CALIFORNIA |
94-2862863 |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
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100 ROWLAND WAY, NOVATO, CALIFORNIA |
94945 |
(Address of principal executive offices) |
(Zip code) |
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(415) 878-4000 |
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Issuer's telephone number |
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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 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. [X]
Issuers revenues for its most recent fiscal year. $11,985,000.
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 7, 2004 was approximately $26,124,231.
As of September 7, 2004, 27,434,956 Shares of Issuers common stock, no par value, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
INTERNATIONAL MICROCOMPUTER SOFTWARE, INC.
FORM 10-KSB ANNUAL REPORT
FOR THE YEAR ENDED JUNE 30, 2004
Table of Contents
PART I |
3 |
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ITEM 1- DESCRIPTION OF BUSINESS |
3 |
ITEM 2- DESCRIPTION OF PROPERTY |
12 |
ITEM 3- LEGAL PROCEEDINGS |
12 |
ITEM 4- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
12 |
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PART II |
13 |
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ITEM 5- MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS |
13 |
ITEM 6- MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION |
13 |
ITEM 7- FINANCIAL STATEMENTS |
30 |
ITEM 8- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
57 |
ITEM 8A- CONTROLS AND PROCEDURES |
57 |
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PART III |
59 |
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ITEM 9- DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT |
59 |
ITEM 10- EXECUTIVE COMPENSATION |
61 |
ITEM 11- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
63 |
ITEM 12- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS |
63 |
ITEM 13- EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K |
64 |
ITEM 14- PRINCIPAL ACCOUNTANT FEES AND SERVICES |
65 |
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SIGNATURES |
66 |
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POWER OF ATTORNEY |
67 |
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INDEX TO EXHIBITS |
68 |
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 managements 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 "Managements 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
Headquartered in Novato, California, IMSI was incorporated in California in November 1982. Over the next 16 years, we grew to become a leading developer and publisher of productivity software in the precision design, graphic design, and other related business applications fields. We acquired TurboCAD, our flagship product, in 1985, and developed and acquired numerous products and product categories over the years. By the end of 1998, we developed, marketed and distributed our products worldwide, primarily through the retail channel.
In 1998, we acquired ArtToday.com ("ArtToday") an Internet provider of clipart, photos and other graphics content as part of our strategy to transition from the retail channel to Internet based product distribution and to migrate our core products and content in the design and graphics categories to the Internet. This transition proved costly and we suffered large losses that threatened our survival. Beginning in 2000, we underwent a major financial restructuring that focused on the design and graphics software categories and on expanding ArtToday.com.
In August 2001, we entered into a merger agreement with Digital Creative Development Corp ("DCDC"). Upon signing of the merger agreement, Mr. Martin Wade III, a director and the 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, Inc ("Keynomics") from DCDC, which focused on productivity enhancement software. Keynomics develops and markets productivity and ergonomic compliance tools improvements through its proprietary software system, "The KeySoft Performance System". Keynomics mission is to reduce corporate keyboarding costs and their related 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 proposed merger.
In June 2003, we sold ArtToday, our wholly owned subsidiary based in Arizona, to Jupitermedia Corporation ("JupiterMedia") for a combination of cash, restricted stock and two-year earn-outs.
The sale of ArtToday to Jupitermedia provided the Company with significant capital allowing us to accelerate the implementation of our strategy of strengthening and expanding our core businesses of precision design and consumer software. Our focus is to acquire and develop businesses and product lines which have significant revenue and cost synergies with our existing product lines as well as which utilize the internet as a primary means of distribution. To that end we have completed several acquisitions and one divestiture aimed at growing our revenues and strengthening our financial results. The following is a description of the key transactions, in chronological order of closing, which were integral to this strategy that we completed subsequent to our divestiture of ArtToday:
DevDepot On May 11, 2004 we entered into an asset purchase agreement with DevDepot, LLC, whereby we acquired certain assets of DevDepot. The assets included inventories, customers profiles, rights to all contracts and license agreements in addition to certain interests in intellectual properties related to the business. DevDepot is a highly focused on-line marketer of utilities and hardware and software add-ons primarily for the Macintosh market. It operates www.devdepot.com
and www.radgad.com as well as being active in the sale of products at well known industry trade shows.
Allume
On April 19, 2004 we completed the acquisition of all the outstanding stock
of Aladdin Systems, Inc. ("Aladdin"), a developer and publisher of utility
software solutions in the areas of information access, removal, recovery,
security and distribution of information and data for the Windows, Linux and
Macintosh platforms. We purchased Aladdin for a combination of cash, stock
and notes from its parent company, Aladdin Systems Holdings, Inc. and subsequently
changed the companys name to Allume Systems, Inc ("Allume"). With over
50% of its sales being generated via the internet, Allume has broadened our
reach into this key distribution channel. With its strengths in product development
and direct marketing as demonstrated by the award winning StuffIt product
line, Allume has significantly improved the depth and breadth of our product
offerings. Reflecting its development and marketing strengths, Allume is the
number #1 developer of utilities for Macintosh as well as the #1 reseller
of 3rd party products in the Digital Rivers network. With its long standing
direct marketing model and extensive Macintosh user base, Allume is well suited
to create revenue synergies with DevDepot. More information regarding products
and services are available at www.allume.com
and www.StuffIt.com.
Houseplans.com On February 23, 2004 we entered, through our wholly owned subsidiary, Houseplans, Inc. ("Houseplans"), into an asset purchase and license agreement with ULTRYX, Inc ("ULTRYX") whereby we acquired certain assets of ULTRYX. The assets included the Houseplans.com domain name, related web site assets including 2,000 stock house plans and related on-line and print content in addition to customers profiles. The acquisition of this key domain name and related content will allow us to continue to expand our presence and improve our efficiency in the fast growing market for the sale of stock house plans via the internet. More information regarding products and services
are available at www.houseplans.com and www.houseplanguys.com.
Houseplans On November 17, 2003, we acquired Planworks L.L.C. ("Planworks"), a leading on-line distributor of stock house plans. Planworks operates the Houseplanguys.com website that contains an extensive library of over 11,000 unique house plans and has more than 25,000 registered members. We also acquired ten other domain names which are used to assist individuals and designers looking for house plans and related products, further strengthening the IMSI network of on-line design and content commerce sites. We subsequently changed the companys name from Planworks to Houseplans, Inc. This business represents a new connection point for our historically strong design and content
customers. More information regarding products and services are available at www.houseplans.com and www.houseplanguys.com.
CADsymbol On November 6, 2003, we entered into an asset purchase agreement with Assistto GmbH ("Assistto"), a German company, whereby we acquired title and interest in certain tangible and intangible assets of Assistto. The assets included over 30 million CAD symbols, custom developed software and all related assets including inventory, web sites and domain names. With these symbols and the related website assets, we will be able to continue to develop and deliver, via the internet, CAD content to our Architecture, Engineering and Construction customers who rely on this content to create, modify and design drawings using a variety of CAD software packages. More information regarding
products and services are available at www.CADsymbol.com.
CADsymbols On October 27, 2003, we entered into an asset license and purchase agreement with Cardiff Consultants, Limited, a New York corporation ("Cardiff"), whereby we acquired from Cardiff the exclusive, non-transferable right to use the CADsymbols.com and CADsymbols.net domain names and trademarks until December 31, 2006, when Cardiff is to assign the domain names and trademark to us subject to our payment of all amounts due Cardiff. As part of the transaction, we also entered into a license
for Cardiffs CAD symbols which with the key domain name formed the basis of this business. The Cadsymbols domains, in combination with the on-line part libraries acquired from CADalog Inc and Assisto, allowed us to establish one of the CAD industry's largest subscription-based CAD content sites. More information regarding products and services are available at www.CADsymbols.com.
CADalog On September 12, 2003, we acquired from CADalog, Inc, CADalog.com, a network of websites that offers one of the largest mechanical parts symbols libraries on-line and allows members access to over eight million 2D and 3D hardware component symbols. The acquisition also included the purchase of CADalog, Inc.'s Partsxl.com, Partswork.com and 3DModelsharing.com websites. The acquisition is a natural extension of our CAD expertise as CADalog.com and its related sites allowed us to join various parts of our businesses for a complete offering of CAD related software resources. More information regarding products and services are available at
www.CADalog.com.
DesignCAD On July 28, 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. These products enabled us to significantly strengthen the depth and variety of our offerings to consumers and small business users in the under $100 CAD market. More information regarding products and services are available at www.imsisoft.com
.
Keynomics To further refine the focus of the company, in July 2004, we sold the assets and customer related liabilities of our wholly owned subsidiary Keynomics, Inc. The acquiring entity (Keynomics, L.L.C.) will continue to provide ergonomic and keyboard training using the KeySoft Performance System(TM) for worker-related safety, productivity, and ergonomic compliance improvements. As part of the consideration, which consisted mainly of cash with the potential for additional cash consideration based on the achievement of certain revenue targets, we acquired a ten (10%) ownership interest in Keynomics, L.L.C. As a result of this sale, we have categorized the operations of this
subsidiary as discontinued and we expect, in the September 2004 quarter, to record a gain on the sale of the Keynomics, Inc. assets of approximately $84,000.
