-----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, QNqyQNioF/+qH1lhDnHQqpH9FbloC0PWrM179twFGaGQku+2PvI8euv7RNmvo/gT 2QjKkJZCQxal9EPkhWp30g== 0001144204-03-000438.txt : 20030211 0001144204-03-000438.hdr.sgml : 20030211 20030211085654 ACCESSION NUMBER: 0001144204-03-000438 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030211 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTERNATIONAL MICROCOMPUTER SOFTWARE INC /CA/ CENTRAL INDEX KEY: 0000814929 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 942862863 STATE OF INCORPORATION: CA FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-15949 FILM NUMBER: 03548717 BUSINESS ADDRESS: STREET 1: 75 ROWLAND WAY CITY: NOVATO STATE: CA ZIP: 94945 BUSINESS PHONE: 4158784000 MAIL ADDRESS: STREET 1: 1895 EAST FRANCISCO BLVD CITY: SAN RAFAEL STATE: CA ZIP: 94901 10QSB 1 doc1.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington D.C. 20549 FORM 10-QSB [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended DECEMBER 31, 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 incorporation (I.R.S. or organization) Employer identification No.) 75 ROWLAND WAY, NOVATO, CA 94945 (Address of principal executive offices) (Zip code) (415) 878-4000 -------------- (Registrant's telephone number including area code) Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- As of February 5, 2003, 22,810,732 shares of Registrant's common stock, no par value, were outstanding. Transitional Small Business Disclosure Format: YES NO X --- INTERNATIONAL MICROCOMPUTER SOFTWARE, INC. AND SUBSIDIARIES TABLE OF CONTENTS ----------------- TABLE OF CONTENTS 2 PART I - FINANCIAL INFORMATION 3 ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 3 CONDENSED CONSOLIDATED BALANCE SHEETS 3 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS and COMPREHENSIVE L0SS 4 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY 5 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS 6 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 11 ITEM 3. CONTROLS AND PROCEDURES 17 PART II - OTHER INFORMATION 18 ITEM 1. LEGAL PROCEEDINGS 18 ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 19 ITEM 3. DEFAULTS UPON SENIOR SECURITIES 19 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 19 ITEM 5. OTHER INFORMATION 19 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 19 SIGNATURES 20 EXHIBIT 99.1 24 EXHIBIT 99.2 25 2 PART I - FINANCIAL INFORMATION ------------------------------ ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS INTERNATIONAL MICROCOMPUTER SOFTWARE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share amounts)
(UNAUDITED) ------------------- --------------- DECEMBER 31, 2002 JUNE 30, 2002 ------------------- --------------- ASSETS Current assets: Cash and cash equivalents $ 1,173 $ 2,455 Restricted cash 65 600 Receivables, less allowances for doubtful accounts, discounts and returns of 1,185 798 $329 and $217 Inventories 461 387 Other current assets 677 324 ------------------- --------------- TOTAL CURRENT ASSETS 3,561 4,564 Fixed assets, net 422 390 Other Assets Software development costs and license fees, net 620 931 Domain names, net 651 756 Distribution rights, net 419 491 Goodwill, net 271 271 ------------------- --------------- TOTAL ASSETS $ 5,944 $ 7,403 =================== =============== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Short term debt and current portion of long-term debt 947 $ 1,930 Trade accounts payable 1,444 1,425 Accrued and other liabilities 741 1,329 Accrued arbitration award 253 330 Deferred revenue 1,664 1,309 ------------------- --------------- TOTAL CURRENT LIABILITIES 5,049 6,323 Accrued arbitration award 451 463 Long term debt and other obligations 292 374 ------------------- --------------- TOTAL LIABILITIES $ 5,792 $ 7,160 Shareholders' equity: Common stock, no par value; 300,000,000 authorized; Issued and outstanding 35,257 35,159 22,794,232 and 22,778,899 shares Accumulated deficit (35,078) (34,891) Accumulated other comprehensive loss (27) (25) ------------------- --------------- TOTAL SHAREHOLDERS' EQUITY 152 $ 243 ------------------- --------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 5,944 $ 7,403 =================== ===============
See Notes to Condensed Consolidated Financial Statements 3 INTERNATIONAL MICROCOMPUTER SOFTWARE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE L0SS (In thousands, except per share amounts) (Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED DECEMBER 31, DECEMBER 31, 2002 2001 2002 2001 Net revenues $ 3,570 $ 3,149 $ 6,609 $ 5,724 Product costs 1,203 809 1,770 1,518 -------- -------- -------- -------- GROSS MARGIN 2,367 2,340 4,839 4,206 Costs and expenses: Sales and marketing 913 668 1,706 1,193 General and administrative 960 1,246 2,328 2,319 Research and development 666 537 1,271 1,145 -------- -------- -------- -------- TOTAL OPERATING EXPENSES 2,539 2,451 5,305 4,657 -------- -------- -------- -------- OPERATING LOSS (172) (111) (466) (451) -------- -------- -------- -------- Other income and (expense): Interest and other, net (136) 71 (198) (366) Gain on liquidation of foreign subsidiaries -- -- 42 -- Gain on extinguishment of debt 257 2,243 435 7,970 -------- -------- -------- -------- INCOME (LOSS) BEFORE INCOME TAX (51) 2,203 279 7,153 Income tax provision -- 1 -- 3 -------- -------- -------- -------- NET INCOME (LOSS) $ (51) $ 2,202 $ (187) $ 7,150 Other comprehensive loss, net of tax: Foreign currency translation, net of tax (6) (16) (2) (12) -------- -------- -------- -------- OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX $ (57) $ 2,186 $ (189) $ 7,138 ======== ======== ======== ======== Basic earnings (loss) per share ($0.00) $ 0.22 ($0.01) $ 0.73 Diluted earnings (loss) per share ($0.00) $ 0.21 ($0.01) $ 0.68 Shares used in computing basic earnings (loss) per share information 22,792 9,810 22,792 9,860 Shares used in computing diluted earnings (loss) per share information 22,792 10,417 22,792 10,467
