-----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, SyNgvh9pPKpqAe/pKpYbIT1vDCeJE0vbFk6lEqrng9dOhY8HTxWyd1r+LNcdUccL IjaENGQcmJm6DCbjliPN6Q== 0001144204-02-001712.txt : 20021227 0001144204-02-001712.hdr.sgml : 20021227 20021227085948 ACCESSION NUMBER: 0001144204-02-001712 CONFORMED SUBMISSION TYPE: 10QSB/A PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20020331 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: 02869504 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 MARCH 31, 2002 ---------------- [ ] 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 The purpose of this Amendment to the Company's Quarterly Report on Form 10-QSB is to incorporate changes and in response to further interpretive guidance that the company has received regarding the accounting change discussed below. This filing on Form 10-QSB/A is amending our original Form 10-QSB for the interim period ended March 31, 2002 as filed with the Securities and Exchange Commission on May 20, 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. and the exchange of shares with Digital Creative Development Corporation for their retirement of the Union Bank Note, as disclosed in Notes 1, 2, 3 & 4 to the Financial Statements, using fair values as compared to the previous accounting which accounted for the transactions as transfers 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 March 31, 2002, or modify or update those disclosures, except as discussed above. PART I - FINANCIAL INFORMATION 3 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 19 ITEM 3. CONTROLS AND PROCEDURES 36 PART II - OTHER INFORMATION 37 ITEM 1. LEGAL PROCEEDINGS 37 ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 37 ITEM 3. DEFAULTS UPON SENIOR SECURITIES 38 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 38 ITEM 5. OTHER INFORMATION 38 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 38 SIGNATURES 40 EXHIBIT 99.1 41 EXHIBIT 99.2 42 EXHIBIT 99.3 43 EXHIBIT 99.4 44 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)
------------ ----------- March 31, June 30, (Unaudited) (Restated) (Restated) ------------ ----------- ASSETS Current assets: $2,352 $1,230 Cash and cash equivalents: Receivables, less allowances for doubtful accounts, 999 940 discounts and returns of $193 and $182 387 113 Inventories 28 229 Prepaid royalties and licenses 366 362 ------------ ----------- Other current assets 4,132 2,874 TOTAL CURRENT ASSETS 429 580 Fixed assets, net 1,118 1,305 Capitalized software development costs, net 1,229 1,229 ------------ ----------- Other assets, net $6,908 $5,988 =========== ============ TOTAL ASSETS LIABILITIES AND SHAREHOLDERS' DEFICIT Current liabilities: $2,271 $1,1682 Current portion long-term debt 2,163 2,353 Trade accounts payable 52 2,293 Accrued interest and penalties payable 2,758 2,717 Accrued and other liabilities 179 131 Accrued arbitration award-current 1,337 1,178 Deferred revenue 8,760 20,354 TOTAL CURRENT LIABILITIES 625 702 Accrued arbitration award 387 179 Long term debt and other obligations 9,772 21,235 TOTAL LIABILITIES Shareholders' deficit: Common stock, no par value; 300,000,000 authorized; 33,921 28,754 Issued and outstanding 21,402,827 and 9,695,740 shares (36,787) (44,008) Accumulated deficit 2 7 ------------ ----------- Accumulated other comprehensive income (2,864) (15,247) TOTAL SHAREHOLDERS' DEFICIT $6,908 $5,988 ============ =========== TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT
See Notes to 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) (Unaudited) Three Months Ended Nine Months Ended March 31, March 31, ------------------- ------------------ 2002 2001 2002 2001 (Restated)(Restated)(Restated)(Restated) ------------------- ------------------ Net revenues $3,661 $3,107 $9,385 $9,399 Product costs 712 720 2,229 2,521 ------------------- ------------------ GROSS MARGIN 2,949 2,387 7,156 6,878 Costs and expenses: Sales and marketing 846 800 2,040 1,971 General and administrative 1,114 1,047 3,433 3,029 Research and development 535 666 1,680 2,023 ------------------- ------------------ TOTAL OPERATING EXPENSES 2,495 2,513 7,153 7,023 ------------------- ------------------ OPERATING INCOME (LOSS) 454 (126) 3 (145) Gain on product line sale -- -- 20 285 Interest and other, net (394) (572) (779) (1,661) Gain (loss) on disposition of fixed assets 9 (6) 10 (9) Gain on extinguishment of debt -- -- 7,970 -- Settlement of fee agreement -- -- -- (187) ------------------- ------------------ INCOME (LOSS) BEFORE INCOME TAX AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE 69 (704) 7,224 (1,717) Income tax provision (benefit) 1 (14) 3 (21) ------------------- ------------------ INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE 68 (690) 7,221 (1,696) Cumulative effect of change in accounting principle -- -- -- (285) ------------------- ------------------ NET INCOME (LOSS) $68 $(690) $7,221 $(1,981) =================== ================== Other comprehensive income, net of tax: Foreign currency translation, net of tax 6 10 (5) 13 ------------------- ------------------ OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX $74 $(680) $7,216 $(1,968) =================== ================== BASIC EARNINGS (LOSS) PER SHARE Earnings (loss) per share before cumulative effect of change in accounting $0.01 $(0.07) $0.65 $(0.17) Cumulative effect of change in accounting principle per share -- -- -- (0.03) Net income (loss) per share $0.01 $(0.07) $0.65 $(0.20) DILUTED EARNINGS (LOSS) PER SHARE Earnings (loss) per share before cumulative effect of change in accounting $0.01 $(0.07) $0.59 $(0.17) Cumulative effect of change in accounting principle per share (0.03) Net income (loss) per share $0.01 $(0.07) $0.59 $(0.20) Shares used in computing basic earnings (loss) per share 14,082 9,694 11,180 9,685 Shares used in computing diluted earnings (loss) per share 15,056 9,694 12,154 9,685
See Notes to Condensed Consolidated Financial Statements 4 INTERNATIONAL MICROCOMPUTER SOFTWARE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (UNAUDITED)
(Unaudited) Nine Months Ended March 31, --------------------------------- 2002 (Restated) 2001 (Restated) --------------- ---------------- Cash flows from operating activities: NET CASH PROVIDED BY OPERATING ACTIVITIES $ 1,809 $ 561 --------------- ---------------- Cash flows from investing activities: Proceeds from product line and domain name sales 20 285 Purchase of equipment and furniture (71) (352) Software development costs (17) -- Acquisition of subsidiary from affiliated company (266) -- Other (155) (6) --------------- ---------------- NET CASH USED BY INVESTING ACTIVITIES (489) (73) --------------- ---------------- Cash flows from financing activities: Increase in notes payable 479 -- Repayment of loans (1,209) (20) Repayment of capital lease obligations (218) (149) Proceeds from issuance of common stock 755 11 --------------- ---------------- NET CASH USED BY FINANCING ACTIVITIES (193) (158) --------------- ---------------- Effect of exchange rate change on cash and cash equivalents (5) 13 NET INCREASE IN CASH AND CASH EQUIVALENTS 1,122 343 Cash and cash equivalents at beginning of period 1,230 1,477 --------------- ---------------- CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ 2,352 $1,820 =============== ================
