period $ 1,183 $ 1,796 ============= ============== Supplemental disclosure of non-cash investing and financing activities Note payable arising from acquisition of Keynomics $ 150
See Notes to Condensed Consolidated Financial Statements 5 INTERNATIONAL MICROCOMPUTER SOFTWARE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION - --------------------------- On November 29, 2001, we entered into an agreement to acquire all issued and outstanding shares of the capital stock of Keynomics, Inc., a California corporation focused on productivity enhancement software. Keynomics was a wholly owned subsidiary of Digital Creative Development Corporation ("DCDC"). We originally accounted for this acquisition as a transfer between entities under common control because at the time of the acquisition, the IMSI board of directors was identical to the DCDC board of directors, with the exception of Mr. Robert Mayer, who was a board member of IMSI only. Additionally, Mr. Martin Wade and Mr. Vincent DeLorenzo served as the Chief Executive Officer and Chief Financial Officer, respectively, of both companies. Using the guidance for accounting for entities under common control, we had restated the financial statements for all prior periods similar to a pooling of interests. However, in consideration of further interpretive guidance, we have revised our treatment of this transaction to account for it using the purchase method of accounting. We are hereby amending our original form 10-QSB for the interim period ended December 31, 2001 as filed with the Securities and Exchange Commission on February 14, 2002 and restating our interim condensed consolidated financial statements for the same period to account for the change in accounting treatment relative to the Keynomics' acquisition. This amended filing has not been updated for events which have occurred subsequent to the initial filing of the Form 10-QSB on February 14, 2002 with the exception of the modification for the accounting treatment of the Keynomics acquisition as disclosed in Note 8 and 10 and the termination of the merger with DCDC as disclosed in Note 9. The originally filed Form 10-QSB for the quarter ended December 31, 2001 presented restated historical financial statements as of June 30, 2001 and for the three and six months ended December 31, 2001 to reflect the Keynomics transaction as a transfer among entities under common control. This treatment required us to present our financial information as if Keynomics had been a part of IMSI in all periods presented. As a result of revising the accounting treatment to reflect the business combination as a purchase, the financial statements as of June 30, 2001 and for the three and six months ended December 31, 2001 have been adjusted to include the results of Keynomics only from the date of acquisition. The interim condensed consolidated financial statements have been prepared from the records of International Microcomputer Software, Inc. and Subsidiaries ("IMSI") without audit. In the opinion of management, all adjustments, which consist only of normal recurring adjustments, necessary to present fairly the financial position at December 31, 2001 and the results of operations and cash flows as of and for the three and six months ended December 31, 2001 and 2000 have been made. The interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in our Annual Report on Form 10-K for the fiscal year ended June 30, 2001. The results of operations for the three and six months ended December 31, 2001 are not necessarily indicative of the results to be expected for any other interim period or for the full year. 2. REALIZATION OF ASSETS - --------------------------- The financial statements have been prepared on a basis that contemplates our continuation as a going concern and the realization of assets and liquidation of liabilities in the ordinary course of business. We have an accumulated deficit of $36,855 and negative working capital of $ 9,498 as of December 31, 2001. Our large accumulated losses and the negative amount of shareholders' equity as of December 31, 2001 make it difficult for us to obtain new debt financing or to 6 obtain equity financing at attractive prices. In addition, it is likely that we will require additional capital, through equity or financing arrangements. The financial statements do not include any adjustments relating to the recoverability or classification of assets or the amounts and classification of liabilities that might result from the outcome of this uncertainty. 3. SIGNIFICANT CHANGES IN OTHER ASSETS - ------------------------------------------- We reached a settlement with Broderbund during the quarter ended December 31, 2001 for the outstanding issues related to our acquisition of OrgPlus from The Learning Company (predecessor of Broderbund). Simultaneously, we entered into an agreement with Human Concepts in which we transferred ownership of OrgPlus in exchange for royalties based on a percentage of their revenues and distribution rights. As a consequence of these agreements, we recorded a new intangible asset, Capitalized Distribution Rights, in the amount of $755,000. The basis for Capitalized Distribution Rights is composed of the following:
Effect on Capitalized Description of transaction Distribution Rights Reclassification of remaining basis in OrgPlus from Goodwill and Capitalized Brand $675,000 Agreement to pay advances to Human Concepts for rights to distribute OrgPlus 270,000 Grant to Broderbund of credit against future royalties 250,000 Agreement to pay settlement for all amounts owed (four quarterly payments beginning August 2002) 160,000 Grant to Broderbund of 800,000 names to use for 4 mailings 76,000 Broderbund return of 200,000 shares of IMSI common stock at $0.26 per share previously issued for the acquisition of OrgPlus (52,000) Release of liabilities on our books to Broderbund and its predecessors (624,000) -------------- $755,000 ==============
Capitalized Distribution Rights are being amortized over a period of 48 months, the initial period of the distribution agreement with Human Concepts. 4. SEGMENT INFORMATION - ------------------------ We have four reportable operating segments based on the sales market. Two of these are geographic segments and generate revenues and incur expenses related to the sale of our PC productivity software. The third and forth segments comprise the revenues and expenses related to ArtToday.com, our graphic design Internet subsidiary and to Keynomics our newly acquired business applications subsidiary. The following table details segment information as follows (in thousands): 7
North Other RESTATED ArtToday.com Keynomics America Foreign Eliminations Total -------------- ----------- --------------- --------------- ------------- ------- Restated Restated Three Months Ended December 31, 2001 Net Revenues-external $1,043 $81 $1,887 $138 -- $3,149 -------------- ----------- --------------- --------------- ------------- ------- Operating income (loss) 327 (19) (432) 13 -- (111) -------------- ----------- --------------- --------------- ------------- ------- Identifiable assets 1,394 252 4,548 (123) (38) 6,033 -------------- ----------- --------------- --------------- ------------- ------- Three Months Ended December 31, 2000 Net Revenues-external $722 -- $2,439 $73 -- $3,234 -------------- ----------- --------------- --------------- ------------- ------- Operating income (loss) (42) -- 53 10 -- 21 -------------- ----------- --------------- --------------- ------------- ------- Identifiable assets 1,125 -- 6,681 (12) -- 7,794 -------------- ----------- --------------- --------------- ------------- ------- Six months Ended December 31, 2001 Net Revenues-external $1,930 $81 $3,432 $281 -- $5,724 -------------- ----------- --------------- --------------- ------------- ------- Operating income (loss) 606 (19) (1,069) 32 -- (450) -------------- ----------- --------------- --------------- ------------- ------- Identifiable assets 1,394 252 4,548 (123) (38) 6,033 -------------- ----------- --------------- --------------- ------------- ------- Six months Ended December 31, 2000 Net Revenues-external 1,531 4,576 185 -- 6,292 -------------- ----------- --------------- --------------- ------------- ------- Operating income (loss) 44 (89) 25 -- (20) -------------- ----------- --------------- --------------- ------------- ------- Identifiable assets 1,125 6,832 (12) -- 7,945 -------------- ----------- --------------- --------------- ------------- -------
5. EARNINGS (LOSS) PER SHARE - -------------------------------- Basic earnings per share are computed using the weighted average number of common shares outstanding during the period. Diluted earnings per share are computed using the weighted average number of common and potentially dilutive securities outstanding during the period. Potentially dilutive securities consist of the incremental common shares issuable upon on exercise of stock options and warrants (using the treasury stock method). Potentially dilutive securities are excluded from the computation if their effect is anti-dilutive. The following tables set forth the computation of basic and diluted earnings (loss) per share (in thousands, except per share amounts): 8
Three months ended --------------------------------------- December 31, December 31, 2001 2000 ------------------ ------------------- Numerator: Net income (loss) $ 2,202 $ (799) Numerator for basic earnings per share (loss) available to common stockholders 2,202 (799) Numerator for diluted earnings per share (loss) available to common stockholders after assumed conversions 2,202 (799) Denominator: Denominator for basic earnings per share - weighted average shares outstanding 9,809,876 9,693,892 Effect of dilutive securities using the treasury stock method as at December 31, 2000 664,291 Warrants Outstanding -- -- 2,123,271 Stock Options Outstanding -- -- Effect of dilutive securities using the treasury stock method as at December 31, 2001 2,821,791Warrants Outstanding 428,214 -- 1,800,162 Stock Options Outstanding 178,670 -- Dilutive potential common shares 606,884 -- Denominator for diluted earnings per share 10,416,760 9,693,892 Basic earnings (loss) per share $ 0.22 $ (0.08) Diluted earnings (loss) per share $ 0.21 $ (0.08)
9