See Notes to Condensed Consolidated Financial Statements 4 INTERNATIONAL MICROCOMPUTER SOFTWARE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Six Months ended December 31, 2002 (In thousands) (Unaudited)
Accumulated Common Stock Other Accumulated Comprehensive Shares Amount Deficit Income (Loss) Total ------------------------------------------------------- BALANCE AT JUNE 30, 2002 22,779 $35,159 ($34,891) ($25) $243 ------------------------------------------------------- Issuance of common stock related to: Settlement of debt 10 8 8 Stock options exercise 5 1 1 Issuance of warrants related to: Employee compensation 259 259 Baystar debt refinancing 184 184 Consulting services rendered 71 71 Reversal of employee warrant amortization (432) (432) Issuance of stock options related to: Consulting services rendered 13 13 Variable accounting adjustment (6) (6) Net loss (187) (187) Foreign currency translation adjustment (2) (2) ------------------------------------------------------- BALANCE AT DECEMBER 31, 2002 22,794 $35,257 $ (35,078) $ (27) $152 =======================================================
See Notes to Condensed Consolidated Financial Statements 5 INTERNATIONAL MICROCOMPUTER SOFTWARE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)
SIX MONTHS ENDED DECEMBER 31, -------------------------------- 2002 2001 -------------- ---------------- Cash flows from operating activities: NET CASH (USED) PROVIDED BY OPERATING ACTIVITIES $ (694) $ 733 -------------- ---------------- Cash flows from investing activities: Purchase of equipment (139) (24) Proceeds from product line and domain name sales 20 Acquisition of subsidiary from related party -- (266) Additions to other assets (40) (8) -------------- ---------------- NET CASH USED BY INVESTING ACTIVITIES (179) (278) -------------- ---------------- Cash flows from financing activities: Accounts Receivable Financing 321 215 Debt repayments (638) (550) Repayment of capital lease obligations (91) (158) Proceeds from issuance of common stock 1 2 -------------- ---------------- NET CASH USED BY FINANCING ACTIVITIES (407) (491) -------------- ---------------- Effect of exchange rate change on cash and cash equivalents (2) (11) Net decrease in cash and cash equivalents (1,282) (47) Cash and cash equivalents at beginning of period 2,455 1,230 -------------- ---------------- CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ 1,173 $ 1,183 ============== ================ Supplemental disclosure of non-cash financing and investing activities: Note payable arising from acquisition of Keynomics $ -- $ 150
See Notes to Condensed Consolidated Financial Statements 6 INTERNATIONAL MICROCOMPUTER SOFTWARE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION --------------------- The interim condensed consolidated financial statements have been prepared from the records of International Microcomputer Software, Inc. and Subsidiaries ("IMSI") without audit. All significant inter-company balances and transactions have been eliminated in consolidation. In the opinion of management, all adjustments, which consist of only normal recurring adjustments, to present fairly the financial position at December 31, 2002 and the results of operations and cash flows as of and for the three and six months ended December 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-KSB for the fiscal year ended June 30, 2002. The results of operations for the three and six months ended December 31, 2002 are not necessarily indicative of the results to be expected for any other interim period or for the full year. 2. SEGMENT INFORMATION ------------------- We have four reportable operating segments based on the sales market. The North America and Other Foreign segments are geographic locations and generate revenues and incur expenses related to the sale of our PC productivity software. The ArtToday.com segment comprises the revenues and expenses related to subscriptions sold through ClipArt.com, Photos.com and RebelArtist.com. The Keynomics segment represents our productivity software subsidiary. The following table details segment information as follows (in thousands):
QUARTER ENDED DECEMBER 31, 2002 ARTTODAY.COM KEYNOMICS NORTH AMERICA OTHER FOREIGN ELIMINATIONS TOTAL - --------------------------------------------------------------------------------------------------------------------------- Net Revenues $ 1,181 $ 447 $ 1,825 $ 117 $ -- $3,570 Operating income (loss) (61) 58 (121) (48) -- (172) Identifiable assets 2,883 261 2,971 (134) (37) 5,944 - --------------------------------------------------------------------------------------------------------------------------- QUARTER ENDED DECEMBER 31, 2001 ARTTODAY.COM KEYNOMICS NORTH AMERICA OTHER FOREIGN ELIMINATIONS TOTAL - --------------------------------------------------------------------------------------------------------------------------- Net Revenues $ 1,043 $ 81 $ 1,887 $ 138 -- $3,149 Operating income (loss) 327 (19) (432) 13 -- (111) Identifiable assets 1,394 252 4,548 (123) (38) 6,033 - --------------------------------------------------------------------------------------------------------------------------- SIX MONTHS ENDED DECEMBER 31, 2002 ARTTODAY.COM KEYNOMICS NORTH AMERICA OTHER FOREIGN ELIMINATIONS TOTAL - --------------------------------------------------------------------------------------------------------------------------- Net Revenues $ 2,221 $ 624 $ 3,486 $ 278 $ -- $6,609 Operating income (loss) 163 (8) (592) (29) -- (466) Identifiable assets 2,883 261 2,971 (134) (37) 5,944 - --------------------------------------------------------------------------------------------------------------------------- SIX MONTHS ENDED DECEMBER 31, 2001 ARTTODAY.COM KEYNOMICS NORTH AMERICA OTHER FOREIGN ELIMINATIONS TOTAL - --------------------------------------------------------------------------------------------------------------------------- Net Revenues $ 1,930 $ 81 $ 3,432 $ 281 -- $5,724 Operating income (loss) 606 (20) (1,069) 32 -- (451) Identifiable assets 1,394 252 4,548 (123) (38) 6,033