See Notes to Condensed Consolidated Financial Statements 5 INTERNATIONAL MICROCOMPUTER SOFTWARE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION - --------------------------- This filing on Form 10-QSB/A is amending our original Form 10-QSB for the interim period ended March 31, 2002 as filed with the Securities and Exchange Commission on May 20, 2002. 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 and the exchange of shares and cash with Digital Creative Development Corporation ("DCDC") for their retirement of the Union Bank note as disclosed in Notes 2, 3 & 4. This amended filing has not been updated for events which have occurred subsequent to the initial filing of the Form 10-QSB on May 20, 2002 with the exception of the modification for the accounting treatment of the Keynomics acquisition and the termination of the merger with DCDC as disclosed in Notes 2, 3 & 4. The originally filed Form 10-QSB for the quarter ended March 31, 2002 presented restated historical financial statements as of June 30, 2001 and for the three and nine months ended March 31, 2002 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 nine months ended March 31, 2002 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 March 31, 2002 and the results of operations and cash flows as of and for the three and nine months ended March 31, 2002 and 2001 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 nine months ended March 31, 2002 are not necessarily indicative of the results to be expected for any other interim period or for the full year. We have revised our accounting for certain transactions with DCDC as follows: - The Keynomics transaction has been accounted for using purchase accounting. - The exchange of shares and cash with DCDC for their retirement of the Union Bank note as a fair value transaction. Both of these transactions 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 and the extinguishment of the note with Union Bank and subsequent issuance of 9,000,000 IMSI common shares to DCDC as a capital transaction with no gain or loss recorded. Since these transactions were initially disclosed in our Form 10-QSB for the periods ended December 31, 2001 and March 31, 2002, we have received further interpretive guidance and have concluded that the transactions should be recorded using fair values. 2. KEYNOMICS ACQUISITION (RESTATED) - -------------------------------------- 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, 6 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. Our filing on Form 10-QSB for the period ended December 31, 2000, has been amended to reflect this change. The aggregate purchase price, using purchase accounting, 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. 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. 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 March 31, 2002, we had amortized approximately $27,000 with a remaining balance of approximately $208,000. We began to consolidate Keynomics from the date of the acquisition. The following unaudited condensed balance sheets as of June 30, 2001 and unaudited condensed income statements for the nine months ended March 31, 2002 and three and nine months ended March 31, 2001 reflect our pro forma 7 financial results as if we had completed the acquisition of Keynomics effective July 1, 2000. - -------------------------------------------------------------------------------- JUNE 30, 2001 ------------- BALANCE SHEET (IN THOUSANDS) ASSETS Current assets $3,311 Long term assets 3,180 TOTAL ASSETS 6,491 LIABILITIES AND SHAREHOLDERS' DEFICIT Current Liabilities 21,128 Long term liabilities 933 TOTAL LIABILITIES 22,061 TOTAL SHAREHOLDERS' DEFICIT (15,570) TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $6,491 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- THREE MONTHS ENDED MARCH 31, 2001 ---- STATEMENTS OF OPERATIONS (IN THOUSANDS) --------------------------------------- Net revenues $3,314 Product costs 727 GROSS MARGIN 2,587 Total operating expenses 2,907 OPERATING INCOME (LOSS) (320) Other Income (Expense) (582) INCOME (LOSS) BEFORE INCOME TAX (902) Income tax expense (benefit) (14) NET INCOME (LOSS) $(888) DILUTED EARNINGS (LOSS) PER SHARE $(0.09) - -------------------------------------------------------------------------------- 8 - --------------------------------------------------------------------------------
NINE MONTHS ENDED MARCH 31, STATEMENTS OF OPERATIONS (IN THOUSANDS) 2002 2001 ---- ---- Net revenues $9,981 $ 9,944 Product costs 2,213 2,536 Gross margin 7,768 7,408 Total operating expenses 7,716 8,132 OPERATING INCOME (LOSS) 52 (724) Other Income (Expense) (559) (1,576) Gain on extinguishment of debt 7,970 -- GAIN (LOSS) BEFORE INCOME TAX AND CUMULATIVE EFFECT OF ACCOUNTING PRINCIPLE 7,463 (2,300) Income tax expense (benefit) 3 (21) GAIN (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 7,460 (2,279) Cumulative effect of change in accounting principle -- (285) NET INCOME (LOSS) $7,460 $(2,564) DILUTED EARNINGS (LOSS) PER SHARE $ 0.67 $ (0.26)
- -------------------------------------------------------------------------------- 3. DCDC DEBT CONVERSION (RESTATED) - -------------------------------------- On August 31, 2001, IMSI and DCDC entered into an Agreement and Plan of Merger and Reorganization ("merger agreement") pursuant to which DCDC was to acquire 51% of IMSI. Simultaneously and pursuant to the merger agreement, DCDC purchased for $2,500,000 all rights as lender and holder under the promissory note between Union Bank of California and IMSI with a remaining principal amount of $3,580,000. On March 1, 2002, the merger agreement with DCDC was terminated. In connection with the termination, DCDC agreed to cancel the entire outstanding principal amount of $3,580,000 and all interest due under the Union promissory note 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 from the staff of the Securities and Exchange Commission, 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. The loss on extinguishment was determined as follows (dollars in thousands, except per share amounts): 9 - -------------------------------------------------------------------------------- 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) ============ - -------------------------------------------------------------------------------- 4. UNAUDITED QUARTERLY FINANCIAL INFORMATION (RESTATED) - ------------------------------------------------------------ As discussed in Note 1, we have revised our accounting for certain transactions with DCDC as follows: - - The Keynomics transaction accounted for using purchase accounting. - - The exchange of shares and cash with DCDC for their retirement of the Union Bank note as a fair value transaction. Both of these transactions 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 and the extinguishment of the note with Union Bank and subsequent issuance of 9,000,000 IMSI common shares to DCDC as a capital transaction with no gain or loss recorded. Since these transactions were initially disclosed in our Form 10-QSB for the periods ended December 31, 2001 and March 31, 2002, we have received further interpretive guidance and have concluded that the transactions should be recorded using fair values. The effect of this restatement is as follows: 10 CONSOLIDATED STATEMENT OF INCOME in thousands, except per share data all amounts unaudited
UNAUDITED UNAUDITED Quarter Ended September 30, 2001 Quarter Ended December 31, 2001 As As Reported Restated Difference Reported Restated Difference -------- -------- ---------- -------- -------- ---------- Net Revenues $ 2,664 $ 2,575 ($89) (1) $ 3,656 $ 3,149 ($507) (1) Product Costs 709 709 - 812 809 3 -------------------------------- --------------------------------- Gross Margin 1,955 1,866 (89) 2,844 2,340 (504) Costs and Expenses Sales and Marketing 697 524 173 (1) 811 668 143 (1) General and Administrative 1,206 1,073 133 (1) 1,298 1,246 53 (1) & (3) Research and Development 641 608 33 (1) 566 537 29 (1) -------------------------------- --------------------------------- Total Operating Expenses 2,544 2,205 399 2,675 2,451 224 -------------------------------- --------------------------------- Operating Income (Loss) (589) (339) 250 169 (111) (280) ================================ ================================= Other Income (Expense) Interest and Other Expense (437) (431) 6 (1) (262) 44 306 (1) & (4) Gain (loss) on issuance of stock - - - - - - Gain (loss) Disposal of Assets - (5) (5) 8 8 - Gain on Sales of Product Lines - - - 20 20 0 Gain on Extinguishment of Debt 5,727 5,727 - 2,243 2,243 - -------------------------------- --------------------------------- Income (Loss) Before Taxes 4,701 4,952 251 2,178 2,204 26 -------------------------------- --------------------------------- Income Tax Expense (Benefit) 1 1 - 1 1 - -------------------------------- --------------------------------- Net Income $ 4,700 $4,951 $251 $ 2,177 $ 2,203 $26 ================================ =================================