Six months ended --------------------------------------- December 31, 2001 December 31, 2000 ------------------ ------------------- Numerator: Net income (loss) $ 7,150 $ (1,291) Numerator for basic earnings per share (loss) available to common stockholders 7,150 (1,291) Numerator for diluted earnings per share (loss) available to common stockholders after assumed conversions 7,150 (1,291) Denominator: Denominator for basic earnings per share- weighted average shares outstanding 9,860,325 9,680,040 Effect of dilutive securities using the treasury stock method as at December 31, 2000 664,291 Warrants Outstanding -- -- 2,123,271 Stock Options Outstanding -- -- Effect of dilutive securities using the treasury stock method as at December 31, 2001 2,821,791Warrants Outstanding 428,214 -- 1,800,162 Stock Options Outstanding 178,670 -- Dilutive potential common shares 606,884 -- Denominator for diluted earnings per share 10,467,209 9,680,040 Basic earnings (loss) per share $ 0.73 $ (0.13) Diluted earnings (loss) per share $ 0.68 $ (0.13)
6. NEW ACCOUNTING STANDARDS - ------------------------------ In June 2001, the Financial Accounting Standards Board adopted SFAS No. 142 Goodwill And Intangible Assets. SFAS No. 142 addresses the methods used to amortize intangible assets and to assess impairment of those assets, including goodwill resulting from business combinations accounted for under the purchase method. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001, except for the non-amortization provisions of the statement, which are effective for business combinations completed after June 30, 2001. Included in our assets at December 31, 2001, is goodwill with a net carrying values of $133,000 and $179,000 relating to the acquisitions of ArtToday.com and Keynomics, respectively. OrgPlus goodwill, which was included in this category prior to this quarter, was transferred to capitalized distribution rights in conjunction with the settlement of a dispute regarding our software license and distribution agreement with Broderbund and concurrent software assignment, license and distribution agreements with Human Concepts. Upon adoption of SFAS No. 142, we will no longer amortize goodwill related to ArtToday.com, decreasing amortization expense by approximately $81,000 in fiscal 2003. We are required to assess this goodwill for impairment in the year of adoption. We do not expect the adoption of SFAS No. 142 to have a material 10 effect on our financial condition or results of operation. Since we are restating our accounting of the Keynomics' acquisition to account for it using the purchase methodology, and since the acquisition occurred after June 30, 2001, we will not record any amortization relating to the Keynomics' goodwill, instead we will assess this goodwill for impairment and will adjust the carrying value accordingly if such impairment exists. In 2001, the FASB issued SFAS 143, Accounting for Asset Retirement Obligations. SFAS 143 applies to all entities that have legal obligations associated with the retirement of a tangible long-lived asset. SFAS 143 requires that a liability for an asset retirement obligation be recognized if the obligation meets the definition of a liability in FASB Concepts Statement 6, Elements of Financial Statements, and if the amount of the liability can be reasonably estimated. When a retirement obligation is initially recognized, the asset retirement cost is capitalized by increasing the carrying amount of the related long-lived asset by an amount equal to the liability. The initial recording of the obligation should be at fair market value. SFAS 143 is effective for fiscal years beginning after June 15, 2002, but earlier application is encouraged The Company does not expect this statement to have a material effect on its financial statements. In 2001, the FASB issued SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS 144 supersedes SFAS 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of, as well as the provisions of APB Opinion 30, Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, that address the disposal of a business. SFAS 144 also amends ARB 51, Consolidated Financial Statements, to eliminate the exception to consolidate a subsidiary for which control is likely to be temporary. SFAS 144 carries over the recognition and measurement provisions of SFAS 121, but differs from SFAS 121 in that it provides guidance for estimating future cash flows to test recoverability. SFAS 144 also includes criteria that have to be met for an entity to classify a long-lived asset or asset group as held for sale, and extends the presentation of discontinued operations permitted by Opinion 30 to include disposals of a component of an entity. SFAS 144 is effective for fiscal years beginning after December 15, 2001, except for the disposal provisions, which are immediately effective. We do not expect the adoption of SFAS No. 144 to have a material effect on our financial condition or results of operation. 7. GAIN ON EXTINGUISHMENT OF DEBT - -------------------------------------- During the fiscal quarter ended December 31, 2001, we recognized $2,243,000 gain from extinguishment of debt. $2,062,000 was related to the forgiveness of a portion of the principal and accrued interest on the Silicon Valley Bank note. $140,000 was related to the forgiveness of amounts payable to Light Work Design and $40,500 was related to the forgiveness of amounts payable to Microsoft. Light Work Design and Microsoft are two unsecured creditors that were owed royalties. In the quarter ended September 30, 2001, we recognized a gain of $5,727,000 related to the extinguishment of debt to BayStar Capital and DelRay Technologies. BayStar Capital agreed to settle for 10% of the principal and accrued interest and penalties outstanding. Payments are to be made in four quarterly installments beginning September 30, 2002, with interest accruing at the rate of 8% per annum from August 31, 2001 to the date of the first installment. Thereafter, the interest rate is 12% per annum until the note is paid in full on or before June 30, 2003. DelRay Technologies agreed to a one-time payment of $20,000 as settlement in full of its outstanding claim. These combined transactions resulted into an aggregate forgiveness of debt gain of $7,970,000 for the six-month period ended December 31, 2001. 11 8. KEYNOMICS ACQUISITION - -------------------------- On November 29, 2001, we entered into an agreement to acquire all issued and outstanding shares of the capital stock of Keynomics, Inc., a California corporation focused on productivity enhancement software. Keynomics was a wholly owned subsidiary of DCDC. We originally accounted for this acquisition as a transfer between entities under common control because at the time of the acquisition, the IMSI board of directors was identical to the DCDC board of directors with the exception of Mr. Robert Mayer, who was a board member of IMSI only. Additionally, Mr. Martin Wade and Mr. Vincent DeLorenzo served as the Chief Executive Officer and Chief Financial Officer, respectively, of both companies. Using the guidance for accounting for entities under common control, we had restated the financial statements for all prior periods similar to a pooling of interests. However, in consideration of further interpretive guidance, we have revised our treatment of this transaction to account for it using the purchase method of accounting. This change in accounting treatment has been reflected in our financial statements as of November 29, 2001. The aggregate purchase price was $300,000 and we assumed approximately $566,000 of liabilities from Keynomics. The consideration was comprised of three components; i) $50,000 in cash paid at closing, ii) $100,000 in management fees and iii) a $150,000 note payable. As of June 30, 2002, $300,000 had been paid to DCDC and the note in favor of DCDC has been canceled. The agreement also called for contingent consideration depending on Keynomics' performance. These amounts, payable 60 days after the end of the next three fiscal years, consist of 50% of Keynomics' net operating income, if any, in excess of: $500,000 in the fiscal year ending June 30, 2003 $1,000,000 in the fiscal year ending June 30, 2004 $1,500,000 in the fiscal year ending June 30, 2005 Furthermore, potential payments would have been due DCDC if we had sold substantially all of the capital stock or substantially all of the assets of Keynomics before June 2002. Such payments would have been fifty percent of any amount in excess of $1.2 million. No payments were due or earned as no transaction to sell substantially all of the assets of Keynomics occurred before June 2002 . As of the date of the purchase, Keynomics had $245,000 of promissory notes outstanding. Subsequent to the acquisition of Keynomics by IMSI, holders of an aggregate $225,000 of the outstanding notes agreed to convert them into 661,765 shares of IMSI's capital stock at $0.34 per share. Gordon Landies, our president, and Paul Jakab, our Chief Operating Officer, received 192,079 and 10,232 shares of IMSI's capital stock, respectively, in exchange for their outstanding promissory notes from Keynomics. Joe Abrams, an IMSI related party, received 287,389 shares in exchange for his outstanding promissory note to Keynomics. Mr. Abrams holds IMSI stock options and warrants, which if exercised, would result in ownership exceeding 5% of the total shares outstanding. 12 The allocation of the purchase price is as follows (in thousands):
Consideration Paid Cash $ 50 Note Payable 150 Management Fees 100 Total Consideration $ 300 =================== Allocation of Consideration to Assets Current Assets 379 Long Term Assets 73 Liabilities Assumed (566) Identifiable Intangibles 235 Assumed Goodwill 179 Allocated Assets $ 300 ====================
The identifiable intangibles consist of software development costs that will be amortized over 3 years. At December 31, 2001, we had amortized approximately $7,000 with a remaining balance of approximately $228,000. We began to consolidate Keynomics from the date of the acquisition. The following unaudited condensed balance sheets as of December 31, 2001 and June 30, 2001 and unaudited condensed income statements for the three and six months ended December 31, 2001 and 2000 reflect our pro forma financial results as if we had completed the acquisition of Keynomics effective July 1, 2000.
