-----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, DvCuQE6loPS3yPfqQ8ZUDyc/fSqJi5TiqjxVxQxdyqAOpsAIzdBD9ivxLZ4Pdz/U vjwxzZ/DRMqKnveppv9jXg== 0001144204-03-005808.txt : 20030925 0001144204-03-005808.hdr.sgml : 20030925 20030925060223 ACCESSION NUMBER: 0001144204-03-005808 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 20030630 FILED AS OF DATE: 20030925 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: 10KSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-15949 FILM NUMBER: 03909081 BUSINESS ADDRESS: STREET 1: 75 ROWLAND WAY CITY: NOVATO STATE: CA ZIP: 94945 BUSINESS PHONE: 4158784000 MAIL ADDRESS: STREET 1: 75 ROWLAND WAY CITY: NOAVTAO STATE: CA ZIP: 94945 10KSB 1 form10ksb.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-KSB [X] Annual Report under section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended JUNE 30, 2003 [ ] Transition report under Section 13 or 15(d) of the Exchange Act of 1934 For the Transition Period from _____ to _____ Commission File No. 0-15949 INTERNATIONAL MICROCOMPUTER SOFTWARE, INC. (Name of Small business issuer in its charter)
CALIFORNIA 94-2862863 - ------------------------------------------------------------- -------------------------------------------------- (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) 75 ROWLAND WAY, NOVATO, CALIFORNIA 94945 - ------------------------------------------------------------- -------------------------------------------------- (Address of principal executive offices) (Zip code) (415) 878-4000 - ------------------------------------------------------------- Issuer's telephone number
Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, NO PAR VALUE Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [ ] Issuer's revenues for its most recent fiscal year. $8,932,000 The aggregate market value of the voting and non-voting common stock held by non-affiliates computed by reference to the average bid and asked price of the common stock as of SEPTEMBER 22, 2003 was approximately $31,283,892. As of SEPTEMBER 22, 2003, 23,173,253 Shares of Issuer's common stock, no par value, were outstanding. DOCUMENTS INCORPORATED BY REFERENCE None 1 INTERNATIONAL MICROCOMPUTER SOFTWARE, INC. FORM 10-KSB ANNUAL REPORT FOR THE YEAR ENDED JUNE 30, 2003 TABLE OF CONTENTS
PART I 3 - --------------------------------------------------------------------------------------------------------------------------------- ITEM 1- DESCRIPTION OF BUSINESS 3 ITEM 2- DESCRIPTION OF PROPERTY 7 ITEM 3- LEGAL PROCEEDINGS 7 ITEM 4- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 8 PART II 8 - --------------------------------------------------------------------------------------------------------------------------------- ITEM 5- MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 8 ITEM 6- MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION 8 ITEM 7- FINANCIAL STATEMENTS 18 ITEM 8- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 38 ITEM 8A- CONTROLS AND PROCEDURES 38 PART III 38 - --------------------------------------------------------------------------------------------------------------------------------- ITEM 9- DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT 38 ITEM 10- EXECUTIVE COMPENSATION 40 ITEM 11- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS 42 ITEM 12- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 43 ITEM 13- EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K 44 ITEM 14- PRINCIPAL ACCOUNTANT FEES AND SERVICES 45 SIGNATURES 46 - --------------------------------------------------------------------------------------------------------------------------------- POWER OF ATTORNEY 47 - --------------------------------------------------------------------------------------------------------------------------------- INDEX TO EXHIBITS 48 - ---------------------------------------------------------------------------------------------------------------------------------
2 PART I FORWARD-LOOKING INFORMATION This Annual Report of International Microcomputer Software, Inc ("IMSI" or the "Company") on Form 10-KSB contains forward-looking statements, particularly those identified with the words, "anticipates," "believes," "expects," "plans," and similar expressions. These statements reflect management's best judgment based on factors known at the time of such statements. The reader may find discussions containing such forward-looking statements in the material set forth under "Legal Proceedings" and "Management's Discussion and Analysis and Plan of Operations," generally, and specifically therein under the captions "Liquidity and Capital Resources" as well as elsewhere in this Annual Report on Form 10-KSB. Actual events or results may differ materially from those discussed herein. ITEM 1- DESCRIPTION OF BUSINESS BUSINESS DEVELOPMENT IMSI was incorporated in California in November 1982. Our mission is to develop and publish PC software applications, and since our founding we have become a leading developer and publisher of productivity software in the precision design and other related business applications fields. Our corporate headquarters are in Novato, California and we maintain a branch office in Australia. In August 2001, Digital Creative Development Corporation ("DCDC") entered into a merger agreement with IMSI. This merger was approved by the directors of DCDC and was subject to DCDC shareholder approval. It was also approved by the directors of IMSI and 52% of the outstanding shareholders of IMSI. Upon signing of the merger agreement, Mr. Martin Wade III, a director and CEO of DCDC, became CEO of IMSI, four of our five directors resigned and the entire board of directors of DCDC was appointed to the IMSI board of directors. In November 2001, we acquired Keynomics from DCDC, which focused on productivity enhancement software. Keynomics provides ergonomic and keyboard training for worker-enhanced safety, productivity and ergonomic compliance improvements thru its proprietary software system, "The KeySoft Performance System". Keynomics' mission is to reduce corporate keyboarding costs and risks and provide significant long-term savings through ergonomic and productivity training and awareness. In February 2002, we entered into a "Mutual Termination Agreement and Release" with DCDC whereby the proposed merger 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. In June 2003, we sold ArtToday, Inc ("ArtToday"), our wholly owned subsidiary based in Arizona, to Jupitermedia Corporation ("Jupiter") for a combination of cash, restricted stock and two-year earn-outs. Under Generally Accepted Accounting Principles ("GAAP") in the United States, ArtToday's operating results have been accounted for as discontinued operations. The following table presents net revenues and operating income as included in continuing and discontinued operations: FISCAL YEAR 2003 2002 ---- ---- Net Revenue Continued Operations $ 8,932 $ 8,484 Discontinued Operations 5,249 4,152 14,181 12,636 ====== ====== Operating income (loss) Continued Operations (2,610) (1,803) Discontinued Operations 1,265 1,271 ($1,345) ($532) ======= ===== 3 OVERVIEW OF OUR BUSINESS We have pursued the objective of developing and publishing PC graphics, design, and business applications software. Our best-known product families include TurboCAD and FloorPlan in the precision design category, and MasterClips, OrgPlus and Keynomics in the business applications category. PRINCIPAL PRODUCTS PRECISION DESIGN Our precision design products accounted for 42% and 52% of our net revenues in fiscal 2003 and 2002, respectively. Our precision design products include the following: o TURBOCAD(R) is a top-selling Computer Aided Design ("CAD") software product that allows a user to create precision drawings, with over 1 million units sold. It offers comprehensive functionality for the technical professional combined with ease-of-use for the novice user. TurboCAD is used by architects, engineers, and contractors in small and medium-sized businesses, as well as by workgroups within many large corporations such as Pennzoil, Dow Chemical, Bechtel, Babcock & Wilcox, Houston Power & Lighting, and Motorola. o FLOORPLAN 3D(R) is a software tool for residential and commercial space layout that allows a user to create, view, and walk through plans in three dimensions with photo-realistic rendering. FloorPlan 3D has received numerous industry awards such as PC Magazine's Editors Choice Award, and has sold over 1 million units. o TURBOCADCAM integrates our popular, award winning computer-aided design program with powerful computer-aided machining capabilities. This seamless integration of CAD, CAM and CNC is designed to immediately increase machine shop and manufacturer profits and productivity. BUSINESS APPLICATIONS AND OTHER Our business applications and other products include art images, photographs, video clips, animations and fonts stored in electronic form that enhance communication by making online, onscreen and printed output more visually appealing and other business graphics and general office products. These products accounted for 58% and 48% of net our revenues in fiscal 2003 and 2002 respectively. Our business applications products include the following: o CLIPART & MORE, ANIMATIONS & MORE are large collections of top-quality, royalty-free images, animations, videos, fonts, sounds and images in a variety of categories. The included media is useful to a wide range of customers such as individuals making printed announcements in their home, and professional graphic artists designing brochures for clients. o MASTERCLIPS is a collection of top-quality, royalty-free images for use in personal projects such as advertising, brochures, newsletters, postcards, and more. o HIJAAK is a professional graphics toolkit that allows users to convert, manage and view over 115 graphics file formats including 3D and full Postscript files. o FLOWCHARTS & MORE enables general business users to create a wide variety of diagrams, including flowcharts, organization charts, timelines, block diagrams, geographic maps, and marketing charts. o ORGPLUS is an application designed for creating professional organization charts. OrgPlus completely automates chart creation so that no drawing or manual positioning of boxes is required. o TURBOPROJECT is a project management tool that allows users to create and manage a project schedule, allocate resources and establish and track project budgets. o FORMTOOL(R) is a forms automation product that allows users to design and print personal forms quickly, or choose from over 400 pre-built templates. o LORD OF THE RINGS ACTIVITY STUDIO allows the user to experience the movie magic of J.R.R. Tolkien's best selling Fellowship of the Ring books. The software includes movie stills, and lets the user print themed calendars, posters, party kits, and more. o EZLANGUAGE is a tool for learning over 16 languages, including Spanish, French, German, Russian, English, Italian, Japanese, Korean, and more. Perfect for beginners, business travelers, and others wishing to learn a new language or sharpen existing skills. o KEYNOMICS produces ergonomic and keyboard training applications for worker-enhanced safety, productivity and ergonomic compliance improvements. 4 DISTRIBUTION METHODS INTERNET- A key emphasis of our sales strategy is to significantly increase the marketing of our products via the Internet. We sell from our own websites, as well as through strategic partnerships with online resellers and service bureaus. REPUBLISHING- In March 2000, we executed an agreement with ValuSoft to republish and sell our software products to major retailers in North America. Under this agreement, ValuSoft performs the manufacturing, assembly, packaging, sales and distribution of our products to retailers. In return we receive guaranteed royalty payments, which totaled $1,241,000 in the year ending June 30, 2003. In fiscal year 2004 we have chosen to begin reselling these products directly, and will assume most of the licensing rights. We have similar exclusive republishing agreements internationally. Our republishers for certain portions of Europe are MediaGold; Sumitomo Metals Ltd. and Rock International in Japan; and Mindscape France for France and certain portions of Europe and Africa. Several international republishing agreements call for minimum guaranteed royalty payments, which totaled $655,000 in the year ending June 30, 2003. DIRECT MAIL- We conduct direct mail campaigns, both postal and email for new IMSI products and upgrades of existing products, as well as third-party offers. These mailings generally offer a specially priced product, as well as complementary or enhanced products for a further charge. RETAIL- We are increasing our presence in the retail market through selected distribution channels for a number of our products in order to reach a wider range of end users. However, intense price competition along with the intermittent unfavorable retail conditions, including erosion of margins from competitive marketing and high rates of product returns make this distribution channel increasingly challenging. CORPORATE- We believe that certain of our products, particularly TurboCAD, TurboProject, OrgPlus and HiJaak, are well suited for use within large corporations. Over the past year, we have sold site licenses to large companies, including Fortune 100 companies. We market to these corporations through a combination of telemarketing, direct mail, and e-mailing. COMPETITIVE BUSINESS CONDITIONS The PC software industry and the Internet are highly competitive and characterized by several key factors: o Rapid changes in technology and customer requirements - New opportunities for existing and new competitors can quickly render existing technologies less valuable. o Relatively low barriers to entry - Startup capital requirements for software companies can be very small, and software distribution over the Internet is inexpensive and easily outsourced. o Significant price competition - Direct distribution of competing products over the Internet may cause prices and margins to decrease in traditional sales channels. o Consolidations and mergers - Software companies and their individual products have a high rate of mergers, product line sales, and other transfers and consolidation. These factors could have a material adverse effect on our future operating results, including reduced profit margins and potential loss of market share. Each of our major software products competes with one or more products from other major independent software vendors. Our main products and their primary competition are listed in the following table: 5
IMSI PRODUCT COMPETING PRODUCTS COMPETITOR - ------------ ------------------ ---------- TurboCAD AutoCAD AutoDesk Inc. FloorPlan 3D Architect Broderbund Home Architect Sierra Online Home Design Suite Punch Software MasterClips, ClipArt & More, Animations & More ArtExplosion Nova Development Photo ClipArt Hemera Big Box of Art Hemera Designer ClipArt GlobalStar Software OrgPlus Visio Microsoft
Approximately 65% of our revenues were derived from sales in the above product lines for fiscal year 2003 as compared to 74% in fiscal year 2002. A decline in sales or a decline in the gross margin on one or more of these products could worsen our results of operations. We may be more vulnerable to market declines and competition in the markets for such products than companies with more diversified sources of revenues. DEPENDENCE ON MAJOR CUSTOMERS No single customer accounted for greater than 10% of our revenues in fiscal year 2003 or 2002. PROPRIETARY RIGHTS AND LICENSES We acquired the technology for TurboCAD in 1985, FloorPlan Design Suite in 1990, Hijaak in 1995 and KeySoft in 2001. Our ability to compete effectively depends in part on our ability to develop and maintain proprietary aspects of our technology. We take certain steps to protect our technology: o We rely on a combination of copyrights, trademarks, trade secret laws, restrictions on disclosure, and transferring title and other methods. o We enter into confidentiality or license agreements with our employees and consultants, and control access to and distribution of our documentation and other proprietary information. o We provide our products to end users under non-exclusive licenses, which generally are non-transferable and have a perpetual term. Software companies face a number of risks relating to technology. In particular, we have identified several factors that present the greatest technology risk to us: o We make source code available for some products. The provision of source code may increase the likelihood of misappropriation or other misuse of our intellectual property. o We license all of our products pursuant to shrink-wrap licenses or Internet click-wrap licenses that are not signed by licensees and therefore may be unenforceable under the laws of certain jurisdictions. o We hold no patents, and existing copyright and trade secret laws afford only limited protection. o It may be possible for a third-party to copy or otherwise obtain and use our products or technologies without authorization, or to develop similar technologies independently. There can be no assurance that the steps taken by us will prevent misappropriation or infringement of our technology. In addition, litigation may be necessary to protect our trade secrets or to determine the validity and scope of the proprietary rights of others. Litigation presents several additional risk factors to us: o Litigation could result in substantial costs and diversion of resources that could have a material adverse effect on our business, operating results and financial condition. o As the number of software products in the industry increases and the functionality of these products further overlaps, software developers and publishers may increasingly become subject to infringement claims. 6 o If any valid claims or actions were asserted against us, we might seek to obtain a license under a third party's intellectual property rights. There can be no assurance, however, that under such circumstances a license would be available on commercially reasonable terms, or at all. From time to time we have received, and may receive in the future, notice of claims of infringement of other parties' proprietary rights. Although we investigate claims and respond as we deem appropriate, there can be no assurance that infringement or invalidity claims (or claims for indemnification resulting from infringement claims) will not be asserted or prosecuted against us. GOVERNMENTAL REGULATION Our products are not subject to approval from the United States government, with the exception of export restrictions to certain countries. Our business operations do not fall under Federal, State, or local environmental regulations. We do not anticipate current or future government regulation to have a material adverse effect on our capital expenditures, earnings, or competitive position. PRODUCT DEVELOPMENT Our research and development expenses totaled $1.5 million and $1.5 million in each of fiscal 2003 and 2002. The majority of our development costs are focused in the TurboCAD and FloorPlan product lines, both of which are internally developed. Other products which we bring to market are primarily comprised of technology that is licensed from third parties. During fiscal year 2003, the following new products and versions were released: PRODUCT DEVELOPMENT METHOD RELEASE DATE ------- ------------------ ------------ Resume Builder Licensed April 2003 TurboCAD V9.0 Internal March 2003 FlowCharts & More Internal February 2003 Lord of the Rings Licensed December 2002 Legacy Family Tree Licensed November 2002 Animations & More Internal October 2002 ClipArt & More Internal July 2002 We generally create product specifications and manage the product development and quality assurance process from our offices in Novato, California. Most program coding and quality testing for internally developed products is performed using contract programmers in development centers in Russia. Contract programmers located outside the United States are usually dedicated on a full-time basis to our products. EMPLOYEES As of June 30, 2003, we had 41 employees, all of whom are located in the United States with the exception of 1 employee in Australia. In addition, we have approximately 25 software developers working as contractors in Russia under a software development contract. None of our employees are represented by a labor union and we have experienced no work stoppages. Our success depends to a significant extent upon the performance of our executive officers, key technical personnel, and other employees. ITEM 2- DESCRIPTION OF PROPERTY Our principal facilities are located in Novato, California occupying approximately 5,000 square feet of office space for IMSI and 1,000 square feet for Keynomics, in separate structures. Both facilities are leased on a month-to-month basis, with no specified end date or future obligation. We also occupy approximately 350 square feet of leased office space in Alexandria, Australia from which we conduct our Australian sales operations. ITEM 3- LEGAL PROCEEDINGS We have no pending litigation as of the date of this filing. 7 ITEM 4- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not Applicable. PART II ITEM 5- MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The following table sets forth the quarterly high and low sales prices of the common stock for fiscal 2003 and fiscal 2002, as quoted on the OTCBB. Such prices represent prices between dealers and do not include retail mark-ups, markdowns or commissions and may not represent actual transactions. HIGH LOW ---- --- FISCAL YEAR 2002 First Quarter $0.42 $0.15 Second Quarter 0.65 0.15 Third Quarter 0.97 0.35 Fourth Quarter 1.27 0.76 FISCAL YEAR 2003 First Quarter $1.01 $0.64 Second Quarter 0.79 0.51 Third Quarter 0.67 0.43 Fourth Quarter 0.85 0.40 On June 30, 2003, there were approximately 1,093 registered holders of record of the common stock. We believe that additional beneficial owners of our common stock hold shares in street names. We have not paid any cash dividends on our common stock and do not plan to pay any such dividends in the foreseeable future. Our Board of Directors will determine our future dividend policy on the basis of many factors, including results of operations, capital requirements and general business conditions. ITEM 6- MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION The following information should be read in conjunction with the consolidated financial statements and the notes thereto contained elsewhere in this report. This annual report on Form 10-KSB, and in particular this "Management's Discussion and Analysis and Plan 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. 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 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. Our significant accounting policies are more fully described in Note 1 to our consolidated financial statements. 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. 8 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. o Revenue from packaged product sales to resellers and end users is recorded at the time of the sale net of estimated returns. o 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. o For software delivered via the Internet, revenue is recorded when the customer downloads the software. o Revenue from post contract customer support (PCS) is recognized ratably over the contract period. o Training fees are recognized when the service is performed. o Subscription revenue is recognized ratably over the contract period. o 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. o Non-refundable advanced payments received under license agreements with no defined terms are recognized as revenue when the customer accepts the delivered software. o 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. o 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. o Revenue from Original Equipment Manufacturer (OEM) contracts is recognized upon completion of our contractual obligations. 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. As of June 30, 2003, approximately $47,000 of our inventory was held by certain of our distributors under consignment arrangements. IMPAIRMENT 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 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 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. In accordance with SFAS No. 142, Goodwill and Intangible Assets, we will assess the underlying goodwill for impairment annually or more frequently if circumstances indicate impairment. 