11 CONSOLIDATED STATEMENT OF INCOME (CONTINUED) in thousands, except per share data all amounts unaudited
UNAUDITED UNAUDITED Quarter Ended March 31, 2002 Quarter Ended March 31, 2002 As As Reported Restated Difference Reported Restated Difference -------- -------- ---------- -------- -------- ------------ Net Revenues $ 3,661 $ 3,661 $ 0 $ 9,981 $ 9,385 ($596) Product Costs 692 712 (20) (2) 2,213 2,229 16 -------------------------------- ---------------------------------- Gross Margin 2,969 2,949 (20) 7,768 7,156 (612) Costs and Expenses Sales and Marketing 846 846 - 2,356 2,040 (316) General and Administrative 1,114 1,114 - 3,617 3,433 (184) Research and Development 535 535 - 1,743 1,680 (63) -------------------------------- ---------------------------------- Total Operating Expenses 2,495 2,495 - 7,716 7,153 563 -------------------------------- ---------------------------------- Operating Income (Loss) 474 454 (20) 52 3 (49) ================================ ================================== Other Income (Expense) Interest and Other Expense 101 101 - (589) (284) 305 Gain (loss) on issuance of stock - (495) (495) (5) - (495) (495) Gain (loss) Disposal of Assets 5 9 4 10 10 - Gain on Sales of Product Lines - - 20 20 - Gain on Extinguishment of Debt - - 7,970 7,970 - -------------------------------- ---------------------------------- Income (Loss) Before Taxes 580 69 (511) 7,463 7,244 (239) -------------------------------- ---------------------------------- Income Tax Expense (Benefit) 1 1 - 3 3 - -------------------------------- ---------------------------------- Net Income $ 579 $ 68 ($511) $ 7,460 $ 7,221 ($239) ================================ ==================================
12 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. 5) Accounting for the extinguishment of the Union Bank Note as a fair value transaction resulted in a loss of $495,000on the early extinguishment of debt due to the issuance of 9,000,000 shares and obligation to pay $250,000 in cash to DCDC 5. 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 $36,787,000 and negative working capital of $4,628,000 as of March 31, 2002. It is possible that we will require additional capital, either through equity or other financing arrangements. Our large accumulated losses and the negative amount of shareholders' equity as of March 31, 2002 make it difficult for us to obtain new debt financing or to obtain equity financing at attractive prices. 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. 6. EQUITY RELATED TRANSACTIONS - --------------------------------- The following tables detail the activity regarding our common stock, warrants and stock options for the nine-month period ended March 31, 2002: 13
NUMBER OF TRANSACTION TYPE GROUP SECURITES AMOUNT - --------------------------------------------- ------------------------------ ----------------- ------------- SHARES OUTSTANDING AS OF JUNE 30, 2001 9,695,740 $ 29,088,425 Private placement Accredited investors 835,000 417,500 Capital Contribution Former Keynomics owner 116,580 Debt to equity conversion Related Parties 9,661,764 3,555,000 Options issued for consulting services Consultants 41,956 Warrants issued for consulting services Consultants 269,272 Options exercised Employees and Consultants 82,000 16,794 Warrants exercised Executives & advisers to IMSI 1,282,500 318,750 Settlement shares and warrants Vendors 45,823 88,388 Retirement into treasury Broderbund settlement (200,000) (52,000) Variable accounting charge Re-priced stock options 16,131 ------------ ------------- TOTAL 11,707,087 $ 4,788,371 ------------ ------------- SHARES OUTSTANDING AS OF MARCH 31, 2002 21,402,827 $33,876,796 ------------ -------------
- -------------------------------------------------------------------------------- OPTIONS WARRANTS OUTSTANDING AT JUNE 30, 2001 1,976,164 729,291 Granted 1,056,000 2,092,500 Exercised (82,000) (1,282,500) Cancelled (899,927) ------------- ------------- OUTSTANDING AT MARCH 31, 2002 2,050,237 1,539,291 - -------------------------------------------------------------------------------- 7. 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 (in thousands): 14
NORTH OTHER RESTATED ARTTODAY.COM KEYNOMICS AMERICA FOREIGN ELIMINATIONS TOTAL -------- ------------ --------- ------- ------- ------------ ----- RESTATED RESTATED - -------------------------------------------------------------------------------------------------- THREE MONTHS ENDED MARCH 31, 2002 (RESTATED) - -------------------------------------------------------------------------------------------------- Net Revenues-external $1,082 $ 239 $2,219 $121 -- $3,661 Operating income (loss) 402 (84) 137 (1) -- 454 Identifiable assets 1,989 89 4,964 (97) (37) 6,908 THREE MONTHS ENDED MARCH 31, 2001 (RESTATED) - -------------------------------------------------------------------------------------------------- Net Revenues-external $ 778 $2,269 $ 60 -- $3,107 Operating income (loss) (28) (57) (40) -- (126) Identifiable assets 2,324 6,453 205 (1,587) 7,395 NINE MONTHS ENDED MARCH 31, 2002 (RESTATED) - -------------------------------------------------------------------------------------------------- Net Revenues-external $3,013 $ 320 $5,650 $402 -- $9,385 Operating income (loss) 1,008 (103) (932) 31 -- 3 Identifiable assets 1,989 89 4,964 (97) (37) 6,908 NINE MONTHS ENDED MARCH 31, 2001 (RESTATED) - -------------------------------------------------------------------------------------------------- Net Revenues-external $2,309 $6,845 $245 -- $9,399 Operating income (loss) 101 (231) (15) -- (145) Identifiable assets 2,324 6,453 205 (1,587) 7,395
16 8. 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:
THREE MONTHS ENDED ------------------------------- MARCH 31, 2002 MARCH 31, 2001 -------------- -------------- NUMERATOR: - ---------- Net income (loss) $ 72 (680) Numerator for basic earnings per share (loss) available to common stockholders 72 (680) Numerator for diluted earnings per share (loss) available to common stockholders after assumed conversions 72 (680) DENOMINATOR: - ------------ Denominator for basic earnings per share - weighted average shares outstanding 14,081,521 9,693,892 Effect of dilutive securities using the treasury stock method as at March 31, 2001 664,291 Warrants Outstanding -- -- 2,142,855 Stock Options Outstanding -- -- Effect of dilutive securities using the treasury stock method as at March 31, 2002 1,539,291Warrants Outstanding 488,856 -- 2,050,237 Stock Options Outstanding 485,171 -- Dilutive potential common shares 974,027 -- Denominator for diluted earnings per share 15,055,548 9,693,892 BASIC EARNINGS (LOSS) PER SHARE $ 0.01 $ (0.07) DILUTED EARNINGS (LOSS) PER SHARE $ 0.01 $ (0.07)
17
NINE MONTHS ENDED ---------------------- MARCH 31, MARCH 31, 2001 ---------------------- NUMERATOR: - ---------- Net income (loss) $7,216 $(1,968) Numerator for basic earnings per share (loss) available to common stockholders 7,216 (1,968) Numerator for diluted earnings per share (loss) available to common stockholders after assumed conversions 7,216 (1,968) DENOMINATOR: Denominator for basic earnings per share - weighted average shares outstanding 11,179,696 9,684,590 Effect of dilutive securities using the treasury stock method as at March 31, 2001 664,291 Warrants Outstanding -- -- 2,142,855 Stock Options Outstanding -- -- Effect of dilutive securities using the treasury stock method as at March 31, 2002 1,539,291Warrants Outstanding 488,856 -- 2,050,237 Stock Options Outstanding 485,171 -- Dilutive potential common shares 974,027 -- Denominator for diluted earnings per share 12,153,723 9,684,590 BASIC EARNINGS (LOSS) PER SHARE $0.65 $(0.20) DILUTED EARNINGS (LOSS) PER SHARE $0.59 $(0.20)