December 31, 2001 June 30, 2001 BALANCE SHEET (in thousands) ASSETS Current assets $3,033 $3,311 Long term assets 2,585 3,180 Total assets $5,618 $6,491 LIABILITIES AND SHAREHOLDERS' DEFICIT Current Liabilities 12,554 21,128 Long term liabilities 1,120 933 Total liabilities 13,674 22,061 Total shareholders' deficit (8,056) (15,570) Total liabilities and shareholders' deficit $5,618 $6,491
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STATEMENTS OF OPERATIONS Three months ended Three months ended AND COMPREHENSIVE INCOME (in thousands) December 31,2001 December31,2000 Net revenues $3,656 $3,370 Product costs 812 851 Gross margin 2,844 2,519 Total operating expenses 2,675 2,706 Operating income (loss) 169 (187) Other Income / Expense (234) (533) Gain on extinguishment of debt 2,243 - Income (Loss) before income tax and cumulative effect of change in accounting principle 2,178 (720) Income tax provision (benefit) 1 2 Income (Loss) before cumulative effect of change in accounting principle 2179 (722) Cumulative effect of change in accounting principle - (285) Net income (loss) $2,179 $(1,007) Diluted Earnings (Loss) per Share $0.22 $(0.10)
14
STATEMENTS OF OPERATIONS Six months ended Six months ended AND COMPREHENSIVE INCOME (in thousands) December 31,2001 December31,2000 Net revenues $6,320 $6,630 Product costs 1,521 1,810 Gross margin 4,799 4,820 Total operating expenses 5,220 5,223 Operating income (loss) (421) (403) Other Income / Expense (669) (994) Gain on extinguishment of debt 7,970 - Income (Loss) before income tax and cumulative effect of change in accounting principle 6,880 (1,397) Income tax provision (benefit) 3 (6) Income (Loss) before cumulative effect of change in accounting principle 6,877 (1,391) Cumulative effect of change in accounting principle - (285) Net income (loss) $6,877 $(1,676) Diluted Earnings (Loss) per Share $0.70 $(0.17)
9. SUBSEQUENT EVENT (RESTATED) - --------------------------------- As of March 1, 2002, we entered into a "Mutual Termination Agreement and Release" with DCDC whereby the Merger Agreement between the companies dated August 31, 2001 was terminated and each company was released from all duties, rights, claims, obligations and liabilities arising from, in connection with, or relating to, the Merger Agreement. The two companies agreed to enter into an agreement entitled "Promissory Note Conversion and General Release" pursuant to which DCDC agreed to cancel the entire outstanding principal amount of $3.58 million and all interest due on the promissory note that DCDC had acquired in return for 9,000,000 shares of common stock of IMSI and cash in the amount of $250,000 to be paid in monthly installments over 15 months as follows: $10,000 per month for the first five installments starting March 1, 2002 $20,000 per month for ten months thereafter Consistent with the Keynomics transaction, we had previously accounted for this transaction as an arrangement between entities under common control, and as a result did not record any gain or loss on the extinguishment of the note. 15 However, in consideration of further interpretive guidance, we have revised our treatment of this transaction to account for it using fair values. This change has resulted in our recognizing a loss on the transaction of $495,000 in the quarter ended March 31, 2002. The loss on extinguishment was determined as follows (dollars in thousands, except per share amounts):
Book Value of Debt $ 3,580 ============= FMV of Stock Shares Issued 9,000,000 Market Value per Share $ 0.425 Total Value of Stock $ 3,825 Cash Paid $ 250 Total Consideration $ 4,075 ============= Loss from Stock Issuance $ (495) =============
The effect of this transaction will be recorded in our amended Form 10-QSB/A for the interim period ended March 31, 2002 as filed with the Securities and Exchange Commission. 10. UNAUDITED QUARTERLY FINANCIAL INFORMATION (RESTATED) - ------------------------------------------------------------- This filing on form 10-QSB/A is amending our original form 10-QSB for the interim period ended December 31, 2001 as filed with the Securities and Exchange Commission. We are restating our interim condensed consolidated financial statements for the same period to account for the change in accounting treatment relative to the Keynomics' acquisition from DCDC. This transaction had been accounted for under the assumption that the two companies, DCDC and IMSI, were under common control. This resulted in the Keynomics transaction being recorded using the "pooling of interests" methodology. Since this transaction was initially disclosed in our Form 10-QSB for the period ended December 31, 2001, in consideration of further interpretive guidance and we have revised our treatment of this transaction to account for it using fair values. The effect of this restatement is as follows: CONSOLIDATED STATEMENT OF INCOME in thousands, except per share data
all amounts unaudited UNAUDITED UNAUDITED UNAUDITED Quarter Ended September 30, 2001 Quarter Ended December 31, 2001 Six Months Ended December 31, 2002 As As As Reported Restated Difference Reported Restated Difference Reported Restated Difference ----------- -------- ---------- -------- -------- ---------- -------- -------- --------- Net Revenues $2,664 $2,575 ($89)(1) $ 3,656 $3,149 ($507)(1) $6,320 $5,724 ($596) Product Costs 709 709 - 812 809 3 (2) 1,521 1,518 (3) ----------- -------- ---------- -------- -------- ---------- -------- -------- --------- Gross Margin 1,955 1,866 (89) 2,844 2,340 (504) 4,799 4,206 (593) ----------- -------- ---------- -------- -------- ---------- -------- -------- --------- Costs and Expenses: Sales and Marketing 697 524 173 (1) 811 668 143 (1) 1,508 1,193 (315) General and Administrative 1,206 1,073 133 (1) 1,298 1,246 52 (1)&3) 2,504 2,319 (185) Research and Development 641 608 33 (1) 566 537 29 (1) 1,207 1,145 (67) ----------- -------- ---------- -------- -------- ---------- -------- -------- --------- Total Operating Expenses 2,544 2,205 339 2,675 2,451 224 5,219 4,657 562 ----------- -------- ---------- -------- -------- ---------- -------- -------- --------- ----------- -------- ---------- -------- -------- ---------- -------- -------- --------- Operating Income (Loss) (589) (339) 250 169 (111) (280) (420) (451) (31) =========== ======== ========== ======== ======== ========== ======== ======== ========= Other Income (Expense) Interest and Other Expense (437) (431) 6 (1) (262) 44 306 (1)&4) (699) (387) 312 Loss on the early Extinguishment of Debt - - - - - - - - Gain (Loss) Disposal of Assets - (5) (5) 8 8 - 8 1 (7) Gain on Sales of Product Lines - - - 20 20 - 20 20 - Gain from Forgiveness of Debt 5,727 5,727 - 2,243 2,243 - 7,970 7,970 - ----------- -------- ---------- -------- -------- ---------- -------- -------- ---------- Income (Loss) Before Taxes 4,701 4,952 251 2,178 2,204 26 6,879 7,153 274 ----------- -------- ---------- -------- -------- ---------- -------- -------- ---------- Income Tax Expense (Benefit) 1 1 - 1 1 - 2 3 1 ----------- -------- ---------- -------- -------- ---------- -------- -------- ---------- Net Income $4,700 $4,951 $251 $ 2,177 2,203 $26 $6,877 $7,150 $273 =========== ======== ========== ======== ======== ========== ======== ======== ========== Diluted Income (loss) per Share $ 0.48 $ 0.50 $0.02 $ 0.21 $ 0.21 $ 0.00 $ 0.70 $ 0.73 $ 0.03 Shares Used in Computing earnings (loss) 9,858 9,858 9,858 10,409 10,409 10,049 9,760 9,760 9,760 per share information
INDEX TO ADJUSTMENTS: - ----------------------- 1) Reflects the reversal of revenue and expense amounts that were included in our results when recording the transaction as entities under common control. The amounts are excluded from our results using purchase accounting. 2) Reflects the amortization of the intangible software asset of $235,000. We will amortize this asset over 3 years in accordance with our normal policy; quarterly amortization is approximately $20,000. 3) We initially expensed $100,000 of management fees paid to DCDC. As part of our revised accounting we have treated this amount as a component of the total consideration paid to DCDC. 4) We initially expensed $200,000 related to amounts payable to DCDC as part of the acquisition. As part of our revised accounting we have treated this amount as a component of the total consideration paid to DCDC. 17 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following information should be read in conjunction with the consolidated financial statements and the notes thereto and in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations in our Fiscal 2001 Form 10-K. This quarterly report on Form 10-QSB/A, and in particular this "Management's Discussion and Analysis of Financial Condition and Results of Operations," may contain forward-looking statements regarding future events or our future performance. These future events and future performance involve certain risks and uncertainties including those discussed in the "Other Factors That May Affect Future Operating Results" section of this Form 10-QSB/A, as well as in our Fiscal 2001 Form 10-K, as filed with the Securities and Exchange Commission ("SEC"). Actual events or our actual future results may differ materially from any forward-looking statements due to such risks and uncertainties. We assume no obligation to update these forward-looking statements to reflect actual results or changes in factors or assumptions affecting such forward-looking statements. This analysis is not intended to serve as a basis for projection of future events. This filing on Form 10-QSB/A is amending our original Form 10-QSB for the interim period ended December 31, 2001 as filed with the Securities and Exchange Commission on February 14, 2002. We are restating our interim condensed consolidated financial statements for the same period to reflect the modification of our accounting treatment relative to the Keynomics acquisition that was effective on November 29, 2001. All other subsequent events, including the termination of the merger agreement with DCDC, effective as of March 1, 2002, and their effect on our financial conditions have not been reflected in this form 10-QSB/A. CRITICAL ACCOUNTING POLICIES - ------------------------------ In accordance with recent Securities and Exchange