9 SIGNIFICANT EVENTS DURING FISCAL 2003 The following discussion and analysis provides information which our management team believes relevant to an assessment and understanding of our results of operations and financial condition. The following main events impacted our financial condition during this fiscal year and will have a significant influence on our condition in future reporting periods. SALE OF ARTTODAY TO JUPITER On June 25, 2003, we entered into an agreement with Jupiter to sell all issued and outstanding shares of the capital stock of ArtToday, our wholly owned subsidiary based in Arizona and focused on web based delivery of clipart, photos, flash objects, animations, fonts and other graphic content. The transaction closed on June 30, 2003. The sales price included the following consideration; o $13 million cash of which $1.3 million is being held in escrow for a period of up to eighteen months, o 250,000 restricted shares of Jupiter common stock all of which is being held in escrow until December 30, 2005, and o An earn-out that could result in an additional $4 million during the next two fiscal years. As a result of this sale, we recognized, during fiscal 2003, a gain from discontinued operations, net of income tax, of $12,237,000. SETTLEMENT OF LITIGATION - IMAGELINE INC. V IMSI 0n April 18, 2003, we reached a final settlement of all outstanding claims with Imageline, Inc. relating to a July 2001 settlement agreement. Under the terms of the restructured settlement agreement, we agreed to the following: o An immediate payment of $621,750 o A promissory note for $178,250 plus simple interest of 10% per annum due on or before April 18, 2004. On June 10, 2003, we amended the amount of this note to $160,000 if payment were made on or before July 7, 2003. The amendment also called for us to pay $5,000 immediately. Subsequent to fiscal year end, we made the $160,000 payment in full satisfaction of this note. o Licensing and republishing rights to certain intellectual property o The issuance of 600,000 fully vested three year warrants with a strike price of $0.46 per share to purchase the Company's common stock In return, the restructured settlement ends all litigation between the parties, eliminates an existing judgment against us, and removes a lien on certain of our assets. The licenses granted in this settlement agreement will not negatively affect our ongoing operations and will allow us to end an expensive and time consuming legal dispute. As a result of this settlement we recognized an additional non-operating charge of approximately $415,000 in the fiscal year ended June 30, 2003. FIVE-YEAR, 15% SECURED PROMISSORY NOTES, WITH WARRANTS ATTACHED In March 2003, we initiated a private placement of five-year, 15% secured promissory notes to accredited investors. We were successful in raising $805,000. Purchasers of the notes also received warrants to purchase IMSI's common stock at the rate of one warrant for each $2.00 of principal of the notes. These warrants have a strike price of $0.45 and will expire on June 30, 2006. The notes were secured by the pledge of the common stock of ArtToday. None of the participants in these private placements, except our Chief Financial Officer, Mr. William J. Bush and Mr. Joseph Abrams (an IMSI related party as a former beneficial owner of IMSI Common Stock) who participated in the amounts of $80,000 and $50,000 respectively and received 40,000 and 25,000 warrants to purchase shares of IMSI's stock respectively, were deemed to be an "affiliate" or a "related party" as defined in Statement of Financial Accounting Standards No.57, "Related Party Disclosures". The offering was conducted directly by IMSI. Proceeds of the offering were intended to retire existing debt, purchase of and/or license of digital content and software assets and fund general working capital needs. 10 Concurrent with the sale of ArtToday on June 30, 2003, we repaid the notes in full with an early repayment penalty of 2% which was $16,000. TERMINATION OF ORGPLUS AGREEMENTS On April 1, 2003, we amended our original license and distribution agreement dated November 1, 2001 between IMSI and Human Concepts whereby we gave up the right to distribute the OrgPlus product to resellers and end users after June 30, 2003 in exchange for the forgiveness of approximately $110,000 of royalties that were due and additional discounts on future royalties totaling $270,000. We however retained the right to distribute and resell the OrgPlus product on an exclusive basis to one of our distributors until December 31, 2003, at which date such rights also terminate. SUBSEQUENT EVENTS DESIGNCAD PRODUCT LINE ACQUISITION On July 29, 2003, we entered into an agreement to purchase the tangible and intangible assets of Upperspace Corporation ("Upperspace"), an Oklahoma corporation, constituting its DesignCAD line of products, several learning aids, and various smaller design programs. The purchase price included the following consideration: o $700,000 cash (of which $100,000 to be held in escrow for a period of 12 months) o $300,000, 5% simple interest, promissory note payable 12 months from the date of closing o An earn-out that could result in an additional $300,000 during the next three fiscal years o A license pursuant to which Upperspace shall act for a period as the exclusive distributor of the purchased products to retail outlets, and a non-exclusive reseller of the product through direct sales channels such as the internet, email, telephone and fax. CADKEY ACQUISITION On August 22, 2003, we entered into an agreement to purchase substantially all the assets of CADKEY Corporation ("CADKEY") a Massachusetts corporation. CADKEY owns the CADKEY line of products and several smaller design programs. The proposed purchase price was $2,500,000 and the assumption of CADKEY customer obligations. The sale of the assets is conditioned upon court approval pursuant to Section 363 of the U.S. Bankruptcy Code. CADKEY filed a voluntary petition under Chapter 11 of the Bankruptcy Code on August 22, 2003 in the U.S. Bankruptcy Court in Worcester, Massachusetts. CADKEY will continue to manage its business operations as "debtor in possession". CADKEY anticipates filing a motion in the Bankruptcy Court as soon as practical seeking approval of the sale to IMSI and requesting the approval hearing be set no later than October 20, 2003. As required by the Bankruptcy Code, CADKEY will also file a motion asking the Court to establish bidding procedures in the event other parties also wish to submit offers to purchase its assets. If no overbids are submitted, or if IMSI bids over any other bids submitted, IMSI will complete the purchase of substantially all of the CADKEY assets and assumption of customer obligations immediately after the October hearing. DCDC 15% NOTE On September 18, 2003, we entered into a 15% one-year note with DCDC whereby we loaned them $350,000. The note is due, with interest, on September 18, 2004. The note is secured by 400,000 shares of our stock held by DCDC. The agreement also calls for DCDC not to sell any other IMSI common stock which it holds, with the exception of private sales of IMSI common stock, until February 15, 2004. Concurrent with this note, DCDC repaid the entire principal portion of a $50,000 note, made in favor of IMSI on February 25, 2003. That note, due on February 25, 2004 was unsecured and carried a 4% interest rate. The interest payable, amounting to $1,162, is outstanding as of the filing and is due and payable on February 18, 2004. 11 RESULTS OF OPERATIONS The following table sets forth our results of operations for the fiscal years ended June 30, 2003 and 2002 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. These numbers exclude amounts attributable to ArtToday for Fiscal 2003 and 2002 as they have been included under the caption "Income from Discontinued Operations, Net of Income Tax". 12
FISCAL YEAR ENDED JUNE 30, -------------------------------------------------- 2003 2002 CHANGE -------------------- ----------------------- ----------------------- AS % OF AS % OF $ INCREASE/ $ SALES $ SALES (DECREASE) % -------- ----- -------- -------- -------- -------- Net Revenues $ 8,932 100.0% $ 8,484 100.0% $ 448 5.3% Product Costs 3,989 44.7% 2,738 32.3% 1,251 45.7% -------- ----- -------- -------- -------- -------- GROSS MARGIN 4,943 55.3% 5,746 67.7% (803) -14.0% Operating Expenses Sales & Marketing 2,957 33.1% 2,509 29.6% 448 17.9% General & Administrative 3,082 34.5% 3,536 41.7% (454) -12.8% Research & Development 1,514 17.0% 1,504 17.7% 10 0.7% -------- ----- -------- -------- -------- -------- TOTAL OPERATING EXPENSES 7,553 84.6% 7,549 89.0% 4 0.1% OPERATING LOSS (2,610) -29.2% (1,803) -21.3% (807) 44.8% Other Income (Expenses) Interest and Other, Net (891) -10.0% (342) -4.0% (549) 160.5% Early Extinguishment of Debt -- 0.0% (495) -5.8% 495 -100.0% Gain (Loss) on Sales of Assets (41) -0.5% 25 0.3% (66) -264.0% Gain on Extinguishment of Debt 769 8.6% 10,456 123.2% (9,687) -92.6% -------- ----- -------- -------- -------- -------- TOTAL OTHER INCOME (EXPENSES) (163) -1.9% 9,644 113.7% (9,807) -101.7% INCOME (LOSS) BEFORE INCOME TAX (2,773) -31.1% 7,841 92.4% (10,614) -135.4% Income tax (Expense) (7) -0.1% (54) -0.6% 47 -87.0% -------- ----- -------- -------- -------- -------- NET INCOME (LOSS) FROM CONTINUING OPERATIONS (2,780) -31.2% 7,787 91.8% (10,567) -135.7% -------- ----- -------- -------- -------- -------- Income from Discontinued Operations, Net of Income Tax 1,211 13.6% 1,330 15.7% (119) -8.9% Gain from Discontinued Operations, Net of Income Tax 12,237 137.0% -- 0.0% 12,237 -------- ----- -------- -------- -------- -------- NET INCOME $ 10,668 119.4% $ 9,117 107.5% $ 1,551 17.0% -------- ----- -------- -------- -------- --------
13 NET REVENUES Net revenues of each of our principal product categories in dollars and as a percentage of total net revenues for the last two fiscal years are summarized in the following table (in thousands except for percentage amounts):
FISCAL YEAR ENDED JUNE 30, 2003 2002 CHANGE ---- ---- ------ $ % $ % $ % ------ ------ ------ ------ ------ ------ Precision Design 3,725 42% 4,418 52% (693) -16% Business Applications and Other 5,207 58% 4,066 48% 1,141 28% - ------------------------------------ ------ ------ ------ ------ ------ ------ NET REVENUES 8,932 100.0% 8,484 100.0% 448 5% - ------------------------------------ ------ ------ ------ ------ ------ ------
Declines in the precision design category are primarily due to the timing of the launch of the new version of TurboCAD(R) 9.0 which was introduced in March 2003. With the launch of version 8 in December 2001, the comparable periods from the previous fiscal year included the effect of the newly released product during six months as compared to only four month's effect for TurboCAD(R) 9.0. The introduction of TurboCADCAM during fiscal 2003 slightly offset the overall decrease in sales in the precision design category. The increase in revenues in the business application and other category during the fiscal year ended June 30, 2003, as compared to the prior fiscal year, was primarily due to the increased contribution from Keynomics, our wholly owned productivity software provider which we acquired in November 2001 and to the introduction during fiscal 2003 of several new software titles (TurboTyping, The Lord of the Rings activity studio series, Legacy Family Tree, QuickVerse Essential and other third party products) to this category. Revenues from Keynomics were $1,147,000 and $320,000 for the fiscal years ended June 30, 2003 and 2002, respectively. Also, the introduction of several new graphics products during fiscal 2003, including ClipArt & More(R) and Animations & More(R) which are gradually replacing the MasterClips brand positively impacted revenues in the business application and other category. We expect these new products to generate additional revenue going forward and we plan to release new products in this category in fiscal year 2004. Internationally, we distribute our products through our wholly owned Australian and German subsidiaries and republishing partners in Europe and Asia. During Fiscal 2003, we stopped the liquidation of our German subsidiary with a petition to the German Court which allowed us to utilize the wholly owned subsidiary to sell directly into the European Union. The following table details the revenue breakdown between the domestic and international markets for the periods indicated.
- ------------------------------------------------------------------------------------------------------------------ FISCAL YEAR ENDED JUNE 30, 2003 2002 ---- ---- $ % OF TOTAL $ % OF TOTAL $ CHANGE % CHANGE - ------------------------------------------------------------------------------------------------------------------ Domestic sales $7,518 84% $7,273 86% $ 245 3% International sales 1,414 16% $1,211 14% 203 17% - ------------------------------------------------------------------------------------------------------------------ TOTAL NET SALES $8,932 100% $8,484 100% $ 448 5% - ------------------------------------------------------------------------------------------------------------------
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. 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. RESERVE FOR RETURNS, PRICE DISCOUNTS AND REBATES During fiscal year 2003 we provided $807,000 for returns and received actual returns of approximately $511,000. The return reserve balance as of June 30, 2003 of $379,000 is consistent with the level of our estimate of excess inventory in the channel. 14 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 increase in product costs in absolute dollars and as a percentage of net revenues in fiscal 2003 as compared to fiscal 2002 was primarily attributable to a shift in product mix towards products with a higher cost relative to sales price, and increases in royalty expenses. 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 fiscal year 2003, we capitalized $20,000 of additional software development costs. Amortization of existing costs was $216,000 and $662,000 in the twelve-month periods ended June 30, 2003 and June 30, 2002, respectively. GROSS MARGIN The decrease in gross margin during Fiscal 2003 as compared to the previous fiscal year is mainly attributable to the increased royalty expenses we incurred during the year from republishing third party products and to the shift in our product mix towards the "business application and other" segment from the higher margin "precision design" segment as a result of less than expected sales in the precision design segment. The higher margin contribution from Keynomics' business partially offset the decrease in our aggregate gross margin in the fiscal year ended June 30, 2003. 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 EXPENSES Our sales and marketing expenses consist primarily of sales and marketing personnel salaries and benefits, commissions, advertising, printing and direct mail expenses. The increase in sales and marketing expenses during fiscal 2003 as compared to fiscal 2002 is due to a combination of factors: o The additional sales and marketing expenses related to Keynomics' business. We incurred sales and marketing expenses relating to Keynomics for the entire fiscal year versus only seven months in the previous fiscal year since the acquisition was not effective before November 29, 2002. o The additional sales and marketing expenses related to our German subsidiary. We did not incur similar charges during the previous fiscal year. o The increased consultant expenses related to sales and marketing. We believe that this investment will generate increased revenues going forward, and is an indication of our continuing commitment to our core products. GENERAL AND ADMINISTRATIVE EXPENSES 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, fees to our professional advisors, rent and other general operating costs. Despite the increase in legal and accounting fees during Fiscal 2003 and the increase in payroll and related expenses necessary to attract and retain talent, general and administrative expenses decreased as compared to the same period in Fiscal 2002. This decrease was primarily due to the following: o The absence of significant charges relating to warrants issued to outside consultants. In fiscal year 2002, we incurred a charge of $211,000 relating to the issuance of warrants to outside consultants, totaling 785,000 warrants with an average exercise price of $0.27 and exercise terms of three to ten years, combined with a charge of $172,000 relating to the issuance of warrants to one of our officers. o The reversal during Fiscal 2003 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 agreed to the full and complete cancellation of all outstanding warrants granted to Mr. Wade. 15 o A decrease in goodwill amortization expense of approximately $241,000 due to the discontinuance of the amortization of goodwill, as required by SFAS No. 142. RESEARCH AND DEVELOPMENT EXPENSES 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 remained flat in the twelve-month period ended June 30, 2003 as compared to the previous fiscal year. We continue to maintain a consistent investment in existing and new products. The constant ratio of research and development expenses as a percentage of sales reflects our commitment to investing in and developing our core products as well as maintaining strong relationships with our development team in Russia. INTEREST AND OTHER EXPENSE, NET Interest and other expenses, net, include interest expense and penalties on debt instruments, interest income, foreign currency transaction gains and losses, and other non-recurring items. The following table summarizes the components of interest and other, net for fiscal 2003 and 2002;
FISCAL YEAR ENDED JUNE 30, 2003 2002 CHANGE - -------------------------------------------------------------------------------------- INTEREST AND OTHER EXPENSE, NET Interest (expense) $(485) $(497) $ 12 Penalties -- (90) 90 Interest Income 11 12 (1) Foreign Exchange Gain 60 34 26 Gain (Loss) on Liquidation of Foreign Subs 46 54 (7) Other Income (Expense) (523) 146 (669) - -------------------------------------------------------------------------------------- TOTAL $(891) $(341) $(550) - --------------------------------------------------------------------------------------
Other income (expense) relate mainly to charges we recognized while settling various disputes. During fiscal 2003 theses charges related mainly to settle the Imageline and the Sorrentino litigations which amounted to $415,000 and $60,000 respectively. During Fiscal 2002, we recognized a gain of $164,000 representing the net recovery amount we obtained from indemnification claims we had against third parties associated with the original circumstances leading to the adverse Imageline arbitration award, in part offset by an $18,000 charge relating to settlement of a dispute with one of our vendors. EARLY EXTINGUISHMENT OF DEBT During fiscal 2002, we incurred a $495,000 charge relating to the loss on the conversion of notes payable to DCDC into IMSI stock. GAIN (LOSS) ON SALE OF ASSETS During Fiscal 2003 we terminated our distribution agreement with Human Concepts relating to the OrgPlus product line and we consequently incurred a $41,000 loss on sale of assets. During fiscal 2002, we sold the rights to the VisualCADD 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. GAIN ON EXTINGUISHMENT OF DEBT During fiscal 2003, we recognized a $763,000 gain on forgiveness of debt as a result of settlements with various unsecured creditors who accepted our payoff offers for discounted amounts averaging 10% of the face values of these claims. During fiscal 2002, we recognized a $10.5 million gain on forgiveness of debt as a result of the following items: o $2.2 million was related to the forgiveness of a portion of the principal and accrued interest on a note held by Silicon Valley Bank. 16 o $5.7 million related to the forgiveness of debt to Baystar Capital o $2.6 million related to other unsecured creditors who accepted our offer to settle all their claims at a 90% discount on average. INCOME FROM DISCONTINUED OPERATIONS AND GAIN FROM DISCONTINUED OPERATIONS On June 25, 2003, we entered into an agreement with Jupiter to sell all issued and outstanding shares of the capital stock of ArtToday, Inc., our wholly owned subsidiary based in Arizona focused on web based delivery of clipart, photos flash objects, animations, fonts and other graphic content. The transaction closed on June 30, 2003. The sales price included the following consideration: o $13 million cash of which $1.3 million is being held in escrow for a period of up to eighteen months, o 250,000 restricted shares of Jupiter common stock all of which is being held in escrow until December 30, 2005, and o An earn-out that could result in an additional $4 million during the next two fiscal years. As a result of this sale we recognized a gain of $12,237,000, net of income tax of $247,000, during fiscal year 2003. Additionally, we recognized $1,211,000 as income from discontinued operations, which was derived from the ArtToday segment, net of income tax of $24,000. PROVISION (BENEFIT) FOR INCOME TAX Our effective tax rate from continuing operations was 2.65% and 0.52% in fiscal 2003 and fiscal 2002, respectively. We have provided a valuation allowance of $15,966,000 as of June 30, 2003 due to the uncertainty of realizing deferred tax assets, consisting primarily of loss carry forwards. The income tax expense for fiscal year 2003 is primarily related to the gain on the sale of ArtToday. The income tax expense recognized in fiscal year 2002 is due to the alternative minimum taxes generated from our current year debt settlements payable to the state of California. LIQUIDITY AND CAPITAL RESOURCES Our cash and cash equivalents increased by $7,944,000 to $10,399,000 at June 30, 2003 from $2,455,000 at June 30, 2002. Working capital improved to a positive $8,656,000 at June 30, 2003 from a negative $1,759,000 at June 30, 2002. Total shareholder's equity improved from $243,000 in fiscal 2002 to $11,261,000 in fiscal 2003. The sale of ArtToday accounted for most of these improvements. Our operating activities used cash of $986,000 during Fiscal 2003. This compares to a positive cash flow generated from operations of $1,841,000 during Fiscal 2002. Our increased operating loss, combined with the increase in accounts receivable, contributed to the usage of cash during Fiscal 2003. The decline in our profitability both on the gross margin level and operating income level during Fiscal 2003 as compared to the previous fiscal year and additional working capital needed to invest in accounts receivable and to reduce our trade accounts payable explains the transition from a positive to a negative operating cash flow. Our investing activities provided net cash of $10,099,000 during Fiscal 2003 and used net cash of $480,000 during fiscal 2002. The sale of our wholly owned subsidiary accounted for the majority of the cash provided from our investing activities during Fiscal 2003. The proceeds from the ArtToday sales were in part offset by investments we made in equipment and software development as well as investments we made into the ArtToday business during Fiscal 2003. Our financing activities used $1,132,000 and $104,000 in cash during fiscal 2003 and 2002 respectively. The cash was mainly used to repay various debts and notes outstanding including amounts owed to DCDC and Baystar as well as various lease obligations and other notes that were held by ArtToday's creditors. During March 2003, we initiated, through a private placement to accredited investors, an offering of five-year 15% secured promissory notes with warrants attached. We raised $805,000 in the offering. Purchasers of the notes also received warrants to purchase IMSI's common stock at the rate of one warrant for each $2.00 of principal of the notes. These warrants have a strike price of $0.45 and will expire on June 30, 2006. None of the participants in these private placements, except our Chief Financial Officer, Mr. William J. Bush and Mr. Joseph Abrams (an IMSI related party as a 17 former beneficial owner of IMSI common stock) who participated in the amounts of $80,000 and $50,000 respectively and received 40,000 and 25,000 warrants to purchase shares of IMSI's stock respectively, were deemed to be an "affiliate" or a "related party" as defined in Statement of Financial Accounting Standards No.57, "Related Party Disclosures". Concurrent with the sale of ArtToday on June 30, 2003 (which stock was pledged as collateral for this transaction), we repaid the notes in full with an early repayment penalty of 2% which was $16,000. In June 2002, we entered into two loan agreements with Bank of Marin for $500,000 and $100,000, both of which matured on July 10, 2002. The notes carried a 3% interest rate and were 100% secured by deposits held at the bank. These deposits were classified as restricted cash as of June 30, 2002. Both notes were repaid in full on the maturity date and the deposit accounts, which were assigned to the bank as collateral for the loans, were released. Subsequent to the end of fiscal year 2003, we made payment relative to a note that arose from our final settlement with Imageline. The payment of $160,000 was made on July 7, 2003 against a full and final satisfaction of our obligation under the settlement agreement. Historically, we have financed our working capital and capital expenditure requirements primarily from retained earnings, short-term and long-term notes and 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 until the end of our next fiscal year, based on our current cash position and equity sources. If we continue to improve our financial performance, we believe that we will be able to obtain any additional financing required at competitive terms. In addition, we will continue to engage in discussions with third parties concerning the sale or license of certain product lines and/or the sale or license of part of our assets. To achieve our growth objectives, we are considering different strategies, including growth through mergers and/or acquisitions. As a result, we are evaluating other companies and businesses for potential synergies that would add value to our existing operations. 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. We have no material commitments for capital expenditures except for those required to support the normal operating activities. As of June 30, 2003, we have no material long-term debt. Over the next five years, we have capital lease obligations totaling $85,000, and $30,000 of obligations related to operating leases. ITEM 7- FINANCIAL STATEMENTS Documents filed as part of this annual report on Form 10-KSB: Financial Statements Independent Auditors' Report for the years ended June 30, 2003, and 2002 Consolidated Balance Sheet at June 30, 2003 Consolidated Statements of Operations for the years ended June 30, 2003 and 2002 Consolidated Statements of Shareholders' Equity for the years ended June 30, 2003 and 2002 Consolidated Statements of Cash Flows for the years ended June 30, 2003 and 2002 Notes to Consolidated Financial Statements 18 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Board of Directors and Shareholders International Microcomputer Software, Inc. We have audited the accompanying consolidated balance sheets of International Microcomputer Software, Inc. and subsidiaries (the "Company") as of June 30, 2003 and the related consolidated statements of operations and comprehensive income, shareholders' equity, and cash flows for each of the two years in the period ended June 30, 2003. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of International Microcomputer Software, Inc. and subsidiaries as of June 30, 2003, and the consolidated results of their operations and their consolidated cash flows for each of the two years in the period ended June 30, 2003, in conformity with accounting principles generally accepted in the United States of America. Grant Thornton LLP San Francisco, California September 12, 2003 19 INTERNATIONAL MICROCOMPUTER SOFTWARE, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (In thousands, except share amounts)