Overview of Our Business
Principal Products and Services
We publish over 100 software titles worldwide and offer an array of services to our customers. The following is a brief description of our principal product families and selected product brands:
Business Segment |
Product Family |
Product Group |
Product Brand |
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Precision Design Solutions |
Precision Design Software |
Professional CAD Solutions |
TurboCAD Professional |
TurboCADCAM |
CADalog |
CADsymbol CD |
Consumer CAD Solutions |
TurboCAD Deluxe |
DesignCAD |
Instant Series |
FloorPlan |
Precision Design Services |
Content |
Houseplans.com |
Houseplanguys.com |
CADsymbols.com |
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Consumer and Business
Software Solutions |
Utilities |
Compression, Access and
Transmission (CAT) |
StuffIt Delux & Standard |
Security and Internet |
iClean |
Internet Cleanup |
SpamCatcher |
Spring Cleaning |
NetAccelerator |
DragStrip |
Software Compilations |
Ten for X |
Creative Essentials |
The Big Mix |
Business Applications and Other |
Business Solutions |
FlowCharts & More |
FormTool |
OrgChart Professional |
QuickStart |
TurboProject |
Graphics Solutions |
Animations & More |
ClipArt & More |
HiJaak |
Consumer Solutions |
The Lord of the Rings Activity Studio |
EazyLanguage |
Legacy Family Tree |
TurboTyping |
Precision
Design Solutions
Precision
Design Software
Professional
CAD Solutions
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· |
TurboCAD is a top-selling Computer Aided Design ("CAD") software product that allows a user to create and modify precision drawings. 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. |
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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. |
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CADalog is a network of websites that offers one of the largest mechanical parts symbols libraries on-line and allows members access to over eight million 2D and 3D hardware component symbols. |
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CADsymbol CD is the most extensive collection of standard parts and symbols available containing over 30 million symbol drawings and models in 2D view and freely revolving 3D models. |
Consumer CAD Solutions
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TurboCAD Deluxe is an easy to use solution to design and present 2D and 3D ideas. It features over 250 2D/3D precision tools. |
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DesignCAD is a group of CAD software products (including DesignCAD 3d Max and DesignCAD Express), that are targeted toward smaller contractors, DIYs (do it yourselfers) and residential homeowners. |
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Instant Series is an array of CAD titles, including Instant Architect and Instant Deck Design with common easy to use features geared toward consumers. |
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FloorPlan 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 Magazines Editors Choice Award, and has sold over one million units. |
Precision
Design Services (Content)
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Houseplans.com and Houseplanguys.com are part of a network of websites that contain an extensive library of over 15,000 unique house plans, which are targeted to general contractors, individuals and designers. The network has more than 50,000 registered members. |
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CADsymbols.com is a library of content offered on-line and aimed to help graphic designers and engineers in their graphic application. |
Consumer & Business Software Solutions
Utilities
This product family is substantially comprised by products obtained through our acquisition of Allume. These products are organized in three groups:
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Compression, Access and Transmission (CAT) |
Compression, Access and Transmission
This group is mainly comprised of the StuffIt brand. StuffIt is a leading software product that addresses the following:
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Sending information in a way that is fast, safe and secure over the Internet or any network |
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Accessing information received |
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Maximizing storage capacity and bandwidth |
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Automating the process of sending and receiving information |
StuffIt has been adopted as a worldwide compression standard for the Macintosh platform and is distributed by Apple Computer and America Online. StuffIt products have been shipped to over 20 million users worldwide over the last three years, including approximately 13 million copies distributed by Apple Computer shipped pre-loaded on Apple Computer's products.
The StuffIt brand includes:
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StuffIt Deluxe (Windows and Macintosh) |
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StuffIt Standard Edition (Windows, Macintosh and Linux) |
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StuffIt Expander (Windows and Macintosh) |
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StuffIt Express (Windows and Macintosh) |
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StuffIt Installermaker (Macintosh) |
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StuffIt Engine SDK (Windows, Linux, Solaris and Macintosh) |
Security and Internet
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iClean (Windows and Macintosh) - iClean allows a user to remove specific unwanted or unneeded files gathered by the Web browser. Removing these files recovers disk space and helps ensure on-line privacy. iClean is targeted at the OEM marketplace. |
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Internet Cleanup (Windows and Macintosh) - Internet Cleanup is a spyware, Internet cleanup and privacy solution used to remove unwanted internet files and protect users identity. Internet Cleanup also blocks pop-up and banner ads, and detects and removes Spyware. |
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SpamCatcher (Windows) - SpamCatcher is an anti-spam software solution published by Allume Systems. SpamCatcher is designed to catch unwanted and undesirable, unsolicited email that a person receives. It integrates with Microsoft's Outlook email client and also works with most of the popular email solution programs on the market today. |
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Spring Cleaning (Windows and Macintosh) - Spring Cleaning is a software "uninstaller" product that removes unwanted and unused software and their related files from a user's computer. |
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NetAccelerator (Windows) is enhancement tool that boosts computer performance and makes the browsing and downloading experience faster. |
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DragStrip (Windows and Macintosh) - DragStrip allows users to launch, find, organize and access applications and documents quickly and efficiently. |
Software Compilations
The Ten for X brand was developed to take advantage of the lack in functionality in many areas of the new Macintosh OS X operating system and the many good software products that are being created by developers who do not have access, ability, desire, or the organization to expand their software offering beyond the shareware model. Ten for X allows these developers to reach a wider audience. The software is sold at Apple Computer stores and other retailers, as well as Allume Systems web sites.
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Ten for X: Utilities Volume 1 is a collection of 11 Macintosh OS X utility software products. |
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Ten for X: Utilities Volume 2 is the second collection of utilities and includes a spam solution along with ten other popular software utilities for Macintosh OS X. |
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Ten for X: Games Volume 1 is a collection of 13 games for Macintosh OS X, including the very popular Bugdom 2. |
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GameOn
Action is a collection of six action pack
games for the Macintosh. This compilation includes games like Spyhunter
(TM) and Freedom Force. |
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GameOn
Family is a collection of games for the whole
family, designed to provide hours of endless fun. This compilation includes
Zoo Tycoon and Tony Hawk's Pro Skater 3 plus three other games. |
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Creative Essentials is a collection of professional graphic tools for the Mac sold at an affordable price. |
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The
Big Mix
is a collection of music and audio tools that allows Macintosh users
to learn, create, listen and share their music. |
Business Applications and Other
Our business applications and other family of products includes art images, photographs, video clips, animations and fonts stored in electronic form that enhance communication by making on-line, onscreen and printed output more visually appealing and other business graphics and general office products. Our business applications products include the following three product groups:
Business Solutions
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FlowCharts & More enables general business users to create a wide variety of diagrams, including flow charts, organization charts, timelines, block diagrams, geographic maps, and marketing charts. |
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FormTool is a forms automation product that allows users to design and print personal forms quickly, or choose from over 400 pre-built templates. |
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OrgChart Professional is an application designed for creating professional organization charts. OrgChart Professional completely automates chart creation so that no drawing or manual positioning of boxes is required. |
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QuickStart is an application that generates professionally designed layouts, images, business cards, letterheads, greeting cards, postcards and labels for envelopes, CDs, DVD cases, file folders, bar codes, diskettes, shipping, video tapes and jewel cases. |
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TurboProject is a project management tool that allows users to create and manage a project schedule, allocate resources and establish and track project budgets. |
Graphics Solutions
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Animations & More, ClipArt & More are large collections of top-quality, royalty-free images, animations, videos, fonts, sounds and images in a variety of categories. The included media are useful to a wide range of customers such as individuals making printed announcements in their home, and professional graphic artists designing brochures for clients. |
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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. |
Consumer Solutions
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The Lord of the Rings Activity Studio allows the user to experience the movie magic of J.R.R. Tolkiens best selling Fellowship of the Ring books. The software includes movie stills, and lets the user print themed calendars, posters, party kits, and more. |
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EazyLanguage 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. |
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Legacy Family Tree is a powerful and easy-to-use family history software designed to easily produce and share family trees. |
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TurboTyping, geared toward home users, business users and students, is a fast way to improve typing skills. This application improves the users typing skills by a factor of three to five times. |
Distribution Methods
Depending on the product and the customer, we deliver our products either as Electronic Software Download (ESD) or as physical products. Our distribution methods are comprised of the following three major channels:
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Direct to Consumer- We conduct direct mail campaigns, both postal and email, for our existing and new products in addition to 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. We maintain e-commerce websites and employ a sales force internally and through strategic partnerships: |
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On-line- 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 on-line resellers and service bureaus. |
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Telesales- We sell certain of our products and services through our sales force as well as through external call centers. |
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Direct to Businesses- We believe that certain of our products and services, particularly TurboCAD, StuffIt, TurboProject, OrgChart Professional 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. |
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Retail / Distribution- We are increasing our presence in the retail software market utilizing selected distributors and partners 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. |
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Republishing- We have republishing agreements domestically and internationally which typically include minimum guaranteed royalty payments. |
Competitive Business Conditions
The software industry and the Internet are highly competitive and characterized by several key factors:
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Rapid changes in technology and customer requirements - New opportunities for existing and new competitors can quickly render existing technologies less valuable. |
· |
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. |
· |
Significant price competition - Direct distribution of competing products over the Internet may cause prices and margins to decrease in traditional sales channels. |
· |
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:
IMSI Product |
Competing products |
Competitor |
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TurboCAD |
AutoCAD |
Autodesk Inc. |
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FloorPlan |
3D Architect |
Broderbund |
Home Architect |
Sierra Online |
Home Design Suite |
Punch Software |
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ClipArt & More, Animations & More |
ArtExplosion |
Nova Development |
Photo ClipArt |
Hemera |
|
Big Box of Art |
Hemera |
|
Designer ClipArt |
GlobalStar Software |
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OrgChart Professional |
Visio |
Microsoft |
OrgPlus |
Human Concepts |
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StuffIt |
WinZip |
WinZip Computing, Inc |
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SpamCatcher |
MailShield |
Lyris |
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Internet Cleanup |
SpyBot Search and Destroy |
SpyBot |
Dependence on Major Customers
No single customer accounted for greater than 10% of our revenues in fiscal year 2004 or 2003.
Proprietary Rights and Licenses
We acquired the technology for TurboCAD in 1985, FloorPlan Design Suite in 1990, HiJaak in 1995, DesignCAD in 2003 and StuffIt in 2004.
We use the following trademarks and service marks in our business: Allume, CADalogSM, CADsymbolsSM, FloorPlan®, FormTool®, Gobar®, HiJaak®, HouseplansTM, HomePlan
SM, iClean®, IMSI®, Installermaker® , Internet CleanupTM, MasterClips®, OrgChart®, SpamCatcherTM, Spring Cleaning®, StuffIt®, StuffIt Deluxe®, Ten for XTM
, Turboviewer®, TurboCAD®, TurboProject®,
ZipFolders®, Zipmagic®.
Our ability to compete effectively depends in part on our ability to develop and maintain the proprietary aspects of our technology. We take certain steps to protect our technology including:
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· |
We rely on a combination of copyrights, patents, trademarks, trade secret laws, restrictions on disclosure, and transferring title and other methods. |
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· |
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. |
|
· |
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 proprietary rights and licenses. In particular, we have identified several factors that present the greatest technology risk to us:
|
· |
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. |
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· |
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 or difficult to enforce under the laws of certain jurisdictions. |
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· |
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:
|
· |
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. |
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· |
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. |
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· |
If any valid claims or actions were asserted against us, we might seek to obtain a license under a third partys 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 and believe we do not infringe upon the intellectual property rights of others, there can be no assurance that infringement 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 will have a material adverse effect on our capital expenditures, earnings, or competitive position.