7 3. 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 table sets forth the computation of basic and diluted earnings (loss) per share:
THREE MONTHS ENDED SIX MONTHS ENDED --------------------------------- -------------------------- DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 2002 2001 2002 2001 ----------------- ------------ ------------- ------------- NUMERATOR: - ---------- Net income (loss) $ (51) $ 2,202 $ (187) $ 7,150 Numerator for basic earnings per share - loss available to common stockholders $ (51) $ 2,202 $ (187) $ 7,150 Numerator for diluted earnings per share - loss available to common stockholders after assumed conversions $ (51) $ 2,202 $ (187) $ 7,150 DENOMINATOR: - ------------- Denominator for basic earnings per share - weighted average shares outstanding 22,792,261 9,809,876 22,792,391 9,860,325 Effect of dilutive securities using the treasury stock method as at December 31, 2001 Warrants Outstanding -- 428,214 -- 428,214 Stock Options Outstanding -- 178,670 -- 178,670 Effect of dilutive securities using the treasury stock method as at December 31, 2002 Warrants Outstanding -- -- -- -- Stock Options Outstanding -- -- -- -- Dilutive potential common shares -- 606,884 -- 606,884 Denominator for diluted earnings per share - adjusted weighted average shares and assumed conversion 22,792,261 10,416,760 22,792,391 10,467,209 BASIC EARNINGS (LOSS) PER SHARE $ (0.00) $ 0.22 $ (0.01) $ 0.73 DILUTED EARNINGS (LOSS) PER SHARE $ (0.00) $ 0.21 $ (0.01) $ 0.69
8 4. GAIN ON EXTINGUISHMENT OF DEBT ------------------------------ Consistent with our efforts over the past two years, we continue to resolve, on a case by base basis, trade and bank debt. Our efforts resulted in the extinguishment of $337,000 of debt in the quarter ending December 31, 2002 resulting in a gain of $257,000. We are continuing our efforts to resolve our past due liabilities which will likely result in extinguishment gains. Although the number and amount of these settlements is not determined, as of December 31, 2002, we had $314,000 of past due liabilities recorded. The following table details the major settlements we entered into during the three and six-month periods ended December 31, 2002 and 2001 and their effects on our financial statements (in thousands):
GAIN ON BALANCE BALANCE EXTINGUISHMENT BEFORE AFTER OF SETTLEMENT SETTLEMENT DEBT ----------- ----------- ---------- QUARTER ENDED DECEMBER 31, 2002 Digital Creative Development Corporation ("DCDC") $ 107 80 $ 27 Other Unsecured 230 -- 230 ----------- ----------- ---------- TOTAL $ 337 $ 80 $ 257 =========== =========== ========== QUARTER ENDED DECEMBER 31, 2001 Silicon Valley Bank 3,262 1,200 2,062 Other Unsecured 200 20 181 ----------- ----------- ---------- TOTAL $ 3,462 $ 1,220 $2,243 =========== =========== ========== SIX MONTHS ENDED DECEMBER 31, 2002 DCDC 107 80 27 Baystar Capital, LLC 681 597 84 Other Unsecured 491 167 324 ----------- ----------- ---------- TOTAL $ 1,279 $ 844 $ 435 =========== =========== ========== SIX MONTHS ENDED DECEMBER 31, 2001 Silicon Valley Bank 3,262 1,200 2,062 Baystar Capital, LLC 6,256 626 5,631 Other Unsecured 317 40 277 ----------- ----------- ---------- TOTAL $ 9,835 $ 1,866 $7,970 =========== =========== ==========
We entered into an agreement with DCDC, a related party, to settle certain debts owed to them which arose from the termination of our planned merger with DCDC. The settlement agreement called for us to make a certain payments to DCDC creditors in exchange for the elimination of future payments to DCDC. 5. NEW ACCOUNTING STANDARDS - ACCOUNTING FOR GOODWILL -------------------------------------------------- Effective July 1, 2002, we adopted SFAS NO. 142 GOODWILL AND OTHER 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 were effective for business combinations completed after June 30, 2001. Included in our assets at December 31, 2002 and June 30, 2002, is goodwill with a net carrying value of $271,000. Our policy is to review the recoverability of 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. With the adoption of SFAS No. 142 on July 1, 2002, we no longer amortized goodwill. Had we continued to amortize goodwill, we would have incurred amortization expense of approximately $29,000 and $59,000 in the three and six-month periods ended December 31, 2002 as compared to $23,000 and $43,000 which were incurred during the same periods in the prior fiscal year. 9 6. CHANGE IN EXECUTIVE EMPLOYMENT AGREEMENT ---------------------------------------- As disclosed on Form 10-QSB for the period ended September 30, 2002, effective on November 12, 2002, we amended the Employment Agreement between us and Mr. Martin Wade III, our Chief Executive Officer, dated April 27, 2002 whereby both parties agree to the full and complete cancellation of all outstanding warrants granted to Mr. Wade. Furthermore, both parties agreed that upon the sale or merger of IMSI, or the acquisition of at least fifty one percent (51%) of our common stock by a single corporate entity (excluding the ownership of existing stockholders), while Mr. Wade is employed as our Chief Executive Officer, we shall pay him the