JUNE 30, 2003 ------------- ASSETS Current assets: Cash and cash equivalents $ 10,399 Receivables, less allowances for doubtful accounts, discounts and returns of $445 734 Inventories, net 268 Other current assets 240 -------- TOTAL CURRENT ASSETS 11,641 FIXED ASSETS, NET 85 Intangible Assets Capitalized software, net 87 Domain names, net 4 Distribution rights, net 36 Goodwill 179 -------- TOTAL INTANGIBLE ASSETS 306 Other assets: Investment in securities 998 Assets related to discontinued operations 1,300 -------- TOTAL OTHER ASSETS 2,298 -------- TOTAL ASSETS $ 14,330 -------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Short term debt 304 Trade accounts payable 564 Accrued Payroll 709 Income taxes payable 271 Accrued Royalties 239 Accrued and other liabilities 593 Deferred revenue 305 -------- TOTAL CURRENT LIABILITIES 2,985 Liabilities related to discontinued operations 84 -------- TOTAL LIABILITIES 3,069 Shareholders' Equity Common stock, no par value; 300,000,000 authorized; 23,148,253 issued and outstanding 35,546 Accumulated deficit (24,223) Accumulated other comprehensive loss (62) -------- TOTAL SHAREHOLDERS' EQUITY 11,261 -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 14,330 --------
See Notes to Consolidated Financial Statements 20 INTERNATIONAL MICROCOMPUTER SOFTWARE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (In thousands, except per share amounts)
12 MONTHS ENDED JUNE 30, 2003 2002 ---- ---- Net revenues $8,932 $8,484 Product costs 3,989 2,738 ------------------------------------ GROSS MARGIN 4,943 5,746 COSTS AND EXPENSES: Sales and marketing 2,957 2,509 General and administrative 3,082 3,536 Research and development 1,514 1,504 ------------------------------------ TOTAL OPERATING EXPENSES 7,553 7,549 ------------------------------------ OPERATING LOSS (2,610) (1,803) ------------------------------------ OTHER INCOME AND EXPENSE: Interest and other, net (891) (342) Early extinguishment of debt -- (495) Gain (Loss) on sale of assets (41) 25 Gain on forgiveness of debt 769 10,456 ------------------------------------ INCOME (LOSS) BEFORE INCOME TAX (2,773) 7,841 Income tax provision 7 54 ------------------------------------ INCOME (LOSS) FROM CONTINUING OPERATIONS (2,780) 7,787 Income from discontinued operations, net of income tax 1,211 1,330 Gain on the sale of discontinued operations, net of income tax 12,237 -- ------------------------------------ NET INCOME $10,668 $9,117 ------------------------------------ Other comprehensive income Foreign currency translation adjustments (37) (32) ------------------------------------ COMPREHENSIVE INCOME $10,631 $9,085 ------------------------------------ BASIC EARNINGS (LOSS) PER SHARE Net income (loss) per share from continuing operations ($0.12) $0.56 Income from discontinued operations, net of income tax 0.05 0.09 Gain from the sale of discontinued operations, net of income tax 0.54 -- Net income per share 0.47 0.65 DILUTED EARNINGS (LOSS) PER SHARE Net income (loss) per share from continuing operations (0.12) 0.47 Income from discontinued operations, net of income tax 0.05 0.08 Gain from the sale of discontinued operations, net of income tax 0.54 -- Net income per share 0.47 0.5 Shares used in computing basic earnings per share 22,801 13,966 Shares used in computing diluted earnings per share 22,801 16,432
See Notes to Consolidated Financial Statements 21 INTERNATIONAL MICROCOMPUTER SOFTWARE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Years ended June 30, 2003 and 2002 (In thousands, except share amounts)
COMMON STOCK ------------------------ ACCUMULATED OTHER COMPREHENSIVE SHARES AMOUNT RETAINED EARNINGS INCOME (LOSS) TOTAL ----------- ----------- ----------- ----------- ----------- BALANCE AT JULY 1, 2001 9,695,740 $ 28,754 $ (44,008) $ 7 $ (15,247) =========== =========== =========== =========== =========== Issuance of common stock related to: Settlement of liabilities 45,822 11 11 Conversion of debt to equity 9,661,765 4,050 4,050 Warrants exercised 1,282,500 318 318 Stock options exercised 109,500 22 22 Private placement net of fees of $67,000 2,433,572 1,436 1,436 Settlement of liabilities for warrants 77 77 Stock based compensation charges 800 800 Stock received in Broderbund settlement (200,000) (52) (52) Stock repurchase for cash and warrants (250,000) (257) (257) Net income 9,117 9,117 Foreign currency translation adjustment (32) (32) ----------- ----------- ----------- ----------- ----------- BALANCE AT JUNE 30, 2002 22,778,899 $ 35,159 $ (34,891) $ (25) $ 243 =========== =========== =========== =========== =========== Issuance of common stock related to: Settlement of debt 10,000 9 9 Stock options exercised 29,333 6 6 Issuance of warrants related to: -- Consulting services rendered 84 84 Employment compensation 259 259 Baystar settlement 184 184 Imageline Settlement 173 173 Private placement 121 121 Retirement into treasury related to Broderbund settlement 18 18 Variable accounting adjustment (6) (6) Reversal of warrant amortization (461) (461) Net income 10,668 10,668 Foreign currency translation adjustment (37) (37) ----------- ----------- ----------- ----------- ----------- BALANCE AT JUNE 30, 2003 22,818,232 $ 35,546 $ (24,223) $ (62) $ 11,261 =========== =========== =========== =========== ===========
See Notes to Consolidated Financial Statements 22 INTERNATIONAL MICROCOMPUTER SOFTWARE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended June 30
(IN THOUSANDS) FISCAL YEAR FISCAL YEAR 2003 2002 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: NET INCOME $ 10,668 $ 9,117 ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES: Depreciation and amortization 882 1,042 Net provision for bad debt (85) (34) Net provision for returns and price discounts 314 68 Net provision for inventory obsolescence 46 (82) Extinguishment of debt (769) (10,456) Income from discontinued operations (1,211) (1,330) Gain on the sale of ArtToday subsidiary (12,237) -- Loss (gain) on disposal of assets 41 (25) Imageline settlement (384) -- Stock based compensation charges 372 600 Settlement of liabilities with stock -- 11 Settlement of liabilities with warrants -- 77 Early extinguishment of debt -- 495 CHANGES IN ASSETS AND LIABILITIES: Receivables (257) 396 Inventories 65 (115) Other current assets 30 100 Trade accounts payable (228) 337 Accrued and other liabilities (72) (474) Accrued interest and penalties -- 270 Accrued arbitration award (249) (40) Deferred revenue 40 -- Operating cash provided by discontinued operations 2,048 1,884 -------- -------- NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES ($986) $ 1,841 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of assets 10,449 25 Purchases of equipment (41) (31) Software development costs and in-process technologies (20) -- Purchase of domain names -- (5) Acquisition of Keynomics, net of $34 of cash acquired -- (266) Cash used by discontinued operations in investing activities (289) (203) -------- -------- NET CASH PROVIDED USED BY INVESTING ACTIVITIES $ 10,099 ($480) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from loans 1,488 532 Repayments of loans (2,297) (2,059) Repayments of capital lease obligations (154) (153) Proceeds from warrants and options exercised 6 341 Purchase of common stock -- (56) Proceeds from issuance of common stock -- 1,436 Cash used by discontinued operations in financing activities (175) (145) -------- -------- NET CASH USED BY FINANCING ACTIVITIES ($1,132) ($104) -------- -------- EFFECT OF EXCHANGE RATE CHANGE ON CASH AND CASH EQUIVALENTS (37) (32) NET INCREASE IN CASH AND CASH EQUIVALENTS 7,944 1,225 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 2,455 1,230 CASH AND CASH EQUIVALENTS AT END OF THE YEAR $ 10,399 $ 2,455 -------- --------
See Notes to Consolidated Financial Statements 23 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Interest paid $200 $129 SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING ACTIVITIES Equipment acquired through capital lease obligations $ 5 $ 24 Intangible assets acquired through notes payable $302 $612 See Notes to Consolidated Financial Statements 24 INTERNATIONAL MICROCOMPUTER SOFTWARE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION International Microcomputer Software, Inc. ("IMSI") was incorporated in California in November 1982. IMSI develops and publishes software in the precision design (computer assisted drawing) and business applications categories targeted to small to medium-size businesses, professionals, and consumers. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of IMSI and its wholly owned subsidiaries. All significant inter-company balances and transactions have been eliminated in consolidation. USE OF ESTIMATES Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States ("GAAP"). These accounting principles require us to make certain estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions upon which we rely are reasonable based upon information available to us at the time that these estimates, judgments and assumptions are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements as well as the reported amounts of revenues and expenses during the periods presented. Our financial statements would be affected to the extent there are material differences between these estimates and actual results. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management's judgment in its application. There are also areas in which management's judgment in selecting any available alternative would not produce a materially different result. 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 a collection of the resulting account is probable. o Revenue from packaged product sales to resellers and end users is recorded at the time of the sale net of estimated returns. o 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. o For software delivered via the Internet, revenue is recorded when the customer downloads the software. o Revenue from post contract customer support (PCS) is recognized ratably over the contract period. o Training fees are recognized when the service is performed. o Subscription revenue is recognized ratably over the contract period. o 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. o Non-refundable advanced payments received under license agreements with no defined terms are recognized as revenue when the customer accepts the delivered software. o 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. o 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. o 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. 25 CONCENTRATIONS Financial instruments that potentially subject us to concentrations of credit risk consist of cash and cash equivalents and accounts receivable. At times, cash balances held at financial institutions are in excess of federally insured limits. We sell our products to end-users through three main sales channels: republishers, distributors and resellers, and direct to end-users. Republishers pay based on the greater of minimum guaranteed royalties or actual royalties, according to the terms of the contract. We do not generally carry more than one month of receivables for republishers. Distributors and resellers are extended credit terms after establishing a positive history with us. Terms of 30 to 60 days are extended to distributors according to contract, and terms of 30 days are extended to resellers. Sales to direct and end users occur on cash or credit card terms. Credit terms, when extended, are based on evaluation of the customers' financial condition and, generally, collateral is not required. We maintain allowances for doubtful accounts for estimated losses resulting from the inability of customers to make required payments. Management regularly evaluates the allowance for doubtful accounts. Estimated losses are based on the aging of accounts receivable balances, a review of significant past due accounts, and our historical write-off experience, net of recoveries. If the financial condition of our customers were to deteriorate, whether due to deteriorating economic conditions generally or otherwise, resulting in an impairment of their ability to make payments, additional allowances would be required. 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. No single customer accounted for greater than 10% of our gross revenues in any period. ROYALTY AGREEMENTS We have entered into agreements whereby we are obligated to pay royalties on software published. We generally pay royalties based on a percentage of sales on respective products or on a fee per unit sold basis. We expense software royalties as product costs during the period in which the related revenues are recorded. CASH, RESTRICTED CASH, AND CASH EQUIVALENTS We consider all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. SOFTWARE DEVELOPMENT COSTS AND LICENSE FEES Costs incurred in the initial design phase of software development are expensed as incurred in research and development. Once the point of technological feasibility is reached, direct production costs are capitalized in compliance with Statement of Financial Accounting Standards ("SFAS") No. 86, Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed. We cease capitalizing computer software costs when the product is available for general release to customers. Costs associated with acquired completed software are capitalized. Total capitalized software development costs at June 30, 2003 and June 30, 2002 were $1,103,000 and $4,129,000 less accumulated amortization of $1,016,000 and $3,198,000 respectively. We amortize capitalized software development costs and visual content 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) 18, 36, or 60 months, depending on the product. IMSI evaluates the net realizable value of each software product at each balance sheet date and records write-downs to net realizable value for any products for which the carrying value is in excess of the estimated net realizable value. Total amortization expense of capitalized software and license fees, all of which was charged to product costs, was $216,000 and $662,000, for the fiscal year ended June 30, 2003 and 2002, respectively. 26 DOMAIN NAMES Domain names represent internet addresses, which are registered by us for our exclusive use. These domain names are used in Uniform Resource Locators (URLs), which users type into their Internet browsers to view our proprietary web sites. Domain names are amortized over a period of 36 to 60 months. GOODWILL Total goodwill at June 30, 2003 related to the acquisition of Keynomics, Inc. was $179,000. In accordance with SFAS No. 142, Goodwill and Intangible Assets, we will assess the underlying goodwill for impairment annually or more frequently if circumstances indicate impairment. DISTRIBUTION RIGHTS We reached a settlement with Broderbund during the quarter ended December 31, 2001 for outstanding issues related to our acquisition of OrgPlus in 1998 from The Learning Company (predecessor of Broderbund). Simultaneously, we entered into an agreement with Human Concepts; a company controlled by Mr. Martin Sacks, the former President and CEO of IMSI, in which we transferred ownership of OrgPlus to Human Concepts in exchange for royalties based on a percentage of their revenues and distribution rights. As a consequence of these agreements, we recorded a new intangible asset, Capitalized Distribution Rights, in the amount of $573,000. This asset is being amortized over a period of 48 months and as of June 30, 2003, $227,000 had been amortized. As a result of the termination of the majority of our distribution rights, as of June 30, 2003, this asset was subsequently written down to $36,000. We maintain the right to distribute the products to one of our distributors until December 31, 2003. INVENTORIES Inventories, consisting primarily of CD-ROMs, manuals, packaging, freight in, production costs and packing supplies, 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. We recognize all inventory reserves as a component of product costs. As of June 30, 2003, approximately $47,000 of our inventory was held by certain of our distributors under consignment arrangement. FIXED ASSETS Fixed Assets are stated at cost. Depreciation of furniture and equipment is computed using the straight-line method over the estimated useful lives of the respective assets of 3 to 5 years. Depreciation of software and computer equipment is computed using the straight-line method over an estimated useful life of 3 years. INCOME TAXES Income taxes are accounted for using an asset and liability approach for financial reporting. We recognize deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the financial statement carrying amount and the tax basis of assets and liabilities and net operating loss and tax credit carry forwards. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. FOREIGN CURRENCY TRANSLATION The asset and liability accounts of foreign subsidiaries are translated from their respective functional currencies at the rates in effect at the balance sheet date, and revenue and expense accounts are translated at weighted average rates during the periods. Foreign currency translation adjustments are included in other comprehensive income. Foreign currency transaction gains and losses are included in the statement of operations. IMPAIRMENT OF LONG LIVED ASSETS We review long-lived assets and identifiable intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. We assess these assets for impairment based on estimated undiscounted future cash flows from these assets. If the carrying value of the assets exceeds the estimated future undiscounted cash flows, a loss is recorded for the excess of the asset's carrying value over the fair value. We did not recognize any impairment loss for long-lived assets in either fiscal 2003 or fiscal 2002. 27 FAIR VALUE OF FINANCIAL INSTRUMENTS The fair value of cash and cash equivalents, trade receivables, trade payables and debt approximates carrying value due to the short maturity of such instruments. As of June 30, 2003 we have $998,000 classified under investments in securities on our balance sheet. This amount, held in escrow until December 30, 2005, represents the market value of the 250,000 shares of Jupiter common stock we received as part of the total consideration paid for the sale of ArtToday. At our discretion, we have the ability to replace all or a portion of the common stock held in escrow with cash in an amount equal to the closing market value of the common stock to be replaced at June 30, 2003. We also hold, in escrow, $1,300,000 in cash in connection to the ArtToday sale under the caption Assets related to discontinued operations. Under the terms of the escrow agreement, $650,000 net of any identified claim reserves will be released to us on June 30, 2004. The remaining escrow balance, net of any identified claim reserves, will be released to us on December 30, 2004. On August 27, 2003, the 250,000 shares were included as part of a registration statement on Form S-3 that Jupiter filed. STOCK BASED AWARDS Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure, an Amendment of FASB Statement No. 123," amends the disclosure requirements of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), to require more prominent disclosures in both annual and interim financial statements regarding the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company accounts for stock-based compensation plans in accordance with Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," under which no compensation cost is recognized in the financial statements for employee stock arrangements when grants are made at fair market value. The Company has adopted the disclosure only provisions of SFAS No. 123, "Accounting for Stock Based Compensation". In February 2000, we canceled approximately 870,000 options held by existing employees and replaced those options with new options with a revised expiration date. The canceled options had a weighted average exercise price of $3.51 per share, and the reissued options are exercisable at $0.75 per share. This cancellation and re-grant meets the definition of a re-pricing under FIN 44, and the reissued options are being accounted for as variable options. Under variable plan accounting, we recognize a charge equal to the per share change in the share value until the underlying options expires or is exercised. During fiscal year 2003 and 2002, we recognized $6,000 and $7,000 respectively related to variable awards. Had compensation cost for the stock-based compensation plans been determined based upon the fair value at grant dates for awards under those plans consistent with the method prescribed by SFAS 123, net income would have been reduced to the pro forma amounts indicated below:
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) YEAR ENDED JUNE 30, - ---------------------------------------- --------------------------- 2003 2002 ---------- ---------- Net Income, as reported $ 10,668 $ 9,117 Intrinsic compensation charge recorded under APB 25 (173) 173 Pro Forma compensation charge under SFAS 123 (1,570) (1,294) Pro Forma net income 8,925 7,996 Earnings Per Share: Basic--as reported 0.47 0.65 Basic--pro forma 0.39 0.57 Diluted--as reported 0.47 0.55 Diluted--pro forma $ 0.39 0.49