Product Development
The majority of our development costs are focused in the TurboCAD, StuffIt and FloorPlan product lines, all of which are internally developed. Other products which we bring to market are primarily comprised of technology that is licensed from third parties.
We generally create product specifications and manage the product development and quality assurance process from our offices in Novato and Watsonville, California. Program coding and quality testing for internally developed products is either performed in-house or by using contract programmers in development centers in Russia and India depending on the product and its complexity. Contract programmers located outside the United States are usually dedicated on a full-time basis to our products.
Our research and development expenses consist primarily of salaries and benefits for research and development employees and payments to independent contractors. We spent approximately $2.5 million and $1.4 million on research and development in the twelve-month periods ended June 30, 2004 and 2003, respectively. We will continue to invest in existing and new products which reflects our commitment to developing our core products as well as maintaining strong relationships with our internal and contract development teams.
Employees
As of June 30, 2004 we had 105 employees, all of whom are located in the United States with the exception of one employee in Australia and one employee in Germany. In addition, we have development contracts with two companies in Russia and one in India. 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 offices are located in Novato, CA occupying approximately 10,000 square feet of office space. The lease term expires in March 2007. We also occupy approximately 17,000 square feet of leased office space in Watsonville, CA, where our wholly owned subsidiary Allume Systems conducts its business, and 7,500 square feet of warehouse space in Vacaville, CA.
We believe the space is adequate for our immediate needs. Additional space may be required as we expand our activities. We do not foresee any significant difficulties in obtaining any required additional facilities.
Item 3- Legal Proceedings
From time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business. We know of no material, existing or pending legal proceedings against us, nor are we involved as a plaintiff in any material proceeding or pending litigation. There are no proceedings in which any of our directors, officers or affiliates, or any registered or beneficial shareholder, is an adverse party or has a material interest adverse to our interest.
Item 4- Submission of Matters to a Vote of Security Holders
On February 23, 2004, we filed with the Securities and Exchange Commission a Definitive Proxy Statement on Schedule 14-A pursuant to section 14(A) of the Securities Exchange Act Of 1934 in connection with the solicitation of proxies by the board of directors of IMSI for use at the annual meeting of the shareholders.
The annual meeting of the shareholders of IMSI was held on March 17, 2004 and the following proposals were approved by the shareholders:
|
· |
The election of seven directors for a term of one year: |
NAME |
AGE |
OCCUPATION |
DIRECTOR SINCE |
Votes cast for |
Votes Withheld |
|
|
|
|
|
|
Bruce Galloway |
45 |
Chairman of the Board of Directors |
2001 |
18,430,101 |
28,729 |
Martin Wade, III |
54 |
Chief Executive Officer |
2001 |
18,435,351 |
23,479 |
Evan Binn |
64 |
Director |
2001 |
17,677,611 |
781,219 |
Donald Perlyn |
60 |
Director |
2001 |
17,677,161 |
781,669 |
Robert Mayer |
49 |
Executive Vice President |
2000 |
17,673,911 |
784,919 |
Robert S. Falcone |
57 |
Director, Chairman of the Audit Committee |
2002 |
18,443,051 |
15,779 |
Richard J. Berman |
61 |
Director |
2002 |
18,442,901 |
15,929 |
|
· |
The approval of the 2004 Incentive Stock Option Plan. This proposal was approved according to the votes as cast below: |
|
· |
The authorization of the issuance of options aggregating up to 49.0% of the outstanding capitalization. This proposal was approved according to the votes as cast below: |
|
· |
The ratification of the appointment of Grant Thornton LLP as IMSIs independent auditors for the fiscal year ending June 30, 2004. This proposal was approved according to the votes as cast below: |
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 2004 and 2003, as quoted on the OTCBB. This information represents prices between dealers and does not include retail mark-ups, markdowns or commissions and may not represent actual transactions.
|
|
High |
|
Low |
|
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 |
|
Fiscal Year 2004 |
|
|
|
|
|
|
|
First Quarter |
|
$ |
1.45 |
|
$ |
0.73 |
|
Second Quarter |
|
|
1.50 |
|
|
1.00 |
|
Third Quarter |
|
|
1.77 |
|
|
1.10 |
|
Fourth Quarter |
|
$ |
1.72 |
|
$ |
1.11 |
|
On September 7, 2004, there were approximately 1,068 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- Managements Discussion and Analysis or Plan of Operation
Overview
IMSI has established a tradition of providing the professional and home user with innovative technology and easy-to-use, high-quality software products at affordable prices. We are a developer and publisher of precision design and consumer and business software solutions which we market and sell to individuals and small business users. We offer a variety of software products and services, primarily precision design and utilities offerings that we market through an array of distribution channels including direct to consumer and businesses, retail and through republishers.
Strategy and Growth
We believe that consistent growth of both the revenues and operating earnings can be achieved through internally developed products and services and through acquisition. Management believes that good value target companies are present in the marketplace and that business combinations with these entities would help us achieve our growth potential in addition to providing synergies that would improve profitability.
Acquisitions during Fiscal 2004
DevDepot
On
May 11, 2004 we entered into an asset purchase agreement with DevDepot, LLC,
whereby we acquired certain assets of DevDepot. The assets included inventories,
customers profiles, rights to all contracts and license agreements in
addition to certain interests in intellectual properties related to the business.
DevDepot is a highly focused on-line marketer of utilities and hardware and
software add-ons primarily for the Macintosh market. It operates www.devdepot.com
and www.radgad.com
as well as being active in the sale of products at well known industry trade
shows. With its long standing direct marketing model and extensive Macintosh
user base, DevDepot is well suited to create revenue synergies with Allume.
The consideration for the acquisition was paid in a combination of cash and
112,000 unregistered common shares, a portion of which are subject to an escrow
period.
Allume
On April 19, 2004 we completed the acquisition of all the outstanding stock
of Aladdin, a developer and publisher of utility software solutions in the
areas of information access, removal, recovery, security and distribution
of information and data for the Windows, Linux and Macintosh platforms. We
purchased Aladdin for a combination of cash, stock and notes from its parent
company, Aladdin Systems Holdings, Inc. and subsequently changed the companys
name to Allume Systems, Inc. With over 50% of its sales being generated via
the internet, Allume has broadened our reach into this key distribution channel.
With its strengths in product development and direct marketing as demonstrated
by the award winning StuffIt product line, Allume has significantly improved
the depth and breadth of our product offerings. Reflecting its development
and marketing strengths, Allume is the number #1 developer of utilities for
Macintosh as well as the #1 reseller of 3rd party products in the Digital
Rivers network.
The consideration paid to Aladdin Systems Holdings, Inc. ("Aladdin Holdings") for the acquisition consisted of a combination of cash in the amount of $1,500,000, subject to a 10% escrow, 2,317,881 unregistered shares of IMSI common stock and two three-year convertible notes in the aggregate amount of $3,000,000. These notes are secured by the Allume common stock. Under the terms of the original purchase agreement, additional cash earn-out payments could have been earned, up to an aggregate of $2,000,000, based on net revenues derived from Aladdin for the three consecutive twelve-month periods following the Closing Date.
In early September 2004, IMSI and Aladdin Holdings amended the portion of the agreement which called for earn-outs to be paid based on the achievement of certain revenue targets. The payments were converted from contingent obligations to contractual obligations as follows;
|
· |
The first earn out payment of $666,667 which could have been due on April 19, 2005 became fully earned and payable on June 2, 2005 |
|
· |
The second and third earn-out payments were terminated in consideration of the issuance of shares of the common stock of IMSI priced as of the closing bid price on the date of the amendment. As a result, IMSI will issue an additional 1,065,807 of its common stock to Aladdin Holdings. These shares will be included in the registration statement to be filed on Form SB-2 pursuant to the Registration Rights Agreement between Aladdin Holdings and IMSI, as contemplated below. |
As part of the same agreement, Aladdin Holdings agreed to modify the date by which IMSI was required to file a registration statement on Form SB-2 of the common stock that Aladdin Holdings received from IMSI as part of the original agreement from ninety (90) days from the closing date to September 30, 2004. Additionally, Aladdin Holdings agreed to modify the date by which the registration statement was to be considered effective by the Securities and Exchange Commission from one hundred and eighty (180) days from the closing date to March 31, 2005. Should IMSI not be able to complete the registration statement or if it does not become effective within the dates prescribed, IMSI could be subject to liquidated damage penalties equal to 5% of the value of the common stock which was delivered as
part of the original agreement payable during each month in which the registration statement is delinquent.
The
unaudited pro forma information below presents results of operations as if
the Allume acquisition had occurred as of July 1, 2002. The unaudited pro
forma information is not necessarily indicative of the results of operations
of the combined companies had these events occurred at the beginning of the
years presented nor is it indicative of future results (in thousands, except
per share amounts):
|
Fiscal
year ended June 30, |
Unaudited
Pro Forma Information |
2004 |
|
2003 |
Revenues
|
$ |
19,076
|
|
$ |
15,990 |
|
Loss
from continuing operations |
|
(987 |
) |
|
(2,493 |
) |
Net
income |
|
770
|
|
|
11,045
|
|
Shares
used in computing earnings per share |
|
26,759,793
|
|
|
25,118,676
|
|
Basic
and diluted earnings per share |
$ |
0.03
|
|
$ |
0.44
|
|
Houseplans.com On February 23, 2004 we entered, through our wholly owned subsidiary, Houseplans, Inc., into an asset purchase and license agreement with ULTRYX, Inc. whereby we acquired certain assets of ULTRYX. The assets included the Houseplans.com domain name, related web site assets including stock house plans images and related on-line and print content in addition to customers profiles. The acquisition of this key domain name and related content will allow us to continue to expand our presence and improve our efficiency in the fast growing market for the sale of stock house plans via the internet.
The total consideration for the acquisition was a combination of cash and notes payable. Included in the agreement was a warrant to purchase 20,000 shares of IMSIs common stock at any time within the three-year period following the execution of the agreement at $1.24 per share.
Subsequent to June 30, 2004, this agreement was modified to eliminate a portion of the notes payable in exchange for the rescheduling of certain of the content deliverables. The effect of the modification was a reduction in the purchase price and a corresponding reduction in the value allocated to the acquired assets.
Houseplans On November 17, 2003, we acquired Planworks L.L.C., a leading on-line distributor of house plans. Planworks operated the Houseplanguys.com website that contained an extensive library of over 11,000 unique house plans and has more than 25,000 members. We also acquired ten other domain names which are used to assist individuals and designers looking for house plans and related products, further strengthening the IMSI network of on-line design and content commerce sites. The total consideration for the acquisition was comprised of cash, 85,000 shares of unregistered common stock and earn-out payments. Following the acquisition, we reorganized Planworks, L.L.C as
HomePlan, Inc. which in turn was subsequently changed to Houseplans, Inc. This business represents a new connection point for our historically strong design and content customers.
