Robert Mayer, Executive Vice President of Precision Design. See above.
William J. Bush, CFO, age 39. Mr. Bush joined our executive team in September 2002. As the former Director of Business Development for Buzzsaw.com and former Corporate Controller and Finance Manager for the AutoCAD Product Division at Autodesk, Inc., the fourth largest software applications company in the world, he brings over 15 years of experience in accounting, financial support and business development to IMSI. Prior to joining IMSI, Mr. Bush was one of the founding members of Buzzsaw.com, a privately held company spun off from Autodesk in 1999, focusing on online collaboration, printing and procurement applications. At Buzzsaw.com, Mr. Bush was responsible for establishing the companys finance and accounting infrastructure as well as leading
its acquisition and financing efforts. From 1997 to 1999, Mr. Bush was the Corporate Controller at Autodesk, where his responsibilities included financial planning and analysis, general accounting, and SEC and management reporting. Mr. Bush began his career in public accounting with Ernst & Young, and later with Price Waterhouse in Munich, Germany. He received a B.S. in Business Administration from U.C. Berkeley and is a Certified Public Accountant.
Jonathan Kahn, President Allume Systems, age 46. Mr. Kahn joined the management of IMSI with the acquisition of Allume Systems in April 2004. Mr. Kahn is one of the original founders of Allume Systems and has served as a Director since 1988. Prior to becoming CEO in 1998, he served as President, and Vice President of Sales. Mr. Kahn has extensive expertise in software industry sales, marketing, business development and licensing arrangements. Mr. Kahn is a graduate of the University of Rhode Island with a B.A. in Economics.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of September 28, 2004 the beneficial ownership of the Company's Common Stock by:
· |
Each person who is known by the Company to own of record or beneficially more than five percent (5%) of the Company's Common Stock |
· |
Each director or nominee |
· |
Each other executive officer named in the Summary Compensation Table, and |
· |
All directors and executive officers as a group. Except as otherwise indicated, the shareholders listed in the table have sole voting and dispositive power with respect to the shares indicated, subject to community property laws where applicable. |
The table below includes shares as to which the holders are eligible to acquire beneficial ownership within 60 days
Table 5
Name |
|
Total |
|
|
Number |
Percent |
|
|
|
|
Digital Creative Development Corp |
|
7,685,758 |
27.46% |
Aladdin Systems Holdings, Inc. |
|
3,383,688 |
12.09% |
Capital Ventures, Inc. |
|
2,553,791 |
9.08% |
Gordon Landies |
|
1,778,664 |
6.12% |
Geoffrey Koblick |
|
1,022,600 |
3.60% |
Robert Mayer |
|
867,086 |
3.06% |
Bruce Galloway |
|
657,500 |
2.31% |
William Bush |
|
327,426 |
1.16% |
Robert Falcone |
|
265,000 |
0.94% |
Richard Berman |
|
250,000 |
0.89% |
Evan Binn |
|
60,000 |
0.21% |
Donald Perlyn |
|
50,000 |
0.18% |
Martin Wade |
|
46,667 |
0.17% |
|
|
|
|
All directors and executive officers as a Group |
|
5,324,943 |
16.97% |
DESCRIPTION OF SECURITIES
Common Stock. Pursuant to our Articles of Incorporation, as amended, we are authorized to issue 300,000,000 shares of common stock, no par value per share. The following is a description of our common stock, shares of which are being offered in this prospectus:
Holders of the common stock are entitled to one vote for each share held by them of record on the books of IMSI in all matters to be voted on by the stockholders. Holders of common stock are entitled to receive such dividends as may be declared from time to time by the board of directors out of funds legally available, and in the event of liquidation, dissolution or winding up of IMSI to share ratably in all assets remaining after payment of liabilities. Declaration of dividends on common stock is subject to the discretion of the board of directors and will depend upon a number of factors, including the future earnings, capital requirements and financial condition of IMSI. IMSI has not declared dividends on its common stock in the past and management currently anticipates that retained earnings, if any, in the
future will be applied to the expansion and development of IMSI rather than the payment of dividends.
The holders of common stock have no preemptive or conversion rights and are not subject to further calls or assessments by IMSI. There are no redemption or sinking fund provisions applicable to the common stock. The Articles of Incorporation require the approval of the holders of a majority of IMSIs common stock for the election of directors and for certain fundamental corporate actions, such as mergers and sales of substantial assets, or for an amendment to the Articles of Incorporation, other than an amendment to designate one or more series of preferred stock, as described below. There exists no provision in the Articles of Incorporation or IMSIs Bylaws that would delay, defer or prevent a change in control of IMSI.