28 The fair value of each option granted was estimated on the date of the grant using the Black-Scholes option-pricing model using the following weighted average assumptions: YEAR ENDED JUNE 30, 2003 2002 ---- ---- Risk-free interest rates 1.2% 2.8% Expected dividend yields 0% 0% Expected volatility 120% 181% Expected option life (in years) 5 5 The weighted average fair value as of the grant date for grants made in fiscal 2003 and 2002 were $0.54 and $0.45, respectively. We have granted options and warrants to certain employees and key consultants which resulted in charges recognized as of June 30, 2003. Charges for grants to non-employees were recorded at the time of options and warrant grants, and calculated using the Black-Scholes method of valuation. The charge to income for stock based compensation has been as follows (in thousands) FISCAL YEAR ENDED PERIOD JUNE 30, 2003 JUNE 30, 2002 - ------ ------------- ------------- Sales Adjustments $ 21 $-- Sales and Marketing 11 77 General and Administrative (138) 500 Research and Development -- 23 Non operating Expenses 478 -- ------------- ------------- TOTAL CHARGE TO EARNINGS $ 372 $ 600 NEW ACCOUNTING STANDARDS ACCOUNTING FOR REVENUE ARRANGEMENTS WITH MULTIPLE DELIVERABLES- In November 2002, the EITF reached a consensus on Issue No. 00-21, Revenue Arrangements with Multiple Deliverables. Issue 00-21 provides guidance on how to account for arrangements that involve the delivery or performance of multiple products, services and/or rights to use assets. The provisions of Issue 00-21 will apply to revenue arrangements entered into in fiscal periods beginning after June 15, 2003. We do not believe that the adoption of Issue 00-21 will have a material effect on our consolidated financial position, results of operations or cash flows. AMENDMENT OF STATEMENT 133 ON DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES- On April 30, 2003, the FASB issued Statement No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. Statement 149 is intended to result in more consistent reporting of contracts as either freestanding derivative instruments subject to Statement 133 in its entirety, or as hybrid instruments with debt host contracts and embedded derivative features. In addition, Statement 149 clarifies the definition of a derivative by providing guidance on the meaning of initial net investments related to derivatives. Statement 149 is effective for contracts entered into or modified after June 30, 2003. At June 30, 2003, we do not hold any derivative instruments. We do not believe the adoption of Statement 149 will have a material effect on our consolidated financial position, results of operations or cash flows. FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY- On May 15, 2003, the FASB issued Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. Statement 150 establishes standards for classifying and measuring as liabilities certain financial instruments that embody obligations of the issuer and have characteristics of both liabilities and equity. Statement 150 represents a significant change in practice in the accounting for a number of financial instruments, including mandatory redeemable equity instruments and certain equity derivatives that frequently are used in connection with share repurchase programs. Statement 150 is effective for all financial instruments created or modified after May 31, 2003, and to other instruments as of July 1, 2003. We adopted Statement 150 on July 1, 2003 and do not believe the effect of adopting this statement will have a material impact on our financial position, results of operations or cash flows. 29 RECLASSIFICATIONS Reclassifications have been made to the amounts reported in 2002 to conform to the current year presentation. The amounts reported for fiscal 2003 and 2002 present the results of operations for ArtToday as discontinued operations due to the sale of ArtToday on June 30, 2003. 2. INVENTORIES Inventories consist of (in thousands): Raw materials $ 79 Finished goods 313 ----- SUBTOTAL 392 Reserves for obsolescence (124) ----- NET INVENTORY $ 268 3. FIXED ASSETS Fixed assets consist of (in thousands): Computer and office equipment $ 441 Software 361 Building Improvements 11 ----- SUBTOTAL 813 Accumulated depreciation (728) ----- FIXED ASSETS, NET $ 85 ----- We incurred depreciation expenses of $265,000 and $332,000 for the fiscal years ended June 30, 2003 and 2002 respectively. At June 30, 2003, we had $85,000 of fixed assets with a zero net book value under capital leases. 4. SOFTWARE DEVELOPMENT COSTS AND LICENSE FEES Capitalized software development costs and license fees consist of the following (in thousands): Acquired cost $ 1,103 Accumulated amortization (1,016) ------- CAPITALIZED SOFTWARE, NET $ 87 ------- 5. DOMAIN NAMES CapitalizEd domain names consist of the following (in thousands): Acquired cost $ 5 Accumulated amortization (1) ------- CAPITALIZED DOMAIN NAMES, NET $ 4 ------- 6. AMORTIZATION EXPENSE The following table summarizes the actual and estimated amortization expense for our intangible assets for the periods indicated:
FISCAL YEAR ENDED JUNE 30, ------------------------------------------------------------------------------ 2003 2004 2005 2006 2007 2008 ------ --------------------------------------------------------------- ACTUAL ESTIMATE ------ --------------------------------------------------------------- Capitalized Software $ 720 $ 87 $ -- $ -- $ -- $ -- Capitalized Domain Names 220 1 1 1 1 -- Capitalized Distribution Rights 143 36 -- -- -- -- ------ ------ ------ ------ ------ ----- TOTAL AMORTIZATION EXPENSE $1,083 $ 124 $ 1 $ 1 $ 1 $ -- ------ ------ ------ ------ ------ -----
30 7. DEBT JUNE 30, 2003 ------------- SHORT-TERM BORROWINGS (IN THOUSANDS) Note payable to Imageline $ 160 Capital lease obligations 80 Note payable to Remington 64 ----------- TOTAL SHORT-TERM BORROWINGS $ 304 ----------- LONG-TERM DEBT AND OTHER OBLIGATIONS (IN THOUSANDS) Escrow due to minority shareholders $ 84 ----------- TOTAL LONG-TERM DEBT AND OTHER OBLIGATIONS $ 84 ----------- NOTE PAYABLE TO IMAGELINE 0n April 18, 2003, we reached a final settlement of all outstanding claims with Imageline, Inc. relating to a July 2001 settlement agreement. Under the terms of the restructured settlement agreement, we agreed among other considerations to a promissory note for $178,250 plus simple interest of 10% per annum due on or before April 18, 2004. On June 10, 2003, we amended the amount of this note to $160,000 if payment were made on or before July 7, 2003. NOTE PAYABLE TO REMINGTON PARTNERS As of June 30, 2003 we had a $64,000 debt outstanding to Remington Partners representing a 27% revolving note secured by Keynomics' accounts receivable. The balance due to Remington was paid in full on August 26, 2003. 8. INTEREST EXPENSE Interest and other expenses, net, include interest expense and penalties on debt instruments, interest income, foreign currency transaction gains and losses, and other non-recurring items. The following table summarizes the components of interest and other, net for fiscal 2003 and 2002; (IN THOUSANDS) FISCAL YEAR ENDED JUNE 30, 2003 2002 ---- ---- INTEREST AND OTHER EXPENSE, NET Interest (expense) $(485) $(497) Penalties -- (90) Interest Income 11 12 Foreign Exchange Gain 60 34 Gain (Loss) on Liquidation of Foreign Subs 46 54 Other Income (Expense) (523) 146 - ------------------------------------------------------------------------------ TOTAL $(891) $(341) - ------------------------------------------------------------------------------ Other income (expense) relates mainly to charges we recognized while settling various disputes. During fiscal 2003 these charges related mainly to the settlement of the Imageline and the Sorrentino litigation matters as disclosed in note 11 to the consolidated financial statements, which amounted to $415,000 and $60,000 respectively. During Fiscal 2002, we recognized a gain of $164,000 representing the net recovery amount we obtained from indemnification claims we had against third parties associated with the original circumstances leading to the adverse Imageline arbitration award, in part offset by an $18,000 charge relating to settlement of a dispute with one of our vendors. 9. GAIN ON EXTINGUISHMENT OF DEBT During fiscal 2003, we recognized a $769,000 gain on forgiveness of debt as a result of settlements with various unsecured creditors who accepted our payoff offers for discounted amounts averaging 10% of the face values of these claims. During fiscal 2002, we recognized a $10.5 million gain on forgiveness of debt as a result of the following items: o $2.2 million was related to the forgiveness of a portion of the principal and accrued interest on a note held by Silicon Valley Bank. 31 o $5.7 million related to the forgiveness of debt to Baystar Capital o $2.6 million related to other unsecured creditors who accepted our offer to settle all their claims at a 90% discount on average. 10. SALE OF ARTTODAY On June 25, 2003, we entered into an agreement with Jupiter to sell all issued and outstanding shares of the capital stock of ArtToday, our wholly owned subsidiary based in Arizona focused on web based delivery of clipart, photos flash objects, animations, fonts and other graphic content. The transaction closed on June 30, 2003. The sales price included the following consideration; o $13 million cash of which $1.3 million is being held in escrow for a period of up to eighteen months, o 250,000 restricted shares of Jupiter common stock all of which is being held in escrow until December 30, 2005, and o An earn-out that could result in an additional $4 million during the next two fiscal years. As a result of this sale, we recognized a net gain from discontinued operations of $12,237,000 during fiscal year 2003. The following table details the calculations related to this gain: (in thousands) TOTAL -------- Sales Price - Consideration per contract agreement $ 13,861 Less: Cash held by ArtToday (44) Minority Interest (1,290) -------- TOTAL SALES PRICE $ 12,527 Basis in ArtToday Assets, net of cash on hand (1,883) Liabilities 2,557 -------- NET BASIS $ 674 Sales related expenses Fees to related party (Chairman of the Board) (150) Other expenses (including legal and accounting fees) (567) -------- TOTAL EXPENSES $ (717) Gain, Before Income Tax 12,484 Income Tax (247) -------- GAIN ON SALE, NET OF TAX $ 12,237 -------- The following table details selected financial data related to ArtToday during the fiscal years ended June 30, 2003 and 2002: PROFIT AND LOSS DATA FOR THE YEAR ENDED JUNE 30, - -------------------- --------------------------- 2003 2002 ------- ------- Revenue $ 5,249 $ 4,152 Operating Income 1,265 1,271 Income before income tax $ 1,235 $ 1,330 Income tax provision (24) -- ------- ------- NET INCOME $ 1,211 $ 1,330 ------- ------- Included in the sale of ArtToday, were intangible assets in the aggregate amount of $1,186,000 comprised of the following: 32 o Capitalized software: $191,000 o Goodwill: $92,000 o Capitalized domain names: $903,000 11. LEGAL PROCEEDINGS We have no pending litigation at June 30, 2003 and as of the date of this filing. IMAGELINE, INC. VS. INTERNATIONAL MICROCOMPUTER SOFTWARE, INC. On January 14, 2000, Imageline, Inc. received a $2.6 million arbitration award against IMSI for intellectual property violations and attorney's fees. In April 2000 IMSI and Imageline initiated negotiations to settle the award through a variety of considerations, including cash, a consulting agreement, and warrants to purchase common stock. As of April 18, 2003, all litigation relating to a July 2001 settlement agreement that we had originally entered into with Imageline, Inc. and its president, George Riddick has been restructured and fully and finally resolved. Under the terms of the restructured settlement agreement, we agreed to the following: o An immediate payment of $621,750. o A promissory note for $178,250 plus simple interest of 10% per annum due on or before April 18, 2004. On June 10, 2003, we amended the amount of this note to $160,000 if payment were made on or before July 7, 2003. The amendment also called for us to pay $5,000 immediately. Subsequent to fiscal year end, we made the $160,000 payment in full satisfaction of this note. o Licensing and republishing rights to certain intellectual property. o The issuance of 600,000 fully vested three year warrants with a strike price of $0.46 per share to purchase the Company's common stock. In return, the restructured settlement ends all litigation between the parties, eliminates an existing judgment against us, and removes a lien on certain of our assets. The licenses granted in this settlement agreement will not negatively affect our ongoing operations and will allow us to end an expensive and time consuming legal dispute. As a result of this settlement we recognized an additional non-operating charge of approximately $415,000 in fiscal year ended June 30, 2003. SORRENTINO VS. DIGITAL CREATIVE DEVELOPMENT CORPORATION, ET AL. On or about June 28, 2002, Ralph Sorrentino, an individual, and RJS Consulting Corp., a New York corporation, filed a complaint in the Supreme Court of the state of New York, county of New York against DCDC, IMSI, and several other individuals. The complaint alleges that DCDC breached the settlement agreement reached on October 30, 2001, between Mr. Sorrentino and DCDC regarding the 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 sought, among other things, compensatory and punitive damages and a constructive trust on all of the shares of IMSI stock owned by DCDC and on all of the assets of IMSI. As of February 13, 2003 we entered into a settlement of litigation with Ralph Sorrentino and RJS Consulting Corp. pursuant to which we agreed to pay a total of $60,000 in equal installments over twelve months, and the parties agreed to a stipulation of discontinuance of the action with prejudice. Separately, Mr. Sorrentino also entered into a settlement agreement with the other named parties in the action, including certain of IMSI's Directors. As of June 30, 2003, $45,000 was still remaining of the total amount due to Mr. Sorrentino. 12. EMPLOYEE STOCK INCENTIVE PLANS AND EQUITY RELATED TRANSACTIONS The 1993 Employee Incentive Plan, as amended, permits us to grant options to purchase up to 2,925,000 shares of common stock to employees, directors and consultants at prices not less than the fair market value at date of grant for incentive stock options and not less than 85% of fair market value for non-statutory stock options. These options generally expire 10 years from the date of grant and become exercisable ratably over a 3 to 5-year period. At June 30, 2003, 2,660 shares were available for future grants under the 1993 plan. 33 Option activity under the plan is as follows:
WEIGHTED AVERAGE EXERCISE NUMBER OF SHARES PRICE - ---------------------------------------------------------------------------------------------------- OUTSTANDING, JULY 01, 2001 1,976,164 $0.97 - ---------------------------------------------------------------------------------------------------- Granted (weighted average fair value of $0.45) 1,346,000 0.43 Exercised (109,500) 0.20 Cancelled (1,061,526) 0.87 - ---------------------------------------------------------------------------------------------------- OUTSTANDING, JUNE 30, 2002 2,151,138 $0.72 - ---------------------------------------------------------------------------------------------------- Granted (weighted average fair value of $0.54) 974,351 $0.66 Exercised (29,333) 0.20 Cancelled (835,403) 0.85 - ---------------------------------------------------------------------------------------------------- OUTSTANDING, JUNE 30, 2003 2,260,753 $0.66 - ----------------------------------------------------------------------------------------------------
Warrants have been granted from time to time in conjunction with financings, debt settlements, compensation for members of the Board of Director and employee's and consulting arrangements. Warrant activity is as follows:
- --------------------------------------------------------------------------------------------- AVERAGE NUMBER OF EXERCISE WARRANTS PRICE - --------------------------------------------------------------------------------------------- OUTSTANDING, JULY 01, 2001 729,291 4.31 - --------------------------------------------------------------------------------------------- Granted (weighted average fair value of $0.68) 7,619,786 0.76 Exercised (1,282,500) 0.25 - --------------------------------------------------------------------------------------------- OUTSTANDING, JUNE 30, 2002 7,066,577 $1.22 - --------------------------------------------------------------------------------------------- Granted (weighted average fair value of $0.90) 1,302,500 (0.95) Exercised (2,112,500) (0.81) - --------------------------------------------------------------------------------------------- OUTSTANDING, JUNE 30, 2003 6,256,577 $1.16 - ---------------------------------------------------------------------------------------------
Additional information regarding options and warrants outstanding as of June 30, 2003 is as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------- ------------------- RANGE OF EXERCISE NUMBER WEIGHTED AVG. REMAINING WEIGHTED AVG. NUMBER WEIGHTED AVG. PRICES OUTSTANDING CONTRACTUAL LIFE (YRS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE - ----------------------- ------------------ -------------------------------- ---------------------- ----------------- --------------- $0.20-$0.35 531,166 8.3 0.27 365,153 0.25 $0.41-$0.70 539,238 9.5 0.58 221,337 0.62 $0.71-$0.75 761,426 8.2 0.73 421,833 0.75 $0.80-$0.95 343,960 8.4 0.90 191,461 0.89 $1.06-$4.17 84,963 5.6 1.95 71,630 2.12 - ----------------------- ------------------ -------------------------------- ---------------------- ----------------- --------------- 2,260,753 1,271,414 - ----------------------- ------------------ -------------------------------- ---------------------- ----------------- ---------------
WARRANTS OUTSTANDING WARRANTS EXERCISABLE -------------------- -------------------- RANGE OF EXERCISE PRICES NUMBER OUTSTANDING WEIGHTED AVG. EXERCISE PRICE NUMBER EXERCISABLE WEIGHTED AVG. EXERCISE PRICE - ------------------------------------------------------------------------------------------------------------------------------------ $0.15 - $0.32 1,070,000 0.25 1,070,000 0.25 $0.45 - $0.46 1,002,500 0.46 1,002,500 0.46 $0.50 - $0.75 670,286 0.61 670,286 0.61 $0.81 2,737,500 0.81 2,012,500 0.81 $0.90 - $1.03 382,000 0.93 244,000 0.93 $5.00 - $14.85 394,291 9.05 394,291 9.05 - ------------------------------------------------------------------------------------------------------------------------------------ 6,256,577 5,393,577 - ------------------------------------------------------------------------------------------------------------------------------------
13. COMMITMENTS All facilities are rented on a month-to-month basis and carry no future commitments. Future minimum payments for the capital and operating lease are as follows (in thousands): 34
FISCAL YEAR CAPITAL LEASES OPERATING LEASES ----------- -------------- ---------------- 2004 $85 $7 2005 -- 7 2006 -- 7 2007 -- 7 2008 and after -- 4 - ------------------------------------------------------------------------------------------------------------------- TOTAL MINIMUM PAYMENTS $85 $30 - ------------------------------------------------------------------------------------------------------------------- Less amount representing interest (5) Recorded obligations 80 LESS CURRENT PORTION (80) - ------------------------------------------------------------------------------------------------------------------- LONG-TERM PORTION $-- - -------------------------------------------------------------------------------------------------------------------
Capital lease obligations consist primarily of computer and office equipment with an average term of 5 years. Total rent expense for all operating leases was $145,000 and $284,000 for the periods ended June 30, 2003 and 2002 respectively. 14. INCOME TAXES The provision for taxes on income was comprised of the following (in thousands):
FISCAL YEAR ENDED JUNE 30, 2003 FISCAL YEAR ENDED JUNE 30, 2002 ------------------------------- ------------------------------- Current: Federal $120 $-- State 226 54 Foreign (68) -- - ----------------------------------------------------------------------------------------------------- TOTAL TAX PROVISION $278 $54 - -----------------------------------------------------------------------------------------------------
Deferred tax balances consist of the following (in thousands): JUNE 30, 2003 ------------- Current tax assets Allowance for doubtful accounts and returns $ 112 Inventory reserve 24 Accrued employer liabilities 50 Accrued royalties 89 State tax 95 - ------------------------------------------------------------------ TOTAL CURRENT TAX ASSETS 370 - ------------------------------------------------------------------ Non-current tax assets Net operating loss carry forward 12,926 Package Design Costs 37 Fixed assets 11 Purchased intangibles 2,548 Loss on investment in subsidiaries in liquidation 74 - ------------------------------------------------------------------ TOTAL NON-CURRENT ASSETS 15,596 - ------------------------------------------------------------------ Valuation allowance (15,966) - ------------------------------------------------------------------ NET DEFERRED TAX ASSETS $-- - ------------------------------------------------------------------ At June 30, 2003, IMSI had an operating loss carry forward of approximately $34.5 million for federal tax purposes and approximately $14.6 million for state tax purposes, which expire in various amounts through 2021. The effective tax rate differs from the federal statutory rate for the years ended June 30, 2003 and 2002 as follows (in thousands): 35
YEAR ENDED JUNE 30, YEAR ENDED JUNE 30, 2003 2002 - -------------------------------------------------------------------------------------- Federal tax at 35% statutory rate 3,576 $ 3,100 State tax provision, net of federal benefit 556 532 Change in valuation allowance (2,630) (3,968) Book/tax difference in gain on sale of ArtToday (1,001) -- State tax credits (235) Other 12 390 - -------------------------------------------------------------------------------------- TOTAL INCOME TAX PROVISION (BENEFIT) $ 278 $ 54 - --------------------------------------------------------------------------------------
The components of the provision related to continuing operations and discontinued operations are as follows:
YEAR ENDED JUNE 30, 2003 YEAR ENDED JUNE 30, 2002 Continuing operations $ 7 $54 Discontinued operations 271 -- - ------------------------------------------------------------------------------------------ TOTAL TAX PROVISION $278 $54 - ------------------------------------------------------------------------------------------
15. 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 summarizes the weighted average shares outstanding:
FISCAL YEAR ENDED JUNE 30 2003 2002 - ---------------------------------------------------------------------------------------------------- BASIC WEIGHTED AVERAGE SHARES OUTSTANDING 22,800,795 13,966,364 - ---------------------------------------------------------------------------------------------------- Total Stock Options Outstanding 2,260,753 2,151,138 Less: Assumed treasury stock purchases -- (1,144,814) Less: Anti Dilutive Stock Options due to loss (2,260,753) -- Less: Out of the money options -- (147,555) Total Warrants Outstanding 6,256,577 7,066,577 Less: Assumed treasury stock purchases -- (4,965,464) Less: Anti Dilutive Warrants due to loss (6,256,577) -- Less: Out of the money warrants -- (494,291) - ---------------------------------------------------------------------------------------------------- DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING 22,800,795 16,431,955 - ----------------------------------------------------------------------------------------------------
16. SEGMENT INFORMATION We have three 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 segment comprises the revenues and expenses related to Keynomics, our business applications subsidiary which provides ergonomic and keyboard training for worker-enhanced safety, productivity and ergonomic compliance improvements thru its proprietary software system, "The KeySoft Performance System". The following table details segment information (in thousands). The foreign segment refers to the operations of our German and Australian wholly owned subsidiaries, IMSI GmbH and IMSI Australia Pty. Ltd.