CADsymbol
On November 6, 2003, we entered into an asset purchase agreement with Assistto
GmbH, a German company, whereby we acquired title and interest in certain
tangible and intangible assets of Assistto. The assets included over 30 million
CAD symbols, custom developed software and all related assets including inventory,
web sites and domain names. With these symbols and the related website assets,
we will be able to continue to develop and deliver, via the internet, CAD
content to our Architecture, Engineering and Construction customers who rely
on this content to create, modify and design drawings using a variety of CAD
software packages.
The total consideration was comprised of cash (including escrowed cash) and warrants granted to the principals of Assistto to purchase 40,000 shares of IMSIs common stock at any time within the three year period following the closing at an exercise price of $1.21.
CADsymbols On October 27, 2003, we entered into an asset license and purchase agreement with Cardiff Consultants, Limited, a New York corporation, whereby we acquired from Cardiff the exclusive, non-transferable right to use the CADsymbols.com and CADsymbols.net domain names and trademarks until December 31, 2006, when Cardiff is to assign the domain names and trademark to us subject to our payment of all amounts due Cardiff. As part of the transaction, we also entered into a license for Cardiff
s CAD symbols which with the key domain name formed the basis of this business. The Cadsymbols domains, in combination with the on-line part libraries acquired from CADalog Inc and Assisto, allowed us to establish one of the CAD industry's largest subscription-based CAD content sites. The total consideration for the acquisition was comprised of cash, notes payable and a warrant to purchase 25,000 shares of IMSIs common stock at any time within the three-year period following the execution of the agreement at $1.14 per share.
CADalog
On September 12, 2003, we acquired from CADalog, Inc, CADalog.com, a network
of websites that offers one of the largest mechanical parts symbols libraries
on-line and allows members access to over eight million 2D and 3D hardware
component symbols. The acquisition also included the purchase of CADalog,
Inc.'s Partsxl.com, Partswork.com and 3DModelsharing.com websites. The acquisition
is a natural extension of our CAD expertise as CADalog.com and its related
sites allowed us to join various parts of our businesses for a complete offering
of CAD related software resources. The total consideration for the acquisition
was paid in cash.
DesignCAD On July 28, 2003, we entered into an agreement to purchase the tangible and intangible assets of Upperspace Corporation, an Oklahoma corporation, constituting its DesignCAD line of products, several learning aids, and various smaller design programs. These products enabled us to significantly strengthen the depth and variety of our offerings to consumers and small business users in the under $100 CAD market.
In addition to the total consideration (comprised of cash including escrowed cash and notes payable) the agreement calls for an earn-out based on net revenue that could result in an additional amount to be paid to Upperspace during the next three fiscal years and 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.
In May 2004, we modified the agreement to obtain all retail distribution rights to the products in exchange for cash and 69,000 shares of unregistered common stock.
Subsequent to June 30, 2004, it was determined that Upperspace had not earned the earn-out compensation in the first fiscal year of the agreement.
Subsequent Events
The Sale of Keynomics
In
July 2004, we sold the assets and customer related liabilities of our wholly
owned subsidiary Keynomics, Inc. The acquiring entity (Keynomics, L.L.C.)
will continue to provide ergonomic and keyboard training using the KeySoft
Performance System for worker-related safety, productivity, and ergonomic
compliance improvements. As part of the consideration, which consisted mainly
of cash with the potential for additional cash consideration based on the
achievement of certain revenue targets, we acquired a ten (10%) ownership
interest in Keynomics, L.L.C. As a result of this sale, we have categorized
the operations of this subsidiary as discontinued and we expect, in the September
2004 quarter, to record a gain on the sale of the Keynomics, Inc. assets of
approximately $84,000.
Simultaneous with this transaction, we entered into a non-exclusive licensing agreement to sell and distribute subscriptions of the TurboTyping On-line product for Keynomics, L.L.C. for the education market.
Critical Accounting Policies
Those material accounting policies that we believe are the most critical to an investors understanding of our financial results and condition are discussed below.
Our significant accounting policies are more fully described in the notes 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.
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 or service has been delivered, the fee is fixed and determinable, and collection
of the resulting account is probable.
|
· |
Revenue from packaged product sales to resellers and end users is recorded at the time of the sale net of estimated returns. |
|
· |
Revenue from sales to distributors is recognized when the product sells through to retailers and end users. Sales to distributors permit limited rights of return according to the terms of the contract. |
|
· |
For software and content delivered via the Internet, revenue is recorded when the customer downloads the software, activates the subscription account or is shipped the content. |
|
· |
Revenue from post contract customer support (PCS) is recognized ratably over the contract period. |
|
· |
Subscription revenue is recognized ratably over the contract period. |
|
· |
We use the residual method to recognize revenue when a license agreement includes one or more elements to be delivered at a future date. If there is an undelivered element under the license arrangement, we defer revenue based on vendor-specific objective evidence (VSOE) of the fair value of the undelivered element, as determined by the price charged when the element is sold separately. If VSOE of fair value does not exist for all undelivered elements, we defer all revenue until sufficient evidence exists or all elements have been delivered. |
|
· |
Non-refundable advanced payments received under license agreements with no defined terms are recognized as revenue when the customer accepts the delivered software. |
|
· |
Revenue from software licensed to developers, including amounts in excess of non-refundable advanced payments, is recorded as the developers ship products containing the licensed software. |
|
· |
Revenue from minimum guaranteed royalties in republishing agreements is recognized ratably over the term of the agreement. Royalties in excess of the guaranteed minimums are recognized when collected. |
|
· |
Revenue from Original Equipment Manufacturer (OEM) contracts is recognized upon completion of our contractual obligations. |
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 managements 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, 2004, approximately $21,000 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 managements 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, goodwill is being assessed for impairment annually or more frequently if circumstances indicate impairment.
Reclassifications
Effective for the quarter ended December 31, 2003, we revised our accounting treatment with regard to fees paid to our third party E-commerce solution provider, whereby we now record them as sales and marketing expenses as compared to our prior treatment of them as an offset to revenue. The effect of this reclassification, as of June 30, 2004, was to increase revenues and sales and marketing expense by $428,000 for the fiscal year ended June 30, 2004. In order to conform our prior years results to this revised presentation for fiscal year ended June 30, 2003, we have increased revenues and sales and marketing expense by $309,000.
Forward Looking Statement
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 "Managements Discussion and Analysis or 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.
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 managements judgment in its application. There are also areas in which managements judgment in selecting any available alternative would not produce a materially different result.
Results of Operations
Reclassifications have been made to the amounts reported in 2003 to conform to the current year presentation. The amounts reported for fiscal 2004 and 2003 present the results of operations for ArtToday and Keynomics as discontinued operations due to the sale of ArtToday on June 30, 2003 and the sale of Keynomics on July 29, 2004.
The following table sets forth our results of operations for the fiscal years ended June 30, 2004 and 2003 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.
|
|
Fiscal Year ended June 30, |
|
|
|
|
|
2004 |
|
2003 |
|
$ Change from
previous year |
|
|
|
$ |
As % of sales |
|
$ |
|
As % of sales |
|
$Better /
(Worse) |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
$ |
11,985 |
|
100 |
% |
$ |
8,095 |
|
|
100 |
% |
$ |
3,890 |
|
48 |
% |
Product cost |
|
|
4,137 |
|
35 |
% |
|
3,947 |
|
|
49 |
% |
|
190 |
|
5 |
% |
Gross margin |
|
|
7,848 |
|
65 |
% |
|
4,148 |
|
|
51 |
% |
|
3,700 |
|
89 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales & marketing |
|
|
5,190 |
|
43 |
% |
|
2,621 |
|
|
32 |
% |
|
2,569 |
|
98 |
% |
General & administrative |
|
|
3,910 |
|
33 |
% |
|
2,903 |
|
|
36 |
% |
|
1,007 |
|
35 |
% |
Research & development |
|
|
2,519 |
|
21 |
% |
|
1,358 |
|
|
17 |
% |
|
1,161 |
|
85 |
% |
Total operating expenses |
|
|
11,619 |
|
97 |
% |
|
6,882 |
|
|
85 |
% |
|
4,737 |
|
69 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
|
(3,771 |
) |
-31 |
% |
|
(2,734 |
) |
|
-34 |
% |
|
(1,037 |
) |
38 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (expenses) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and other, net |
|
|
78 |
|
1 |
% |
|
(850 |
) |
|
-11 |
% |
|
928 |
|
-109 |
% |
Realized gain on marketable securities |
|
|
585 |
|
5 |
% |
|
- |
|
|
0 |
% |
|
585 |
|
100 |
% |
Unrealized gain on marketable securities |
|
|
1,982 |
|
17 |
% |
|
- |
|
|
0 |
% |
|
1,982 |
|
100 |
% |
Loss on disposal of fixed assets |
|
|
(13 |
) |
0 |
% |
|
- |
|
|
0 |
% |
|
(13 |
) |
100 |
% |
Gain (loss) on sale of product line |
|
|
59 |
|
0 |
% |
|
(41 |
) |
|
-1 |
% |
|
100 |
|
-244 |
% |
Gain on extinguishment of debt |
|
|
76 |
|
1 |
% |
|
762 |
|
|
9 |
% |
|
(686 |
) |
-90 |
% |
Total other income (expenses) |
|
|
2,767 |
|
23 |
% |
|
(129 |
) |
|
-2 |
% |
|
2,896 |
|
-2245 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income tax |
|
|
(1,004 |
) |
-8 |
% |
|
(2,863 |
) |
|
-35 |
% |
|
1,859 |
|
-65 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provision |
|
|
(38 |
) |
0 |
% |
|
(7 |
) |
|
0 |
% |
|
(31 |
) |
443 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations |
|
|
(1,042 |
) |
-9 |
% |
|
(2,870 |
) |
|
-35 |
% |
|
1,828 |
|
-64 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations, net of income tax |
|
|
(312 |
) |
-3 |
% |
|
1,301 |
|
|
16 |
% |
|
(1,613 |
) |
-124 |
% |
Gain from the sale of discontinued operations, net of income tax |
|
|
2,000 |
|
17 |
% |
|
12,237 |
|
|
151 |
% |
|
(10,237 |
) |
-84 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
646 |
|
5 |
% |
$ |
10,668 |
|
|
132 |
% |
|
($10,022 |
) |
-94 |
% |
Net Revenues
We develop, market and sell a variety of software titles and services that are targeted to for a wide array of uses primarily for individuals and small businesses. To efficiently serve our customers and maximize our revenue opportunities, we have aligned our business along two segments as described below:
|
· |
Precision Design Solutions (comprised of the precision design software and the precision design services product families). |
|
· |
Consumer & Business Software Solutions (comprised of the utilities and the business applications and other product families). |
We sell our products using a variety of marketing techniques through three major distribution channels:
Our ability to develop and distribute products and services and determine the optimum distribution channel for their maximum exposure is a competitive advantage that differentiates us from other players in the industry. .