9. 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 March 31, 2002, is goodwill with a net carrying value of $112,000 and $179,000 relating to the acquisitions of ArtToday.com and Keynomics, respectively. OrgPlus goodwill, which was included in this category prior to September 30, 2001, was transferred to capitalized distribution rights in conjunction with the settlement of our software license and distribution agreement with Broderbund and concurrent software assignment, license and distribution agreements with Human Concepts. Upon adoption of SFAS No. 142, we will no longer amortize goodwill related to ArtToday.com, decreasing amortization expense by approximately $81,000 in fiscal 2003. We are required to assess this goodwill for impairment in the year of 18 adoption. We do not expect the adoption of SFAS No. 142 to have a material effect on our financial condition or results of operation. Since we restated 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. 10. GAIN ON EXTINGUISHMENT OF DEBT - --------------------------------------- During the fiscal quarter ended December 31, 2001, we recognized a $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 promissory note payable to Silicon Valley Bank, one of our senior secured creditors. $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 a gain from extinguishment of debt 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. According to the agreement, payments are to be made in four quarterly installments of $177,534 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. 19 These combined transactions resulted into an aggregate extinguishment of debt gain of $7,970,000 for the nine-month period ended March 31, 2002. The tax expense on the gain on extinguishment of debt is approximately $3,183,000 as calculated at our marginal tax rate of 39.94%. This expense will be entirely offset by the net operating loss carryforward. 11. EXECUTIVE EMPLOYMENT AGREEMENT - ------------------------------------- As of April 27, 2002 we entered into a three-year executive employment agreement commencing January 1, 2002, with Martin Wade, which outlined the terms of Mr. Wade's employment by us as Chief Executive Officer of IMSI. As compensation for his services, Mr. Wade is to receive the following: warrants totaling 1,250,000 at an exercise price of $0.35, vesting on March 1, 2003 and expiring five years after the grant date; an additional 2 million warrants upon the sale, merger, or acquisition of at least fifty one percent of the Company's common stock by a single corporate entity at an exercise price representing the average closing price of the Company's stock over the twelve months preceding the execution of a definitive agreement for such sale, merger, or acquisition; an initial bonus of $25,000; an annual bonus for fiscal 2002 of $25,000 if the Company meets its annual plan; two subsequent annual bonuses of $50,000 each if the Company meets its annual plans for fiscal years 2003 and 2004; and the right to participate in the Company's benefit plans. 12. SUBSEQUENT EVENTS: SILICON VALLEY NOTE RESTRUCTURE - ------------------------------------------------------------ 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 provided 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. We had made the first five payments as of March 31, 2002. On April 3, 2002, we amended this agreement whereby we offered to Silicon Valley Bank and Silicon Valley Bank accepted an early payment of the $700,000 balance of the note at a $100,000 discount. The payment of the $600,000 was made on April 5, 2002, on which date Silicon Valley Bank declared all our obligations to them under the revised promissory note, the related ArtToday Security Agreement and the related Pledge Agreement to have been satisfied and therefore released its interest in the collateral securing the note and the note itself. During the quarter ended June 30, 2002, we will recognize an additional gain from forgiveness of debt of $100,000 arising from this transaction as an extraordinary item. 20 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 and previously filed fiscal 2002 Forms 10-QSB/A. 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 March 31, 2002 as filed with the Securities and Exchange Commission on May 20, 2002. We are restating our interim condensed consolidated financial statements for the same period to reflect the modification of our accounting treatment relative to our acquisition of Keynomics' and the DCDC debt conversion to account for these transactions using fair values. All other subsequent events 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. 21 - - 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. - - 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. 22 RECENT EVENTS - -------------- FISCAL QUARTER ENDED MARCH 31, 2002. MERGER TERMINATION On August 31, 2001 IMSI and DCDC entered into an Agreement and Plan of Merger and Reorganization ("Merger Agreement") pursuant to which DCDC was to merge with and into "DCDC Merge, Inc". ("Merger Sub"), a California corporation and a wholly owned subsidiary of IMSI, and Merger Sub was to continue as the surviving corporation. Simultaneously and pursuant to the Merger Agreement, DCDC agreed to purchase for $2,500,000 all rights as lender and holder under a promissory note between Union Bank of California and IMSI in the original principal amount of $3,580,000. On March 1, 2002, we entered into a "Mutual Termination Agreement and Release" with DCDC whereby the Merger Agreement 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. Furthermore 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 $3,580,000 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 acquisition of Keynomics, 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 with Union Bank and subsequent issuance of 9,000,000 IMSI common shares to DCDC. HOWEVER, SINCE THIS TRANSACTION WAS INITIALLY DISCLOSED IN OUR FORM 10-QSB FOR THE PERIOD ENDED MARCH 31, 2002, AND 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. The loss on extinguishment was determined as follows (in thousands, except per share amounts): 23 - -------------------------------------------------------------------------------- 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) =========== - -------------------------------------------------------------------------------- PRIVATE PLACEMENT OF SHARES AND WARANTS EXERCISED During the fiscal quarter ended March 31, 2002, we were successful in raising additional working capital through a private offering of IMSI shares. We offered shares of common stock at $.50 per share to certain investors in a private placement offering to qualified private investors. The money received in the offering, together with additional funds received pursuant to certain warrant exercises (as described below), contributed significantly to our ability to pay off early and at a $100,000 discount the remaining $700,000 principal balance of the Silicon Valley Bank note. This repayment occurred on April 5, 2002. As of March 31, 2002, we had received formal commitment from investors to purchase 1,005,000 shares of IMSI's capital stock at an aggregate purchase price of $502,500. We received funds totaling $417,500 from the subscribers as of the end of the quarter. Subsequently and as of the date of this filing, all committed funds have been received and deposited and all shares have been issued. None of the participants in this private placement, except Mr. John Wade who is our CEO's brother and Mr. Matthew Rexon who is our chairman's cousin, were deemed to be an "affiliate" or a "related party" as defined in the Glossary to Statement of Financial Standards No.57, Related Party Disclosures. The shares related to the offering have not been registered under the Securities Act of 1933 nor have they been registered under the securities laws of any state. The offer and sale of the shares was exempt from registration under section 4(2) of the Securities Act of 1933, and Rule 506 of Regulation D thereunder and exempt from the qualification requirements of state securities laws under the respective rules and regulations of the states in which the shares were being offered and sold. Also, during the fiscal quarter ended March 31, 2002, certain officers and advisors to the company exercised previously issued warrants in the aggregate number of 1,282,500 at exercise prices ranging from $.20 to $.30 (averaging $.25). The proceeds to the company from this warrant exercise totaled $318,750. SILICON VALLEY NOTE RESTRUCTURE 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 provided 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. We had made the first five payments as of March 31, 2002. 