KEYNOMICS NORTH AMERICA FOREIGN ELIMINATIONS TOTAL --------- ------------- ------- ------------ ----- FISCAL YEAR ENDED JUNE 30, 2003 Net Revenues-external $1,147 $7,116 $669 $-- $8,932 Operating loss (99) (2,227) (284) -- (2,610) Identifiable assets ($218) $14,656 ($165) $57 $14,330 FISCAL YEAR ENDED JUNE 30, 2002 Net Revenues-external $477 $7,451 $556 $-- $8,484 Operating income (loss) (268) (1,553) 18 -- (1803) Identifiable assets ($9) $4,949 ($72) $(38) $4,830
36 All inter-company amounts are eliminated through consolidation. Certain general and administrative expenses are allocated among our different segments based on each segment contribution to total revenue. The following table details net revenues information (in thousands): FISCAL YEAR ENDED JUNE 30, 2003 2002 - ------------------------------------------------------------- Precision Design $3,725 $4,418 Business Applications and Other 5,207 4,066 - ------------------------------------------------------------- NET REVENUES $8,932 $8,484 - ------------------------------------------------------------- 17. RELATED PARTY TRANSACTIONS On May 1, 2003 we entered into a consulting agreement with Mr. Bruce Galloway, chairman of our board of directors, to provide services to the company related to potential acquisitions and divestitures. In return for his services, Mr. Galloway could be entitled to a fee from zero to $200,000 dependent on his involvement and on the consideration received or paid by us as a result of the transaction. Upon the successful sale of ArtToday in June 2003 we paid Mr. Galloway a fee of $150,000 per the terms of the agreement. In March 2003, we initiated a private placement of five-year, 15% secured promissory notes to accredited investors. We were successful in raising $805,000. Purchasers of the notes also received warrants to purchase IMSI's common stock at the rate of one warrant for each $2.00 of principal of the notes. These warrants have a strike price of $0.45 and will expire on June 30, 2006. The notes were secured by the pledge of the common stock of ArtToday.com. None of the participants in these private placements, except for our Chief Financial Officer, Mr. William J. Bush and Mr. Joseph Abrams (an IMSI related party as a former beneficial owner of IMSI Common Stock) who participated in the amounts of $80,000 and $50,000 respectively and received 40,000 and 25,000 warrants to purchase shares of IMSI's stock respectively, were deemed to be an "affiliate" or a "related party" as defined in Statement of Financial Accounting Standards No.57, "Related Party Disclosures". Concurrent with the sale of ArtToday on June 30, 2003, we repaid the notes in full with an early repayment penalty of 2% which was $16,000. In June 2003, Paul Jakab resigned as Chief Operating Officer and we terminated our agreement with him with regard to those services. Concurrently, we entered into a new agreement with him to serve as Business Affairs Advisor, where he will be responsible for certain international sales and from time to time certain legal matters as directed by the Company. Mr. Jakab will be paid $8,000 per month for such services. 18. UNAUDITED QUARTERLY FINANCIAL INFORMATION The following selected financial data should be read in conjunction with the Consolidated Financial Statements, including the related notes, and Item 6 - Management's Discussion and Analysis or Plan of Operations:
FISCAL 2003 FISCAL 2002 ----------- ----------- QUARTER ENDED NET REVENUES NET INCOME (LOSS) NET REVENUES NET INCOME (LOSS) ------------- ------------ ----------------- ------------ ----------------- September 30 $1,999 ($136) $1,687 $4,951 December 31 2,390 (51) 2,107 2,202 March 31 2,532 (103) 2,579 68 June 30 2,011 10,958 2,111 1,896 - ------------------------------------------------------------------------------------------------------------------------ TOTALS $8,932 $10,668 $8,484 $9,117 - ------------------------------------------------------------------------------------------------------------------------
37 ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable ITEM 8A- CONTROLS AND PROCEDURES (a) Under the supervision and with the participation of IMSI's management, including IMSI's principal executive officer and principal financial officer, we conducted an evaluation of our 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) We have evaluated our 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 our internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation referenced in paragraph (a) above. PART III ITEM 9 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT On September 9, 2002, William J. Bush was named Chief Financial Officer. In June 2003 Paul Jakab stepped down as Chief Operating Officer. DIRECTORS The names of all members of the Board of Directors of IMSI, and information about them as of September 22, 2003 are set forth below:
NAME AGE OCCUPATION DIRECTOR SINCE - ----- --- ---------- -------------- Bruce Galloway (1) (3) (4) 45 Chairman of the Board of Directors 2001 Martin Wade, III (3) 54 President and Chief Executive 2001 Officer Evan Binn (1) (2) 64 Director 2001 Donald Perlyn (1) 60 Director 2001 Robert Mayer 49 Executive Vice President 2000 Robert S. Falcone (2) 56 Director 2002 Richard J. Berman (2) (3) 61 Director 2002
(1) Member of the Compensation Committee. (2) Member of the Audit Committee. (3) Member of the Executive Committee. (4) Chairman of Board of Directors BRUCE R. GALLOWAY, AGE 45. Mr. Galloway became a director of IMSI in August 2001. Mr. Galloway is currently a managing director of Burnham Securities Inc., an NASD Broker/Dealer and investment bank based in New York. He is currently the Chairman of Arthur Treacher's, Inc., Datametrics Corporation and Digital Systems Group, Inc., as well as a director of Waiters.com, Inc. Prior to joining Burnham in 1993, Mr. Galloway was a senior vice president at Oppenheimer & Company, an investment bank and NASD Broker/Dealer based in New York, from 1991 through 1993. Mr. Galloway holds a B.A. degree in Economics from Hobart College and an M.B.A. in Finance from New York University's Stern Graduate School of Business. 38 MARTIN WADE III, AGE 54. Mr. Wade became a director and CEO of IMSI in August 2001. He brings to the Company a proven track record in mergers and acquisitions and investment banking. Prior to joining DCDC in 2000, Mr. Wade served from 1998 to 2000 as an M&A banker at Prudential Securities and from 1996 to 1998 as a managing director in M&A at Salomon Brothers. From 1991 to 1996, Mr. Wade was National Head of Investment at C.J. Lawrence, Morgan Grenfell, where he was appointed to the Board of Directors. Martin Wade also spent six years in the M&A department at Bankers Trust and eight years at Lehman Brothers Kuhn Loeb. Mr. Wade is credited with participating in over 200 M&A transactions involving various clients such as, Nike, Cornerstone National Gas Company, Handmark Graphics and Redken Laboratories, Inc. Mr. Wade was previously National Head of Investment Banking for Price Waterhouse. He is also a member of the Board of Directors for DiMon (NYSE: DMN), NexMed (OTC: NEXM) and Energy Transfer Group of Dallas, Texas. DONALD PERLYN, AGE 60. Mr. Perlyn became a director of IMSI in August 2001. Mr. Perlyn joined Miami Subs Corporation in May 1989. He was promoted to the position of President of Miami Subs Corporation in July of 1998. In October of 1999 and as a result of the acquisition of Miami Subs Corp. by Nathan's Famous Inc. (a DCDC subsidiary) Mr. Perlyn assumed the position of Executive Vice President of Nathan's Famous, Inc. in addition to his responsibilities at Miami Subs. Mr. Perlyn is also a member of the Board of Directors of Nathan's Famous, Inc. Mr. Perlyn is an attorney and a 32 year veteran of the of the restaurant industry with extensive experience in restaurant development, operations and franchising. EVAN BINN, AGE 64. Mr. Binn became a director of IMSI in August 2001. Mr. Binn received his bachelor's degree from University of California at Los Angeles and is a certified public accountant in California. He is a member of the California Society of Certified Public Accountants and has maintained a practice in Los Angeles, California for thirty-seven years. ROBERT MAYER, AGE 49. MR. MAYER became a director in February 2000. Mr. Mayer served as the Company's Vice President of Sales from 1990 until 1995 and then as Executive Vice President of Worldwide Sales until March 2000 when he left the Company to serve as a Vice President at Adventa.com, Inc. Mr. Mayer rejoined the IMSI team in November 2000 as Executive Vice President. Mr. Mayer also served as a director from 1985 until May 1999. Mr. Mayer received a Bachelors of Arts degree from the University of California at Berkeley, and Masters of Science degree from the University of Washington. ROBERT S. FALCONE, AGE 56. MR. FALCONE became a director in February 2002 and has over 32 years of financial management and Board experience. Mr. Falcone is currently the Executive Vice President and Chief Financial Officer of Bearing Point, Inc. an international consulting firm serving Global 2000 companies, medium-sized businesses, government agencies and other organizations. He served as senior vice president and chief financial officer for Nike, Inc., the world's largest international footwear and apparel company, from 1992 to 1998, a time when the company grew annual sales to nearly $10 billion. He began his career at Price Waterhouse, LLP where he spent 21 years, eight of which as an audit partner. Most recently, he was chief financial officer for 800.com, a pioneer in consumer electronics Internet retailing. A graduate of Villanova University and a certified public accountant, Falcone serves on the boards of directors for RadioShack Corporation, and The Nautilus Group. RICHARD J. BERMAN, AGE 61. MR. BERMAN became a director in February 2002 and his business career spans 35 years of venture capital, management and mergers and acquisitions experience. In the last five years, Mr. Berman was Chairman and CEO of Internet Commerce Corporation, an Internet supply chain company whose market capitalization rose from $1.2 million to about $1 billion. He is Chairman of KnowledgeCube, an early stage technology fund, and Candidate Resources, Inc, the leading manager of human resource websites. He is also a Director of NexMed, a life sciences company; he is also recently became a Director of Stonehedge Partners, a family of hedge funds. Previously, Mr. Berman worked at Goldman Sachs; was Senior Vice President of Bankers Trust Company where he started the M&A and Leverage Buyout departments; created the largest battery company in the world by merging Prestolite, General Battery and Exide to form Exide (NYSE); and advised on over $4 billion of M&A transactions. He is a past Director of the Stern School of Business of NYU where he has a B.S. and an MBA. He also has US and foreign law degrees from Boston College and The Hague Academy of International Law, respectively. EXECUTIVE OFFICERS MARTIN WADE III, CEO. See above. 39 GORDON LANDIES, PRESIDENT, AGE 47. Mr. Landies joined IMSI on September 1, 2001 as President subsequent to the merger agreement between IMSI and DCDC. He brings to the Company 17 years of experience in management of software companies. Before joining IMSI Mr. Landies was a consultant and managing partner in GL Ventures, LLC providing services to software publishing and media companies. In 1999, Mr. Landies was the General Manager of the Home and Game division of Mattel Interactive. From 1994 to 1998 Mr. Landies held positions of Senior Vice President of sales and Executive Vice President for Mindscape, a $100+ million consumer software company. From 1990 to 1994 he was Vice President of sales for The Software Toolworks. Mr. Landies previously served on the Board of Directors of IMSI from 1995 to 1998 as well as on the Boards of Directors of Mindscape, Inc, Entertainment Universe, Inc. and several other private organizations. Mr. Landies graduated in 1981 from Northern Illinois University with a Masters of Business Administration and holds a B.S. in economics from Elmhurst College. ROBERT MAYER, EXECUTIVE VICE PRESIDENT OF DIRECT SALES AND MARKETING. See above. WILLIAM J. BUSH, CFO, AGE 38. Mr. Bush joined our executive team in September 2002. As the former Director of Business Development for Buzzsaw.com and former Corporate Controller and Finance Manager for the AutoCAD Product Division at Autodesk, he brings over 15 years of experience in accounting, financial support and business development to IMSI. Prior to joining IMSI, Mr. Bush was one of the founding members of Buzzsaw.com, a privately held company spun off from Autodesk, Inc. in 1999, focusing on online collaboration, printing and procurement applications. At Buzzsaw.com, Mr. Bush was responsible for establishing the company's finance and accounting infrastructure as well as leading its acquisition and financing efforts. From 1997 to 1999, Mr. Bush worked at Autodesk, Inc., the fourth largest software applications company in the world. As Corporate Controller at Autodesk, his responsibilities included financial planning and analysis, general accounting, and SEC and management reporting. Mr. Bush began his career in public accounting with Ernst & Young, and later with Price Waterhouse in Munich, Germany. He received a B.S. in Business Administration from U.C. Berkeley and is a Certified Public Accountant. SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Exchange Act requires the Company's directors and executive officers, and persons who own more than ten percent of a registered class of the Company's equity securities, to file with the Commission initial reports of ownership and reports of changes in ownership of the Company's Common Stock and other equity securities of the Company. Officers, directors and greater than ten percent shareholders are required by the Commission's regulations to furnish the Company with copies of all Section 16(a) forms they filed. We have been provided with copies of all forms (3, 4 and 5) filed by officers, directors, or ten percent shareholders within three days of such filings. ITEM 10- EXECUTIVE COMPENSATION The following table sets forth all compensation awarded, earned or paid for services rendered in all capacities to the Company and its subsidiaries during each of the fiscal years ended June 30, 2003, 2002 and 2001 to (i) the Company's chief executive officer during fiscal 2003; and (ii) the Company's four most highly compensated executive officers other than the CEO who were serving as executive officers at the end of fiscal 2003. SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION ANNUAL COMPENSATION AWARDS OTHER ANNUAL SECURITIES UNDERLYING FISCAL SALARY BONUS COMPENSATION OPTIONS / SARS NAME AND PRINCIPAL POSITIONS YEAR ($)(1) ($) ($) (2) (#) - ---------------------------- ---- ------ --- ------- --- Martin Wade III 2003 175,000 175,000 7,976 (2,000,000) Chief Executive Officer 2002 100,000 25,000 4,458 2,000,000 2001 -- -- -- -- Gordon Landies 2003 156,000 221,500 7,976 30,025 President (3) 2002 130,000 40,000 65,670 1,250,000 2001 -- -- -- -- Paul Jakab 2003 151,500 45,000 10,270 107500 Former Chief Operating Officer 2002 125,000 45,000 7,312 950,000 (4) 2001 161,000 -- -- -- Robert Mayer 2003 120,000 18,000 28,708 57,500 Executive Vice President, (5) 2002 120,000 66,044 3,827 382,500 Worldwide Sales (6) 2001 107,638 26,887 69,675 -- William Bush 2003 99,279 106,000 -- 162,426 Chief Financial Officer 2002 -- -- -- -- 2001 -- -- -- --
40 (1) Amounts stated above are the actual amounts received. Amounts paid in fiscal 2003 are based upon the following annual salaries: Wade $200,000, Landies $156,000, Jakab $156,000, Mayer $120,000, and Bush $120,000. (2) Includes payments of medical and dental insurance premiums by the Company. (3) Includes $55,000 of consulting fees. (4) Mr. Jakab accepted his new position of Business Affairs Advisor in May, 2003. Mr. Jakab is no longer an officer of IMSI beginning June 2003. Until May 2001 Mr. Jakab had been Executive Vice President, International Sales and Business development for IMSI. He rejoined IMSI on September 1, 2001 as Chief Operating Officer subsequent to the signing of the merger agreement between IMSI and DCDC. Salary in fiscal 2001 included $21,000 of severance. (5) Mr. Mayer worked for IMSI on a full-time basis through March 31, 2000, at which time he became a consultant to the Company. Mr. Mayer rejoined the Company in his current capacity in November 2000. (6) Includes the forgiveness in June 2001 of a note receivable owed by Mr. Mayer to IMSI in the amount of $69,675. OPTION GRANTS The following table sets forth the individual grants of stock options made during the last fiscal year to each of the named executive officers. There were no SAR grants.
NUMBER OF SECURITIES UNDERLYING PERCENT OF TOTAL OPTIONS/SARS EXERCISE OR OFFICER OPTIONS/SARS GRANTED GRANTED TO EMPLOYEES IN FISCAL YEAR BASE PRICE EXPIRATION DATE ------- -------------------- ----------------------------------- ---------- --------------- Bush, William 100,000 10.3% $0.93 09/08/07 Bush, William 10,000 1.0% 0.60 12/04/07 Bush, William 8,900 0.9% 0.41 04/26/08 Bush, William 10,100 1.0% 0.53 05/27/08 Bush, William 33,426 3.4% 0.71 06/28/08 Jakab, Paul 100,000 10.3% 0.63 10/30/07 Jakab, Paul 7,500 0.8% 0.41 04/26/08 Landies, Gordon 12,525 1.3% 0.41 04/26/08 Landies, Gordon 17,500 1.8% 0.53 05/27/08 Mayer, Robert 7,500 0.8% 0.41 04/26/08 Mayer, Robert 10,000 1.0% 0.70 06/17/08 Mayer, Robert 40,000 4.1% 0.71 06/28/08
WARRANT GRANTS No grants of warrants were made during the last fiscal year to any of the named executive officers. During fiscal 2003 we granted 50,000 warrants to Mr. Geoffrey Koblick, our former Chairman and CEO. These warrants have an exercise price of $0.86 and expire on September 20, 2007. Subsequent to fiscal year end, we issued to our Chief Executive Officer, Mr. Martin Wade III, 46,667 warrants to purchase shares of IMSI common stock at an exercise price of $0.75 per share. These warrants were awarded to Mr. Wade as part of a bonus. On November 12, 2002, we amended the Employment Agreement between us and Mr. Martin Wade III whereby both parties agreed to the full and complete cancellation of all the 2,000,000 outstanding warrants granted to Mr. Wade as part of his Employment Agreement. When the warrants were issued, we calculated $1,037,000 of intrinsic value as a result of 41 the difference between the exercise price of the warrants and the then current market price. We were amortizing this amount 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 $432,000 in the quarter ending December 31, 2002. OPTIONS EXERCISED No options were exercised by the named executives in fiscal year 2003. The following table sets forth information with respect to the number of shares covered by both exercisable and non-exercisable stock options as of June 30, 2003. Also reported are the values for "in-the-money" options, which represent the positive spread between the exercise price of any such existing stock options and the fiscal year-end price of the Common Stock. AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
VALUE OF UNEXERCISED NUMBER OF UNEXERCISED OPTIONS/SARS IN-THE-MONEY OPTIONS AT JUNE 30, 2003 (1) AT JUNE 30, 2003 ($) (2) VALUE REALIZED EXERCISABLE / EXERCISABLE / NAME EXERCISE # ($) UNEXERCISABLE UNEXERCISABLE ---- ---------- -------------- ------------- ------------- Martin Wade III -- -- -- / -- $-- / $-- Bush, William -- -- 42,503 / 119,923 $550 / $5,038 Jakab, Paul -- -- 183,340 / 24,160 $45,503 / $9,747 Landies, Gordon -- -- 50,000 / 30,025 $-- / $6,907 Mayer, Robert -- -- 50,000 / 57,500 $25,500 / $2,350
(1) These options, which have a four-year vesting period, become exercisable over time based on continuous employment with the Company and in certain cases are subject to various performance criteria or vest in full upon acquisition of the Company. (2) Based on the difference between the market price of the Common Stock at June 30, 2003 ($.71 per share), and the aggregate exercise prices of options shown in the table. ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The following table sets forth, as of September 15, 2003, the beneficial ownership of the Company's Common Stock by: o Each person who is known by the Company to own of record or beneficially more than five percent (5%) of the Company's Common Stock o Each director or nominee o Each other executive officer named in the Summary Compensation Table, above in Item 10, and o All directors and executive officers as a group. Except as otherwise indicated, the shareholders listed in the table have sole voting and dispositive power with respect to the shares indicated, subject to community property laws where applicable.
TOTAL NAME NUMBER PERCENT - ------------------------------------------------------------------------------------------------ Digital Creative Development Corp 7,685,758 33.2% Capital Ventures, Inc. 2,553,791 10.97% Gordon Landies 1,648,664 6.85% Geoffrey Koblick 1,022,600 4.33% Robert Mayer 842,086 3.58% Paul Jakab 832,732 3.48% Bruce Galloway 500,000 2.11% Robert Falcone 250,000 1.07% Richard Berman 250,000 1.07% William Bush 202,426 0.87% Donald Perlyn 50,000 0.22% Evan Binn 50,000 0.22% Martin Wade 46,667 0.22% ALL DIRECTORS AND EXECUTIVE OFFICERS AS A GROUP 5,695,175 21.06% - ------------------------------------------------------------------------------------------------
42 ITEM 12- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS DCDC 15% NOTE On September 18, 2003, we entered into a 15% one-year note with DCDC whereby we loaned them $350,000. The note is due, with interest, on September 18, 2004. The note is secured by 400,000 shares of our stock held by DCDC. The agreement also calls for DCDC not to sell any other IMSI common stock which it holds, with the exception of private sales of IMSI common stock, until February 15, 2004. Concurrent with this note, DCDC repaid the entire principal portion of a $50,000 note, made in favor of IMSI on February 25, 2003. That note, due on February 25, 2004 was unsecured and carried a 4% interest rate. The interest payable, amounting to $1,162, is outstanding as of the filing and is due and payable on February 18, 2004. CONSULTING AGREEMENT On May 1, 2003 we entered into a consulting agreement with Mr. Bruce Galloway, chairman of our board of directors, to provide services to the company related to potential acquisitions and divestitures. In return for his services, Mr. Galloway could be entitled to a fee from zero to $200,000 dependent on his involvement and on the consideration received or paid by us as a result of the transaction. Upon the successful sale of ArtToday in June 2003 we paid Mr. Galloway a fee of $150,000 per the terms of the agreement. FIVE-YEAR, 15% SECURED PROMISSORY NOTES, WITH WARRANTS ATTACHED In March 2003, we initiated a private placement of five-year, 15% secured promissory notes to accredited investors. We were successful in raising $805,000. Purchasers of the notes also received warrants to purchase IMSI's common stock at the rate of one warrant for each $2.00 of principal of the notes. These warrants have a strike price of $0.45 and will expire on June 30, 2006. The notes were secured by the pledge of the common stock of ArtToday.com. None of the participants in these private placements, except for our Chief Financial Officer, Mr. William J. Bush and Mr. Joseph Abrams (an IMSI related party as a former beneficial owner of IMSI Common Stock) who participated in the amounts of $80,000 and $50,000 respectively and received 40,000 and 25,000 warrants to purchase shares of IMSI's stock respectively, were deemed to be an "affiliate" or a "related party" as defined in Statement of Financial Accounting Standards No.57, "Related Party Disclosures". The offering was conducted directly by IMSI. Proceeds of the offering were intended to retire existing debt, purchase of and/or license of digital content and software assets and fund general working capital needs. Concurrent with the sale of ArtToday on June 30, 2003, we repaid the notes in full with an early repayment penalty of 2% which was $16,000. EXECUTIVE EMPLOYMENT AGREEMENT AND AMENDMENTS TO EXECUTIVE EMPLOYMENT AGREEMENT On November 12, 2002, we amended the Employment Agreement between us and Mr. Martin Wade III 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: o 1.75% of the total amount of the transaction for any transaction of at least $1.25 per net share o 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. 