The following illustrations of our revenue distribution reflect the allocation of our products across our business segments for the fiscal year ended June 30, 2004 and 2003 and are indicative of our business model.
Revenue by Business Segment:
Revenue by Product Family:
Revenue by Distribution Channel:
Revenues by Business Segment and Distribution Channel
|
|
|
|
|
|
|
|
Precision Design Solutions |
|
Consumer & Business Software Solutions |
|
Fiscal 2003 |
|
|
|
|
|
Direct Marketing |
|
|
51 |
% |
|
26 |
% |
Retail / Distribution |
|
|
5 |
% |
|
63 |
% |
Republishing |
|
|
44 |
% |
|
11 |
% |
Total |
|
|
100 |
% |
|
100 |
% |
|
|
|
|
|
|
|
|
Fiscal 2004 |
|
|
|
|
|
|
|
Direct Marketing |
|
|
65 |
% |
|
26 |
% |
Retail / Distribution |
|
|
17 |
% |
|
62 |
% |
Republishing |
|
|
18 |
% |
|
12 |
% |
Total |
|
|
100 |
% |
|
100 |
% |
Revenues by Product Family and Distribution Channel
|
|
PRECISION DESIGN SOLUTIONS |
|
CONSUMER & BUSINESS SOFTWARE SOLUTIONS |
|
|
|
Precision Design Software |
|
Precision Design Services |
|
Business Applications & Other |
|
Utilities |
|
Fiscal 2003 |
|
|
|
|
|
|
|
|
|
|
|
|
51 |
% |
|
|
|
|
26 |
% |
|
|
|
Retail / Distribution |
|
|
5 |
% |
|
|
|
|
63 |
% |
|
|
|
Republishing |
|
|
44 |
% |
|
|
|
|
11 |
% |
|
|
|
Total |
|
|
100 |
% |
|
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct Marketing |
|
|
58 |
% |
|
100 |
% |
|
14 |
% |
|
48 |
% |
Retail / Distribution |
|
|
21 |
% |
|
|
|
|
68 |
% |
|
51 |
% |
Republishing |
|
|
21 |
% |
|
|
|
|
18 |
% |
|
1 |
% |
Total |
|
|
100 |
% |
|
100 |
% |
|
100 |
% |
|
100 |
% |
Net revenues of each of our business segments 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, |
|
|
|
2004 |
|
2003 |
|
Change |
|
|
|
$ |
|
% |
|
$ |
|
% |
|
$ |
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Precision Design Solutions |
|
$ |
6,048 |
|
|
50 |
% |
$ |
3,498 |
|
|
43 |
% |
$ |
2,550 |
|
|
73 |
% |
Consumer & Business Software Solutions |
|
|
5,937 |
|
|
50 |
% |
|
4,597 |
|
|
57 |
% |
|
1,340 |
|
|
29 |
% |
Net Revenues |
|
$ |
11,985 |
|
|
100 |
% |
$ |
8,095 |
|
|
100 |
% |
$ |
3,890 |
|
|
48 |
% |
The substantial increase in the sales of our precision design segment was the result of a combined effect of internal growth, mainly due to the successful launch of TurboCAD 10.0 in March 2004 as we improved our direct marketing focus through investment in people and technology, coupled with the introduction of new products. Consistent with our strategy to acquire new products and services in order to improve and diversify our offerings, in fiscal 2004 we introduced a new product family "precision design services" that helped boost the sales in this segment. This new product family is primarily comprised of the products and services we introduced upon the acquisition in the second quarter of 2004 of a network of websites (marketed under the name "Houseplans") that contain an extensive library of over
15,000 unique stock house plans, which are targeted to general contractors, individuals and designers. Revenues from Houseplans were $1,186,000 since we acquired it in November 2003. We did not have similar revenues to report for the previous fiscal year.
In addition to the increased revenues from our flagship product, TurboCAD, the introduction of new software titles (DesignCAD and the Instant Series are a result of product line acquisitions during fiscal 2004) also accounted for the overall increase in revenues of the precision design category. Revenues from the precision design category should continue to grow during the future reporting period as we have yet to witness the extent of the acquisitions we consummated across a full fiscal year.
The increase in revenues in the Consumer & Business software solutions was primarily the result of the addition of the utilities product family to this segment. This new product family is primarily comprised of the products we added upon the acquisition of Allume systems in the fourth quarter of fiscal 2004. With the introduction of new and revised titles in the coming fiscal year, we expect this segment to continue to demonstrate revenue growth.
Historically, the Consumer & Business software solutions product category was comprised of the business application and other family of products, which saw a decline in sales during fiscal 2004 as compared to the previous fiscal year despite the introduction of new titles (OrgChart Pro and PhotoObject) and the release of newer version of our existing products (EasyLanguage and Net Accelerator). The decline in sales of our historically strong selling products in the business applications and other product family like MasterClips and OrgPlus resulted into an overall decrease in this product family during fiscal 2004.
As with the precision design segment, we continued to diversify our product offering in the Consumer & Business software solutions segment. To that effect, we acquired all of the outstanding common stock of Aladdin Systems, Inc. (Allume Systems), a developer and publisher of utility software solutions in the areas of information access, removal, recovery, security and distribution of information and data for the Windows, Linux and Macintosh platforms. The addition of the utility product family (which is comprised of the revenues derived from Allumes products) more than offset the decline in sales of the business application and other family of products. Fiscal 2004 revenues included Allumes revenues in the amount of $1,969,000 for the period from April 19, 2004 (the date of acquisition)
through June 30, 2004. Revenues from the Consumer & Business software solutions segment is also expected to continue to grow during the future reporting periods as we recognize full year benefits of the various acquisitions completed during fiscal 2004. For purposes of illustration, had we acquired Allume as of July 1, 2003, we would have recognized additional revenues of approximately $7.1 million of revenue in the utility category for fiscal 2004.
Internationally, we distribute our products through our wholly owned Australian and German subsidiaries and republishing partners in Europe and Asia. The following table details the revenue breakdown between the domestic and international markets for the periods indicated.
|
|
Fiscal Year ended June 30, |
|
|
|
2004 |
|
2003 |
|
|
|
|
|
|
|
$ |
|
% of total |
|
$ |
|
% of total |
|
$ Change |
|
% change |
|
Domestic sales |
|
$ |
10,226 |
|
|
85 |
% |
$ |
6,629 |
|
|
82 |
% |
$ |
3,597 |
|
|
54 |
% |
International sales |
|
|
1,759 |
|
|
15 |
% |
|
1,466 |
|
|
18 |
% |
|
293 |
|
|
20 |
% |
Total Net Sales |
|
$ |
11,985 |
|
|
100 |
% |
$ |
8,095 |
|
|
100 |
% |
$ |
3,890 |
|
|
48 |
% |
Despite the decrease in the revenues recognized from our Australian subsidiary after we licensed the distribution rights of some of our products in Australia to a third party publisher in exchange for royalty payments, the overall international revenues increased during fiscal 2004 as compared to the previous fiscal year. This was primarily due to our successful reentry into the European market by re-activating our German subsidiary in the middle of fiscal 2003. Total net sales from our German subsidiary were $749,000 and $161,000, respectively for the fiscal years ended June 30, 2004 and 2003.
Our international revenues may be affected by the risks customarily associated with international operations, including fluctuations of the U.S. dollar, increases in duty rates, exchange or price controls, longer collection cycles, government regulations, political instability and changes in international tax laws.
We 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.
Product Costs and Gross Margin
Our product costs include license fees, royalties that we pay to third parties based on sales of published software and content, amortization of capitalized software acquisition and development costs, the costs of CD-ROM duplication, printing of manuals, packaging and fulfillment, and freight. 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.
Our gross margin improved to 65% from 51% during fiscal 2004. The introduction of our new and high margin product families (the precision design services and the utility families of product) accounted for the majority of this increase. In addition, we witnessed a shift in our traditional revenue mix toward the higher margin precision design software products. These products carry a lower cost as compared to products in the business applications and other family as we own the majority of their underlying technology.
Other improvements to our overall gross margin were the result of a significant reduction in amortization expenses for software products due to full amortization of the products. Amortization relative to software costs capitalized during fiscal 2004 has seen their effect minimized as these capitalizations (mainly related to the acquisition of Allume) happened later in the fiscal year. Amortization of capitalized software to be recorded in the next fiscal year related to the Allume acquisition will be approximately $400,000 and $335,000 for the other acquisitions which were completed. Other future business and product line acquisitions will continue to increase our basis in certain intangible
assets (i.e. capitalized software development), the amortization of which may negatively affect our gross margin in the future.
Given the uncertain product lifecycle for some of our historically high margin products and depending on the success of the release of newer software versions, we may see our gross margin decline in future reporting periods.