following: - - 1.75% of the total amount of the transaction for any transaction of at least $1.25 per net share - - 7.5% of the amount of the transaction over $1.25 per net share Such payment shall not be made in preference, but on the equal basis, to any payments made to the common shareholders of IMSI. When the warrants were issued, we recorded $1,037,000 of intrinsic value as a result of the difference between the exercise price of the warrants and the then current market price. We were amortizing this charge over the vesting period of the warrants (twelve months). In the quarter ending December 31, 2002, we reversed the charges related to the amortization of the intrinsic value of these warrants as they were unvested at the time of this amendment. As a result, general and administrative expense was reduced by $432,000 in the quarter ending December 31, 2002. 10 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 2002 Form 10-KSB. This quarterly report on Form 10-QSB, and in particular this "Management's Discussion and Analysis of Financial Condition and Results of Operations," may contain forward-looking statements regarding future events or our future performance. These future events and future performance involve certain risks and uncertainties including those discussed in the "Other Factors That May Affect Future Operating Results" section of this Form 10-QSB, as well as in our Fiscal 2002 Form 10-KSB, 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. CRITICAL ACCOUNTING POLICIES - ---------------------------- In accordance with recent Securities and Exchange Commission guidance, those material accounting policies that we believe are the most critical to an investor's understanding of our financial results and condition have been expanded and are discussed below. Certain of these policies are particularly important to the portrayal of our financial position and results of operations and require the application of significant judgment by our management to determine the appropriate assumptions to be used in the determination of certain estimates. REVENUE RECOGNITION Revenue is recognized in accordance with American Institute of Certified Public Accountants Statement of Position ("SOP") 97-2, Software Revenue Recognition, and SOP 98-9, Modification of SOP 97-2, With Respect to Certain Transactions. Revenue is recognized when persuasive evidence of an arrangement exists (generally a purchase order), product has been delivered, the fee is fixed and determinable and collection of the resulting account is probable. - - Revenue from packaged product sales to resellers and end users is recorded at the time of the sale net of estimated returns. - - Revenue from sales to distributors is recognized when the product sells through to retailers and end users. Sales to distributors permit limited rights of return according to the terms of the contract. - - For software delivered via the Internet, revenue is recorded when the customer downloads the software. - - Subscription revenue is recognized ratably over the contract period. - - Revenue from hybrid products is allocated to the underlying components based on the ratio of the value of each component to the total price and each portion is recognized accordingly. - - Non-refundable advanced payments received under license agreements with no defined terms are recognized as revenue when the customer accepts the delivered software. - - 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 11 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. RESULTS OF OPERATIONS - --------------------- The following table sets forth our results of operations for the three and six months ended December 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: 12
THREE MONTHS ENDED DECEMBER 31, SIX MONTHS ENDED DECEMBER 31, ------------------------------------------------------ -------------------------------------------------- 2002 2001 2002 2001 ------------------ ---------------- ---------------- ---------------- $ % $ CHANGE % CHANGE CHANGE CHANGE $ AS % OF $ AS % OF FROM FROM $ AS % OF $ AS % OF FROM FROM SALES SALES PREVIOUS PREVIOUS SALES SALES PREVIOUS PREV- YEAR YEAR YEAR IOUS YEAR ------------------ ---------------- ------------------ ---------------- ---------------- ---------------- Net revenues $3,570 100.0% $3,149 100.0% $421 13.4% $6,609 100.0% $5,724 100.0% $ 885 15.5% Product cost 1,203 33.7% 809 25.7% 394 48.7% 1,770 26.8% 1,518 26.5% 252 16.6% - ------------------------- ------------------ ---------------- ------------------ ---------------- ---------------- ---------------- GROSS MARGIN 2,367 66.3% 2,340 74.3% 27 1.2% 4,839 73.2% 4,206 73.5% 633 15.0% Operating expenses Sales & marketing 913 25.6% 668 21.2% 245 36.6% 1,706 25.8% 1,193 20.8% 513 43.0% General & administrative 960 26.9% 1,246 39.6% (286) -23.0% 2,328 35.2% 2,319 40.5% 9 0.4% Research & development 666 18.7% 537 17.1% 129 24.0% 1,271 19.2% 1,145 20.0% 126 11.0% - ------------------------- ------------------ ---------------- ------------------ ---------------- ---------------- ---------------- TOTAL OPERATING EXPENSES 2,539 71.1% 2,451 77.8% 88 3.6% 5,305 80.3% 4,657 81.4% 648 13.9% - ------------------------- ------------------ ---------------- ------------------ ---------------- ---------------- ---------------- OPERATING INCOME (LOSS) (172) -4.8% (111) -3.5% (61) 55.3% (466) -7.1% (451) -7.9% (15) 3.3% - ------------------------- ------------------ ---------------- ------------------ ---------------- ---------------- ---------------- Other income (expenses) Interest (expense) (139) -3.9% (65) -2.1% (74) 114.3% (194) -2.9% (472) -8.2% 278 58.9% Interest income 3 0.1% 4 0.1% (1) -32.0% 10 0.1% 6 0.1% 4 64.9% Foreign exchange gain (loss) - 