Preferred Stock. Our Articles of Incorporation further authorize our board of directors, subject to any limitations prescribed by law and without further stockholder approval, to issue from time to time up to 20,000,000 shares of preferred stock in one or more series. Our charter also authorizes our board of directors, subject to the limitations prescribed by California law, to establish the number of shares to be included in each series and to fix the voting powers, preferences, qualifications and special or relative rights or privileges of each series; and to issue preferred stock with voting, conversion and other rights and preferences that could adversely affect the voting power or other rights of the holders of common stock.
The purpose of authorizing our board of directors to issue preferred stock and determine its rights and preferences is to eliminate delays associated with a stockholder vote on specific issuances. The issuance of preferred stock or of rights to purchase preferred stock, however, could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from attempting to acquire, a majority of our outstanding common stock.
As of the date hereof, there were no series of preferred stock designated, and we have no current plans to issue any preferred stock.
American Stock Transfer and Trust acts as our transfer agent and registrar.
INTEREST OF NAMED EXPERTS AND COUNSEL
Grant Thornton LLP, independent auditors, has audited the financial statements of IMSI as of June 30, 2004 and for each of the two years in the period ended June 30, 2004, as set forth in their report. The financial statements are included in reliance on such reports given upon the authority of Grant Thornton LLP as experts in accounting and auditing. Grant Thornton LLP does not have any ownership interest in us.
The validity of the issuance of the shares of common stock offered hereby and certain other legal matters in connection herewith have been passed upon for us by Niesar & Diamond LLP. Niesar & Diamond LLP does not have any ownership interest in us.
DISCLOSURE OF COMMISSION POSITION OF INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Indemnification. Our bylaws and Section 317 of the California Corporations Code allow, and in some cases require, the indemnification of directors and officers to the fullest extent permitted by law for all expenses relating to civil, criminal, administrative or investigative procedures to which they are a party (i) by reason of the fact that they are or were directors or officers of IMSI or (ii) by reason of the fact that, while they are or were directors or officers of IMSI, they are or were serving at the request of IMSI as a director, officer or employee of another enterprise.
SEC Position on Securities Act Liabilities. Insofar as indemnification for liabilities arising under the Securities Act of 1933 (the "Securities Act") may be permitted to directors, officers or persons controlling us pursuant to the foregoing provisions, or otherwise, we have been advised that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable.
DESCRIPTION OF BUSINESS
Headquartered in Novato, California, IMSI was incorporated in California in November 1982. During our first 16 years in business, 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 additional products and product categories over the years. By the end of 1998, we marketed and distributed several products worldwide primarily through the retail channel.
In 1998, we acquired ArtToday, an Internet provider of clipart, photos and other graphics content as part of our new strategy to transition from sales of boxed product through the retail channel to Internet sales 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, DCDC entered into a merger agreement with IMSI. Upon signing of the merger agreement, Mr. Martin Wade III, a director and CEO of DCDC, became CEO of IMSI, four of our five directors resigned and the entire board of directors of DCDC was appointed to the IMSI board of directors.
In November 2001, we acquired Keynomics from DCDC, which focused on productivity enhancement software. Keynomics provides productivity and ergonomic compliance improvements thru its proprietary software system, The KeySoft Performance System. Keynomics mission is to reduce corporate keyboarding costs and risks and provide significant long-term savings through ergonomic and productivity training and awareness.
In February 2002, we entered into a Mutual Termination Agreement and Release with DCDC whereby the proposed merger was terminated and each company was released from all duties, rights, claims, obligations and liabilities arising from, in connection with, or relating to, the merger.
In June 2003, we sold ArtToday, our wholly owned subsidiary based in Arizona, to Jupitermedia Corporation for a combination of cash, restricted stock and two-year earn-outs.
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, we acquired a ten (10%) ownership interest in Keynomics, L.L.C.
The sale of ArtToday to Jupitermedia provided the Company with significant capital allowing us to refine and 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 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:
Abbisoft House Plans, Inc. On September 28, 2004 we completed, through our wholly owned subsidiary Houseplans, Inc, a stock purchase agreement whereby we acquired all the outstanding stock of Abbisoft House Plans, Inc. (Abbisoft), an on-line provider of stock house plans. Abbisoft operates the Homeplanfinder.com website. This acquisition will allow us to strengthen our position and increase our market share in the market for the sale of stock house plans via the internet.