Sales and Marketing Expenses
The additional expenses related to the businesses we acquired during fiscal 2004 (mainly Allume and Houseplans) accounted for the majority of the increase in our sales and marketing expenses which consist primarily of sales and marketing personnel salaries and benefits, commissions, advertising, printing and direct mail expenses. We have identified several synergies and potential savings which we are in the process of implementing. We believe these actions will positively affect our sales and marketing expenses once the integration of these businesses is completed. Other factors that accounted for the increase of our sales and marketing expenses during fiscal 2004 include the following:
|
|
|
|
· |
Increased direct mail expenses, consultant expenses related to sales and marketing and commissions paid to outside service providers of sales forces and E-commerce systems that help us in our growing efforts to focus on direct targeting of our customers via marketing campaigns. We believe that these investments will generate increased revenues going forward, and are an indication of our continuing commitment to our core products. |
|
|
|
|
· |
Increased payroll and related wage expenses due to additional headcount needed to strengthen our direct marketing presence. |
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 savings on legal and accounting expenses during fiscal 2004, our general and administrative expenses increased significantly. This increase was primarily due to the following:
|
· |
Increased consulting expenses, mainly related to IT /IS upgrade projects and acquisition related consulting work. Our consulting expenses also included additional amortization expenses of $458,000 from the issuance of warrants to outside consultants mainly providing services in the area of investor relations. We had not incurred similar amortization charges during the previous fiscal year. |
|
|
|
|
· |
Additional general and administrative expenses we incurred relating to the Allume business. Although these additional expenses are only related to the period from the acquisition date of April 19, 2004 to June 30, 2004 and should be significantly higher during the next reporting period, the synergies that we identified during the due diligence process and post acquisition should reduce these expenses to a sustainable level. |
|
|
|
|
· |
Increased amortization expenses, mainly relating to acquired domain names. Domain names related amortization expenses were $212,000 and $1,000 for fiscal 2004 and 2003 respectively. |
Our general and administrative expenses from the previous fiscal year also included the reversal of the intrinsic value of warrants issued to Mr. Martin Wade III, our CEO, as part of his initial employment agreement. During the second quarter of fiscal 2003, we amended Mr. Wades employment agreement whereby IMSI and Mr. Wade agreed to the full and complete cancellation of all outstanding warrants granted to Mr. Wade. Consequently, we reversed, during fiscal 2003, $432,000 of already incurred amortization expense of the intrinsic value of warrants issued to Mr. Wade which were unvested ($172,000 of which was incurred during fiscal 2002).
Research and Development Expenses
The increase in research and development expenses during fiscal 2004 as compared to the previous fiscal year resulted mainly from the additional expenses related to the Allume operations and the increased personnel and consulting costs. These costs related to the development of our web properties including houseplans.com and the development of new versions of our software products including the recently released TurboCAD Professional Version 10 and OrgChart Professional.
Our research and development expenses consist primarily of salaries and benefits for research and development employees and payments to independent contractors. Our management believes that investment in research and development is essential to respond to ever-evolving customers demands. The increased ratio of research and development expenses as a percentage of sales reflects our commitment to investing in and developing our core products. We continue to maintain a strong partnership with our third
party contract development teams at competitive costs.
Interest and Other Expense, Net
Interest and other expense, net, include interest expense, 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 2004 and 2003;
|
|
Fiscal Year ended June 30, |
|
|
|
|
|
|
|
$ Change from previous year |
|
|
|
2004 |
|
2003 |
|
|
|
$ |
|
$ |
|
$ Better / (Worse) |
|
% |
|
Interest & Other, net |
|
|
|
|
|
|
|
|
|
Interest (expense) |
|
|
($79 |
) |
|
($444 |
) |
|
$365
|
|
|
82 |
% |
Interest income |
|
|
97 |
|
|
11 |
|
|
86 |
|
|
782 |
% |
Foreign exchange gain |
|
|
9 |
|
|
60 |
|
|
($ 51 |
) |
|
-85 |
% |
Other income (Expenses) |
|
|
51 |
|
|
($523 |
) |
|
574 |
|
|
110 |
% |
Gain
on liquidation of foreign subs |
|
|
- |
|
|
46 |
|
|
($ 46 |
) |
|
-100 |
% |
Total Interest & Other, net |
|
|
$78
|
|
|
($850 |
) |
|
$928
|
|
|
109 |
% |
The decrease in interest expenses during fiscal 2004 was mainly the result of our balance sheet restructuring during fiscal 2003, as we settled the majority of our interest bearing debt. The interest expenses we incurred during fiscal 2004 relate primarily to the acquisitions-related notes and interest incurred on our short term financing activities.
On September 18, 2003, we received a 15% one-year note from DCDC upon extending a loan to DCDC in the amount of $350,000. The note is due, with interest, on September 18, 2004. The note is secured by 400,000 shares of IMSIs stock held by DCDC. 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. This note had been previously recorded as a fully reserved receivable as it was unsecured. The reversal of the reserve upon the repayment of this note was consequently accounted for as other income during fiscal 2004.
During fiscal 2003, other income (expense) relate mainly to charges we recognized while settling various disputes. Theses charges were incurred mainly to settle the Imageline and the Sorrentino litigations which amounted to $415,000 and $60,000 respectively.
Realized gain on marketable securities
During fiscal 2004, we realized $585,000 gain on marketable securities as we sold securities in our investment portfolio. Of this amount, $489,000 was related to the sale of 60,000 shares of Jupitermedia that we received as part of the sale of ArtToday.
Unrealized gain on marketable securities
During fiscal 2004, we recorded $1,982,000 of unrealized gain on marketable securities as we marked to market the value of the securities in our investment portfolio. $1,934,000 of that unrealized gain resulted from the appreciation of the shares of Jupitermedia that we received as part of the sale of ArtToday.
Gain (loss) on Sale of Product Line
As previously disclosed, in September 2001, we undertook an intensive reassessment of the current costs and future potential financial benefits of the Design.NET project, an on-line design and visualization tool allowing users to design homes and offices on the Internet. We concluded it would be in our best interests to spin off the Design.NET project. Consequently, we entered into an agreement with Michael Gariepy (a former Vice President of IMSI) to transfer the majority of the ownership of the project (80.01%) to employees (including Mr. Gariepy) who were key to its continued development while we retained a 19.99% ownership interest in the new venture. Based on our understanding of the project and the risks associated with its technical feasibility, we recorded the value of our ownership with a
zero book value. Pursuant to that agreement, the employees resigned from IMSI and established Plan3D, Inc. to pursue the development of the technology. During fiscal 2004, we sold our ownership in Plan3D to Mr. Gariepy in exchange for 45,000 shares of IMSI common stock that he held. As a result of this transaction, we recognized a gain of $59,000.
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.
Gain on extinguishment of Debt
During fiscal 2004, we recognized a gain of $76,000 from the extinguishment of debt primarily relating to the settlement of liabilities related to assets under a capital lease.
During fiscal 2003, we recognized a $762,000 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.
Income (loss) from Discontinued Operations and Gain from Discontinued Operations
In July 2004, we sold the assets and customer related liabilities of our wholly owned subsidiary Keynomics, Inc. to Keynomics, L.L.C. (the acquiring entity). As part of the consideration, which consisted mainly of cash with the potential for additional cash consideration based on the achievement of certain revenue targets, we acquired a ten (10%) ownership interest in Keynomics, L.L.C.
Under Generally Accepted Accounting Principles ("GAAP") in the United States, Keynomics operating results for the fiscal year ended June 30, 2004 have been accounted for as discontinued operations. As a result of this sale, the loss of $312,000 incurred by Keynomics is classified as a loss from discontinued operations.
In June 2003, we sold to Jupitermedia all issued and outstanding shares of the capital stock of ArtToday, Inc., our wholly owned subsidiary based in Arizona. 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, during fiscal 2003 we recognized a total of $1,301,000 as income from discontinued operations. Of that amount, $1,211,000 (net of income tax of $24,000) was attributable to ArtToday, and $90,000 was attributable to Keynomics.
During the second quarter of fiscal 2004, we recorded an additional gain of $1.0 million from the sale of discontinued operations representing the successful achievement of the first earn-out from the sale of ArtToday. This earn-out was contingent on ArtToday reaching certain revenue milestones. The full amount of the $1.0 million earn-out was earned during the quarter ended December 31, 2003 and was paid per the stock purchase agreement on February 13, 2004.
During the fourth quarter of fiscal 2004 we recorded an additional gain of $1.0 million from the sale of discontinued operations representing the successful achievement of the second earn-out from the sale of ArtToday. The full amount of the $1.0 million was paid per the stock purchase agreement on August 14, 2004.
Liquidity and Capital Resources
Our cash and cash equivalents decreased by $7,138,000 to $3,212,000 at June 30, 2004 from $10,350,000 at June 30, 2003. Working capital declined to $4,054,000 at June 30, 2004 from $8,656,000 at June 30, 2003. Total shareholders equity improved from $11,261,000 in fiscal 2003 to $17,865,000 in fiscal 2004.
Our operating activities used net cash of $3,865,000 during fiscal 2004. This compares to net cash used in operations of $1,061,000 during the previous fiscal year. Disbursements we made during fiscal 2004 relating to accrued taxes and other accrued expenses coupled with the decline in our profitability on the operating level for fiscal 2004 and additional working capital needed to invest in our receivables and inventories explain the increased usage of cash in fiscal 2004 as compared to the previous fiscal year. Changes in the distribution methods for some of our products, including TurboCAD, from licensing arrangements to selling directly to resellers and distributors accounted for the majority of the increase in our receivables and inventories balances during fiscal 2004.
During fiscal 2004, we recorded a gain of $2.0 Million from the sale of discontinued operations representing the successful achievement of the first and second earn-outs from the sale of ArtToday. These earn-outs were contingent on ArtToday reaching certain revenue milestones. The first installment of $1.0 Million was earned during the second quarter of fiscal 2004 and was paid per the stock purchase agreement on February 13, 2004 and the second installment of the earn-outs was earned during the fourth quarter of fiscal 2004 and was paid on August 14, 2004
Our investing activities used net cash of $3,022,000 during fiscal 2004 and provided net cash of $10,112,000 during Fiscal 2003. During 2004 the cash was mainly used to acquire Allume, Houseplans and several new product lines and assets. We completed these acquisitions consistent with our strategy to expand our software and services businesses with a focus on products and services that complement our strengths in direct marketing and on-line distribution. These acquisitions were funded through a combination of cash on hand, debt and the issuance of our common stock. The divestiture of ArtToday provided us with the liquidity to strengthen our product portfolio and distribution channels. We expect to continue to identify and acquire products and launch services that satisfy our customer needs and have the
combination of high growth potential and positive EBITDA.
Our investing activities also included investment in marketable securities in the amount of $476,000 during fiscal 2004 in part offset by proceeds of $116,000 we collected from the sale of marketable securities. Also, during fiscal 2004, we received a 15% one-year note from DCDC when we extended a loan to them in the amount of $350,000. The note is due, with interest, on September 18, 2004. The note is secured by 400,000 shares of IMSIs stock held by DCDC. The agreement also called for DCDC not to sell any IMSI common stock that it held with the exception of private sales of IMSI common stock, prior to February 15, 2004.