43 DEBT TO EQUITY CONVERSION In November 2001, we entered into a stock purchase agreement with DCDC to acquire all issued and outstanding shares of capital stock of Keynomics. As of the date of the purchase, Keynomics had promissory notes outstanding in the aggregate principal amount of $245,000. Subsequent to the execution of the stock purchase agreement, holders of an aggregate of $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 then 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 as a former beneficial owner of IMSI common stock, received 287,389 shares in exchange for his outstanding promissory note to Keynomics. MANAGEMENT AGREEMENTS AND AMENDMENT TO MANAGEMENT AGREEMENTS GORDON LANDIES, PRESIDENT AND PAUL JAKAB, COO. As of September 2001 we entered into individual management agreements with Gordon Landies and Paul Jakab pursuant to which Mr. Landies was named President of the Company and Mr. Jakab was named Chief Operating Officer of the Company. As compensation for their services, each executive is to receive a monthly base salary of $13,000; options or warrants totaling 350,000; a quarterly bonus of up to 25% of their base pay, depending upon the extent to which profit and cash goals (to be agreed to by our Executive Committee) are met; and the right to participate in our benefit plans. In June 2003 we amended the management agreement between IMSI and Mr. Paul Jakab to provide for Mr. Jakab's resignation as an officer of IMSI. Instead he assumed the position of Business Affairs Advisor where he will be responsible for certain international sales and from time to time certain legal matters as directed by the company. Mr. Jakab will be paid $8,000 per month for such services. DCDC. Also in September 2001, we entered into a six-month management agreement with DCDC to formalize the arrangement whereby DCDC was to provide management services to us in connection with our day-to-day business in exchange for a fee of $50,000 per month. Specifically, DCDC (through its CEO and CFO, and from time to time various assistants to the CFO) was to provide the Company advisory services in the areas of financial management, insurance, investment banking, and business planning, among others. This agreement was terminated in March 2002. SEVERANCE Jeffrey B. Morgan, our former Chief Financial Officer, received a $75,000 severance package when he resigned his position on August 31, 2001. The agreement calls for payments of $60,000 (representing 50% of Mr. Morgan's annual base salary) payable in 12 equal installments starting in September 2001 and a $15,000 payment made in September 2001. The entire severance amount was paid as of June 30, 2003. ASSET ASSIGNMENT Until September 2001 we were developing an online design and visualization tool, Design.NET that was planned to allow users to design homes and offices on the Internet. Our strategy had been to license the Design.NET technology to industry leaders in major market segments. In September 2001 we undertook an intensive reassessment of the current costs and future potential financial benefits of the Design.NET project. We concluded it would be in our best interest to spin off the Design.NET project. Consequently, we signed a letter of intent with Michel Gariepy (a former Vice president of IMSI) to transfer a majority of the ownership of the project (80.01%) to employees (including Mr. Gariepy) who are key to its continued development. Pursuant to this letter of intent, these employees have resigned from IMSI and have established an independent company to pursue the development of this technology. We retained a 19.99% ownership interest in this new company, but otherwise will have no further obligation to expend capital on its activities or any outstanding obligations, if any. ITEM 13- EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K (A) EXHIBITS AND FINANCIAL STATEMENTS: The following documents are filed as a part of this Report: 44 1. FINANCIAL STATEMENTS The following consolidated financial statements of International Microcomputer Software, Inc., and Subsidiaries, and the Independent Auditors' Report issued thereon, are incorporated by reference in Part II, Item 7: Independent Auditors' Report for the years ended June 30, 2003, and 2002 Consolidated Balance Sheet at June 30, 2003 Consolidated Statements of Operations for the years ended June 30, 2003 and 2002 Consolidated Statements of Shareholders' Equity for the years ended June 30, 2003 and 2002 Consolidated Statements of Cash Flows for the years ended June 30, 2003 and 2002 Notes to Consolidated Financial Statements 2. EXHIBITS The following exhibits are filed as part of, or incorporated by reference into this Report: 23 Consent of Grant Thornton LLP 31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2 Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 99.1 DCDC 15% Note 99.2 Consulting Agreement - Bruce Galloway 99.3 Amendment to Management Agreement - Paul Jakab 99.4 Asset Purchase Agreement - Upperspace 99.5 Amendment to Agreement for Assignment of Software - Human Concepts 99.6 Amendment to Software License and Distribution Agreement - Human Concepts (B) REPORTS ON FORM 8-K o On June 25, 2003, we filed a Form 8-K to disclose the details of the sale of our wholly owned subsidiary ArtToday to Jupitermedia Corporation. o On May 08, 2003, we filed a Form 8-K to disclose our financial results for the quarter ended March 31, 2003. o On May 02, 2003, we filed a Form 8-K to disclose the details of our settlement of the Imageline litigation. ITEM 14 - PRINCIPAL ACCOUNTANT FEES AND SERVICES (1) AUDIT FEES Grant Thornton, LLP, our principal accountant, billed us audit fees in the aggregate amounts of $178,000 and $233,000 during Fiscal 2003 and 2002 respectively. These fees relate to the audit of our annual financial statements, to the review of our financial statements included in our quarterly reports on Forms 10-QSB and regulatory filings or engagements in the previous two fiscal years. (2) AUDIT-RELATED FEES Grant Thornton, LLP, our principal accountant, billed us audit-related fees in the aggregate amounts of $33,000 and $63,000 during Fiscal 2003 and 2002 respectively. These fees relate primarily to acquisition and asset sale activity. (3)TAX FEES Grant Thornton, LLP, our principal accountant, billed us tax fees in the aggregate amounts of $121,000 and $17,000 during Fiscal 2003 and 2002 respectively. These fees relate to preparation of our current and delinquent income tax filings and for tax advice and planning regarding mergers, acquisitions and disposition of assets. (4) ALL OTHER FEES No other fees were billed during the previous two fiscal years. 45 SIGNATURES Pursuant to the requirement of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Novato, State of California on September 25, 2003. INTERNATIONAL MICROCOMPUTER SOFTWARE, INC. By: /s/ MARTIN WADE III ------------------------------------------------------ Martin Wade III Chief Executive Officer By: /s/ WILLIAM J. BUSH ------------------------------------------------------ William J. Bush Chief Financial Officer (Principal Accounting Officer) 46 POWER OF ATTORNEY KNOW ALL BY THESE PRESENTS that each individual whose signature appears below constitutes and appoints Martin Wade and William J. Bush, and each of them, his attorneys-in-fact, and agents, each with the power of substitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Report, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or his or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the Requirement of the Securities Exchange Act of 1934, the following persons in the capacities and on September 25, 2003, have signed this report below. By: /s/ BRUCE GALLOWAY ------------------------------------------------- Bruce Galloway Director & Chairman of the Board of Directors By: /s/ MARTIN WADE III ------------------------------------------------- Martin Wade III Director By: /s/ DONALD PERLYN ------------------------------------------------- Donald Perlyn Director By: /s/ EVAN BINN ------------------------------------------------- Evan Binn Director By: /s/ ROBERT MAYER ------------------------------------------------- Robert Mayer Director By: /s/ ROBERT S. FALCONE ------------------------------------------------- Robert S. Falcone Director By: /s/ RICHARD J. BERMAN ------------------------------------------------- Richard J. Berman Director 47 INDEX TO EXHIBITS
NUMBER EXHIBIT TITLE PAGE - --------------------------------------------------------------------------------------------------------------------- 23 Consent of Grant Thornton LLP 49 31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 50 31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 51 32.1 Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 52 32.2 Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 53 99.1 DCDC 15% Note 54 99.2 Consulting Agreement - Bruce Galloway 57 99.3 Amendment to Management Agreement - Paul Jakab 59 99.4 Asset Purchase Agreement - Upperspace 60 99.5 Amendment to Agreement for Assignment of Software - Human Concepts 70 99.6 Amendment to Software License and Distribution Agreement - Human Concepts 71
48 EX-23.1 3 ex23_1.txt EXHIBIT 23.1 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We have issued our report dated September 12, 2003, accompanying the consolidated financial statements included in the Annual Report of International Microcomputer Software, Inc. on Form 10-KSB for the year ended June 30, 2003. We hereby consent to the incorporation by reference of said report in the Registration Statement of International Microcomputer Software Inc. on Form S-8 (File No. 333-105073, effective May 8, 2003). GRANT THORNTON LLP San Francisco, CA September 12, 2003 49 EX-31.1 4 ex31_1.txt Exhibit 31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER UNDER SECTION 302 OF THE SARBANES-OXLEY ACT I, Martin Wade, III, certify that: 1. I have reviewed this annual report on Form 10-KSB of International Microcomputer Software, Inc; 2. Based on my knowledge, this annual 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 annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual 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 annual 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 annual report (the "Evaluation Date"); and c. Presented in this annual 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 control 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 annual 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: September 25, 2003 /s/ MARTIN WADE III - ------------------------------- Martin Wade III Chief Executive Officer 50 EX-31.2 5 ex31_2.txt Exhibit 31.2 CERTIFICATION OF CHIEF EXECUTIVE OFFICER UNDER SECTION 302 OF THE SARBANES-OXLEY ACT I, William J. Bush, certify that: 1. I have reviewed this annual report on Form 10-KSB of International Microcomputer Software, Inc; 2. Based on my knowledge, this annual 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 annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual 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 annual 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 annual report (the "Evaluation Date"); and c. Presented in this annual 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 control 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 annual 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: September 25, 2003 /s/ WILLIAM J. BUSH - ------------------------------------------------------ William J. Bush Chief Financial Officer (Principal Accounting Officer) 51 EX-32.1 6 ex31.txt EXHIBIT 32.1 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 Annual Report on Form 10-KSB for the fiscal year ended June 30, 2003, 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 Annual Report fairly presents, in all material respects, the financial condition and results of 53 operations of the Company. Dated: September 25, 2003 /s/ MARTIN WADE III - ------------------------------- Martin Wade III Chief Executive Officer 52 EX-32.2 7 ex32.txt EXHIBIT 32.2 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 Annual Report on Form 10-KSB for the fiscal year ended June 30, 2003, 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 Annual Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: September 25, 2003 /s/ WILLIAM J. BUSH - --------------------------- William J. Bush Chief Financial Officer 53 EX-99.1 8 ex99_1.txt EXHIBIT 99.1 THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, ACCORDINGLY, NO INTEREST IN THIS NOTE MAY BE OFFERED OR SOLD EXCEPT PURSUANT TO (I) AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (II) AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT. DIGITAL CREATIVE DEVELOPMENT CORPORATION 15% PROMISSORY NOTE $350,000 DATE: SEPTEMBER 18, 2003 FOR VALUE RECEIVED, the undersigned, Digital Creative Development Corporation (the "Payor"), having its principal place of business at 200 East 82nd Street, New York, NY 10028, hereby promises to pay to: International Microcomputer Software, Inc., the ("Payee") having an address at 75 Rowland Way, Novato, CA at the Payee's address set forth herein above, or at such other place as the Payee shall hereafter specify in writing, the principal sum of THREE HUNDRED AND FIFTY THOUSAND and 00/100 DOLLARS ($350,00.00). Principal and interest shall be payable in one payment due by September 25, 2004. Such principal amount and interest shall be payable not later than 12:00 o'clock noon, New York City time, on the date when due, in such currency of the United States of America as at the time shall be legal tender for the payment of public and private debts and in funds immediately available at such payment office. 1. INTEREST AND PAYMENT. 1.1. The principal amount hereof outstanding from time to time shall bear simple interest (computed on the basis of a 360 day year, using the number of days actually elapsed) from the date hereof at the annual rate of 15% until the Maturity Date. 1.2 If any payment under this Note becomes due on a Saturday, Sunday or any other day on which banks in New York City are required or permitted to be closed then such payment shall be made on the next succeeding day which is not a Saturday, Sunday, or any day on which such banks are required or permitted to be closed and any principal amount due shall continue to bear interest until such payment is made. 1.3 Payment of principal and interest shall be satisfied in whole or in part under the following: 2. PREPAYMENT. At the option of the Payor, this Note may be prepaid in whole at any time, or in part from time to time, without penalty or premium. Each partial prepayment of this Note shall first be applied to interest accrued through the date of prepayment and then to principal. 3. Security. The obligation shall be secured by 400,000 shares of restricted common stock of International Microcomputer Software, Inc. ("Payee") currently held by Payor. Such security shall be evidenced by a Pledge and Security Agreement executed contemporaneously herewith. 4. EVENTS OF DEFAULT. Payor shall be deemed to be in default hereunder (an "Event of Default") at the option of Payee, upon the occurrence of any of the following events: 4.1 The failure of the Payor to make payment, when due, of the principal of and accrued interest on this Note; or 4.2 The Payor's insolvency, assignment for the benefit of creditors, application for, or appointment of a receiver or trustee (or other similar official) of the Payor, admission in writing that the Payor cannot pay its debts as they become due or filing of a voluntary or involuntary petition under any provision of the Federal Bankruptcy Code or amendments thereto or any other federal or state statute affording relief to debtors; or there shall be commenced against the Payor any such proceeding or filed against the Payor any such application or petition which proceeding, application or petition is not dismissed or withdrawn within sixty (60) days of commencement or filing, as the case may be; or 4.3 The default in the due observance or performance of any covenant, condition or agreement on the part of the Payor to be observed or performed pursuant to the terms and provisions of the Note (other than the payment provisions) and such default shall continue for thirty (30) days after written notice thereof, specifying such default, shall have been given to Payor by Payee; or 4.4 The sale by Payor of all or substantially all of its assets or the merger or consolidation by the Payor with or into another corporation, except for: (i) mergers or consolidations where Payor is the surviving entity or where the surviving entity expressly accepts and assumes the obligations under this Note and (ii) mergers for the purpose of reincorporating in another jurisdiction; or 4.5 An Event of Default under the terms of the Pledge and Security Agreement of even due herewith. 5. UNCONDITIONAL OBLIGATION: FEES, WAIVERS, OTHER. 5.1 The obligation to make the payments provided for in this Note are absolute and unconditional and not subject to any defense, set-off, counterclaim, recission, recoupment or adjustment whatsoever. 5.2 Payor agrees to pay after an Event of Default, on demand, all reasonable cost and expenses paid or incurred by Payee in seeking to collect this Note, including, without limitation, reasonable attorney's fees and disbursements paid or incurred by Payee. 5.3 No forbearance, indulgence, delay or failure to exercise any right or remedy with respect to this Note shall operate as a waiver, nor as an acquiescence in any default, nor preclude any other or further exercise thereof or the exercise of any other right or remedy. 5.4 This Note may not be modified or discharged (other than by payment of this Note), except by a writing duly executed by the Payor and Payee. 5.5 The Payor hereby expressly waives demand, presentment for payment, notice of nonpayment, notice of dishonor, protest and notice of protest with respect to this Note. 6. SUITS FOR ENFORCEMENT OF REMEDIES. If any one or more Events of Default shall occur and be continuing, the Payee may bring an action to protect and enforce Payee's rights either by specific performance of any covenant, condition or agreement contained in this Note or in any agreement or document referred to herein or in aid of the exercise of any power granted in this Note or in any agreement or document referred to herein, or proceed to enforce the payment of this Note or to enforce any other legal or equitable right of the Payee. No right or remedy herein or in any other agreement or instrument conferred upon the holder of this Note is intended to be exclusive of any other right or remedy, and each and every such right or remedy shall be cumulative and shall be in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or by statue or otherwise. 7. RESTRICTION ON TRANSFER. By its acceptance of this Note the Payee acknowledges that this Note has not been registered or qualified under the securities laws of the United States of America or any state thereof. By its acceptance of the Note the Payee acknowledges and represents that this Note has been acquired for investment and, even if this Note is subsequently amended to be negotiable, no interest in this Note may be offered for sale, sold, delivered after sale, transferred, pledged, or hypothecated in the absence of registration and qualification of this Note under applicable federal and state securities laws or an opinion of counsel of the Payee reasonably satisfactory to the Payor that such registration and qualification are not required. 8. MISCELLANEOUS. 8.1 The headings of the various paragraphs of this Note are for convenience of reference only and shall in no way modify any of the terms or provisions of this Note. 8.2 All notices required or permitted to be given hereunder shall be in writing and shall be deemed to have been duly given when personally delivered, delivered by overnight courier or sent by registered or certified mail, return receipt requested, postage prepaid, to the address of the intended recipient shall have hereafter given to the other party hereto pursuant to the provisions hereof. 8.3 This Note and the obligations of the Payor and the rights of the Payee shall be governed by and construed in accordance with the laws of the State of New York without giving effect to choice of law principles. 8.4 This Note shall bind the Payor and its successors and assigns. DIGITAL CREATIVE DEVELOPMENT CORPORATION Date: September 18, 2003 /s/ GEARY HERMAN - ------------------------- Geary Herman Chief Executive Officer EX-99.2 9 ex99_2.txt EXHIBIT 99.2 CONSULTING AGREEMENT THIS CONSULTING AGREEMENT is entered into as of May 1st, 2003, by and between International Microcomputer Software, Inc., a California corporation ("IMSI"), and Bruce Galloway, an individual residing in the state of New York ("Consultant"). WHEREAS, IMSI is a developer and publisher of productivity software in the visual design, graphic design and other related business applications; and WHEREAS, Consultant is acquainted with persons and entities (each, a "Business Entity"), who may be interested in selling to or acquiring from IMSI, or any of its subsidiaries, a significant asset or assets, or be interested in entering into a strategic alliance, venture, or merger transaction with IMSI or one of its subsidiaries (any such transaction is referred to herein as a "Transaction"); and WHEREAS, in order to advance such possible Transactions, Consultant has agreed to provide introductions and information regarding business opportunities with the Business Entities, and to provide personal services to IMSI during negotiations with the Business Entities pertaining to the Transactions. NOW, THEREFORE, in consideration of the mutual covenants set forth in this Consultant's Agreement, the parties to this Consultant's Agreement agree as follows: 1. CONSULTANT'S FEE. a) Subject to the requirements of subparagraph (b) hereinbelow, if, during the term of this Consultant's Agreement, Consultant introduces to IMSI a Business Entity, which, enters into a Transaction with IMSI, Consultant will be entitled to a Consultant's fee (the "Consultant's Fee") equal to the following: i) For each Transaction, the aggregate value of which at closing is less than $5,000,000, Consultant will receive no fee; ii) For each Transaction, the aggregate value of which at closing is between $5,000,000 and $10,000,000, Consultant will receive $100,000; iii) For each Transaction, the aggregate value of which at closing is between $10,000,000 and $15,000,000, Consultant will receive $125,000; and iv) For each Transaction, the aggregate value of which at closing is between $15,000,000 and $20,000,000, Consultant will receive $150,000; and v) For each Transaction, the aggregate value of which at closing is greater than $20,000,000, Consultant will receive $200,000. Should such Transaction be a joint venture, strategic alliance, or a merger, or any other business arrangement whereby no purchase price is clearly set forth, the aggregate value of the Transaction shall be determined by the value of the consideration(s) or contribution(s) provided by the Business Entity, and/or any other third party, to the Transaction. b) Notwithstanding anything set forth in this Consultant's Agreement, in order to receive the Consultant's Fee, Consultant must provide "Significant Personal Services" contributing to the consummation of the Transaction. For purposes of this Consultant's Agreement, "Significant Personal Services" is defined to mean a level of services provided by the Consultant in connection with the Transaction that is a material factor in bringing the Transaction to a closing. The determination of the IMSI Board of Directors as to whether the Consultant has performed Significant Personal Services in any given Transaction shall be binding upon both parties hereto. The Consultant's Fee shall be paid within thirty (30) days following the closing of the Transaction to which it pertains. 2. AMENDMENT. This Consultant's Agreement shall not be modified or amended except by means of a writing signed by each of the parties to this Agreement. 3. TERMINATION. ISMI shall have the right to terminate this Consultant's Agreement upon five (5) days written notice to Consultant. However, such termination shall not affect Consultant's right to be compensated with respect to any Transaction(s) in which the Consultant performed Significant Personal Services prior to the effective date of such termination. 4. BINDING EFFECT. This Consultant's Agreement shall be binding upon the parties to it and their respective heirs, executors, administrators, successors and assigns. 5. SEVERABILITY. If any provision of this Consultant's Agreement shall under any circumstances be deemed invalid or inoperative to any extent, it is agreed and understood that such invalidity shall not invalidate the whole Consultant's Agreement, but the Consultant's Agreement shall be construed as not to contain the provision or provisions deemed invalid or inoperative. 6. GOVERNING LAW. The construction and interpretation of this Consultant's Agreement shall at all times and in all respects be governed by and construed according to the laws of the State of California. 7. COUNTERPARTS. This Consultant's Agreement may be executed and delivered in any number of counterparts, each of which, shall have the force and effect of an original. IN WITNESS WHEREOF, the undersigned have executed this Consultant's Agreement as of the date first above written. INTERNATIONAL MICROCOMPUTER SOFTWARE, INC. CONSULTANT /s/ MARTIN WADE III /s/ BRUCE GALLOWAY - ------------------------- ---------------------- Martin Wade III Bruce Galloway Chief Executive Officer EX-99.3 10 ex99_3.txt EXHIBIT 99.3 AMENDMENT TO MANAGEMENT AGREEMENT Effective as of May 20, 2003, the Management Agreement ("Agreement") between International Microcomputer Software, Inc., a California corporation, ("IMSI") and Paul A. Jakab, Chief Operating Officer of IMSI, ("ExecutiveEmployee") dated September 1, 2001, is hereby amended ("Amendment") as follows: 1. IMSI and ExecutiveEmployee each shall have the right at any future time, upon ten (10) working days' written notice, to terminate ExecutiveEmployee's employment. Any such termination, whether by IMSI or ExecutiveEmployee, shall be considered "termination without cause" for purposes of the Agreement, and ExecutiveEmployee shall be entitled to all benefits of the "without cause" termination provisions of the Agreement 2. ExecutiveEmployee's monthly salary shall be as originally provided in the Agreement, commencing as of the date of this Amendment. For each month ExecutiveEmployee is employed by IMSI after June , 2003, ExecutiveEmployee's severance pay due for severance without cause shall be reduced by $5,000 per month. 