The consideration for the acquisition was paid in a combination of cash, notes payable and 500,000 unregistered IMSI common shares issued pursuant to a transaction exempt from registration under Section 4(2) of the Securities Act. All of the shares issued as part of this transaction are being registered as part of this registration statement.
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 issued pursuant to a transaction exempt from registration under Section 4(2) of the Securities Act, a portion of which are subject to an escrow period. Eighty-seven thousand of the total shares tendered to DevDepot as part of the consideration are being registered as part of this registration statement.
Aladdin. 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. 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 (all of which are being registered as part of this registration statement) issued pursuant to a transaction exempt from registration under Section 4(2) of the Securities Act 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 as of the amendment date and will be 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, we will issue an additional 1,065,807 shares of our common stock issued pursuant to a transaction exempt from registration under Section 4(2) of the Securities Act to Aladdin Holdings. These shares are being registered as part of this registration statement on Form SB-2 pursuant to the Registration Rights Agreement between Aladdin Holdings and IMSI. |
As part of the same agreement, Aladdin Holdings agreed to modify the date by which IMSI was required to file this 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 this registration statement was required to become effective by the Securities and Exchange Commission from one hundred and eighty (180) days from the closing date to March 31, 2005. If we are not able to timely file this registration statement or if it does not become effective by the date 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 year presented nor is it indicative of future results (in thousands, except per share amounts):
Table 6
|
|
Unaudited |
|
|
Fiscal year ended June 30, |
|
|
2004 |
2003 |
|
|
|
|
Net 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 issued pursuant to a transaction exempt from registration under Section 4(2) of the Securities Act and earn-out payments. Following the acquisition, we reorganized Planworks, L.L.C as 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 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. 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.
On June 9, 2004, we amended the asset purchase agreement between CADalog, Inc. and ourselves to obtain the return of certain escrowed funds originally due CADalog, Inc. in exchange for the issuance of 5,000 shares of IMSIs common stock issued pursuant to a transaction exempt from registration under Section 4(2) of the Securities Act and the right for Cadalog, Inc. to distribute certain of our products in Asia.
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 issued pursuant to a transaction exempt from registration under Section 4(2) of the Securities Act.
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.
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:
Table 7
Business Segment |
|
Product Family |
|
Product Group |
|
Product Brand |
|
|
|
|
|
|
|
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 |
|
|
|
|
|
|
|
Consumer and Business Software Solutions |
|
Utilities |
|
Compression, Access and Transmission (CAT) |
|
StuffIt Deluxe & 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
· |
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. |
· |
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. |
· |
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. |
· |
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
· |
TurboCAD Deluxe is an easy to use solution to design and present 2D and 3D ideas. It features over 250 2D/3D precision tools. |
· |
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. |
· |
Instant Series is an array of CAD titles, including Instant Architect and Instant Deck Design, with common easy to use features geared toward consumers. |
· |
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)
· |
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. |
· |
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:
· |
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:
· |
Sending information in a way that is fast, safe and secure over the Internet or any network |
· |
Accessing information received |
· |
Maximizing storage capacity and bandwidth |
· |
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:
· |
StuffIt Deluxe (Windows and Macintosh) |
· |
StuffIt Standard Edition (Windows, Macintosh and Linux) |
· |
StuffIt Expander (Windows and Macintosh) |
· |
StuffIt Express (Windows and Macintosh) |
· |
StuffIt Installermaker (Macintosh) |
· |
StuffIt Engine SDK (Windows, Linux, Solaris and Macintosh) |
Security and Internet
· |
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. |
· |
Internet Cleanup (Windows and Macintosh) - Internet Cleanup is a spyware, Internet cleanup and privacy solution used to remove unwanted internet files and protect users identities. Internet Cleanup also blocks pop-up and banner ads, and detects and removes Spyware. |
· |
SpamCatcher (Windows) - SpamCatcher is an anti-spam software solution published by Allume. 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. |
· |
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. |
· |
NetAccelerator (Windows) is enhancement tool that boosts computer performance and makes the browsing and downloading experience faster. |
· |
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 Allumes web sites.