0.0% 12 0.4% (12) -100.0% (14) -0.2% 1 0.0% (15)-1527.3% Other (expense) income - 0.0% 93 3.0% (93) -100.0% - 0.0% 78 1.4% (78) -100.0% Gain (loss) on disposal of fixed assets - 0.0% 8 0.3% (8) -100.0% - 0.0% 1 0.0% (1) -100.0% Gain on sales of product line - 0.0% 20 0.6% (20) -100.0% - 0.0% 20 0.3% (20) -100.0% Gain on liquidation of foreign subs - 0.0% - 0.0% - 0.0% 42 0.6% - 0.0% 42 100.0% Gain from extinguishment of debt 257 7.2% 2,243 71.2% (1,986) -88.5% 435 6.6% 7,970 139.2% (7,535) -94.5% - ------------------------- ------------------ ---------------- ------------------ ---------------- ---------------- ---------------- TOTAL OTHER INCOME (EXPENSES) 121 3.4% 2,315 73.5% (2,194) -94.8% 279 4.2% 7,604 132.8% (7.325) -96.3% - ------------------------- ------------------ ---------------- ------------------ ---------------- ---------------- ---------------- INCOME (LOSS) BEFORE TAX (51) -1.4% 2,203 70.0% (2,254) -102.3% (187) -2.8% 7,153 125.0% (7,340) -102.6% - ------------------------- ------------------ ---------------- ------------------ ---------------- ---------------- ---------------- Income tax expense (benefit) - 0.0% 1 0.0% (1) -100.0% - 0.0% 3 0.1% (3) -100.0% - ------------------------- ------------------ ---------------- ------------------ ---------------- ---------------- ---------------- NET INCOME (LOSS) $ (51) -1.4% $2,202 69.9% $(2,253) -102.3% $ (187) -2.8% $7,150 124.9% (7,337)-102.6% ========================= ================== ================ ================== ================ ================ ================ 13
NET REVENUES - ------------ Net revenues of each of our principal product categories in dollars and as a percentage of total net revenues for the three and six months ended December 31, 2002 and 2001 are summarized in the following table (in thousands except for percentage amounts):
QUARTER ENDED DECEMBER 31, SIX MONTHS ENDED DECEMBER 31, ---------------------------------------------------- -------------------------------------------- 2002 2001 CHANGES 2002 2001 CHANGES ------- ------ -------- ------ ------ --------- $ % $ % $ % $ % $ % $ % - - - - - - - - - - - - VISUAL DESIGN $ 696 20% $ 1,220 39% $(524) -43% $ 1,661 25% $ 2,126 37% $(465) -22% GRAPHIC DESIGN 1,386 39% 1,263 40% 124 10% 2,756 42% 2,318 40% 438 19% BUSINESS APPLICATION & OTHER 1,488 42% 667 21% 821 123% 2,192 33% 1,280 22% 912 71% ---------------------------- ---------------------------------------------------- -------------------------------------------- NET REVENUES $ 3,570 100% $ 3,149 100% $ 421 13% $ 6,609 100% $ 5,724 100% $ 884 15% ============================ ==================================================== ============================================
Sales of FloorPlan and IMSI's flagship product, TurboCAD , decreased in the three and six months ended December 31, 2002 as compared to the same reporting periods in the previous fiscal year, resulting in an overall decrease in revenues in the visual design category. The primary reason for this decrease is the late stage of TurboCAD version 8 in its traditional lifecycle. The comparable quarter from the previous fiscal year included the launch of TurboCAD version 8 while the new version of TurboCAD is due in March 2003. The introduction of TurboCADCAM during fiscal 2003 slightly offset the overall decrease in sales in the visual design category. Overall revenues in the graphic design category increased during the three and six months ended December 31, 2002 as compared to the same periods of the previous fiscal year. The introduction of several new graphics products during fiscal 2003 along with increased subscriptions for graphic content from our wholly owned subsidiary ArtToday.com positively impacted revenues in the graphic design category offsetting a decline in revenues from sales of Hijaak . For the six months ended December 31, 2002, revenues from ArtToday.com were $2.2 Million and represented approximately 81% of total sales in the graphic design category. Sales from ArtToday.com increased 16% from the $1.9 Million recognized during the six-month period ended December 31, 2001. This increase is attributable to a higher number of paid subscribers as a result of a wider range of subscription choices and the introduction of our new subscription service, Photos.com. As ArtToday.com's revenues are based on subscriptions, these amounts are initially deferred and then recognized over the subscription periods, which extend up to twelve months. As of December 31, 2002, approximately $1.2 million of subscription revenue related to ArtToday.com was deferred and will be recognized over the next twelve months. This balance represents an increase of $200,000 as compared to the quarter ended September 30, 2002. During the three and six months ended December 31, 2002, revenues in the business application and other category increased significantly as compared to the same periods in the previous fiscal year. The increase was primarily due to our acquisition of Keynomics, a productivity software provider, in November 2001 and to the introduction during fiscal 2003 of several new software titles (TurboTyping, The Lord of the Rings activity studio series and Legacy Family Tree) to this category. Revenues from Keynomics were $447,000 and $625,000 for the three months and six months ended December 31, 2002, respectively. This compares to $81,000 of revenues from Keynomics recognized during the three and six months ended December 31, 2001. Internationally, we distribute our products through our wholly owned Australian subsidiary and republishing partners in Europe and Asia. The following table details the revenue breakdown between the domestic and international markets for the periods indicated.