The sale of our wholly owned subsidiary ArtToday accounted for the majority of the cash provided from our investing activities during Fiscal 2003. The proceeds from that sale 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 net cash of $243,000 during fiscal 2004. This compares to $1,084,000 of net cash used by financing activities during the previous fiscal year. During fiscal 2004 we issued a short term note secured by selected accounts receivable in the amount of $350,000 to one of our lendors and paid off $208,000 prior to year end. We also received cash from the exercise of warrants and options in the amounts of $96,000 and $157,000, respectively during fiscal 2004. We also paid $160,000 to Imageline on July 7, 2003, which represented the final payment in connection with our mutual settlement of previous infringement claims. In addition, we partially repaid during fiscal 2004 notes related to the businesses we acquired in the aggregate amount of $478,000.
The cash used by our financing activities during fiscal 2003 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 ArtTodays creditors.
Also during 2003, we were successful in raising $805,000 as we initiated, through a private placement to accredited investors, an offering of five-year 15% secured promissory notes with warrants attached. Purchasers of the notes also received warrants to purchase IMSIs 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 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 IMSIs 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". Concurrently 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.
Historically, we have financed our working capital and capital expenditure requirements primarily from short-term and long-term notes and bank borrowings, capitalized leases and sales of common stock. The sale of ArtToday to Jupitermedia in June 2003 provided us with additional sources of funds to support future growth. We may also seek additional equity and/or debt financing to sustain our growth strategy. However, we believe that we have sufficient funds to support our operations at least for the next twelve months, based on our current cash position and equity sources. We believe that we will be able to obtain any additional financing required on competitive terms particularly if we are successful in improving our financial performance. In addition, we will continue to seek opportunities and
discussions with third parties concerning the sale or license of certain product lines and/or the sale or license of a portion 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 and we will continue to evaluate 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. Over the next five years, we have no capital lease obligations and $2,600,000 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, 2004, and 2003
Consolidated Balance Sheet at June 30, 2004
Consolidated Statements of Operations for the years ended June 30, 2004 and 2003
Consolidated Statements of Shareholders' Equity for the years ended June 30, 2004 and 2003
Consolidated Statements of Cash Flows for the years ended June 30, 2004 and 2003
Notes to Consolidated Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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, 2004 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, 2004. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States) 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, 2004, and the consolidated results of their operations and their consolidated cash flows for each of the two years in the period ended June 30, 2004, in conformity with accounting principles generally accepted in the United States of America.
Grant Thornton LLP
September 7, 2004
San Francisco, California
INTERNATIONAL MICROCOMPUTER SOFTWARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In thousands, except share amounts)
|
|
June
30, 2004 |
|
ASSETS |
|
|
|
|
Current assets: |
|
|
|
|
Cash and cash equivalents |
|
$ |
3,212 |
|
Investment in marketable securities |
|
|
2,151 |
|
Receivables, less allowances for doubtful accounts, discounts and returns of $958 |
|
|
2,522 |
|
Inventories, net of reserves for obsolescence of $123 |
|
|
1,122 |
|
Receivables, other (related to discontinued operations) |
|
|
1,000 |
|
Note receivable from related party |
|
|
350 |
|
Other current assets |
|
|
552 |
|
Assets
related to discontinued operations |
|
|
828 |
Total current assets |
|
|
11,737 |
|
|
|
|
|
|
Fixed assets, net |
|
|
637 |
|
|
|
|
|
|
Intangible Assets |
|
|
|
|
Capitalized software, net |
|
|
2,748 |
|
Domain names, net |
|
|
2,275 |
|
Distribution rights, net |
|
|
594 |
|
Capitalized customer lists |
|
|
843 |
|
Goodwill |
|
|
7,559 |
|
Total intangible assets |
|
|
14,019 |
|
|
|
|
|
|
Other assets: |
|
|
|
|
Prepaid expenses |
|
|
99 |
|
Investment in securities |
|
|
1,771 |
|
Total other assets |
|
|
1,870 |
|
Total assets |
|
$ |
28,263 |
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS' EQUITY |
|
|
|
|
Current liabilities: |
|
|
|
|
Short term debt |
|
$ |
3,557 |
|
Trade accounts payable |
|
|
2,375 |
|
Accrued and other liabilities |
|
|
1,751 |
|
Total current liabilities |
|
|
7,683 |
|
|
|
|
|
|
Liabilities related to discontinued operations |
|
|
397 |
|
Long-term debt and other obligations |
|
|
2,318 |
|
|
|
|
|
|
Total liabilities |
|
|
10,398 |
|
|
|
|
|
|
Shareholders' Equity |
|
|
|
|
Common stock, no par value; 300,000,000 authorized; 26,261,829 issued and outstanding |
|
|
41,512 |
|
Accumulated deficit |
|
|
(23,577 |
) |
Accumulated other comprehensive loss |
|
|
(70 |
) |
Total shareholders' equity |
|
|
17,865 |
|
|
|
|
|
|
Total liabilities and shareholders' equity |
|
$ |
28,263 |
|
See Notes to Consolidated Financial Statements
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 |
|
|
2004 |
|
Net revenues |
|
$ |
11,985 |
|
$ |
8,095 |
|
Product costs |
|
|
4,137 |
|
|
3,947 |
|
Gross margin |
|
|
7,848 |
|
|
4,148 |
|
|
|
|
|
|
|
|
|
Costs and expenses: |
|
|
|
|
|
|
|
Sales and marketing |
|
|
5,190 |
|
|
2,621 |
|
General and administrative |
|
|
3,910 |
|
|
2,903 |
|
Research and development |
|
|
2,519 |
|
|
1,358 |
|
Total operating expenses |
|
|
11,619 |
|
|
6,882 |
|
|
|
|
|
|
|
|
|
Operating loss |
|
|
(3,771 |
) |
|
(2,734 |
) |
|
|
|
|
|
|
|
|
Other income and expense: |
|
|
|
|
|
|
|
Interest and other, net |
|
|
78 |
|
|
(850 |
) |
Realized gain on marketable securities |
|
|
585 |
|
|
- |
|
Unrealized gain on marketable securities |
|
|
1,982 |
|
|
- |
|
Loss on disposal of fixed assets |
|
|
(13 |
) |
|
- |
|
Gain (loss) on sale of product line |
|
|
59 |
|
|
(41 |
) |
Gain on extinguishment of debt |
|
|
76 |
|
|
762 |
|
|
|
|
|
|
|
|
|
Loss before income tax |
|
|
(1,004 |
) |
|
(2,863 |
) |
|
|
|
|
|
|
|
|
Income tax provision |
|
|
38 |
|
|
7 |
|
|
|
|
|
|
|
|
|
Loss from Continuing Operations |
|
|
(1,042 |
) |
|
(2,870 |
) |
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations, net of income tax |
|
|
(312 |
) |
|
1,301 |
|
Gain from the sale of discontinued operations, net of income tax |
|
|
2,000 |
|
|
12,237 |
|
|
|
|
|
|
|
|
|
Net Income |
|
$ |
646 |
|
$ |
10,668 |
|
|
|
|
|
|
|
|
|
Other comprehensive income |
|
|
|
|
|
|
|
Foreign currency translation adjustments |
|
|
(8 |
) |
|
(37 |
) |
Comprehensive income |
|
$ |
638 |
|
$ |
10,631 |
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share |
|
|
|
|
|
|
|
Loss from continuing operations |
|
|
($0.04 |
) |
|
($0.13 |
) |
Income (loss) from discontinued operations, net of income tax |
|
|
($0.01 |
) |
$ |
0.06 |
|
Gain from the sale of discontinued operations, net of income tax |
|
$ |
0.08 |
|
$ |
0.54 |
|
Net income |
|
$ |
0.03 |
|
$ |
0.47 |
|
Diluted earnings (loss) per share |
|
|
|
|
|
|
|
Net income (loss) from continuing operations |
|
|
($0.04 |
) |
|
($0.13 |
) |
Income from discontinued operations, net of income tax |
|
|
($0.01 |
) |
$ |
0.06 |
|
Gain from the sale of discontinued operations, net of income tax |
|
$ |
0.08 |
|
$ |
0.54 |
|
Net income |
|
$ |
0.03 |
|
$ |
0.47 |
|
|
|
|
|
|
|
|
|
Shares used in computing basic earnings per share |
|
|
23,838 |
|
|
22,801 |
|
Shares used in computing diluted earnings per share |
|
|
23,838 |
|
|
22,801 |
|
See Notes to Consolidated Financial Statements
INTERNATIONAL MICROCOMPUTER SOFTWARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
Years ended June 30, 2004 and 2003
(In thousands, except share amounts)
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
Shares |
|
Amount |
|
Retained Earnings |
|
Accumulated other comprehensive income (loss) |
|
Total |
|
Balance at July 1, 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 |
|
Employee 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 |
|
Issuance of common stock related to: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants exercised |
|
|
508,634 |
|
|
96 |
|
|
|
|
|
|
|
|
96 |
|
Stock options exercised |
|
|
376,116 |
|
|
157 |
|
|
|
|
|
|
|
|
157 |
|
Acquisitions |
|
|
2,603,847 |
|
|
4,221 |
|
|
|
|
|
|
|
|
4,221 |
|
Issuance of warrants related to: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consulting services rendered |
|
|
|
|
|
482 |
|
|
|
|
|
|
|
|
482 |
|
Acquisitions |
|
|
|
|
|
83 |
|
|
|
|
|
|
|
|
83 |
|
Issuance of common stock options related to: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consulting services rendered |
|
|
|
|
|
26 |
|
|
|
|
|
|
|
|
26 |
|
Acquisitions |
|
|
|
|
|
945 |
|
|
|
|
|
|
|
|
945 |
|
Retirement into treasury related sale of Plan 3D |
|
|
(45,000 |
) |
|
(59 |
) |
|
|
|
|
|
|
|
(59 |
) |
Variable accounting adjustment |
|
|
|
|
|
15 |
|
|
|
|
|
|
|
|
15 |
|
Net income |
|
|
|
|
|
|
|
|
646 |
|
|
|
|
|
646 |
|
Foreign currency translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
(8 |
) |
|
(8 |
) |
Balance at June 30, 2004 |
|
|
26,261,829 |
|
$ |
41,512 |
|
$ |
(23,577 |
) |
$ |
(70 |
) |
$ |
17,865 |
|
See Notes to Consolidated Financial Statements
INTERNATIONAL MICROCOMPUTER SOFTWARE, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended June 30 (In thousands)
|
|
Fiscal Year 2004 |
|
Fiscal Year 2003 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
Net income |
|
$ |
646 |
|
$ |
10,668 |
|
Adjustments to reconcile net income to net cash used by operating activities: |
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
833 |
|
|
850 |
|
Unrealized gain on marketable securities |
|
|
(1,982 |
) |
|
|
|
Net provision for bad debt |
|
|
|
|
|
(85 |
) |
Net provision for returns and price discounts |
|
|
407 |
|
|
313 |
|
Net provision for inventory obsolescence |
|
|
3 |
|
|
(9 |
) |
Extinguishment of debt |
|
|
(76 |
) |
|
(769 |
) |
Income from discontinued operations |
|
|
312 |
|
|
(1,301 |
) |
Gain on the sale of discontinued operations |
|
|
(2,000 |
) |
|
(12,237 |
) |
Loss on disposal of assets |
|
|
13 |
|
|
41 |
|
Imageline settlement |
|
|
|
|
|
(384 |
) |
Stock based compensation charges |
|
|
523 |
|
|
372 |
|
Gain on the sale of Design 3D |
|
|
(59 |
) |
|
|
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
Marketable securities |
|
|
(583 |
) |
|
|
|
Receivables |
|
|
(1,554 |
) |
|
(297 |
) |
Receivables Other |
|
|
(1,000 |
) |
|
|
|
Inventories |
|
|
(479 |
) |
|
79 |
|
Other current assets |
|
|
(175 |
) |
|
29 |
|
Long term receivables |
|
|
650 |
|
|
|
|
Trade accounts payable |
|
|
1,535 |
|
|
(172 |
) |
Accrued and other liabilities |
|
|
(632 |
) |
|
(77 |
) |
Accrued arbitration award |
|
|
|
|
|
(249 |
) |
Deferred revenue |
|
|
(45 |
) |
|
16 |
|