· |
Ten for X: Utilities Volume 1 is a collection of 11 Macintosh OS X utility software products. |
· |
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. |
· |
Ten for X: Games Volume 1 is a collection of 13 games for Macintosh OS X, including the very popular Bugdom 2. |
· |
GameOn Action is a collection of six action pack games for the Macintosh. This compilation includes games like Spyhunter (TM) and Freedom Force. |
· |
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. |
· |
Creative Essentials is a collection of professional graphic tools for the Mac sold at an affordable price. |
· |
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
· |
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. |
· |
FormTool is a forms automation product that allows users to design and print personal forms quickly, or choose from over 400 pre-built templates. |
· |
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. |
· |
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. |
· |
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
· |
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. |
· |
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:
o |
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: |
§ |
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. |
§ |
Telesales- We sell certain of our products and services through our sales force as well as through external call centers. |
o |
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
Competition is intense in the PC software industry among a fragmented and wide ranging group of software products and service providers. Many of our current competitors have significantly greater name recognition and financial, technical, marketing and other resources than we do. As a result, they may be able to respond more quickly to new or emerging technologies and changes in customer requirements, or to devote greater resources to the development, promotion, sale and support of their products than we can. We anticipate increased competition from emerging and established companies. We believe that the principal competition methods used by our competitors in the industry include faster adaptation to newly developed technology (including hardware), improving their product performance, decreasing their prices and
strengthening their presence in the distribution channels.
The PC software industry and the Internet are highly competitive and characterized by several key factors:
· |
Rapid changes in technology and customer requirements - New opportunities for existing and new competitors can quickly render existing technologies less valuable. |
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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. |
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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:
Table 8
IMSI Product |
Competing products |
Competitor |
|
|
|
TurboCAD |
AutoCAD |
Autodesk Inc. |
|
|
|
FloorPlan |
3D Architect |
Broderbund |
Home Architect |
Sierra Online |
Home Design Suite |
Punch Software |
|
|
|
ClipArt & More, Animations & More |
ArtExplosion |
Nova Development |
Photo ClipArt |
Hemera |
Big Box of Art |
Hemera |
Designer ClipArt |
GlobalStar Software |
|
|
|
OrgChart Professional |
Visio |
Microsoft |
OrgPlus |
Human Concepts |
|
|
|
StuffIt |
WinZip |
WinZip Computing, Inc. |
|
|
|
SpamCatcher |
MailShield |
Lyris |
|
|
|
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, HomePlanSM, 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:
· |
We rely on a combination of copyrights, patents, trademarks, trade secret laws, restrictions on disclosure, and transferring title and other methods. |
· |
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. |
· |
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. |
· |
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. |
· |
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. |
· |
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. None of the royalty obligations arising from such licenses are material obligations of IMSI.
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.
Regulatory Reporting
We are a reporting company under the Exchange Act. We file quarterly and annual reports with the Securities and Exchange Commission on forms 10-QSB and 10-KSB, and report other material events on form 8-K. The SEC maintains a web site at www.sec.gov from which copies of all reports, proxy and information statements, and other information we file may be found. Copies of these documents may also be obtained from our web site at www.imsisoft.com The public may also read and copy any materials we file with the SEC at the SECs Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549, telephone 1-800-SEC-0330.
MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following information should be read in conjunction with the consolidated financial statements as of June 30, 2004 and for each of the two years in the period ended June 30, 2004 and the notes thereto contained elsewhere in this registration statement. 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.
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
Abbisoft House Plans, Inc. On September 28, 2004 we completed, through our wholly owned subsidiary Houseplans, Inc, a stock purchase agreement whereby we acquired all the outstanding stock of Abbisoft House Plans, Inc. (Abbisoft), an on-line provider of stock house plans. Abbisoft operates the Homeplanfinder.com website. This acquisition will allow us to strengthen our position and increase our market share in the market for the sale of stock house plans via the internet.
The consideration for the acquisition was paid in a combination of cash, notes payable and 500,000 unregistered IMSI common shares issued pursuant to a transaction exempt from registration under Section 4(2) of the Securities Act. All of the shares issued as part of this transaction are being registered as part of this registration statement.
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 issued pursuant to a transaction exempt from registration under Section 4(2) of the Securities Act, a portion of which are subject to an escrow period. Eighty-seven tousand of the total shares tendered to DevDepot as part of the consideration are being registered as part of this registration statement.