Commission guidance, those material accounting policies that we believe are the most critical to an investor's understanding of our financial results and condition have been expanded and are discussed below. Certain of these policies are particularly important to the portrayal of our financial position and results of operations and require the application of significant judgment by our management to determine the appropriate assumptions to be used in the determination of certain estimates. REVENUE RECOGNITION Revenue is recognized in accordance with American Institute of Certified Public Accountants Statement of Position ("SOP") 97-2, Software Revenue Recognition, and SOP 98-9, Modification of SOP 97-2, With Respect to Certain Transactions. Revenue is recognized when persuasive evidence of an arrangement exists (generally a purchase order), product has been delivered, the fee is fixed and determinable and collection of the resulting account is probable. * Revenue from packaged product sales to resellers and end users is recorded at the time of the sale net of estimated returns. * Revenue from sales to distributors is recognized when the product sells through to retailers and end users. Sales to distributors permit limited rights of return according to the terms of the contract. * For software delivered via the Internet, revenue is recorded when the customer downloads the software. * Subscription revenue is recognized ratably over the contract period. * Revenue from hybrid products is allocated to the underlying components based on the ratio of the value of each component to the total price and each portion is recognized accordingly. * Non-refundable advanced payments received under license agreements with no defined terms are recognized as revenue when the customer accepts the delivered software. 17 * Revenue from software licensed to developers, including amounts in excess of non-refundable advanced payments, is recorded as the developers ship products containing the licensed software. * Revenue from minimum guaranteed royalties in republishing agreements is recognized ratably over the term of the agreement. Royalties in excess of the guaranteed minimums are recognized when collected. * Revenue from Original Equipment Manufacturer (OEM) contracts is recognized upon completion of our contractual obligations. The purpose of OEM contracts is to increase our customer base by seeding the marketplace with older versions of our software, bundled with other manufacturers' products. RESERVE FOR RETURNS, PRICE DISCOUNTS AND REBATES Reserves for returns, price discounts and rebates are estimated using historical averages, open return requests, channel inventories, recent product sell-through activity and market conditions. Our allowances for returns, price discounts and rebates are based upon management's best judgment and estimates at the time of preparing the financial statements. Reserves are subjective estimates of future activity that are subject to risks and uncertainties, which could cause actual results to differ materially from estimates. Our return policy generally allows our distributors to return purchased products primarily in exchange for new products or for credit towards future purchases as part of stock balancing programs. These returns are subject to certain limitations that may exist in the contract with an individual distributor, governing, for example, aggregate return amounts, and the age, condition and packaging of returned product. Under certain circumstances, such as terminations or when a product is defective, distributors could receive a cash refund if returns exceed amounts owed. INVENTORIES Inventories are valued at the lower of cost or market and are accounted for on the first-in, first-out basis. Management performs periodic assessments to determine the existence of obsolete, slow moving and non-salable inventories, and records necessary provisions to reduce such inventories to net realizable value. GOODWILL, INTANGIBLE AND OTHER LONG LIVED ASSETS Property, equipment, intangible and certain other long-lived assets are amortized over their useful lives. Useful lives are based on management's estimates of the period that the assets will generate revenues. Long-lived assets and goodwill are written down to fair value whenever events or changes indicate that the carrying amount of an asset may not be recoverable. Our policy is to review the recoverability of all long-lived assets including goodwill at a minimum of once per year and record an impairment loss when the fair value of the assets does not exceed the carrying amount of the asset. RECENT EVENTS - -------------- KEYNOMICS ACQUISITION On November 29, 2001, we entered into an agreement to acquire all issued and outstanding shares of the capital stock of Keynomics, Inc., a California corporation focused on productivity enhancement software. Keynomics was a wholly owned subsidiary of DCDC. We originally accounted for this acquisition as a transfer between entities under common control because at the time of the acquisition, the IMSI board of directors was identical to the DCDC board of directors with the exception of Mr. Robert Mayer, who was a board member of IMSI only. Additionally, Mr. Martin Wade and Mr. Vincent DeLorenzo served as the Chief Executive Officer and Chief Financial Officer, respectively, of both companies. Using the guidance for accounting for entities under common control, we had restated the financial statements for all prior periods similar to a pooling of interests. 18 However, in consideration of further interpretive guidance, we have revised our treatment of this transaction to account for it using the purchase method of accounting. This change in accounting treatment has been reflected in our financial statements as of November 29, 2001. The aggregate purchase price was $300,000 and we assumed approximately $566,000 of liabilities from Keynomics. The consideration was comprised of three components; i) $50,000 in cash paid at closing, ii) $100,000 in management fees and iii) a $150,000 note payable. As of June 30, 2002, the entire $300,000 had been paid to DCDC. The agreement also called for contingent consideration depending on Keynomics' performance. These amounts, payable 60 days after the end of the next three fiscal years, consist of 50% of Keynomics' net operating income, if any, in excess of: * $500,000 in the fiscal year ending June 30, 2003 * $1,000,000 in the fiscal year ending June 30, 2004 * $1,500,000 in the fiscal year ending June 30, 2005 Furthermore, potential payments would have been due DCDC if we had sold substantially all of the capital stock or substantially all of the assets of Keynomics before June 2002. Such payments would have been fifty percent of any amount in excess of $1.2 million. No payments were due or earned as no transactions to sell substantially all of the assets of Keynomics occurred before June 2002. As of the date of the purchase, Keynomics had $245,000 of promissory notes outstanding. Subsequent to the acquisition of Keynomics by IMSI, holders of an aggregate $225,000 of the outstanding notes agreed to convert them into 661,765 shares of IMSI's capital stock at $0.34 per share. Gordon Landies, our president, and Paul Jakab, our Chief Operating Officer, received 192,079 and 10,232 shares of IMSI's capital stock, respectively, in exchange for their outstanding promissory notes from Keynomics. Joe Abrams, an IMSI related party, received 287,389 shares in exchange for his outstanding promissory note to Keynomics. Mr. Abrams holds IMSI stock options and warrants, which if exercised, would result in ownership exceeding 5% of the total shares outstanding. 19 The allocation of the purchase price is as follows (in thousands):
Consideration Paid Cash $ 50 Note Payable 150 Management Fees 100 Total Consideration $ 300 ================ ALLOCATION OF CONSIDERATION TO ASSETS Current Assets 379 Long Term Assets 73 Liabilities Assumed (566) Identifiable Intangibles 235 Assumed Goodwill 179 Allocated Assets $ 300 ================
The identifiable intangibles consist of software development costs that will be amortized over 3 years. At December 31, 2001, we had amortized approximately $7,000 with a remaining balance of approximately $228,000. BRODERBUND SETTLEMENT On October 31, 2001, we entered into a termination agreement with Broderbund (The Learning Company's successor) whereby we, collectively with Broderbund, terminated the October 1998 software license agreement of Org Plus and all related amendments and released each other from all obligations and liabilities. We agreed to pay Broderbund $160,000 payable in four equal quarterly installments commencing on August 15, 2002 for this settlement. We had previously accrued $400,000 in relation to the dispute. The termination agreement also called for Broderbund to transfer back to us ownership of the 200,000 shares of IMSI's capital stock issued to them pursuant to the January 1999 amendment. Furthermore, we executed two additional agreements with Broderbund on October 31, 2001: An assignment of copyrights and trademark rights, whereby Broderbund transfers, grants, conveys, assigns and relinquishes to us, exclusively and in perpetuity, all its right, title and interest in the Org Plus product. A software license and distribution agreement, whereby we grant to Broderbund a three-year, worldwide, non-exclusive license to sell Lumiere, Flow, TurboProject, Hijaak standard and FormTool through direct mail and to OEMs for royalty payments. This agreement also calls for us to grant to Broderbund a perpetual, worldwide, non-exclusive license to the source code of FormTool Express for limited use, as well as the right to email names from our customer database and a perpetual, worldwide, non-exclusive license to PrintMaster content for a limited use. 20 ASSIGNMENT, LICENSE AND DISTRIBUTION AGREEMENTS OF ORG PLUS TO HUMAN CONCEPTS During the month of November 2001, we executed an agreement with Human Concepts (a software republisher), whereby we transferred to Human Concepts ownership of the Org Plus software product in exchange for royalties (Agreement for Assignment of Software). During the same period we also executed a second agreement with Human Concepts (Software License and