QUARTER ENDED DECEMBER 31, SIX MONTHS ENDED DECEMBER 31, ----------------------------------------------------------- -------------------------------------------------- 2002 2001 2002 2001 ------------------- ------------------- ------------------- ------------------ --------------- $ % $ % OF TOTAL $ % OF TOTAL $ CHANGE % CHANGE $ % OF TOTAL $ % OF TOTAL CHANGE CHANGE ------------------- ------------------- ------------------- ------------------ --------------- ------ ------- DOMESTIC SALES $3,290 92% $2,781 88% $ 509 18% $6,015 91% $5,057 88% $ 958 19% INTERNATIONAL SALES 280 8% 368 12% (88) -24% 593 9% 667 12% (74) -11% - ------------------- ------------------- ------------------- ------------------- ------------------ --------------- -------- ------- TOTAL NET SALES $3,570 100% $3,149 100% $ 421 13% $6,609 100% $5,724 100% $ 885 15% =================== =================== =================== =================== ================== =============== ========= ======
We are currently serving the domestic and international retail markets using direct sales methods and republishing agreements. 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. 14 Our international revenues may be affected by the risks customarily associated with international operations, including a devaluation of the U.S. dollar, increases in duty rates, exchange or price controls, longer collection cycles, government regulations, political instability and changes in international tax laws. PRODUCT COSTS - ------------- Our product costs include the costs of diskette and CD-ROM duplication, printing of manuals, packaging and fulfillment, freight-in, freight out, license fees, royalties that we pay to third parties based on sales of published software and amortization of capitalized software acquisition and development costs. Costs associated with the return of products, such as refurbishment and the write down in value of returned goods are also included in product costs. The increase in product costs in absolute dollars and as a percentage of net revenues for the three months ended December 31, 2002 as compared to the same periods from the previous fiscal year was primarily attributable to increased royalty expenses and to a change in product mix. GROSS MARGIN - ------------ During the quarter ended December 31, 2002, gross margin declined to 66% from 74% in the comparable quarter from the previous fiscal year. Gross margin remained flat at 73% in the six months ended December 31, 2002 as compared to the same period in the previous fiscal year. This decrease in gross margin is mainly attributable to a additional royalty expenses, sales returns and provisions and a shift in our product mix towards the business application and other segment from the visual design segment. The Keynomics margin contribution and the slightly improved gross margin from ArtToday.com partially offset the decrease in our aggregate gross margin. Given the uncertain product lifecycle for some of our historically high margin products and depending on the success of newer versions launches, we may see our gross margin decline further in future reporting periods. SALES AND MARKETING - ------------------- Our sales and marketing expenses consist primarily of salaries and benefits of sales and marketing personnel, commissions, advertising, printing and direct mail expenses. The increase in sales and marketing expenses during the three and six-month periods ended December 31, 2002 as compared to the same periods in the previous fiscal year is primarily due to the addition of sales and marketing expenses related to Keynomics' business which was acquired November 29, 2001. The additional sales and marketing expenses relating to Keynomics accounted for $115,000 and $255,000 for the three months and six months ended December 31, 2002, respectively. Sales commissions and consulting fees, in part offset by reductions in direct marketing expenses also accounted for increase in sales and marketing expenses for the three and six months ended December 31, 2002 as compared to the same periods from the previous fiscal year. GENERAL AND ADMINISTRATIVE - -------------------------- Our general and administrative expenses consist primarily of the salaries and benefits for employees in the legal, finance, accounting, human resources, information systems and operations departments and fees to our professional advisors. The decrease in general and administrative expenses during the three and six months ended December 31, 2002 as compared to the same period from the previous fiscal year was mainly the result of the reversal of $432,000 of amortization of the intrinsic value of warrants issued, but unvested, to our Chief Executive Officer, Mr. Martin Wade III. On November 12, 2002, we amended Mr. Wade's Employment Agreement whereby IMSI and Mr. Wade agree to the full and complete cancellation of all outstanding warrants granted to Mr. Wade. RESEARCH AND DEVELOPMENT - ------------------------ Our research and development expenses consist primarily of salaries and benefits for research and development employees and payments to independent contractors. The increase in research and development in the three and six months ended December 31, 2002 as compared to the same periods in the previous fiscal year is mainly the result of additional research and development expenses related to the Keynomics business as we only consolidated their expenses for the month of December in the previous fiscal year. Increased development and localization expenses relating to our upcoming product releases, primarily TurboCAD version 9, also accounted for the increase in our overall research and development expenses. 15 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. Interest and other expense, net, decreased in the six months ended December 31, 2002, as compared to the same period from the previous fiscal year. The decrease in interest expense is mainly the result of the restructuring of our bank debt during fiscal 2002. On July 30, 2001 we entered into an agreement with Baystar, wherein Baystar agreed to accept $626,000 as settlement of all obligations due. Payments were to be made in four quarterly payments beginning September 30, 2002. Interest was 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. On September 30, 2002, we amended the July 2001 agreement with Baystar whereby Baystar accepted $600,000 payable over six months beginning October 1, 2002. The amendment also called for us to issue 250,000, ten-year warrants to purchase IMSI common stock at $0.50 per share. Interest expense included $92,000 relating to the amortization of these warrants during the quarter ended December 31, 2002. PROVISION FOR INCOME TAXES - -------------------------- We have not recorded a tax benefits for domestic tax losses because of the uncertainty of realization. We adhere to Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes," which requires an asset and liability approach to financial accounting and reporting for income taxes. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- As of December 31, 2002, we had $1,173,000 in cash and cash equivalents. This represents a $1,282,000 decline from the $2,455,000 balance at June 30, 2002 and $136,000 decline from the $1,309,000 balance at September 30, 2002. Working capital at December 31, 2002 was a negative $1,488,000. This represents an improvement over both the negative working capital at June 30, 2002 of $1,759,000 and at December 31, 2001 of $9,498,000. The improvement in working capital over the previous six months occurred as we further reduced our current liabilities through payments to creditors and restructuring of debt. Our operating activities used cash of $694,000 during the six months ended December 31, 2002. This compares to a positive cash flow generated from operations of $733,000 in the six months ended December 31, 2001. The increase in inventory levels and accounts receivable contributed to the usage of cash in the six months ended December 31, 2002. Inventory increased as a function of higher sales and demand for some of our products that was not as high as expected. Accounts receivable increased primarily due to the Keynomics' division as its collection cycle is longer than the other business segments Our investing activities consumed cash of $179,000 and $278,000 during the six months ended December 31, 2002 and 2001 principally to maintain our computer infrastructure. These investments, mainly ArtToday.com related, are consistent with our strategy to grow that division and position it among the leading content providers over the Internet. Investment activities during the comparable period of the previous fiscal year related primarily to the acquisition of Keynomics. Our financing activities consumed net cash of $407,000 and $491,000 for the six-month periods ended December 31, 2002 and 2001, respectively, as we continued to make scheduled payments to BayStar on our renegotiated note and further reduced our total debt. As discussed above, in October 2002, we acquired software necessary to support the growth in ArtToday.com's business. This software purchase was partially financed by the vendor and secured by a $65,000 standby letter of credit from Wells Fargo Bank which in turn required cash collateral in the form of 16 certificate of deposit to be deposited with them. These certificates of deposits were classified on our balance sheet as restricted cash as of December 31, 2002. Historically, we have 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. To support future growth, we may seek additional equity and/or debt financing. However, we believe that we have sufficient funds to support our operations at least for the upcoming twelve months, based on our current cash position and other potential credit and equity sources. If we continue to improve our financial performance, we believe that we will be able to obtain any additional financing required. In addition, we will continue to engage in discussions with third parties concerning the sale or license of our remaining non-core product lines and/or the sale or license of part of our assets. The forecast 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. Furthermore, any additional equity financing may be dilutive to shareholders, and debt financing may involve restrictive covenants. If we fail to raise capital when needed, the lack of capital will have a material adverse effect on our business, operating results and financial condition. 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 2002 Form 10-KSB, under "Risk Factors." Factors that may affect operating results in the future include, but are not limited to: - Market acceptance of our products or those of our competitors - Timing of introductions of new products and new versions of existing products - Expenses relating to the development and promotion of such new products and new version introductions - Intense price competition and numerous end-user rebates - Projected and actual changes in platforms and technologies - Accuracy of forecasts of, and fluctuations in, consumer demand - Extent of third party royalty payments - Rate of growth of the consumer software and Internet markets - Timing of orders or order cancellation from major customers - Changes or disruptions in the consumer software distribution channels - 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. 17 PART II - OTHER INFORMATION ----------------------------- ITEM 1. LEGAL PROCEEDINGS IMAGELINE, INC. VS. INTERNATIONAL MICROCOMPUTER SOFTWARE, INC. - -------------------------------------------------------------- Please refer to Form 10-QSB for the quarter ended September 30, 2002 for previous disclosure regarding this litigation. The following is an update from that disclosure. On November 19, 2002, IMSI participated in a court ordered settlement conference before Magistrate Judge Spero, but no resolution was reached. On November 27, 2002, Magistrate Judge Zimmerman entered an order ruling that Imageline could not execute on the original judgment settled by the parties' Settlement Agreement absent a showing that IMSI had breached that agreement, but that the record before the court was insufficient to determine the issues and required further proceedings. Accordingly, the court denied both Imageline's motion for turnover of ArtToday.com stock and an assignment of all of IMSI's receivables, and IMSI's motion to quash and recall all writs of execution and levies, ordering that the stay of execution was to remain in effect pending the further proceedings. On December 6, 2002, the court entered a scheduling order setting forth a limited discovery and briefing schedule, and setting an evidentiary hearing for February 14, 2003 to determine whether Imageline could establish its allegations that IMSI had breached the Settlement Agreement and, if so, the effect of such a showing on the parties' rights and responsibilities under the Settlement Agreement. On December 27, 2002, IMSI filed a request for hearing on the motion filed in IMSI's separate civil action against Imageline and George Riddick seeking permission from the court to deposit or inter-plead all payments due under the Settlement Agreement with the court pending final determination of IMSI's complaint. The court set the matter for hearing on January 8, 2003 and, after taking the matter under submission, denied IMSI's motion by order entered on January 22, 2003. At the January 8, 2003 hearing, Imageline requested a postponement of the February 14, 2003 evidentiary hearing set by the court for an indeterminate period of up