24 On April 3, 2002, we amended this agreement whereby we offered to Silicon Valley Bank and Silicon Valley Bank accepted an early payment of the $700,000 balance of the note at a $100,000 discount. The payment of the $600,000 was made on April 5, 2002, on which date Silicon Valley Bank declared all our obligations to them under the revised promissory note, the related ArtToday Security Agreement and the related Pledge Agreement to have been satisfied and therefore released its interest in the collateral securing the note and the note itself. In the next fiscal quarter, we will recognize an additional gain from forgiveness of debt of $100,000 arising from this transaction as an extraordinary item. FISCAL QUARTERS ENDED DECEMBER 31, 2001 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 as 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, 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 25 10,232 shares of IMSI's capital stock, respectively, in exchange for their outstanding promissory notes from Keynomics. Joe Abrams, an IMSI related party, received 287,389 shares in exchange for his outstanding promissory note to Keynomics. Mr. Abrams holds IMSI stock options and warrants, which if exercised, would result in ownership exceeding 5% of the total shares outstanding. The 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 ========== - -------------------------------------------------------------------------------- DEBT RESTRUCTURING Along with the termination of the merger agreement with DCDC and the restructure of the Silicon Valley Bank note, we restructured our remaining outstanding debt as follows: - On July 27, 2001, and as subsequently amended on September 24, 2001 and October 5, 2001, IMSI and Imageline, Inc agreed on the settlement of a) an arbitration award issued in January 2000 in favor of Imageline; and b) a variety of on going issues between the parties involving the intellectual property rights of Imageline. The agreement, effective September 30, 2001, calls for us to provide Imageline a variety of considerations including the following: o The dismissal of any further appeal of the award (which dismissal occurred on October 11, 2001). o 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. o Certain rights to royalties, licenses, and inventories pertaining to our MasterClips line of products. o A percentage of any net recovery we obtain from an indemnification claim we have against a third party associated with the original circumstances leading to the arbitration award. On March 28, 2002 we received a payment in the amount of $300,000 as settlement of all and any claims we had regarding the adverse arbitration award arising from the ImageLine dispute. On April 26, 2002 we made a payment to ImageLine in the amount of $30,000 representing an advance on its share of the net recovery from the indemnification claims. The remaining balance will 26 be paid as soon as information regarding related legal fees necessary to compute the net recovery amount becomes available. - On July 30, 2001 we entered into an agreement with Baystar Capital wherein Baystar agreed to accept $626,000 as settlement of all obligations due totaling $6,260,000. According to the agreement, 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 most 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 believe that the reduction in our liabilities under planned and completed settlements will assist us to become profitable in the future and help provide a remedy to our working capital needs. In addition, we will continue to engage in discussions with third parties concerning the sale or license of non-core product lines; the sale or license of part of our assets; and raising additional capital investment through the issuance of stock and short or long term debt financing. RESULTS OF OPERATIONS - ----------------------- The following tables set forth our results of operations for the three and nine-month periods ended March 31, 2002 and 2001 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: 27
THREE MONTHS ENDED MARCH 31, --------------------------------------- 2002 (restated) 2001 (restated) --------------------------------------- ------------------ $ CHANGE % CHANGE $ AS % $ AS % FROM FROM OF SALES OF SALES PREVIOUS PREVIOUS YEAR YEAR --------------------------------------- ------------------ Net Revenues $3,661 100.0% $3,107 100.0% $ 554 17.8% Product Cost 712 19.4% 720 23.2% (8) -1.1% GROSS MARGIN 2,949 80.6% 2,387 76.8% 562 23.5% Operating Expenses Sales & Marketing 846 23.1% 800 25.7% 46 5.8% General & Administrative 1,114 30.4% 1,047 33.7% 67 6.4% Research & Development 535 14.6% 666 21.4% (131) -19.7% TOTAL OPERATING EXPENSES 2,495 68.2% 2,513 80.9% (18) -0.7% OPERATING INCOME/(LOSS) 454 12.4% (126) -4.1% 580 460.3% Other Income (Expenses) Interest expense (75) -2.0% (572) -18.4% 497 86.9% Interest income 3 0.1% - 0.0% 3 100% Foreign exchange gain 14 0.4% - 0.0% 14 100% Other Income 159 4.3% - 0.0% 159 100% Loss from Stock Issuance (495) -13.5 - 0.0% (495) -100% Gain (loss) on disposal of fixed assets 9 0.2% (6) -0.2% 15 250.0% TOTAL OTHER EXPENSES (385) -10.5% (578) -18.6% 193 33.4% INCOME (LOSS) BEFORE TAX 69 1.9% (704) -22.7% 773 109.8% Income tax expense (benefit) 1 0.0% (14) -0.5% 15 -107.1% NET INCOME (LOSS) $ 68 1.9% $ (690) -22.2% $ 758 109.9%
28
NINE MONTHS ENDED MARCH 31, ----------------------------------- 2002 (restated) 2001 (restated) ----------------------------------- ------------------ $ CHANGE % CHANGE $ AS % $ AS % FROM FROM OF SALES OF SALES PREVIOUS PREVIOUS YEAR YEAR ----------------------------------- ------------------ Net Revenues $9,385 100.0% $ 9,399 100.0% $ (14) -0.1% Product Cost 2,229 23.8% 2,521 26.8% (292) -11.6% GROSS MARGIN 7,156 76.2% 6,878 73.2% 278 4.0% Operating Expenses Sales & Marketing 2,040 21.7% 1,971 21.0% 69 3.5% General & Administrative 3,433 36.6% 3,029 32.2% 404 13.3% Research & Development 1,680 17.9% 2,023 21.5% (343) -17.0% TOTAL OPERATING EXPENSES 7,153 76.2% 7,023 74.7% 130 1.9% OPERATING INCOME/(LOSS) 3 0.0% (145) -1.5% 148 102.1% Other Income (Expenses) Interest expense (547) -5.8% (1,661) -17.7% 1,114 67.1% Interest income 9 0.1% - 0.0% 9 100.0% Foreign exchange gain 15 0.2% - 0.0% 15 100.0% Other Income 239 2.5% - 0.0% 239 -100.0% Loss from Stock Issuance (495) -5.3% - 0.0% (495) -100.0% Gain (loss) on disposal of fixed assets 10 0.1% (9) -0.1% 19 211.1% Gain on sales of product line 20 0.2% 285 3.0% (265) -93.0% Gain from extinguishment of debt 7,970 84.9% - 0.0% 7,970 100.0% Settlement costs - (187) -2.0% 187 100.0% TOTAL OTHER EXPENSES 7,221 76.9% (1,572) -16.7% 8,793 559.4% INCOME (LOSS) BEFORE TAX AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 7,224 77.0% (1,717) -18.3% 8,941 520.7% Income tax expense (benefit) 3 0.0% (21) -0.2% 24 114.3% INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 7,221 76.9% (1,696) -18.0% 8,917 525.8% Cumulative effect of change in accounting principle - 0.0% (285) -3.0% 285 100.0% NET INCOME (LOSS) $7,221 76.9% $(1,981) -21.1% $9,202 464.5%
29 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 nine-month periods ended March 31, 2002 and 2001 are summarized in the following table (in thousands except for percentage amounts):
THREE MONTHS ENDED MARCH 31, NINE MONTHS ENDED MARCH 31, ---------------------------- --------------------------- RESTATED RESTATED RESTATED RESTATED -------- -------- -------- -------- 2002 2001 CHANGES 2002 2001 CHANGES ---- ---- ------- ---- ---- ------- $ % $ % $ % $ % $ % $ % - - - - - - - - - - - - VISUAL DESIGN $1,427 39% $1,306 42% $121 9% $3,371 36% $3,594 38% $(223) -6% GRAPHIC DESIGN 1,340 37% 1,208 39% 132 11% 3,775 40% 4,073 43% (298) -7% BUSINESS APPLICATION & OTHER 937 25% 641 21% 296 46% 2,299 25% 2,114 23% 185 9% PROVISION FOR RETURNS AND REBATES NOT YET RECEIVED (43) -1% (48) -2% 5 -11% (59) -1% (382) -4% 323 -85% - -------------------------------------------------------------------------------------------------------- NET REVENUES $3,661 100% $ 3,107 100% $554 18% $9,385 100% $9,399 100% $ (14) 0% ========================================================================================================