Distribution Agreement) whereby we licensed from Human Concepts rights to distribute the Org Plus product to end users and resellers in North America, Australia and New Zealand. This contract calls for royalty payments ranging from 25% to 50% of our net revenues to Human Concepts; however, minimum royalties of $30,000 per month for nine months are due starting February 2002. Consequently, upon executing the agreement, we recorded a liability of $270,000 representing the minimum royalties due Human Concepts. In addition, this agreement provides for a buy out clause, whereby this agreement shall terminate if, HC pays IMSI (i) $400,000 at any time from June 30, 2003 to June 30, 2005, and in addition HC has simultaneously bought out the royalty in the Assignment Agreement for an additional $100,000, or (ii) $600,000 at any time from July 1, 2005 to June 30, 2008, or (iii) $900,000 at any time on or after July 1, 2008. HC shall determine, in its sole discretion, if and when to make such payment to IMSI and if such a payment is made by HC this agreement shall terminate on the date such payment is made. Human Concepts is owned in its entirety by Mr. Martin Sacks, a former officer and board member of IMSI. At the present time, Mr. Sacks owns 320,925 of the outstanding shares of IMSI. DEBT RESTRUCTURING AND MERGER (RESTATED) On August 31, 2001, we signed a merger agreement with Digital Creative Development Corporation ("DCDC") a publicly traded company on the Nasdaq OTC Bulletin Board (Nasdaq OTC/BB: DCDCE) pursuant to which we are to issue shares of our common stock totaling 51% of our outstanding shares to DCDC shareholders, in exchange for all the common stock of DCDC and cancellation of a $3.6 million note payable by us to Union Bank of California purchased from Union Bank by DCDC. The merger agreement was approved by all of the directors of DCDC and IMSI. Also, 52% of our outstanding shareholders have agreed to vote in favor of the merger. The merger is subject to formal shareholder approval and other customary conditions. DCDC has yet to file its annual report on form 10-K for the fiscal year ended June 30, 2001. This delay in meeting its filing requirements and the resulting failure to issue a proxy statement and solicit approval of its shareholders for the merger has delayed and could prevent the merger of the two companies. As March 1, 2002, the DCDC merger was terminated. Discussion of the terms of the agreement terminating the merger contained in the amended Form 10-QSB filing for the third quarter of fiscal 2002 filed contemporaneously herewith, are incorporated herein by reference. Along with the execution of the merger agreement, we are in the process of restructuring our outstanding debt as follows: * On October 9, 2001 we signed an agreement with Silicon Valley Bank for a settlement of its existing secured note, which had a balance (including penalties and interest) of approximately $3.2 million. The settlement provides for a new secured promissory note for $1.2 million with 12 monthly payments of $100,000 plus interest at 12% interest per annum beginning October 20, 2001. The first four installments have been paid. * On July 27, 2001, and as subsequently amended on September 24, 2001 and October 5, 2001, IMSI and Imageline agreed on the settlement of a) an arbitration award issued in January 2000 in favor of Imageline; and b) a variety of on going issues between the parties involving the intellectual property rights of Imageline. The agreement, effective September 30, 2001, calls for us to provide Imageline a variety of 21 considerations including the following: * The dismissal of any further appeals of the award (which dismissal occurred on October 11, 2001). * Cash installments over a 12-year period, starting October 2001. These payments are to be made as follows: twelve monthly payments of $11,500 beginning on October 5, 2001; four equal quarterly payments of $78,750 beginning on September 30, 2002 and, 132 monthly payments of $6,500 thereafter. These payments had a net present value at June 30, 2001 of approximately $833,000 assuming a 12% discount rate. * Rights to royalties, licenses, and inventories pertaining to our MasterClips line of products. * A percentage of any net recovery we obtain from indemnification claims we have against third parties associated with the original circumstances leading to the arbitration award. * On July 30, 2001 we entered into an agreement with Baystar wherein Baystar agreed to accept $626,000 as settlement of all obligations due and totaling $6,260,000. Payments are to be made in four quarterly payments beginning September 30, 2002. Interest is to accrue at 8% per annum from August 31, 2001 until the September 2002 payment, and at 12% per annum thereafter until the claim is paid in full on or before June 30, 2003. * We negotiated an agreement with many of our remaining unsecured creditors, which provides for the discounting to 10% of all outstanding amounts owed to them (plus the payment of interest from February 1, 2000 at the rate of 8% per annum). These payments are to be made in quarterly installments beginning August 15, 2002. These unsecured creditors comprise approximately $3,800,000 of debt on our balance sheet. We estimate the total settlement on this debt to be approximately $450,000; and, when settled, we expect to record a gain on forgiveness of debt of approximately $3,350,000. We believe that the reduction in our liabilities under planned and completed settlements, will allow us to become profitable in the future and provide a remedy to our working capital needs. In addition, we will continue to engage in discussions with third parties concerning the sale or license of non-core product lines; the sale or license of part of our assets; and raising additional capital investment through the issuance of stock and short or long term debt financing. 22 SUBSEQUENT EVENT - MERGER TERMINATION As of March 1, 2002, we entered into a "Mutual Termination Agreement and Release" with DCDC whereby the Merger Agreement between the companies dated August 31, 2001 was terminated and each company was released from all duties, rights, claims, obligations and liabilities arising from, in connection with, or relating to, the Merger Agreement. The two companies agreed to enter into an agreement entitled "Promissory Note Conversion and General Release" pursuant to which DCDC agreed to cancel the entire outstanding principal amount of $3.58 million and all interest due on the promissory note that DCDC had acquired in return for 9,000,000 shares of common stock of IMSI and cash in the amount of $250,000 to be paid in monthly installments over 15 months as follows: * $10,000 per month for the first five installments starting March 1, 2002 * $20,000 per month for ten months thereafter Consistent with the Keynomics transaction, we had previously accounted for this transaction as an arrangement between entities under common control, and as a result did not record any gain or loss on the extinguishment of the note. However, in consideration of further interpretive guidance, we have revised our treatment of this transaction to account for it using fair values. This change has resulted in our recognizing a loss on the transaction of $495,000 in quarter ended March 31, 2002. The loss on extinguishment was determined as follows (dollars in thousands, except per share amounts):
Book Value of Debt $ 3,580 ===================== FMV of Stock Shares Issued 9,000,000 Market Value per Share $ 0.425 Total Value of Stock $ 3,825 Cash Paid $ 250 Total Consideration $ 4,075 ===================== Loss from Stock Issuance $ (495) =====================
RESULTS OF OPERATIONS - ----------------------- The following tables set forth our results of operations for the three and six-month periods ended December 31, 2001 and 2000 in absolute dollars and as a percentage of net revenues. It also details the changes from the prior fiscal year in absolute dollars and in percentages: 23
Three Months ended December 31, ----------------------------------------------- 2001(Restated) 2000 (Restated) ---------------------------- ----------------- ---------------------- $Change % Change From from As % of As % of previous previous $ sales $ sales year year ---------------------------- ----------------- ---------------------- Net Revenues $ 3,149 100.00% $ 3,234 100.00% $ (85) -2.63% Product Cost 809 25.69% 845 26.13% (36) -4.26% Gross Margin 2,340 74.31% 2,389 73.87% (49) -2.05% Operating Expenses Sales & Marketing 668 21.21% 654 20.22% 14 2.14% General & Administrative 1,246 39.57% 1,030 31.85% 216 20.97% Research & Development 537 17.05% 684 21.15% (147) -21.49% Total Operating Expenses 2,451 77.83% 2,368 73.22% 83 3.51% Operating Income/ (Loss) (111) -3.52% 21 0.65% (132) -628.57% Other Income (Expenses) Interest expense (65) -2.06% (533) -16.48% 468 -87.80% Interest income 4 0.13% - 0.00% 4 100.00% Foreign exchange gain 12 0.38% - 0.00% 12 100.00% Other expense income 92 2.95% - 0.00% 92 100.00% Gain on disposal of fixed assets 8 0.25% - 0.00% 8 100.00% Gain on sales of product line 20 0.64% - 0.00% 20 100.00% Gain from extinguishment of debt 2,243 71.23% - 0.00% 2,243 100.00% Total other income/(expense) 2,315 73.52% (533) -16.48% 2,847 -534.33% Income (loss) before tax and cumulative effect of change in accounting principles 2,203 69.96% (512) -15.83% 2,715 -530.27% Income tax expense 1 0.03% 2 0.06% (1) -50.00% Income (loss) before cumulative effect of change in accounting principles 2,202 69.93% (514) -15.89% 2,716 -528.40% Cumulative effect of change in accounting principles - 0.00% (285) -8.81% 285 -100.00% Net income (loss) $ 2,202 69.93% $ (799) -24.71% $ 3,001 -375.59%
24