3. ExecutiveEmployee shall be responsible for certain European, Middle Eastern and African sales, and certain legal matters as directed from time to time by IMSI's President. ExecutiveEmployee shall remain Managing Director of IMSI's German subsidiary, IMSI GmbH during the time of employment or until asked to resign from that position by IMSI's President. ExecutiveEmployee shall receive a sales commission of 4% of net sales (i.e. gross sales minus price protection, returns, and bad debt) for which ExecutiveEmployee is responsible. Employee shall not be required to devote his full working time to IMSI matters, but shall be free to undertake other projects as long as these do not conflict with or detract from work done for IMSI. 4. ExecutiveEmployee shall have the title of Business Affairs Advisor, reporting to the President of IMSI. ExecutiveEmployee shall continue to be entitled to all benefits he and his family currently receive, and shall be reimbursed, as currently, for all ordinary and necessary expenses he incurs in the course of his employment by IMSI. 5. ExecutiveEmployee shall work primarily from an off-site location, but shall retain access to IMSI's offices. An appropriate IMSI employee shall be authorized to assist ExecutiveEmployee from time to time with his technology/equipment needs as necessary to carry out his duties from an off-site location. In case of any conflict or inconsistency between the terms and conditions of this Amendment and those of the Agreement, the terms and conditions of this Amendment shall prevail. All other terms and conditions of the Agreement shall remain as originally written and are hereby reaffirmed. ACKNOWLEDGED AND AGREED: IMSI Paul A. Jakab /s/ GORDON LANDIES /s/ PAUL JAKAB - --------------------------- ------------------------- GORDON LANDIES PAUL JAKAB PRESIDENT EX-99.4 11 ex99_4.txt EXHIBIT 99.4 ASSET PURCHASE AGREEMENT This Asset Purchase Agreement (the "AGREEMENT") is entered into as of _July 29, 2003 (the "CLOSING DATE") by and among Upperspace Corporation, an Oklahoma corporation located at 600 SE 49th St., Pryor, OK 74361 ("SELLER"), and International Microcomputer Software, Inc., a California corporation located at 75 Rowland Way, Novato, CA 94945 ("BUYER"). In consideration of the premises and of the mutual agreements, representations, warranties and covenants hereinafter set forth, the parties hereto agree as follows: Transfer of Assets. Seller hereby sells to Buyer, and Buyer hereby purchases and accepts from Seller all of Seller's right, title and interest in and to the tangible and intangible assets of Seller, generally referred to as its computer aided design software ("CAD") business including, but not limited to the DesignCAD and related software products (as described in SCHEDULE 1, the "PRODUCTS") and all related assets including inventory, web sites and domain names relating to the Products, content, graphics, newsletters, archives, hardware, software, databases, mailing lists (postal and e-mail), customer lists, member lists, user lists, artist lists, marketing materials, trademarks, including all related goodwill, tradenames, copyright, patents, logos, development computer and server hardware, web site design and architecture (such hardware, software and equipment as have been necessary for Seller to develop and support CAD products immediately prior to the Closing Date and all such other assets associated with Seller's operation of the CAD business collectively hereafter the "BUSINESS"). These assets are more specifically listed in SCHEDULE 1 (collectively, the "ASSETS"), free and clear of any liens or encumbrances. Liabilities. Buyer is not assuming and shall not be liable for, and Seller shall retain and, as between Buyer and Seller, remain solely liable for and obligated to discharge, all of the debts, contracts, agreements, commitments, obligations and other liabilities of any nature of Seller, whether known or unknown, accrued or not accrued, fixed or contingent, and arising out of or resulting from the operations of Seller until the Closing Date, including any liabilities resulting from the sale of the Assets constituting a "bulk sale" under any state commercial code. Buyer is assuming and shall be solely liable for all debts, contracts, agreements, commitments, obligations and other liabilities of any nature, whether known or unknown, accrued or not accrued, fixed or contingent, and arising out of or resulting from the Buyer's operation of the Business after the Closing Date, including assumption of the obligations arising out of those agreements referenced in Section 5.1(e) herein. Certain Tax Matters. Seller shall be responsible for any sales or use, transfer, real property gains, excise or other similar taxes imposed on Seller and resulting directly from the sale of Assets or otherwise as a consequence of the transactions contemplated by this Agreement. Seller shall pay promptly when due, and reimburse, indemnify and hold harmless Buyer from the taxes described in the preceding sentence, including interest, penalties and additions to tax in respect thereof. Purchase Price; Allocation. PURCHASE PRICE. The total purchase price (the "PURCHASE PRICE") for the Assets and all other rights obtained pursuant to this Agreement will be: A payment of seven hundred thousand dollars ($700,000), of which one hundred thousand Dollars ($100,000) shall be held in escrow for a period of twelve (12) months from closing to be used to fund any indemnity claims should they arise, as further described in that Escrow Agreement attached hereto as EXHIBIT A; A Promissory Note in the form attached hereto as EXHIBIT B in the amount of three hundred thousand dollars ($300,000) payable in twelve months from the Closing Date and secured by the Assets; and An earn out totaling up to three hundred thousand dollars ($300,000) over three years based upon net revenue ("REVENUE"). As used herein, Revenue shall include: (i) all domestic and international revenues received by Buyer from all Products and new versions of such Products; (ii) all revenues received by Buyer resulting from Buyer's actions to upgrade users of the Products to any of Buyer's products, (iii) all revenues received by Buyer as a result of sublicenses of the Intellectual Property (as defined in Section 7.7) to any third parties for incorporation into other products; (iv) a pro rata portion of revenue received by Buyer and attributable to existing or new products of Buyer that incorporate software, code or technology acquired from Seller, and (v) revenues received by Buyer from sales of Products to Target Resellers pursuant to Section 2.01(b)(ii) of that Distribution Agreement between the parties attached as EXHIBIT C); provided, however, that Revenue shall not include revenues received by Buyer upon the sale of materials to Seller for resale by Seller pursuant to the Distribution Agreement. Revenue shall be calculated by Buyer based on U.S. generally accepted accounting principles, applied on a consistent basis ("GAAP") and adjusted as necessary for sales returns, allowances and bad debts. Seller shall be entitled to receive one dollar ($1.00) of additional payment for each two dollars ($2.00) of Revenue earned by the Business over the applicable Minimum amount, payable as follows: Up to a maximum of one hundred thousand dollars ($100,000) provided that the Business generates between seven hundred fifty thousand dollars ($750,000) (the "FIRST MINIMUM") and nine hundred fifty thousand Dollars ($950,000) (the "FIRST MAXIMUM") of Revenue for the twelve (12) consecutive calendar months following the Closing. An additional payment of up to a maximum of one hundred thousand dollars ($100,000) provided that the Business generates between eight hundred twenty-five thousand dollars ($825,000) (the "SECOND MINIMUM") and one million twenty-five thousand Dollars ($1,025,000) (the "SECOND MAXIMUM")of Revenue for the thirteenth through twenty-fourth (13 - 24) consecutive calendar months following the Closing. An additional payment of up to a maximum of one hundred thousand dollars ($100,000) provided that the Business generates between nine hundred thousand dollars ($900,000) (the "THIRD MINIMUM") and one million one hundred thousand Dollars ($1,100,000) (the "THIRD MAXIMUM")of Revenue for the twenty-fifth through thirty-sixth (25 - 36) consecutive calendar months following the Closing. Any payments to be made to Seller pursuant to paragraphs (i), (ii) or (iii) above shall be made forty-five (45) days following the applicable calculation period. ALLOCATION OF PURCHASE PRICE. For purposes of complying with the requirements of Section 1060 of the Internal Revenue Code of 1986, as amended (the "CODE"), the Purchase Price shall be allocated as provided in SCHEDULE 4.2. Each party hereto agrees to prepare its federal and state income tax returns for all current and future tax reporting periods and file Form 8594 (and corresponding state forms) with respect to transfer of the Assets to Buyer contemplated under this Agreement in a manner consistent with such allocation. If any state or federal taxing authority challenges such allocation, the party receiving notice of such challenge shall give the other prompt written notice of such challenge, and the parties shall cooperate in good faith in responding to such challenge in order to preserve the effectiveness of the allocation. POST-CLOSING ASSET ADJUSTMENTS. As soon as reasonably practical after the Closing, but in no event more than thirty (30) days after the Closing Date, Buyer shall prepare (i) a detail of the Assets as of the close of business on the Closing Date (the "CLOSING DATE ASSET DETAIL "), together with (ii) a schedule (the "ADJUSTMENT REPORT") showing the purchase price adjustment, if any (the "NET ASSET ADJUSTMENT"), to be made to the extent that the value of the Assets presented in the Closing Date Asset Detail differs from the Purchase Price. The Closing Date Asset Detail shall be prepared in accordance with GAAP standards. Buyer and Seller shall attempt to resolve all disputes between them regarding the Net Asset Adjustment. If Buyer and Seller cannot resolve all such disputes within thirty (30) days from the Closing Date, the matters in dispute shall be determined by a nationally recognized independent public accounting firm mutually satisfactory to Buyer and Seller (the "ARBITER"). Promptly, but not later than thirty (30) days after the acceptance of its appointment, the Arbiter shall determine (based solely on presentations by Seller and Buyer to the Arbiter and not by independent review) only those items in dispute and shall render a report as to its resolution of such items and the resulting calculation of the Net Asset Adjustment (the "FINAL NET ASSET ADJUSTMENT"). For purposes of the Arbiter's determination, the amounts to be included shall be the appropriate amounts from the Closing Date Asset Detail or the Adjustment Report, as the case may be, as to items that are not in dispute, and the amounts determined by the Arbiter, as to items that are submitted for resolution by the Arbiter. In resolving any disputed item, the Arbiter may not assign a value to such item greater than the greatest value for such item claimed by either party or less than the lowest value for such item claimed by either party. Buyer and Seller shall cooperate with the Arbiter in making its determination and such determination shall be conclusive and binding upon Buyer and Seller. Buyer and Seller shall each bear one-half of the fees and expenses of the Arbiter. Within five Business Days after the final determination of the Net Asset Adjustment in accordance with this Section 4.4: either (x) Buyer shall pay Seller by wire transfer of immediately available funds the amount, if any, by which the Final Net Asset Adjustment is greater than zero; or (y) Seller shall pay Buyer by wire transfer of immediately available funds the amount, if any, by which the Final Net Asset Adjustment is less than zero. Nothing in this Section 4.4 or in the statements, reports or documents contemplated hereby shall affect the parties' rights and obligations in respect of a breach or alleged breach of any representation or warranty herein. Closing. The closing of the transaction contemplated by this Agreement (the "CLOSING") shall be deemed to occur simultaneously with execution of this Agreement. At the Closing: Seller shall deliver the Assets to Buyer, to the extent possible transmitting such Assets electronically to Buyer as directed by Buyer. Buyer shall deliver the Purchase Price to Seller. Seller shall deliver to Buyer a General Bill of Sale substantially in the form of EXHIBIT D, duly executed by Seller, assigning to Buyer all of Seller's right, title and interest in and to the Assets. Buyer and Seller shall execute the Escrow Agreement the Distribution Agreement, and a Security Agreement, attached as EXHIBIT E, governing the security interest in the Assets. Pursuant to the Distribution Agreement, [essential terms to be completed on finalization of Distribution Agreement]. Buyer shall assume the performance of all obligations arising under the Distribution and Republishing Agreements set forth on Schedule 1. Post-Closing Matters. After the Closing, Seller will execute and deliver, upon the request of Buyer, all such other and further materials and documents and instruments of conveyance, transfer or assignment as may reasonably be requested by Buyer to effect, record or verify the transfer to, and vesting in Buyer, of Seller's right, title and interest in and to the Assets, free and clear of all Liens (as defined in Section 7.6), in accordance with the terms of this Agreement. RepresentationS and Warranties of Seller. Seller represents and warrant to Buyer as follows: ORGANIZATION. Seller is a corporation duly formed and validly existing under the laws of Oklahoma, and has full corporate power and authority and legal right to own and operate or lease the Assets and to carry on its business as presently conducted, to execute and deliver this Agreement and all of the other agreements and instruments to be executed and delivered by Seller pursuant hereto, and to consummate the transactions contemplated hereby and thereby. Seller is qualified to do business in Oklahoma and is not required to be qualified in any other state or other jurisdiction. AUTHORITY. The execution and delivery of this Agreement (and all other agreements and instruments contemplated hereunder) by Seller, the performance by Seller of its or their obligations hereunder and thereunder, and the consummation by Seller of the transactions contemplated hereby and thereby have been duly authorized by all necessary action by the Board of Directors of Seller. EXECUTION AND BINDING EFFECT. This Agreement has been duly and validly executed and delivered by Seller and constitutes, and the other agreements and instruments to be executed and delivered by Seller pursuant hereto, upon their execution and delivery by Seller, will constitute (assuming, in each case, the due and valid authorization, execution and delivery thereof by Buyer), legal, valid and binding agreements of Seller, enforceable against Seller in accordance with their respective terms. CONSENTS AND APPROVALS OF GOVERNMENTAL ENTITIES. There is no requirement applicable to Seller to make any filing, declaration or registration with, or to obtain any permit, authorization, consent or approval of, any local, state or federal government department or agency, whether of the U.S. or another country (each a "GOVERNMENTAL ENTITY") as a condition to the lawful consummation by Seller of the transactions contemplated by this Agreement and the other agreements and instruments to be executed and delivered by Seller pursuant hereto or the consummation by Seller of the transactions contemplated herein or therein. NO VIOLATION. Neither the execution, delivery and performance of this Agreement and all of the other agreements and instruments to be executed and delivered pursuant hereto, nor the consummation of the transactions contemplated hereby or thereby, will, with or without the passage of time or the delivery of notice or both: (i) conflict with, violate or result in any breach of the terms, conditions or provisions of the articles, bylaws or other organizational documents or agreements of Seller; (ii) conflict with or result in a violation or breach of, or constitute a default or require consent of any individual, corporation, partnership, trust or unincorporated organization or Governmental Entity ("PERSON") (or give rise to any right of termination, cancellation or acceleration) under, any of the terms, conditions or provisions of any notice, bond, mortgage, indenture, license, franchise permit, agreement, lease or other instrument or obligation to which Seller is a party or by which Seller, any of the properties or assets of Seller may be bound, where such conflict, violation, breach, default or consent would have a material adverse effect on the Assets; or (iii) violate any statute, ordinance or law or any rule, regulation, order, writ, injunction or decree of any Governmental Entity applicable to Seller or by which any properties or assets of Seller may be bound, where such violation would have a material adverse effect on the Assets. ASSETS GENERALLY. Seller holds valid title to all of the Assets and has the complete and unrestricted power and the unqualified right to sell, assign and deliver the Assets to Buyer. Buyer hereby acquires valid title to the Assets free and clear of any mortgages, pledges, liens, security interests, encumbrances, charges or other claims of third parties of any kind ("LIENS"). No Person other than Seller has any right or interest in the Assets, including the right to grant interests in the Assets to third parties. INTELLECTUAL PROPERTY. As used herein, "INTELLECTUAL PROPERTY" shall refer to: the Products; Any and all copyrights in writings, artwork, clipart, CAD symbols, webart, sounds, graphics, photographs, animations, images, designs, mask works or other works, and registrations or applications for registration of copyrights in any jurisdiction in and relating to the Assets ("COPYRIGHTS"); All rights to all fictional business names, trademarks and service marks (registered or unregistered), trade dress, trade names, domain names, URLs and other names and slogans embodying business or product goodwill or indications of origin, all applications or registrations in any jurisdiction pertaining to the foregoing and all goodwill associated therewith and relating to the Products (collectively the "MARKS"); All patents, patentable inventions, discoveries, improvements, ideas, know-how, formula methodology, processes, technology and computer programs, software and databases (including source code, object code, development documentation, programming tools, drawings, specifications and data) and all applications or registrations in any jurisdiction pertaining to the foregoing, including all reissues, continuations, divisions, continuations-in-part, renewals or extensions thereof, all relating to the Products (collectively the "PATENTS"); All trade secrets and know-how, including confidential and other non-public information relating to the Products, and the right in any jurisdiction to limit the use or disclosure thereof ("TRADE SECRETS"); All agreements relating to the Products to which Seller is a party or by which Seller is bound, except for any license implied by the sale of a product and perpetual, paid-up licenses for commonly available software programs with a value of less than $500 under which Seller is the licensee; All books and records relating to the Assets, and lists of all licensees and vendor of the Assets; and All claims or causes of action arising out of or related to infringement or misappropriation of any of the foregoing. Except as listed on Schedule 1, Seller has not entered into any joint ventures, licenses, sublicenses or other arrangements whereby a third party has the right to, or use of, any of the Intellectual Property, and all contracts, agreements and arrangements to which Seller is a party in regard to the Intellectual Property are fully transferable to Seller without consent of any third party. All Intellectual Property is valid, subsisting, unexpired, in proper form and enforceable and all renewal fees and other maintenance fees which have fallen due on or prior to the Closing Date have been paid. The grants, registrations and applications for the Intellectual Property have not lapsed, expired or been abandoned and no application or registration thereof is the subject of any legal or governmental proceeding before any governmental, registration or other authority in any jurisdiction. All products made, used, or sold under the Intellectual Property have been marked with the proper notice. All products and materials containing a Mark bear the proper notice where permitted by law. Trade Secrets. Seller has taken all reasonable precautions to protect the secrecy, confidentiality, and value of the Trade Secrets. Seller has good title and an absolute (but not necessarily exclusive) right to use the Trade Secrets. The Trade Secrets are not part of the public knowledge or literature, and, to Seller's Knowledge, have not been used, divulged, or appropriated either for the benefit of any Person (other than Seller) or to the detriment of Seller. No Trade Secret is subject to any adverse claim or has been challenged or threatened in any way. To the Knowledge of Seller, there are no conflicts with or infringements of any Intellectual Property by any third party. No Patent has been or is now involved in any interference, reissue, reexamination or opposition proceeding. No Mark has been or is now involved in any opposition, invalidation or cancellation and, to Seller's Knowledge, no such action is threatened with respect to any of the Marks. The conduct of Seller's business as currently conducted does not conflict with or infringe in any way with any proprietary right of any third party, which conflict or infringement could have a material adverse effect on Seller, the Intellectual Property or the Business. There is no claim, suit, action or proceeding pending or threatened against Seller (i) alleging any such conflict or infringement with any third party's proprietary rights or (ii) challenging the ownership, use, validity or enforceability of the Intellectual Property. Seller has not entered into any material consent, indemnification, forbearance to sue, settlement agreement or cross-licensing arrangement with any person relating to the Intellectual Property or the intellectual property of any third party other than as may be contained in the agreements listed in Schedule 1. Except as set forth in Schedule 1, Seller is not under any obligation to pay royalties or similar payments in connection with any license to any of its Affiliates. The Intellectual Property does not infringe any patent, trade name, trademark, copyright, trade secret or any other intellectual property right of any Person, without the necessity of relying upon any license held by Seller to any such intellectual property right of any Person. Seller specifically represents that it is not aware of any other international licenses, patents, trade name, trademark, copyright, trade secret or any other intellectual property rights relating to the Business or the Products held by any Person in any other countries than the United States except as listed on the attached Schedules. There is no pending or threatened claim by Seller against any Person for infringement, misuse or misappropriation of any of the Assets. Seller is not obligated or under any liability whatsoever to make any payments by way of royalties, fees or otherwise to any owner of, licensor of, or other claimant to, any patent, trademark, trade name, copyright, trade secret or other intellectual property rights, with respect to the use thereof or in connection with the conduct of Seller's business or otherwise. No former or present employees, officers, directors or consultants or contractors of or to Seller hold any right, title or interest directly or indirectly, in whole or in part, in or to any Intellectual Property. The Assets are sufficient, adequate and all that is necessary for the Business to be continued as contemplated herein and in the Distribution Agreement. SOFTWARE. To the extent the Products have been designed or developed by Seller's management information or development staff or by consultants on Seller's behalf, such Products are original and are protected by the copyright laws of the United States, and Seller has complete rights to and ownership of the Assets. No part of any of the Assets or the use thereof infringes upon the rights of any other person or entity, or violates or infringes upon any common law or statutory rights of any other person or entity, including, without limitation, rights relating to defamation, contractual rights, copyrights, patents, trade secrets and rights of privacy or publicity. Seller has not sold, assigned, licensed, distributed or in any other way disposed of or encumbered the Assets. Apart from the Alliance DXF and DWG import/export file filters licensed from the OpenDWG Alliance, which may be transferred only to other members of the OpenDWG Alliance, the Products and any software components incorporated into such Products, to the extent licensed from any third party licensor or constituting "off-the-shelf" software, are held by Seller legitimately and are fully and freely transferable without any third party consent. All of Seller's computer hardware being transferred to Buyer has legitimately-licensed software installed therein. The Products are free from any significant software defect or programming or documentation error, operates and run in a reasonable and efficient business manner, conforms to the specifications thereof, and, with respect to owned Products, the applications can be recreated from their associated source code. Seller has not knowingly altered the data, or any Product or supporting software which may in turn damage the integrity of the data, stored in electronic, optical or magnetic form. Seller has no knowledge of the existence of any bugs or viruses with respect to the Products which cause the Products to be commercially nonviable. EMPLOYEES. Buyer intends to extend offers of employment to certain employees of Seller. No Seller employee or consultant is obligated under any contract (including licenses, covenants or commitments of any nature) or other agreement, or subject to any judgment, decree or order of any court or administrative agency, that would conflict with his or her obligation to use his or her best efforts to promote the interests of Seller in the Assets. There are no written or oral contracts of employment between Seller and any Employee or consultant to Seller who has provided substantial services to Seller regarding the Business. TAXES. All sales and use taxes, real and personal property taxes, gross receipts taxes, documentary transfer taxes, employment taxes, withholding taxes, unemployment insurance contributions and other taxes or governmental charges of any kind, however denominated, including any interest, penalties and additions to tax in respect thereto, for which Buyer could become liable as a result of acquiring the Assets or which could result in a lien on or charge against the Assets (collectively, "TAXES") have been or will be paid for all periods (or portions thereof) prior to the due dates thereof. Seller and any other person required to file returns or reports of Taxes have duly and timely filed (or will file prior to the Closing Date) all returns and reports of Taxes required to be filed prior to such date, and all such returns and reports are true, correct, and complete. There are no liens for Taxes on any of the Assets. There are no pending or, to the knowledge of Seller, threatened proceedings with respect to Taxes, and there are no outstanding waivers or extensions of statutes of limitations with respect to assessments of Taxes. Seller is not a "foreign person" within the meaning of Section 1445(f)(3) of the Code. CLAIMS. There are no claims, actions, suits, inquiries, proceedings or investigations relating to Seller or the Assets which are currently pending or, to the best knowledge of Seller, threatened, at law or in equity or before or by any Governmental Entity. There are no claims relating to any of the Assets containing allegations that the Assets are defective or in breach of any warranty, or were improperly designed or manufactured or improperly labeled. DEFAULTS. Seller is not (or has not received notice of any) default under or with respect to any judgment, order, writ, injunction or decree of any court or any Governmental Entity relating to (or that could affect) any of the Assets. There does not exist any default by Seller, to the knowledge of Seller, by any other Person, or event that, with notice or lapse of time, or both, would constitute a default under any agreement (including, without limitation, any of the Transferred Agreements) entered into by Seller which could adversely affect the Assets. FULL DISCLOSURE. Seller is not aware of any facts pertaining to the Assets which could affect the Assets in a material adverse manner or which are likely in the future to affect the Assets in a material adverse manner. Neither this Agreement nor any other agreement, exhibit, schedule or certificate being entered into or delivered pursuant hereto contains any untrue statement of a material fact or omits to state any material fact necessary in order to make the statements therein contained not misleading. FAIR CONSIDERATION; NO FRAUDULENT CONVEYANCE. The sale of the Assets pursuant to this Agreement is made in