For the fiscal quarter ended March 31, 2002, sales of FloorPlan and TurboCAD increased as compared to the same reporting period in the previous fiscal year. This increase is the result of more focused direct marketing campaigns targeted toward the end users of these products. Sales of IMSI's flagship product, TurboCAD, decreased in the nine-month period ended March 31, 2002 as compared to the same reporting period in the previous fiscal year, resulting in an overall decrease in revenues in the visual design category. The intense competition that characterized the computer-aided design market and the delays in introducing the new version 8.0 of TurboCAD negatively impacted sales of the visual design category in the nine-month period ended March 31, 2002. In the three and nine month periods ended March 31, 2002, revenues in the graphic design category consisted mostly 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 March 31, 2002 from $778,000 to $1,082,000 and from $2,310,000 to $3,012,000 for the nine-months ended March 31, 2002. This increase is the result of more paid subscribers 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 March 31, 2002, approximately $1,044,000 of revenue related to ArtToday.com remained deferred. The following table details the amortization schedule of these deferred revenues for the upcoming year: ARTTODAY.COM DEFERRED REVENUES TO BE RECOGNIZED 4th Quarter of Fiscal 2002 $ 543,000 1st Quarter of Fiscal 2003 $ 296,000 2nd Quarter of Fiscal 2003 $ 162,000 3rd Quarter of Fiscal 2003 $ 43,000 TOTAL $ 1,044,000 30 The decrease in overall revenues in the graphic design category for the nine-month period ended March 31, 2002 is attributable to the steep decline in the revenues from our historically most important revenue producing product line within this category, MasterClips, and to the decline in sales of our Hijaak product line. 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. 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. The 40% increase in ArtToday's revenues in the quarter ended March 31, 2002 as compared to the same quarter from the previous fiscal year more than offset the decreases in the revenues from MasterClips and Hijaak resulting in an overall increase in the revenues derived from the graphic design category. During the quarter ended December 31, 2001, we acquired Keynomics, a company focused on productivity enhancement software. Sales of Keynomics' products contributed $239,000 and $320,000 to the business application and other category during the three and nine-month periods ended March 31, 2002, respectively. Prior to September 30, 2000, our focus had been primarily on our Internet business and our graphic and visual design products. 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 and TurboProject all declined up to March 2001. These factors combined to bring revenues from the business application and other category to an all time low. During the nine month period ended March 31, 2002, however, demand for some of our non-core products in this category such as Flow!, FormTool, OrgPlus and Graphics converter increased. This increased demand along with the $320,000 increase in Keynomics' revenues replaced lost revenues from the sale of Update Now, a Y2K related product that was popular during fiscal 2001, and therefore maintain revenues from the business application and other category at the same level as in the previous fiscal year. Net revenues from domestic sales increased by $626,000 or 23% to $3,377,000 and were 92% of total net revenues for the three-month period ended March 31, 2002. This compares to net revenues from domestic sales of $2,751,000, or 89% of total net revenues, for the comparable period in the previous fiscal year. For the nine month period ended March 31, 2002, net revenues from domestic sales decreased slightly to $8,433,000 and were 90% of total net revenues. This compares to $8,503,000 or 90% of total net revenues, for the comparable period in the previous fiscal year. Net revenues from international sales decreased by $72,000 or 20%, and were $284,000 or 8% of net revenues for the three-month period ended March 31, 2002. This compares to $356,000 or 11% of net revenues for the three months ended March 31, 2001. For the nine month period ended March 31, 2002, net revenues from international sales increased by $55,000 or 6% to $951,000 and were 10% of total net revenues. This compares to $896,000 or 9% of total net revenues, for the comparable period in the previous fiscal year. We are currently serving the domestic and international retail markets using direct sales methods and republishing agreements. In addition, we are increasing our presence in the retail market through selected distribution channels. Low barriers to entry, intense price competition, and business consolidations continue to characterize the consumer software industry. Any one of these factors along with the intermittent unfavorable retail conditions, including erosion of margins from competitive marketing and high rates of product returns, may adversely affect our revenues in the future. 31 PRODUCT COSTS Our product costs include the costs of 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 nine-month periods ended March 31, 2002 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 the product. During the first nine months of fiscal 2002, we capitalized new software development costs in the amount of $292,000 related to purchases made by ArtToday and Keynomics. Amortization of such costs was $478,000, and $1,006,000 in the nine-month periods ended March 31, 2002 and March 31, 2001, respectively. SALES AND MARKETING Our sales and marketing expenses consist primarily of sales and marketing personnel salaries and benefits, commissions, advertising, printing and direct mail expenses. Increase sales and marketing expenses relating to Keynomics' business in part offset decreased commissions paid to our sales force along with reduced advertising expenses and were the primary reasons for the overall increase in sales and marketing expenses in the three and nine months ended March 31, 2002. The steady ratio of sales and marketing expenses as a percentage of net revenues over the three and nine-month periods ended March 31, 2002 reflects our commitment to our core products and ArtToday's online products. GENERAL AND ADMINISTRATIVE Our general and administrative expenses consist primarily of salaries and benefits for employees in the legal, finance, accounting, human resources, information systems and operations departments and fees to our professional advisors. Additional general and administrative expenses relating to the Keynomics' business were the main reason of the increase in general and administrative expenses in the quarter ended March 31, 2002 as compared to the same period from the previous year. For the nine-month period ended March 31, 2002, a one time charge of $211,000 relating to issuance of warrants to outside consultants, totaling 785,000 warrants with an average exercise price of $0.27 and terms of three to ten years, combined with the severance cost of $60,000 payable to one of our former executives and the additional general and administrative expenses relating to the Keynomics' business were the primary causes of the increase in general and administrative expense. 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 nine-month periods ended March 31, 2002 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. Despite this decrease in research and development expenses, we are 32 still committed to sustaining our investment in developing our core products by maintaining strong relationships with our development team in Russia. INTEREST AND OTHER, NET Interest and other expenses, net, include interest and penalties on debt instruments, foreign currency transaction gains and losses, and other non-recurring items. The following table summarizes the components of interest and other, net for the three and nine-month periods ended March 31, 2002 and 2001:
FISCAL QUARTER ENDED MARCH 31, ----------------------------------------------- 2002 2001 (RESTATED) $ $ ----------------------------- ---------------- INTEREST AND OTHER, NET Interest expense $ (75) $ (406) Interest income 3 6 Foreign exchange gain (loss) 14 (37) Penalties -- (135) Other income (336) -- - ------------------------------------- ---------------------------- ---------------- TOTAL $ (394) $ (572) - ------------------------------------- ---------------------------- ---------------- NINE MONTHS ENDED MARCH 31, ----------------------------------------------- 2002 2001 (RESTATED) ----------------------------- ---------------- $ $ ----------------------------- ---------------- INTEREST AND OTHER, NET Interest expense $ (392) $ (1,214) Interest related to warrants issued (65) -- Interest income 9 19 Foreign exchange gain (loss) 15 (61) Penalties (90) (405) Other income (256) -- - ------------------------------------- ---------------------------- ---------------- TOTAL $ (779) $ (1,661) - ------------------------------------- ---------------------------- ----------------
Interest and other expense, net, decreased substantially in the three and nine-month periods ended March 31, 2002, 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 note 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 original merger agreement provided that the note not bear interest except in the event of the termination of the plan of merger. The plan of merger was terminated and the two companies entered into an agreement entitled Promissory Note Conversion and General Release, pursuant to which DCDC converted the entire outstanding principal amount of $3,580,000 and all interest due under the promissory note it had acquired into 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. In the fiscal quarter ended March 31, 2002, Interest and other expense, net, included $159,000 of other income representing the net recovery amount of 33 $164,000 we obtained from indemnification claims we had against third parties associated with the original circumstances leading to the adverse Imageline arbitration award. 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 lines during the nine-month period ended March 31, 2002. During the nine-month period ended March 31, 2001, 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. LOSS ON STOCK ISSUANCE/DCDC DEBT CONVERSION On August 31, 2001, IMSI and DCDC entered into an Agreement and Plan of Merger and Reorganization ("merger agreement") pursuant to which DCDC was to acquire 51% of IMSI. Simultaneously and pursuant to the merger agreement, DCDC purchased for $2,500,000 all rights as lender and holder under the promissory note between Union Bank of California and IMSI with a remaining principal amount of $3,580,000. On March 1, 2002, the merger agreement with DCDC was terminated. In connection with the termination, DCDC agreed to cancel the entire outstanding principal amount of $3,580,000 and all interest due under the Union promissory note 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 from the staff of the Securities and Exchange Commission, 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. The loss on extinguishment was determined as follows (dollars in thousands, except per share amounts): 34 - -------------------------------------------------------------------------------- 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) ================= - -------------------------------------------------------------------------------- GAIN ON EXTINGUISHMENT OF DEBT We did not record any gain from extinguishment of debt during the quarter ended March 31, 2002. On April 3, 2002, we offered to Silicon Valley Bank and Silicon Valley Bank accepted an early payment of the $700,000 balance of their note at a $100,000 discount. The payment of $600,000 was made on April 5, 2002. In the next fiscal quarter, we will recognize an additional gain from extinguishment of debt of $100,000 arising from this transaction. During the fiscal quarter ended December 31, 2001, we recognized a $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 recorded 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. According to the original agreement, 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 extinguishment of debt gain of $7,970,000 for the nine-month period ended March 31, 2002. The tax expense on the gain on extinguishment of debt is approximately $3,183,000 as calculated at our marginal tax rate of 39.94%. This expense will be entirely offset by the net operating loss carryforward. SETTLEMENT COSTS We recorded a charge of $187,000 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 during the current fiscal year. 35 PROVISION FOR INCOME TAXES We did not record a tax benefit in the nine months ending March 31, 2002 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 March 31, 2002, we had $2,352,000 in cash and cash equivalents. This represents a $1,122,000 increase from the $1,230,000 balance at June 30, 2001. Working capital at March 31, 2002 was a negative $4,628,000. This represents an improvement of $9,738,000 over the negative working capital at June 30, 2001 of $14,366,000. The improvement in working capital over the past nine-month period is mainly the result of the decline in current liabilities following the restructuring of our debt combined with an increase in cash of $1,122,000. The increase in cash and cash equivalents during the quarter and the nine-months ended March 31, 2002 resulted primarily from our improved operations and from the cash we raised through the private placement and the warrant exercises, in part offset by our debt payouts. During the quarter ended March 31, 2002 we raised cash through a combination of a private placement and the exercise of warrants by certain executives and senior advisers to the company. Part of the proceeds were subsequently used to pay off the Silicon Valley Bank note at a discount in the beginning of the fourth quarter of fiscal year 2002. Our operating activities generated cash of $1,077,000 and $1,809,000 during the three and nine-month period ended March 31, 2002. The loss from continuing operations before extraordinary items was $749,000 for the nine months ended March 31, 2002. The main items that helped reconcile this loss to the net cash provided by operating activities during the nine-month period ended March 31, 2002 included depreciation and amortization expenses of $1,050,000, increases of accrued interest expenses of $277,000 and a non cash charge of $310,000 related to warrants issued to outside consultants and other third parties. During the quarter ended March 31, 2002 we recovered $300,000 related to indemnification claims we have against third parties associated with the original circumstances leading to the arbitration award. The recovered amount was subsequently offset by expenses totaling $136,000 representing fees related to this matter. Our investing activities during the nine months ended March 31, 2002 consumed $489,000 in cash used mainly in acquiring new domain names necessary to increase traffic to ArtToday's websites, in acquiring new equipment for ArtToday and in acquiring Keynomics during the previous quarter. Our financing activities consumed cash of $193,000 during the nine-month period ended March 31, 2002. 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 original merger agreement with DCDC, DCDC acquired the Union Bank's note in August 2001 and later converted the note into shares of IMSI's common stock. Also during the same period of fiscal 2002, we made payments relating to capital lease obligations of $218,000 and we repaid $500,000 to Silicon Valley Bank pursuant to the new $1.2 million secured promissory note. Subsequently, and during the fourth quarter of fiscal 2002, we paid the remaining balance of the Silicon Valley Bank at a $100,000 discount. We were able to do so after we raised funds in excess of $700,000 through a private placement and the exercise of warrants by certain executives and senior advisers to the company. 