Six Months ended December 31, ----------------------------------------------- 2001(Restated) 2000 (Restated) ---------------------------- ----------------- ---------------------- $Change % Change From from As % of As % of previous previous $ sales $ sales year year ---------------------------- ----------------- ---------------------- Net Revenues $ 5,724 100.00% $ 6,292 100.00% $ (568) -9.03% Product Cost 1,518 26.52% 1,801 28.62% (283) -15.71% Gross Margin 4,206 73.48% 4,491 71.38% (285) -6.35% Operating Expenses Sales & Marketing 1,193 20.83% 1,171 18.61% 22 1.88% General & Administrative 2,319 40.51% 1,982 31.50% 337 17.00% Research & Development 1,145 20.00% 1,357 21.57% (212) -15.62% Total Operating Expenses 4,657 81.36% 4,510 71.68% 147 3.26% Operating Loss (451) -7.88% (19) -0.30% (432) 2273.68% Other Income (Expenses) Interest expense (472) -8.25% (1,087) -17.28% 615 -56.58% Interest income 6 0.10% - 0.00% 6 100.00% Foreign exchange gain 1 0.02% - 0.00% 1 100.00% Other income 78 1.36% - 0.00% 78 100.00% Gain (loss) on disposal of fixed assets 1 0.02% (4) -0.06% 5 -125.00% Gain on sales of product line 20 0.35% 285 4.53% (265) -92.98% Settlement costs -- 0.00% (187) -2.97% 187 -100.00% Gain from extinguishment of debt 7,970 139.24% - 0.00% 7,970 100.00% Total other income/(expense) 7,604 132.84% (993) -15.78% 8,597 -865.76% Income (loss) before tax and cumulative effect of change in accounting principles 7,153 124.97% (1,012) -16.08% 8,165 -806.82% Income tax expense (benefit) 3 0.05% (6) -0.10% 9 -150.00% Income (loss) before cumulative effect of change in accounting principles 7,150 124.91% (1,006) -15.99% 8,156 -810.74% Cumulative effect of change in accounting principles - 0.00% (285) -4.53% 285 -100.00% Net income (loss) $7,150 124.91% $(1,291) -20.52% $ 8,441 -653.83%
25 NET REVENUES Net revenues of each of our principal product categories in dollars and as a percentage of total net revenues for the three and six-month periods ended December 31, 2001 and 2000 are summarized in the following table (in thousands except for percentage amounts):
Three Months Ended December 31, Six Months Ended December 31, ------------------------------------------ -------------------------------------------- 2001 2000 Changes 2001 2000 Changes (Restated) (Restated) (Restated) (Restated) ------------- ------------- ------------ ------------- -------------- -------------- $ % $ % $ % $ % $ % $ % Precision Design $1,128 36% $1,346 42% $(218) -16% $1,943 34% $2,288 36% $(345) -15% Graphic Design 1,246 40% 1,052 33% 194 18% 2,257 39% 2,576 41% (319) -12% Business Application 632 20% 557 17% 75 14% 1,349 24% 836 13% 513 61% Utilities 20 1% 254 8% (234) -92% 48 1% 861 14% (813) -94% Other Products 133 4% 41 1% 92 223% 144 3% 65 1% 79 121% Provision for returns and rebates not yet received (9) 0% (16) 0% 7 -44% $ (16) 0% (334) -5% 318 -95% - ---------------------------------------- ------------- ------------- ------------ ------------- -------------- -------------- Net Revenues $3,149 100% $3,234 100% $ (85) -3% $5,724 100% $6,292 100% $(568) -9% ======================================== ============= ============= ============ ============= ============== ==============
Sales of FloorPlan and IMSI's flagship product, TurboCAD, decreased in the three and the six month periods ended December 31, 2001 as compared to the same reporting periods in the previous fiscal year, resulting in an overall decrease in revenues in the precision design category. The inability to adequately fund a strong marketing strategy, the intense competition that characterizes the computer-aided design market and the delays in introducing the new version 8.0 of TurboCAD negatively impacted sales of the precision design category. In the three and six month periods December 31, 2001, revenues in the graphic design category consisted in majority of subscription revenues for graphic content from our wholly owned subsidiary ArtToday.com. When compared to the same periods in the previous fiscal year, ArtToday.com's sales increased in the quarter ended December 31, 2001 from $722,000 to $1,043,000 and from $1,531,000 to $1,930,000 for the six-month period ended December 31, 2001. This increase is the direct result of higher average subscription prices paid by customers as a result of a wider range of subscription choices. Because ArtToday.com's revenues are based on subscriptions, these amounts are initially deferred and then amortized over the subscription periods, which extend up to twelve months. As of December 31, 2001, approximately $1,077,000 of revenue related to ArtToday.com remained deferred. The following table details the amortization schedule of these deferred revenues for the upcoming year: 26
ArtToday.com Deferred revenues to be recognized 3rd Quarter of Fiscal 2002 $566,000 4th Quarter of Fiscal 2002 $315,000 1st Quarter of Fiscal 2003 $156,000 2nd Quarter of Fiscal 2003 $40,000 - -------------------------- ----------------------------------------------- Total $1,077,000 - -------------------------- -----------------------------------------------
The decrease in overall revenues in the graphic design category for the six-month period ended December 31, 2001 is attributable to the steep decline in the revenues from the historically most important revenue producing product line within this category, MasterClips. The significant decrease in Masterclips' revenues was the result of decreased sales from our republisher Vivendi who acquired the rights to the product during the previous fiscal year. The republishing agreement with Vivendi expired according to its own terms and we subsequently released new versions of Masterclips in December 2001. Also, the recent settlement agreement we entered into with Imageline on July 27, 2001, and as subsequently amended on September 24, 2001 and October 5, 2001 allowed us to regain full control over the Masterclips line of products. We intend to continue publishing new versions of Masterclips in the future. Future sales of Masterclips along with the increasing trend of ArtToday.com sales should contribute to higher revenues in the graphic design category in future reporting periods. During the quarter ended December 31, 2001, we acquired Keynomics, a company focused on productivity enhancement software. Sales of Keynomics' products contributed $81,000 to the business application category during this fiscal quarter. Keynomics' increased contribution explains the increase in revenues in this category as compared to the same quarter of the previous fiscal year. Prior to September 30, 2000, our focus had been primarily on our Internet business and our graphic and precision design products, and because we did not spend as much on marketing non-core products as during previous periods, sales of Flow!, FormTool, Maplinx, MasterPublisher, OrgPlus, People Scheduler, Web Business Builder, Hijaak and TurboProject all declined as of December 2000 bringing revenues from the business application category to an all time low. During the six month period ended December 31, 2001, however, demand for some of our non-core products in this category such as Flow! and FormTool increased. This increased demand was able to offset the slight decrease in the sales of OrgPlus and further contribute to the overall increase in revenues in the business application category as compared to the same reporting period of the previous fiscal year. The decrease in revenues in the utilities category for the three and six month periods ended December 31, 2001 as compared to the same periods of fiscal 2001 resulted from the sales of Net Accelerator and WinDelete declining during the first two quarters of fiscal 2002. These products have not been updated recently nor have we put many resources into promoting and selling them. Revenues in the other products category for the three and six month periods ended December 31, 2001 were not material and the slight increase over the comparable periods in the previous fiscal year was primarily due to the sales of non-core, third-party products. Net revenues from domestic sales decreased by $232,000 or 8% to $2,781,000 and were 88% of total net revenues for the three-month period ended December 31, 2001. This compares to net revenues from domestic sales of $3,013,000, or 93% of total net revenues, for the comparable period in the previous fiscal year. For the six month period ended December 31, 2001, net revenues from domestic sales decreased $695,000 or 12% to $5,057,000 and were 88% of total net revenues. This compares to $5,752,000 or 91% of total net revenues, for the comparable period in the previous fiscal year. 27 Net revenues from international sales increased by $147,000 or 67%, and were $368,000 or 12% of net revenues for the three-month period ended December 31, 2001. This compares to $221,000 or 7% of net revenues for the three months ended December 31, 2000. For the six month period ended December 31, 2001, net revenues from international sales increased $127,000 or 24% to $667,000 and were 12% of total net revenues. This compares to $540,000 or 9% of total net revenues, for the comparable period in the previous fiscal year. Our financial problems were the primary cause of our overall decreased revenues over the six months period ended December 31, 2001 when compared to the same period in the previous fiscal year. We have not been able to implement the kind of effective advertising programs necessary to maintain unit sales volumes, share of the market, and shelf space in distribution. We currently serve the domestic retail and international markets using direct sales methods and republishing agreements. Low barriers to entry, intense price competition, and continuing business consolidations characterize the consumer software industry. Any one of these factors may adversely affect revenues in the future. We believe, however, that our decision to reduce our reliance on the retail market has provided some insulation from unfavorable retail conditions, including erosion of margins from competitive marketing and high rates of product returns. PRODUCT COSTS Our product costs include the costs of diskette and CD-ROM duplication, printing of manuals, packaging and fulfillment, freight-in, freight out, license fees, royalties that we pay to third parties based on sales of published software and amortization of capitalized software acquisition and development costs. Costs associated with the return of products, such as refurbishment and the write down in value of returned goods are also included in product costs. The decrease in product costs in absolute dollars and as a percentage of net revenues in the three and six-month periods ended December 31, 2001 as compared to the same periods from the previous fiscal year was primarily attributable to lower amortization costs. We amortize capitalized software development costs and license fees on a product-by-product basis. The amortization for each product is the greater of the amount computed using (a) the ratio of current gross revenues to the total of current and anticipated future gross revenues for the product or (b) the economic life of such product. During the first six months of fiscal 2002, we capitalized $235,000 of software development cost relating to the Keynomics acquisition of which we amortized approximately $7,000 during the same period. Total amortization of software development costs and license fees was $369,000, and $750,000 in the six-month periods ended December 31, 2001 and December 31, 2000, respectively. 