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. 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 (all of which are being registered as part of this registration statement) issued pursuant to a transaction exempt from registration under Section 4(2) of the Securities Act 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, we will issue an additional 1,065,807 shares of our common stock issued pursuant to a transaction exempt from registration under Section 4(2) of the Securities Act to Aladdin Holdings. These shares are being registered as part of this registration statement on Form SB-2 pursuant to the Registration Rights Agreement between Aladdin Holdings and IMSI. |
As part of the same agreement, Aladdin Holdings agreed to modify the date by which IMSI was required to file this 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 this registration statement was required to become effective by the Securities and Exchange Commission from one hundred and eighty (180) days from the closing date to March 31, 2005. If we are not able to timely file this registration statement or if it does not become effective by the date 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 year presented nor is it indicative of future results (in thousands, except per share amounts):
Table 6
|
|
Unaudited |
|
|
Fiscal year ended June 30, |
|
|
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 issued pursuant to a transaction exempt from registration under Section 4(2) of the Securities Act and earn-out payments. Following the acquisition, we reorganized Planworks, L.L.C as 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 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. 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.
On June 9, 2004, we amended the asset purchase agreement between CADalog, Inc. and ourselves to obtain the return of certain escrowed funds originally due CADalog, Inc. in exchange for the issuance of 5,000 shares of IMSIs common stock issued pursuant to a transaction exempt from registration under Section 4(2) of the Securities Act and the right for Cadalog, Inc. to distribute certain of our products in Asia.
On June 9, 2004, we amended the asset purchase agreement between CADalog, Inc. and ourselves to obtain the return of certain escrowed funds originally due CADalog, Inc. in exchange for the issuance of 5,000 shares of IMSIs common stock issued pursuant to a transaction exempt from registration under Section 4(2) of the Securities Act and the right for Cadalog, Inc. to distribute certain of our products in Asia.
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 issued pursuant to a transaction exempt from registration under Section 4(2) of the Securities Act.
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.
Events Subsequent to Fiscal Year End
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.
The Acquisition of Abbisoft House Plans, Inc.
On September 28, 2004 we completed, through our wholly owned subsidiary Houseplans, Inc, a stock purchase agreement whereby we acquired all the outstanding stock of Abbisoft House Plans, Inc. (Abbisoft), an on-line provider of stock house plans. Abbisoft operates the Homeplanfinder.com website. This acquisition will allow us to strengthen our position and increase our market share in the market for the sale of stock house plans via the internet.
The consideration for the acquisition was paid in a combination of cash, notes payable and 500,000 unregistered IMSI common shares issued pursuant to a transaction exempt from registration under Section 4(2) of the Securities Act. All of the shares issued as part of this transaction are being registered as part of this registration statement.
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 Statements
The following information should be read in conjunction with the consolidated financial statements and the notes thereto contained elsewhere in this report. This report 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.
Table 9
|
|
Fiscal Year ended June 30, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ Change from previous year |
|
|
|
2004 |
|
2003 |
|
|
|
$ |
|
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% |
|
|
|
|
0 |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
0 |
|
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 for a wide array of uses primarily by 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:
Chart 1
Revenue by Product Family:
Chart 2
Revenue by Distribution Channel:
Chart 3
Revenues by Business Segment and Distribution Channel
Table 10
|
|
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% |
Chart 4
Revenues by Product Family and Distribution Channel
Table 11
|
|
PRECISION DESIGN SOLUTIONS |
|
CONSUMER & BUSINESS SOFTWARE SOLUTIONS |
|
|
Precision Design Software |
Precision Design Services |
|
Business Applications & Other |
Utilities |
|
|
|
|
|
|
|
Fiscal 2003 |
|
|
|
|
|
|
Direct Marketing |
|
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% |
Chart 5
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):
Table 12
|
|
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 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 versions 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 in 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. (now Allume), 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.
Table 13
|
|
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.
Table 14
|
|
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 secured by 400,000 shares of IMSIs stock held by DCDC and due on September 18, 2004. Concurrent with this note, DCDC repaid the entire principal portion of a $50,000 note, made in favor of IMSI on February 25, 2003. That note, due on February 25, 2004, was unsecured and carried a 4% interest rate. 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.
On September 18, 2004, we amended the terms of the promissory note with DCDC extending the maturity of the note to May 31, 2005. The accrued interest which was earned through September 18, 2004 will be paid on or before October 31, 2004. Additionally, DCDC agreed to increase the collateral attached to the note by assigning shares in an investment to IMSI.
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 in 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.