exchange for fair and equivalent consideration, Seller is not now insolvent and Seller will not be rendered insolvent by the sale, transfer and assignment of the Assets pursuant to the terms of this Agreement. Seller is not entering into this Agreement and the other agreements referenced in this Agreement with the intent to defraud, delay or hinder its creditors and the consummation of the transactions contemplated by this Agreement, and the other agreements referenced in this Agreement, will not have any such effect. The transactions contemplated in this Agreement or any agreements referenced in this Agreement will not constitute a fraudulent conveyance, or otherwise give rise to any right of any creditor of Seller whatsoever to any of the Assets in the hands of Buyer after the Closing. Representations and Warranties of Buyer. Buyer represents and warrants to Seller as follows: ORGANIZATION. Buyer is a corporation duly formed and validly existing under the laws of California, and has full corporate power and authority to execute and deliver this Agreement and all of the other agreements and instruments to be executed and delivered by Buyer pursuant hereto, and to consummate the transactions contemplated hereby and thereby. AUTHORITY. The execution and delivery of this Agreement (and all other agreements and instruments contemplated hereunder) by Buyer, the performance by Buyer of its obligations hereunder and thereunder, and the consummation by Buyer of the transactions contemplated hereby and thereby have been duly authorized by all necessary action by the Board of Directors of Buyer. No other act or proceeding on the part of Buyer or its members is necessary to approve the execution and delivery of this Agreement and such other agreements and instruments, the performance by Buyer of its obligations hereunder and thereunder and the consummation of the transactions contemplated hereby and thereby. EXECUTION AND BINDING EFFECT. This Agreement has been duly and validly executed and delivered by Buyer and constitutes, and the other agreements and instruments to be executed and delivered by Buyer pursuant hereto, upon their execution and delivery by Buyer, will constitute (assuming, in each case, the due and valid authorization, execution and delivery thereof by Sellers), legal, valid and binding agreements of Buyer, enforceable against Buyer in accordance with their respective terms. CONSENT AND APPROVALS. There is no requirement applicable to Buyer to make any filing, declaration or registration with, or to obtain any permit, authorization, consent or approval of, any Governmental Entity as a condition to the lawful consummation by Buyer of the transactions contemplated by this Agreement and the other agreements and instruments to be executed and delivered by Buyer pursuant hereto or the consummation of the transactions contemplated herein or therein. NO VIOLATION. Neither the execution, delivery and performance of this Agreement and all of the other agreements and instruments to be executed and delivered pursuant hereto, nor the consummation of the transactions contemplated hereby or thereby, will, with or without the passage of time or the delivery of notice or both: (a) conflict with, violate or result in any breach of the terms, conditions or provisions of the articles or bylaws of Buyer; (b) conflict with or result in a violation or breach of, or constitute a default or require consent of any Person (or give rise to any right of termination, cancellation or acceleration) under, any of the terms, conditions or provisions of any notice, bond, mortgage, indenture, license, franchise, permit, agreement, lease or other instrument or obligation to which Buyer is a party or by which Buyer or any of its properties or assets may be bound, where such conflict, violation, breach, default or consent would have a material adverse effect on the business or assets of Buyer; or (c) violate any statute, ordinance or law or any rule, regulation, order, writ, injunction or decree of any Governmental Entity applicable to Buyer or by which any of its properties or assets may be bound, where such violation would have a material adverse effect on the business or assets of Buyer. FAIR CONSIDERATION; NO FRAUDULENT CONVEYANCE. The sale of the Assets pursuant to this Agreement is made in exchange for fair and equivalent consideration, Buyer is not now insolvent and Buyer will not be rendered insolvent by the purchase of the Assets pursuant to the terms of this Agreement. Seller is not entering into this Agreement and the other agreements referenced in this Agreement with the intent to defraud, delay or hinder its creditors and the consummation of the transactions contemplated by this Agreement, and the other agreements referenced in this Agreement, will not have any such effect. BUYER REVIEW OF PRODUCTS. Buyer has reviewed those of the Products which are commercially available as of the Closing Date, and has deemed them to be free of any bugs or viruses which would cause such Products to be commercially nonviable. Covenants of Seller. NONDISCLOSURE; NONCOMPETITION; NONSOLICITATION. From and after the Closing Date for a period of three (3) years, Seller shall not use, divulge, furnish or make accessible to anyone any proprietary, material non-public, confidential or secret information to the extent relating to the Business (including, without limitation, customer lists, supplier lists and pricing and marketing arrangements with customers or suppliers), and Seller shall cooperate reasonably with the Buyer in preserving such proprietary, confidential or secret aspects of the Business. Notwithstanding the foregoing, nothing in this Agreement shall prohibit the disclosure of the tax treatment and tax structure, each as defined in Treasury Regulations Section 1.6011-4, of the transaction (but no other details about the matters covered by this Agreement, including, without limitation, the identities of the parties except as may be required by legal rule, regulation or legal process). From and after the Closing Date, Seller shall not, and it shall cause each of its Affiliates, officers and directors (so long as such officers and directors are serving as such) not to, directly or indirectly, (i) engage in Competitive Business Activities (as hereinafter defined); (ii) own stock or otherwise have an equity interest in or be affiliated with any person or entity engaged in Competitive Business Activities (except as a stockholder holding less than 5% of the stock of a publicly held corporation); or (iii) utilize its special knowledge of the Business or its relationships with customers, suppliers or others to compete with the Buyer in its conduct of the Business after the Closing Date, for the period applicable to such aspect of the Business, as set forth in Section 9.1(c) below. As used herein, "COMPETITIVE BUSINESS ACTIVITIES" shall mean: development or sale, during the three (3) year period following the Closing Date, of general purpose CAD or mechanical CAD products, other than those products to be offered by Seller immediately following the Closing, and new versions of such products, except as otherwise provided herein and in the Distribution Agreement; and development or sale during the two (2) year period following the Closing Date, of home design products, other than those products to be offered by Seller immediately following the Closing, and new versions of such products, except as otherwise provided herein and in the Distribution Agreement. Notwithstanding the foregoing, development and sale of remote control [vehicle] modeling software shall not be deemed a Competitive Business Activity and shall be unrestricted by this Agreement. Seller shall not, directly or indirectly, for a period of three (3) years from the Closing Date, (i) solicit for hire or enter into any contractual arrangement with Chao Chyuan-Shi, Kevan Chapman or Jerry Herring (each an "EMPLOYEE") without the prior written consent of the Buyer unless such Employee has not been employed or otherwise engaged by the Buyer for a period of one year; or (ii) call on or solicit any of the customers of the Business or make known the names and addresses of such customers or any other information relating in any manner to the Business, except to the extent that such customer was a purchaser of Seller's products other than the Products prior to the Closing, and any such call, solicitation or provision of information relates to the conduct of Seller's business after the Closing in accordance with the terms of this Agreement and the Distribution Agreement. Seller agrees that repeated violations of this Section will cause irreparable injury to the Buyer, and the Buyer shall be entitled, in addition to any other rights and remedies it may have at law or in equity, to an injunction enjoining and restraining Seller from doing or continuing to do any such violation and any other violations or threatened violations of this Section. Seller acknowledges and agrees that the covenants set forth in this Section are reasonable and valid in scope and in all other respects. If any of such covenants is found to be invalid or unenforceable by a final determination of a court of competent jurisdiction (i) the remaining terms and provisions hereof shall be unimpaired and (ii) the invalid or unenforceable term or provision shall be deemed replaced by a term or provision that is valid and enforceable and that comes closest to expressing the intention of the invalid or unenforceable term or provision. TAXES. Seller shall, to the extent that failure to do so could adversely affect the Assets following Closing: (i) continue to file within the required time period for filing all returns and reports relating to Taxes required to be filed by Seller, and such returns and reports shall be true, correct and complete; and (ii) be responsible for and pay when due any and all Taxes attributable to, levied or imposed upon the Assets for periods (or portions thereof) ending on or prior to the Closing. POST-CLOSING COOPERATION. Seller agrees that, if requested by Buyer, it will cooperate with Buyer in enforcing the terms of any agreements between Seller and any third party involving the Assets, including without limitation terms relating to the protection of intellectual property rights. In the event that Buyer is unable to enforce its intellectual property rights against a third party as a result of a rule or law barring enforcement of such rights by a transferee of such rights, Seller agrees to reasonably cooperate with Buyer by assigning to Buyer such rights as may be required by Buyer to enforce its intellectual property rights in its own name. NO DISTRIBUTION OF PRODUCTS. All distribution agreements under which Seller has granted a right to resell or otherwise distribute the products, including a brief description of the termination provisions of each such agreement, are listed in Schedule 1. Indemnification. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The representations and warranties of Seller in Section 7 shall survive for a period one year after the Closing Date, except for claims for fraud, which shall survive indefinitely, and claims for Taxes, which shall survive until lapse of the applicable statute of limitations (including extensions thereof). No investigation, or knowledge acquired, by Buyer or on behalf of Buyer with respect to any breach of any representation or warranty made by Sellers or any other matter shall affect Buyer's rights to indemnification pursuant to this Section 10. INDEMNIFICATION BY SELLER. Seller shall indemnify and hold harmless Buyer, each direct and indirect subsidiary of Buyer and each of their officers, directors, employees, agents, successors and assigns ("BUYER INDEMNITEES") for any and all liabilities, losses, damages, claims, costs and expenses, interest, awards, judgments and penalties (including, without limitation, legal costs and expenses and interest on the amount of any loss from the date suffered or incurred by Buyer Indemnitee) (a "LOSS") arising out of, resulting from or caused by: (i) any breach or the inaccuracy of any of the representations, warranties, covenants, or agreements in this Agreement made by Seller, and (ii) all liabilities or obligations, including, without limitation, those relating to Taxes, (whether known or unknown, accrued or not accrued, fixed or contingent) of Seller existing at Closing. The obligation of Seller to indemnify Buyer under this Section 10.2 shall not be limited in time or amount; provided that (except in the case of fraud by Seller and claims for Taxes) the aggregate liability for claims made solely for breaches of representations and warranties under Section 10.4(a) shall not exceed the Purchase Price, and the indemnification obligations relating to such claims shall terminate one (1) year from the date of this Agreement. Without limiting the generality or effect of the foregoing, Seller shall indemnify, defend and hold harmless Buyer and each of its Affiliates (as defined in Rule 501 under the Securities Act of 1933, as amended) from and against any and all Loss resulting from or arising out of any of the following: (i) any liability to any Employee as of the Closing Date arising in connection with their employment by Seller, including, without limitation, post-retirement health benefits, to the extent not fully funded immediately prior to the Closing, and (ii) any severance or other benefit payable to any Employee by reason of this Agreement or the transactions contemplated hereby, including, without limitation, any stay bonus, golden parachute or other change-in-control payment or benefit; Any claim or liability resulting from or in connection with Seller having failed to obtain, prior to the Closing Date, the approval of its shareholders for any of the transactions contemplated by this Agreement or any other document contemplated herein; or Any claim or liability resulting from or in connection with Seller's breach, prior to the Closing Date, of the terms of any license agreement or Seller's failure to obtain a license for Seller's use of any software incorporated into a Product prior to the Closing Date. INDEMNIFICATION BY BUYER. Buyer shall indemnify and hold harmless Seller ("SELLER INDEMNITEES") for any and all Losses arising out of or resulting from a liability or obligation, including, without limitation, those relating to Taxes, (whether known or unknown, accrued or not accrued, fixed and determined or contingent) of Buyer arising out of or resulting from the use or sale of the Assets by Buyer after the Closing Date, other than a liability or obligation for which any Buyer Indemnitee is entitled to indemnification from Seller pursuant to the provisions of Section 10.2. Buyer's obligation to indemnify Seller under this Section 10.3 shall not be limited in time or amount. INDEMNIFICATION PROCEDURE. Whenever any Loss shall be asserted against or incurred by a Buyer Indemnitee or Seller Indemnitee (the "INDEMNIFIED PARTY"), the Indemnified Party shall give written notice thereof (a "CLAIM") to Seller or Buyer, respectively (the "INDEMNIFYING PARTY"). The Indemnified Party shall furnish to the Indemnifying Party in reasonable detail such information as the Indemnified Party may have with respect to the Claim (including in any case copies of any summons, complaint or other pleading which may have been served on it and any written claim, demand, invoice, billing or other document evidencing or asserting the same). The failure to give such notice shall not relieve the Indemnifying Party of its indemnification obligations under this Agreement. If the Claim is based on a claim of a person that is not a party to this Agreement, the Indemnifying Party shall, at its expense, undertake the defense of such Claim with attorneys of its own choosing reasonably satisfactory to the Indemnified Party. In the event the Indemnifying Party, within a reasonable time after receiving notice of a Claim from the Indemnified Party, fails to defend the Claim, the Indemnified Party may, at the Indemnifying Party's expense, undertake the defense of the Claim and may compromise or settle the Claim, all for the account of the Indemnifying Party. After notice from the Indemnifying Party to the Indemnified Party of its election to assume the defense of such Claim, the Indemnifying Party shall not be liable to the Indemnified Party under this Section 10.4 for any legal expenses subsequently incurred by the Indemnified Party in connection with the defense thereof, except for such expenses incurred in connection with cooperation with, or at the request of, the Indemnifying Party; provided, however, that the Indemnified Party shall have the right to employ counsel to represent it if, in the Indemnified Party's reasonable judgment, based upon the advice of counsel, it is advisable, in light of the separate interests of the Indemnified Party and the Indemnifying Party, for the Indemnified Party to be represented by separate counsel, and in that event the reasonable fees and expenses of such separate counsel shall be paid by the Indemnifying Party. The Indemnifying Party shall not, except with the consent of the Indemnified Party, given in its sole discretion, consent to entry of any judgment or enter into any settlement. General Terms. NOTICES. Every notice or other communication required or contemplated by this Agreement by either party shall be delivered to the other party at the address first set forth above by: (i) personal delivery; (ii) postage prepaid, return receipt requested, registered or certified mail; (iii) internationally recognized express courier, such as Federal Express, UPS or DHL; or (iv) facsimile or email with a confirmation copy sent simultaneously by postal mail. Notice not given in writing shall be effective only if acknowledged in writing by a duly authorized representative of the party to whom it was given. SEVERABILITY. In the event any provision of this Agreement shall be determined to be invalid or unenforceable under applicable law, all other provisions of this Agreement shall continue in full force and effect unless such invalidity or unenforceability causes substantial deviation from the underlying intent of the parties expressed in this Agreement or unless the invalid or unenforceable provisions comprise an integral part of, or are inseparable from, the remainder of this Agreement. If this Agreement continues in full force and effect as provided above, the parties shall replace the invalid provision with a valid provision which corresponds as far as possible to the spirit and purpose of the invalid provision. AMENDMENTS AND WAIVERS. No amendment, modification, termination or waiver of any provision of this Agreement or consent to any departure by any party therefrom shall in any event be effective without the written concurrence of the other party hereto. Any waiver or consent shall be effective only in the specific instance and for the specific purpose for which it is given. No notice to or demand on any party in any case shall entitle any other party to any other or further notice or demand in similar or other circumstances. ABSENCE OF THIRD-PARTY BENEFICIARIES. No provisions of this Agreement, express or implied, are intended or shall be construed to confer upon or give to any Person other than the parties hereto, any rights, remedies or other benefits under or by reason of this Agreement unless specifically provided otherwise herein, and except as so provided, all provisions hereof shall be personal solely between the parties to this Agreement. GOVERNING LAW. The validity, construction, performance and enforceability of this Agreement shall be governed in all respects by the laws of the State of California, without reference to the choice-of-law principles thereof. INTERPRETATION. This Agreement, including any exhibits, addenda, schedules and amendments, has been negotiated at arm's length and between persons sophisticated and knowledgeable in the matters dealt with in this Agreement. The provisions of this Agreement shall be interpreted in a reasonable manner to effect the purposes of the parties and this Agreement. The article and section headings contained in this Agreement are for reference purposes only and will not affect in any way the meaning or interpretation of this Agreement. ENTIRE AGREEMENT. The terms of this Agreement and the other writings referred to herein and delivered by the parties hereto are intended by the parties to be the final expression of their agreement with respect to the subject matter hereof and may not be contradicted by evidence of any prior or contemporaneous agreement. The parties further intend that this Agreement, together with the exhibits and schedules hereto, shall constitute the complete and exclusive statement of its terms. The parties acknowledge and agree that this Agreement and exhibits and schedules hereto constitute the agreements necessary to accomplish the transactions contemplated by this Agreement and are parts of an integrated arrangement between the parties with respect to the purchase and sale of the Assets. COUNTERPARTS. This Agreement may be executed simultaneously in multiple counterparts, each of which shall be deemed an original, but all of which taken together shall constitute one and the same instrument. Execution and delivery of this Agreement by exchange of facsimile copies bearing the facsimile signature of a party hereto shall constitute a valid and binding execution and delivery of this Agreement by such party. Such facsimile copies shall constitute enforceable original documents. EXPENSES. Each of the parties agrees to pay its own expenses in connection with the transactions contemplated by this Agreement, including without limitation legal, consulting, accounting and investment banking fees, whether or not such transactions are consummated. [SIGNATURES ON FOLLOWING PAGE] IN WITNESS WHEREOF, this Asset Purchase Agreement has been duly executed and delivered by the authorized officers of Seller and Buyer as of the date first above written. UPPERSPACE CORPORATION INTERNATIONAL MICROCOMPUTER SOFTWARE, INC. /s/ Mike Webster /s/ ROBERT MAYER Mike Webster Robert Mayer CEO Executive Vice President EX-99.5 12 ex99_5.txt EXHIBIT 99.5 AMENDMENT TO AGREEMENT FOR ASSIGNMENT OF SOFTWARE The Agreement for Assignment of Software dated November 8, 2001 ("Agreement") by and between Human Concepts, LLC, of Mill Valley, CA ("HC") and International Microcomputer Software, Inc., a California corporation ("IMSI"), is hereby amended effective as of April 1, 2003 ("Amendment") as follows: 1. In line 2 of Paragraph 4.1 Royalties, the language ", subject to Section 4.5," is hereby deleted in its entirety. 2. In Paragraph 4.1 Royalties, the language beginning with ""(i) ten percent (10%) of the ..." and ending with ""for such year, in excess of $1.5 million." is hereby deleted in its entirety and replaced with the following: "HC will pay to IMSI ten percent (10%) of total Net Revenue of HC for its sales through and including February 28, 2004. No royalties shall be due under the Agreement for Net Revenue earned after this date. HC shall have no right to buy out in advance this royalty obligation. 3. Paragraph 4.5 Termination of Royalty Obligation is hereby deleted in its entirety. 4. This Amendment shall only be effective upon the execution of a separate amendment of even date herewith to the Software License and Distribution Agreement between the parties. All other terms and conditions of the Agreement are left unchanged and are hereby reaffirmed. IMSI HUMAN CONCEPTS, LLC /s/ Gordon Landies /s/ Martin Sacks Gordon Landies Martin Sacks President CEO EX-99.6 13 ex99_6.txt EXHIBIT 99.6 AMENDMENT TO SOFTWARE LICENSE AND DISTRIBUTION AGREEMENT The Software License and Distribution Agreement dated November 1, 2001 ("Agreement") by and between Human Concepts, LLC, of Mill Valley, CA ("HC") and International Microcomputer Software, Inc., a California corporation ("IMSI"), is hereby amended effective as of April 1, 2003 ("Amendment") as follows: 1. The following language is hereby added to the end of Paragraph 3.1 Grant Of License to Standard Version: "IMSI shall have the right to distribute and sell the Standard Version on an exclusive basis to Resellers until June 30, 2003. Thereafter, IMSI shall have no further distribution rights with respect to the Standard Version to any Resellers other than Ingram. IMSI shall have the exclusive right to distribute and sell the Standard Version to Ingram and the non-exclusive right to distribute and sell the Standard Version to End-Users until December 31, 2003, at which time such rights shall also terminate." 2. The following language is hereby added to the end of Paragraph 3.2 Grant Of License to Professional Version: "IMSI shall have the right to distribute and sell the Professional Version on an exclusive basis to Resellers until June 30, 2003. Thereafter, IMSI shall have no further distribution rights with respect to the Professional Version to any Resellers other than Ingram. IMSI shall have the exclusive right to distribute and sell the Professional Version to Ingram and the non-exclusive right to distribute and sell the Professional Version to End-Users until December 31, 2003, at which time such rights shall also terminate." 3. In Paragraph 3.3 Exclusivity the first and last sentences are hereby deleted in their entirety. 4. Paragraph 3.4 Loss of Exclusivity is hereby deleted in its entirety. 5. In the third line of Paragraph 7.2 Royalties on Standard Version, immediately after the language "...for such copy," the following language is hereby added: "(and in the case of sales to Ingram by IMSI on and after July 1, 2003, fifty percent (50%) of the Net Revenue from each copy)". 6. The following language is hereby added to the end of Paragraph 7.6 Timing of Payments: "Notwithstanding the foregoing, any and all royalties earned by HC under this Agreement through January 31, 2003, and unpaid by IMSI as of the date of this Amendment are forgiven and shall not be due and owing to HC. Royalties due under this Agreement for the months of February and March, 2003, shall be forty percent (40%) of the amount otherwise required by this Article 7. Payments and Reports (the other 60% shall be forgiven), and this amount shall be due and payable by IMSI no later than May 15, 2003. Royalties due for under this Agreement for the months of April, May, and June, 2003, shall be forty percent (40%) of the amount otherwise required by this Article 7. Payments and Reports (the other 60% shall be forgiven), and this amount shall be due and payable by IMSI no later than August 15, 2003." 7. Paragraph 10.3 Failure to Pay Minimum Royalties is hereby deleted in its entirety. 8. Paragraph 10.4 Buy-Out by HC is hereby deleted in its entirety. All other terms and conditions of the Agreement are left unchanged and are hereby reaffirmed. IMSI HUMAN CONCEPTS, LLC /s/ Gordon Landies /s/ Martin Sacks Gordon Landies Martin Sacks President CEO -----END PRIVACY-ENHANCED MESSAGE-----