28 SALES AND MARKETING Our sales and marketing expenses consist primarily of salaries and benefits of sales and marketing personnel, commissions, advertising, printing and direct mail expenses. Additional sales and marketing expenses related to the Keynomics' business, in part offset by decreased commissions paid to our sales force along with reduced advertising expenses were the primary reasons for the slight increase in sales and marketing expenses in the three and six months ended December 31, 2001. GENERAL AND ADMINISTRATIVE Our general and administrative expenses consist primarily of the salaries and benefits for employees in the legal, finance, accounting, human resources, information systems and operations departments and fees to our professional advisors. For the six-month period ended December 31, 2001 a one time charge of $211,000 relating to issuance of warrants to outside consultants, totaling 785,000 warrants with an average exercise price of $0.27 and terms of three to ten years and the severance cost of $60,000 payable to one of our former executives combined with additional general and administrative expenses relating to the Keynomics' business were the primary causes of the increase in general and administrative expense. For the three months ended December 31, 2001, outside consulting fees increased by approximately $25,000. RESEARCH AND DEVELOPMENT Our research and development expenses consist primarily of salaries and benefits for research and development employees and payments to independent contractors. Research and development costs decreased in the three and six-month periods ended December 31, 2001 as compared to the same reporting periods in the previous fiscal year. This decrease is mainly due to lower payroll charges and outside consulting fees relating to the Design.Net division, which was spun off effective October 1, 2001, and to the decrease in the number of products under development in part offset by additional research and development expenses relating to Keynomics' business. The steady ratio as a percentage of net revenues reflects our commitment to sustain our investment in research and development for our core products as well as for our subsidiaries by maintaining strong relationships with our development team in Russia. 29 INTEREST AND OTHER, NET Interest and other expenses, net, include interest and penalties on debt instruments, foreign currency transaction gains and losses, and other non-recurring items. The following table summarizes the components of interest and other, net for the three and six-month periods ended December 31, 2001 and 2000:
Three months ended December 31, 2001 2000 $ $ Interest and other, net Interest expense $ (65) $ (398) Interest income 4 - Foreign exchange gain 12 - Penalties (135) Other income 93 - Total $ 44 $ (533) Six months ended December 31, 2001 2000 $ $ Interest and other, net Interest expense $ (317) $ (817) Interest related to warrants issued (65) Interest income 6 - Foreign exchange gain 1 - Penalties (90) (270) Other income 78 - Total $ (387) $ (1,087)
Interest and other expense, net, decreased substantially in the six-month period ended December 31, 2001, as compared to the same reporting period in fiscal 2001. This decrease is mainly the result of our debt restructuring and the plan of merger we signed with DCDC on August 31, 2001. We did not accrue penalties on the Baystar note after August 2001, and interest expenses of 8% per annum on the new negotiated balance of the Baystar is substantially reduced as compared to the same period from the previous year. We saved on the interest previously paid to Union Bank of California since the note was acquired by DCDC. The merger agreement provides that the note is not to bear interest except in the event of the termination of the plan of merger GAIN ON SALES OF PRODUCT LINE During the second quarter of fiscal 2002 we sold the rights to the Visual Cadd software product to TriTools Partners, a California company, for $20,000. The entire amount of the sale was recorded as a gain since the product had a zero book value at the time of the transaction. This was the only transaction involving a gain or loss on sales of product line during the six-month period ended December 31, 2001. During the six-month period ended December 31, 2000, we collected the remaining $200,000 pertaining to the sale of the Easy Language line of product and recognized that amount as a one-time gain on product line sale. During the same period, ArtToday.com sold the domain name "Caboodles" for $85,000 and recorded a one-time gain for the same amount. 30 GAIN ON EXTINGUISHMENT OF DEBT During the fiscal quarter ended December 31, 2001, we recognized $2,243,000 gain from forgiveness of debt. $2,062,000 was related to the forgiveness of a portion of the principal and accrued interest on the Silicon Valley Bank note. $140,000 was related to the forgiveness of amounts payable to Light Work Design and $40,500 was related to the forgiveness of amounts payable to Microsoft. Light Work Design and Microsoft are two unsecured creditors that were owed royalties. In the quarter ended September 30, 2001, we recorded an extraordinary gain of $5,727,000 related to the forgiveness of debt to BayStar Capital and DelRay Technologies. BayStar Capital agreed to settle for 10% of the principal and accrued interest and penalties outstanding. Payments are to be made in four quarterly installments beginning September 30, 2002, with interest accruing at the rate of 8% per annum from August 31, 2001 to the date of the first installment. Thereafter, the interest rate is 12% per annum until the note is paid in full on or before June 30, 2003. DelRay Technologies agreed to a one-time payment of $20,000 as settlement in full of its outstanding claim. These combined transactions resulted into an aggregate forgiveness of debt gain of $7,970,000 for the six-month period ended December 31, 2001. No similar transactions occurred in the same reporting periods of the previous fiscal year. SETTLEMENT COSTS We recorded a charge of $187,490 during the fiscal quarter ended September 30, 2000 relating to the issuance of 185,005 shares of common stock in July 2000 as a settlement of the ArtToday.com Fee Agreement. We had no similar transactions neither in the current or previous quarters of fiscal 2002. PROVISION FOR INCOME TAXES We did not record a tax benefit in the quarter ending December 31, 2001 for domestic tax losses because of the uncertainty of realization. We adhere to Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes," which requires an asset and liability approach to financial accounting and reporting for income taxes. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. LIQUIDITY AND CAPITAL RESOURCES - ---------------------------------- As of December 31, 2001, we had $1,183,000 in cash and cash equivalents. This represents a $47,000 decline from the $1,230,000 balance at June 30, 2001. Working capital at December 31, 2001 was a negative $9,498,000. This represents an improvement over the negative working capital at June 30, 2001 of $17,480,000. The improvement in working capital over the past six-month period is mainly the result of the decline in current liabilities following our restructuring of debt. The slight decline in cash and cash equivalents from June 30, 2001 resulted mainly from payments we made to meet our obligations to financial creditors and payments we made to acquire Keynomics in part offset by net positive cash of $733,000 generated by our operating activities. We had a net income of $7.2 million during the first six months of fiscal 2002. Excluding one-time non-cash items of approximately $8.0 million representing the gain from the forgiveness of debt, we would have had a net loss in excess of $0.8 million. Despite this loss, our operating activities generated cash of $733,000. The main items that helped reconcile this loss to the net cash provided by operating activities during the six-month period ended December 31, 2001 included depreciation and amortization expenses of $715,000, increases of accrued interest expenses of $267,000 and a non cash charge of $310,000 related 31 to warrants issued to outside consultants and other third parties. Our investing activities during the six months ended December 31, 2001 consumed $278,000 in cash used mainly in acquiring Keynomics. Our financing activities consumed net cash of $491,000 for the six-month period ended December 31, 2001. During this period, we decreased our obligation to Union Bank by $350,000 bringing the balance of all amounts due to the bank to $3,580,000. Subsequent to these payments and pursuant to our merger agreement with DCDC, DCDC acquired the Union Bank's note in August 2001. Also during the same period of fiscal 2002, we made payments relating to capital lease obligations of $158,000, we repaid $200,000 to Silicon Valley Bank pursuant to the new $1.2 million secured promissory note. If we fail to raise additional capital, the negative working capital position could have a material adverse effect on our liquidity in the future. The financial statements have been prepared on a basis that contemplates our continuation as a going concern and the realization of our assets and liquidation of our liabilities in the ordinary course of business. We have an accumulated deficit of $36.9 million and negative working capital of $9.5 million at December 31, 2001. We also lack sustained profitability for our recent history. All these issues raise substantial doubt about our ability to be a going concern for a reasonable period