Operating cash(used) provided by discontinued operations |
|
|
(202 |
) |
|
2,151 |
|
Net cash used by operating activities |
|
|
($3,865 |
) |
|
($1,061 |
) |
Cash flows from investing activities: |
|
|
|
|
|
|
|
Proceeds from sale of discontinued operations |
|
|
2,000 |
|
|
10,449 |
|
Acquisition of product lines |
|
|
(1,815 |
) |
|
|
|
Acquisition of subsidiary |
|
|
(1,982 |
) |
|
|
|
Purchases of equipment |
|
|
(426 |
) |
|
(28 |
) |
Software development costs and in-process technologies |
|
|
(80 |
) |
|
(20 |
) |
Purchase of domain names |
|
|
(2 |
) |
|
|
|
Investment in marketable securities |
|
|
(476 |
) |
|
|
|
Proceeds from the sale of marketable securities |
|
|
116 |
|
|
|
|
Note to related party |
|
|
(350 |
) |
|
|
|
Cash used by discontinued operations in investing activities |
|
|
(7 |
) |
|
(289 |
) |
Net cash provided (used) by investing activities |
|
|
($3,022 |
) |
$ |
10,112 |
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
Proceeds from borrowings |
|
|
350 |
|
|
805 |
|
Repayments of notes |
|
|
(623 |
) |
|
(1,566 |
) |
Repayments of capital lease obligations |
|
|
|
|
|
(154 |
) |
Proceeds from warrants and options exercised |
|
|
253 |
|
|
6 |
|
Settlement of note payable (Imageline) |
|
|
(160 |
) |
|
|
|
Cash used by discontinued operations in financing activities |
|
|
(63 |
) |
|
(175 |
) |
Net cash used by financing activities |
|
|
($243 |
) |
|
($1,084 |
) |
Effect of exchange rate change on cash and cash equivalents |
|
|
(8 |
) |
|
(37 |
) |
Net increase (decrease) in cash and cash equivalents |
|
|
(7,138 |
) |
|
7,930 |
|
Cash and cash equivalents at beginning of year |
|
|
10,350 |
|
|
2,420 |
|
Cash and cash equivalents at end of the year |
|
$ |
3,212 |
|
$ |
10,350 |
|
See Notes to Consolidated Financial Statements
(In thousands) |
|
Fiscal Year 2004 |
|
Fiscal Year
2003 |
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION |
|
|
|
|
|
Interest paid |
|
$ |
79 |
|
$ |
200 |
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING ACTIVITIES |
|
|
|
|
|
|
Equipment acquired through capital lease obligations |
|
|
|
|
$ |
5 |
Intangible assets acquired through notes payable |
|
|
|
|
$ |
302 |
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES |
|
|
|
|
|
|
Notes payable incurred in conjunction with acquisitions |
|
$ |
5,878 |
|
|
|
Capital stock issued in conjunction with acquisitions |
|
$ |
4,221 |
|
|
|
Warrants issued in conjunction with acquisitions |
|
$ |
83 |
|
|
|
Stock options issued in conjunction with acquisitions |
|
$ |
945 |
|
|
|
See Notes to Consolidated Financial Statements
INTERNATIONAL MICROCOMPUTER SOFTWARE, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. |
Summary of Significant Accounting Policies |
Organization, Operations and Liquidity
International Microcomputer Software, Inc. was incorporated in California in November 1982. IMSI develops and publishes software and content in the precision design (computer assisted drawing; "CAD") and consumer software categories targeted to small to medium-size businesses, professionals, and consumers.
Historically, we have financed our working capital and capital expenditure requirements primarily from short-term and long-term notes and bank borrowings, capitalized leases and sales of common stock. The sale of ArtToday to Jupitermedia in June 2003 provided us with additional sources of funds to support future growth. We may also seek additional equity and/or debt financing to sustain our growth strategy. However, we believe that we have sufficient funds to support our operations at least for the next twelve months, based on our current cash position and equity sources. If we are successful in improving our financial performance, we believe that we will be able to obtain any additional financing required on competitive terms. In addition, we will continue to seek opportunities and discussions with
third parties concerning the sale or license of certain product lines and/or the sale or license of a portion 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 and we will continue to evaluate 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.
The Company is subject to the risks associated with similar companies in a comparable stage of growth and expansion. These risks include, but are not limited to, fluctuations in operating results, seasonality, a lengthy sales cycle, competition, a limited customer base, dependence on key individuals, dependence on international operations, foreign currency exchange rate fluctuations, product concentration, and the ability to adequately finance its ongoing operations
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 managements judgment in its application. There are also areas in which managements 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 collection of the
resulting account is probable.
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Revenue from packaged product sales to resellers and end users is recorded at the time of the sale net of estimated returns. |
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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. |
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For software and content delivered via the Internet, revenue is recorded when the customer downloads the software, activates the subscription account or is shipped the content. |
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Revenue from post contract customer support (PCS) is recognized ratably over the contract period.. |
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Subscription revenue is recognized ratably over the contract period. |
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We use the residual method to recognize revenue when a license agreement includes one or more elements to be delivered at a future date. If there is an undelivered element under the license arrangement, we defer revenue based on vendor-specific objective evidence (VSOE) of the fair value of the undelivered element, as determined by the price charged when the element is sold separately. If VSOE of fair value does not exist for all undelivered elements, we defer all revenue until sufficient evidence exists or all elements have been delivered. |
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Non-refundable advanced payments received under license agreements with no defined terms are recognized as revenue when the customer accepts the delivered software. |
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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. |
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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. |
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Revenue from Original Equipment Manufacturer (OEM) contracts is recognized upon completion of our contractual obligations. |
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 and content 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. As of June 30, 2004, approximately $132,000 of our cash was held in foreign financial institutions for the benefit of our foreign subsidiaries. Those funds are not subject to any restrictions.
Marketable Securities
Marketable securities are stated at fair value. Marketable securities maturing within one year that are not restricted are classified as current assets. We determine the appropriate classification of our marketable securities at the time of purchase and reevaluate such classification as of each balance sheet date. We classify all of our marketable securities as available-for-sale and carry such securities at fair value.
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,
2004 and June 30, 2003 were $4,153,000 and $1,103,000 less accumulated amortization of $1,405,000 and $1,016,000 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 $389,000 and $216,000, for the fiscal year ended June 30, 2004 and 2003, respectively.
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 being amortized over a period of 60 months.
Goodwill
Total goodwill at June 30, 2004 was $7,559,000 relating mainly to the acquisitions we consummated during fiscal 2004. As of June 30, 2004, our assets related to discontinued operations also include $179,000 of goodwill related to Keynomics. This amount will be eliminated against the gain on the sale of discontinued operations when the transaction closes during the first quarter of fiscal 2005. In accordance with SFAS No. 142, Goodwill and Intangible Assets goodwill is being assessed for
impairment annually or more frequently if circumstances indicate impairment. We have not recognized any impairment related to goodwill during fiscal 2004.
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, 2004, approximately $21,000 of our inventory was held by certain of our distributors under consignment arrangement.
Advertising Costs
Advertising costs are expensed as the related benefit is received from the advertising vendor.
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 assets carrying value over the fair value. We did not recognize any impairment loss for long-lived assets in either fiscal 2004 or fiscal 2003.
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, 2004 we have $1,771,000 classified under investments in securities
on our balance sheet. This amount represents the market value of the 125,000
shares of Jupitermedia common stock we received as part of the total consideration
paid for the sale of ArtToday and are being held in escrow until December
30, 2005. 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, 2004. As part
of an amended escrow agreement with Jupitermedia, 125,000 of the original
250,000 shares that were tendered as part of the consideration in the sale
were released from the escrow account in February 2004. As of June 30, 2004,
we had sold 60,000 of the Jupitermedia shares. All of the 250,000 shares that
we received as part of the consideration of the ArtToday sale were included
as part of a registration statement on Form S-3 that Jupitermedia filed on
August 27, 2003.
Subsequent to June 30, 2004, we substituted approximately $500,000 in cash for the remaining 125,000 shares of Jupitermedia from the escrow agent. These shares have been deposited into our marketable securities account and will be sold as market conditions allow.
We also hold, in escrow, as of June 30, 2004 $650,000 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 was released to us on June 30, 2004. The remaining $650,000 escrow balance, net of any identified claim reserves, will be released to us on December 30, 2004. Approximately $42,000 of the remaining cash in escrow is due to the former minority shareholders of ArtToday and is payable to them
as we receive the funds from the escrow agent, net of any claims. As of June 30, 2004, we are not aware of any actual or threatened claims which would impair our ability to receive all of these funds when the escrow period is completed.
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 2004 and 2003, we recognized $15,000 and $6,000 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. The pro forma financial information should be read in conjunction with the related historical information and is not necessarily indicative of the results that would have been attained had the transaction actually taken place.
(in thousands, except per share amounts) |
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Year Ended June 30, |
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