to six months. On January 22, 2003, the court entered an order pursuant to a stipulation between the parties vacating the February 14, 2003 evidentiary hearing, and quashing and recalling in their entirety all writs of execution and vacating all levies thereunder. The court further ordered that the stay of execution on the judgment remain in effect as to any breaches of the Settlement Agreement that Imageline alleged IMSI committed prior to September 1, 2002. The court has set the matter for a case management conference on February 14, 2003 to determine the status of the proceedings and Imageline's ability to go forward with the postponed evidentiary hearing. In IMSI's separate civil action against Imageline and George Riddick in the Eastern District of Virginia seeking injunctive and declaratory relief with respect to certain alleged copyright infringements, on January 17, 2003, United States District Court Judge James Spencer granted Imageline's motion to transfer venue to the United District Court for the District of Arizona, Tucson Division. SORRENTINO VS. DIGITAL CREATIVE DEVELOPMENT CORPORATION, ET AL. - --------------------------------------------------------------- On August 28, 2002, we were served with a complaint filed on or about June 28, 2002 in the Supreme Court of the state of New York, county of New York. The complaint was filed by Ralph Sorrentino, an individual, and RJS Consulting Corp., a New York corporation, against DCDC, a Delaware corporation; DCDC, a Utah corporation, (together "DCDC"), IMSI, and several individuals who were or are directors of these companies, including Mr. Martin Wade, Mr. Bruce Galloway, Mr. Donald Perlyn, Mr. Evan Binn, Mr. Gary Herman, Mr. Skuli Thorvaldsson, and Mr. Sigurdur Jon Bjornsson. By a settlement agreement dated October 30, 2001, the plaintiffs and defendants DCDC settled an arbitration proceeding for breach of contract arising out of the April 2001 termination of Mr. Sorrentino as President and Chief Executive Officer of DCDC and the termination of an executive consulting agreement with RJS Consulting Corp. The complaint alleges that DCDC breached the settlement agreement by a) failing to make certain required payments in a timely fashion; b) failing to provide medical coverage and turn over certain medical records; c) making disparaging remarks about plaintiffs; and d) failing to adhere to provisions in the settlement relating to security for payments to be made to plaintiffs. The complaint also alleges that the defendants in this case, both individually and as agents and employees of defendants DCDC and IMSI, conspired to commit a fraud upon plaintiffs by devising a plan to make ineffective the 18 security for payments to be made to plaintiffs, so that DCDC could ultimately default on its financial obligations to the plaintiffs, leaving the plaintiffs without any effective financial recourse under the settlement agreement. The August 2002 complaint seeks, among other things, a) compensatory and punitive damages; b) a constructive trust on all of the shares of IMSI stock owned by DCDC and on all of the assets of IMSI; c) an order requiring DCDC to specifically perform their obligations under the settlement agreement, and either provide plaintiffs with a security interest in the assets of IMSI or the shares of IMSI stock held by DCDC; and d) a preliminary and permanent injunction enjoining defendants from transferring the shares of IMSI owned by DCDC and transferring the assets of IMSI, other than in the ordinary course of business, until the obligations of DCDC under the settlement have been satisfied. As previously reported, the portion of the complaint against IMSI seeking a constructive trust on all of our assets has been dismissed. On January 10, 2003, we filed a response to the complaint. We continue to believe that this case, as it relates to IMSI, lacks merit, and we will continue to vigorously defend the matter. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS Not Applicable ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not Applicable ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not Applicable ITEM 5. OTHER INFORMATION As previously disclosed, refer to note 6 to our financial statements for amendments to our Employment Agreement with our Chief Executive Officer, Mr. Martin Wade III. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K EXHIBITS: - --------- The following documents are filed as a part of this Report: EXHIBIT 99.1 Certification of Chief Executive Officer Pursuant to Section 906, - ------------ of the Sarbanes-Oxley Act of 2002 EXHIBIT 99.2 Certification of Chief Financial Officer Pursuant to Section 906, - ------------ of the Sarbanes-Oxley Act of 2002 REPORTS ON FORM 8-K - ------------------- On December 26, 2002, we filed a Form 8-K to disclose the details of our acquisition of Keynomics, Inc. 19 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: February 11, 2003 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) 20 CERTIFICATION OF CHIEF EXECUTIVE OFFICER UNDER SECTION 302 OF THE SARBANES-OXLEY ACT I, Martin Wade, III, certify that: 1. I have reviewed this quarterly report on Form 10-QSB 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: February 11, 2003 By: /s/ Martin Wade, III Martin Wade, III Director & Chief Executive Officer 21 CERTIFICATION OF CHIEF FINANCIAL OFFICER UNDER SECTION 302 OF THE SARBANES-OXLEY ACT I, William J. Bush, certify that: 1. I have reviewed this quarterly report on Form 10-QSB 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: February 11, 2003 By: /s/ William J. Bush William J. Bush Chief Financial Officer (Principal Accounting Officer) 22 INDEX TO EXHIBITS: The following documents are filed as a part of this Report:
EXHIBIT NUMBER EXHIBIT TITLE PAGE - ------- ------------- ---- 99.1 Certification of Chief Executive Officer Pursuant to Section 906, of the Sarbanes-Oxley Act of 2002 25 99.2 Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 26
23 EX-99.1 3 doc3.txt EXHIBIT 99.1 ------------ 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 for the three-month period ended December 31, 2002, as filed by the Company with the Securities and Exchange Commission (the "Quarterly 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: February 11, 2003 By: /s/ Martin Wade, III Martin Wade, III Director & Chief Executive Officer 24 EX-99.2 4 doc4.txt EXHIBIT 99.2 ------------ 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 for the three-month period ended December 31, 2002, as filed by the Company with the Securities and Exchange Commission (the "Quarterly 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: February 11, 2003 By: /s/ William J. Bush William J. Bush Chief Financial Officer (Principal Accounting Officer) 25 -----END PRIVACY-ENHANCED MESSAGE-----