of time and the auditors' report on our financial statements filed within our fiscal 2001 Form 10-K reflects such doubt. The financial statements do not include any adjustments relating to the recoverability or classification of assets or the amounts and classification of liabilities that might result from the outcome of this uncertainty. Our continued existence is dependent on our ability to complete the debt restructuring and obtain additional financing sufficient to allow us to meet our obligations as they become due and to achieve profitable operations. Historically, we financed our working capital and capital expenditure requirements primarily from retained earnings, short-term and long-term bank borrowings, capitalized leases and sales of common stock. We will require additional working capital to meet our ongoing operating expenses, to develop new products, and to properly conduct business activities. We believe that the reduction in our liabilities under planned and completed settlements, will allow us to continue as a going concern, become profitable in the future, and remedy our working capital needs. In addition, we will continue to engage in discussions with third parties concerning the sale or licensing of product lines; the sale or licensing of part of our assets; and raising additional capital investment through the issuance of stock and short or long term debt financing. The forecast period of time through which the our financial resources will be adequate to support working capital and capital expenditure requirements is a forward-looking statement that involves risks and uncertainties, and actual results could vary. The factors described in "Risk Factors", as filed in our fiscal 2001 Form 10-K, will affect future capital requirements and the adequacy of available funds. We can provide no assurance that needed financing will be available. Furthermore, any additional equity financing, if available, may be dilutive to shareholders, and debt financing, if available, may involve restrictive covenants. Failure to raise capital when needed will have a material adverse effect on our business, operating results, financial condition and ability to continue as a going concern. We have no material commitments for future capital expenditures or material long-term debt at December 31, 2001 except as previously disclosed under the heading "Debt restructuring and Merger" regarding long term obligations to Silicon Valley Bank, Imageline, Baystar Capital and other unsecured creditors. OTHER FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS - ------------------------------------------------------------- Other factors that may cause fluctuations of, or a continuing decline in, operating results in the future include the market factors and competitive factors described in our Fiscal 2001 Form 10-K, under "Future Performance and Additional Risk Factors." Factors that may affect operating results in the future include, but are not limited to: 32 * Market acceptance of our products or those of our competitors * Timing of introductions of new products and new versions of existing products * Expenses relating to the development and promotion of such new products and new version introductions * Intense price competition and numerous end-user rebates * Projected and actual changes in platforms and technologies * Accuracy of forecasts of, and fluctuations in, consumer demand * Extent of third party royalty payments * Rate of growth of the consumer software and Internet markets * Timing of orders or order cancellation from major customers * Changes or disruptions in the consumer software distribution channels * Failure of a proper integration of Keynomics operations * Economic conditions, both generally and within the software or Internet industries ITEM 3. CONTROLS AND PROCEDURES (a) Under the supervision and with the participation of the Company's management, including the Company's principal executive officer and principal financial officer, the Company conducted an evaluation of its disclosure controls and procedures, as such term is defined under Rule 13a-14(c) promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), within 90 days of the filing date of this report. Based on their evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective. (b) The Company has evaluated its accounting procedures and control processes related to material transactions to ensure they are recorded timely and accurately in the financial statements. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation referenced in paragraph (a) above. 33 PART II - OTHER INFORMATION --------------------------- ITEM 1. LEGAL PROCEEDINGS Not Applicable ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS Not Applicable ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not Applicable ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not Applicable ITEM 5. OTHER INFORMATION On November 29, 2001, we entered into an agreement with DCDC to acquire all issued and outstanding shares of capital stock of Keynomics, a California corporation wholly owned and controlled by DCDC. The transaction was originally accounted for as a transfer between entities under common control. However, in consideration of further interpretive guidance, we have revised our treatment of this transaction to account for it using the purchase method of accounting. This change in accounting treatment has been reflected in our financial statements as of November 29, 2001. As a result of this modification, we are required to file the audited financial statements of Keynomics on Form 8-K. The company will file the appropriate documents on Form 8-K as soon as possible. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K Exhibits DOCUMENTS INCORPORATED BY REFERENCE (as originally filed with the Security and Exchange Commission on February 14, 2002 on our original Form 10-QSB for the interim period ended December 31, 2001): * Keynomics Stock Purchase Agreement * Broderbund Termination Agreement * Broderbund Assignment of Copyrights and Trademark Rights * Human Concepts Agreement for Assignment of Software * Human Concepts Software License and Distribution Agreement 34 The following documents are filed as a part of this Report: Exhibit Page Number Exhibit Title 99.1 Certification of Chief Executive Officer -Internal controls 99.2 Certification of Chief Financial Officer -Internal controls 99.3 Certification of Chief Executive Officer Pursuant to Section 906, of the Sarbanes-Oxley Act of 2002 99.4 Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Reports on Form 8-K None SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: December 27, 2002 INTERNATIONAL MICROCOMPUTER SOFTWARE, INC. By: /s/ Martin Wade, III Martin Wade, III Director & Chief Executive Officer By: /s/ William J. Bush William J. Bush Chief Financial Officer (Principal Accounting Officer) 35 EX-99.1 3 doc2.txt EXHIBIT 99.1 ------------ CERTIFICATION I, Martin Wade, III, certify that: 1. I have reviewed this quarterly report on Form 10-QSB/A of International Microcomputer Software, Inc; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the periods covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a. Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the periods in which this quarterly report is being prepared; b. Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c. Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date. 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a. All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls. 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant efficiencies and material weaknesses. Dated: December 27, 2002 By: /s/ Martin Wade, III Martin Wade, III Director & Chief Executive Officer 36 EX-99.2 4 doc3.txt EXHIBIT 99.2 ------------ CERTIFICATION I, William J. Bush, certify that: 1. I have reviewed this quarterly report on Form 10-QSB/A of International Microcomputer Software, Inc; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the periods covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a. Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the periods in which this quarterly report is being prepared; b. Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c. Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date. 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a. All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls. 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant efficiencies and material weaknesses. Dated: December 27, 2002 By: /s/ William J. Bush William J. Bush Chief Financial Officer (Principal Accounting Officer) 37 EX-99.3 5 doc4.txt EXHIBIT 99.3 ------------ Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 The undersigned, who is the Chief Executive Officer of International Microcomputer Software, Inc. (the "Company"), hereby certifies that (i) the restated Quarterly Report on Form 10-QSB/A for the three and six-month period ended December 31, 2001, as filed by the Company with the Securities and Exchange Commission (the "Annual Report"), to which this Certification is an Exhibit, fully complies with the applicable requirements of Section 13(a) and 15(d) of the Exchange Act; and (ii) the information contained in this Quarterly Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: December 27, 2002 By: /s/ Martin Wade, III Martin Wade, III Director & Chief Executive Officer 38 EX-99.4 6 doc5.txt EXHIBIT 99.4 ------------ Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 The undersigned, who is the Chief Financial Officer of International Microcomputer Software, Inc. (the "Company"), hereby certifies that (i) the Quarterly Report on Form 10-QSB/A for the restated Quarterly Report on Form 10-QSB/A for the three and six-month period ended December 31, 2001, as filed by the Company with the Securities and Exchange Commission (the "Annual Report"), to which this Certification is an Exhibit, fully complies with the applicable requirements of Section 13(a) and 15(d) of the Exchange Act; and (ii) the information contained in this Quarterly Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: December 27, 2002 By: /s/ William J. Bush William J. Bush Chief Financial Officer (Principal Accounting Officer) 39 -----END PRIVACY-ENHANCED MESSAGE-----