36 If we fail to raise additional capital, the negative working capital position could have a material adverse effect on our liquidity in the future. The financial statements have been prepared on a basis that contemplates our continuation as a going concern and the realization of our assets and liquidation of our liabilities in the ordinary course of business. We have an accumulated deficit of $37 million and negative working capital of $4.6 million at March 31, 2002. We also lack sustained profitability across all business segments during 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 repayment of debt and obtain additional financing sufficient to allow us to meet our obligations as they become due and to achieve and maintain 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, remain profitable in the future, and remedy our working capital needs. In addition, we will continue to evaluate raising additional capital investment through the issuance of stock and short or long term debt financing. The forecasted period of time through which 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 had no material commitments for future capital expenditures or material long-term debt at March 31, 2002 except as previously disclosed under the heading "Debt restructuring" regarding long term obligations to Imageline, Baystar Capital and other unsecured creditors. OTHER FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS - ------------------------------------------------------------- Other factors that may cause fluctuations of, or a decline in, operating results in the future include the market factors and competitive factors described in our Fiscal 2001 Form 10-K, under "Future Performance and Additional Risk Factors." Factors that may affect operating results in the future include, but are not limited to: - Market acceptance of our products or those of our competitors - Timing of introductions of new products and new versions of existing products - Expenses relating to the development and promotion of such new products and new version introductions - Intense price competition and numerous end-user rebates - Projected and actual changes in platforms and technologies - Accuracy of forecasts of, and fluctuations in, consumer demand Extent of third party royalty payments 37 - Rate of growth of the consumer software and Internet markets - Timing of orders or order cancellations from major customers - Changes or disruptions in the consumer software distribution channels - Failure of Keynomics to become profitable on a sustained basis - 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. 38 PART II - OTHER INFORMATION --------------------------- ITEM 1. LEGAL PROCEEDINGS Not Applicable ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS On March 1, 2002, we mutually agreed with DCDC to terminate our planned merger and released each other from all duties, rights, claims, obligations and liabilities arising from, in connection with, or relating to, the Merger Agreement signed on August 31, 2001. We also agreed to enter into an agreement entitled Promissory Note Conversion and General Release pursuant to which DCDC agreed to convert the entire outstanding principal amount and all interest due under the Union Bank note into 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. In addition, we raised capital through a private offering of IMSI shares during the fiscal quarter ended March 31, 2002. We offered shares of common stock at $.50 per share in a private placement offering to certain qualified accredited investors. The money received in the offering, together with additional funds received pursuant to certain warrant exercises (as described below), contributed significantly to our ability to pay off early and at a $100,000 discount the remaining $700,000 principal balance of the Silicon Valley Bank note. This repayment occurred on April 5, 2002. As of March 31, 2002, we received formal commitment from investors to purchase 1,005,000 shares of IMSI's capital stock at an aggregate purchase price of $502,500. We received funds totaling $417,500 from the subscribers as of the end of the quarter. Subsequently and as of the date of this filing all committed funds have been received and deposited and all shares have been issued. None of the participants in this private placement, except for Mr. John Wade who is our CEO's brother and Mr. Matthew Rexon who is our chairman's cousin are "affiliates" or a "related parties". The shares related to the offering have not been registered under the Securities Act of 1933 nor have they been registered under the securities laws of any state. The offer and sale of the shares are exempt from registration under section 4(2) of the Securities Act of 1933, and Rule 506 of Regulation D thereunder and exempt from securities qualification and related requirements under the respective rules and regulations of the states in which the shares were being offered and sold. All the investors represented to IMSI that they are accredited investors under Rule 501 of Regulation D. Also, during the fiscal quarter ended March 31, 2002, certain officers and advisors to the company exercised previously issued warrants in the aggregate number of 1,282,500 at exercise prices ranging from $.20 to $.30 (averaging $.25). The proceeds to the company from these warrant exercises totaled $318,750. These transactions resulted in the issuance of 11,117,500 shares of common stock that significantly diluted the 10,212,327 shares of IMSI's capital stock issued and outstanding as of December 31, 2001. The following table details the activity regarding common stock for the quarter ended March 31, 2002. 39
TRANSACTION TYPE GROUP SECURITIES AMOUNT - ------------------------------------------- -------------------------- ------------------ ------------------- SHARES OUTSTANDING AS OF DECEMBER31, 2001 10,212,327 $ 29,737,465 Private placement Accredited investors 835,000 417,500 Debt to equity conversion Related parties 9,000,000 3,330,000 Options issued for consulting services Consultants 41,956 Options exercised Employees and consultants 73,000 14,994 Warrants exercised Executives & advisers to IMSI 1,282,500 318,750 Variable accounting charge Re-priced stock options 16,131 ----------------- ------------------- TOTAL 11,190,500 4,139,331 ----------------- ------------------- SHARES OUTSTANDING AS OF MARCH31, 2002 21,402,827 $ 33,876,796 ----------------- -------------------
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 (a) Exhibits DOCUMENTS INCORPORATED BY REFERENCE (as originally filed with the Security and Exchange Commission on May 20, 2002 on our original Form 10-QSB for the interim period ended March 31, 2002) - Executive Employment Agreement - Martin Wade - Amendment To Restructure Agreement - Silicon Valley Bank 40 The following documents are filed as a part of this Report:
EXHIBIT NUMBER EXHIBIT TITLE PAGE - ------- -------------- ---- 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 (b) Reports on Form 8-K
One report on Form 8-K was filed during the third quarter of fiscal year 2002, on March 13, 2002, to discuss the mutual termination of the plan of merger with DCDC and the resignation of four directors as well as the addition of two new directors to our Board. 41 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) 42 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 43 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) 44 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 Quarterly Report on Form 10-QSB/A for the three and nine-month periods ended March 31, 2002, 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 45 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 three and nine-month periods ended March 31, 2002, 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) 46 -----END PRIVACY-ENHANCED MESSAGE-----