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.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Note Receivable from Related Party - DCDC 15% Note
On September 18, 2003, we received a 15% one-year note from Digital Creative Development Corporation ("DCDC") whereby we extended a loan to DCDC in the amount of $350,000, secured by 400,000 shares of IMSIs stock held by DCDC and due on September 18, 2004. The agreement also called for DCDC not to sell any IMSI common stock which it held, with the exception of private sales of IMSI common stock prior to February 15, 2004.
Concurrent with this note, DCDC repaid the entire principal portion of a $50,000 note, made in favor of IMSI on February 25, 2003. That note, due on February 25, 2004, was unsecured and carried a 4% interest rate. 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 the quarter ended September 30, 2003.
On September 18, 2004, we amended the terms of the promissory note with DCDC extending the maturity of the note to May 31, 2005. The accrued interest which was earned through September 18, 2004 will be paid on or before October 31, 2004. Additionally, DCDC agreed to increase the collateral attached to the note by assigning shares in an investment to IMSI.
Consulting agreement
On May 1, 2003, we entered into a consulting agreement with Mr. Bruce Galloway, chairman of our board of directors, to provide services to the company related to potential acquisitions and divestitures. In return for his services, Mr. Galloway could be entitled to a fee from zero to $200,000 dependent on his involvement and the consideration received or paid by us as a result of the transaction. Upon the successful sale of ArtToday in June 2003, we paid Mr. Galloway a fee of $150,000 per the terms of the agreement.
Five-year, 15% secured promissory notes, with warrants attached
In March 2003, we initiated a private placement of five-year, 15% secured promissory notes to accredited investors. We were successful in raising $805,000. Purchasers of the notes also received warrants to purchase 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. The notes were secured by a pledge of the common stock of ArtToday.com.
None of the participants in these private placements, except for our Chief Financial Officer, Mr. William J. Bush and Mr. Joseph Abrams (an IMSI related party as a former beneficial owner of IMSI Common Stock) who participated in the amounts of $80,000 and $50,000 respectively and received 40,000 and 25,000 warrants to purchase shares of 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".
The offering was conducted directly by IMSI. Proceeds of the offering were intended to retire existing debt, purchase of and/or license of digital content and software assets and fund general working capital needs.
Concurrent with the sale of ArtToday on June 30, 2003, we repaid the notes in full with an early repayment penalty of 2% which was $16,000.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The following table sets forth the quarterly high and low sales prices of the common stock for fiscal 2004 and 2003, as quoted on the OTCBB. This information represents prices between dealers and does not include retail mark-ups, markdowns or commissions and may not represent actual transactions.
Table 15
|
|
High |
|
Low |
|
|
|
|
|
|
|
|
|
Fiscal Year 2003 |
|
|
|
|
|
|
|
First Quarter |
|
|
|
|
|
|
|
Second Quarter |
|
|
|
|
|
0.51 |
|
Third Quarter |
|
|
|
|
|
0.43 |
|
Fourth Quarter |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2004 |
|
|
|
|
|
|
|
First Quarter |
|
|
|
|
|
|
|
Second Quarter |
|
|
|
|
|
1.00 |
|
Third Quarter |
|
|
1.77 |
|
|
1.10 |
|
Fourth Quarter |
|
|
|
|
|
|
|
On September 7, 2004, there were approximately 1,068 registered holders of record of the common stock. We believe that additional beneficial owners of our common stock hold shares in street names.
We have not paid any cash dividends on our common stock and do not plan to pay any such dividends in the foreseeable future. Our Board of Directors will determine our future dividend policy on the basis of many factors, including results of operations, capital requirements and general business conditions.
EXECUTIVE COMPENSATION
The following table sets forth all compensation awarded, earned or paid for services rendered to IMSI and its subsidiaries in all capacities during each of the fiscal years ended June 30, 2004, 2003 and 2002 to (i) our chief executive officer during fiscal 2004; and (ii) our most highly compensated executive officers other than the CEO who were serving as executive officers at the end of fiscal 2004.
Table 16
|
Summary Compensation Table |
|
|
|
|
|
Annual Compensation |
|
|
Long-Term Compensation Awards |
|
Name and Principal Positions |
|
|
|
|
Fiscal Year |
|
|
Salary
($) (1) |
|
|
Bonus
($) (1) |
|
|
Other Annual Compensation
($) (2) |
|
|
Securities Underlying Options
(#) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Martin Wade III |
|
|
|
|
2004 |
|
$ |
200,000 |
|
|
|
|
$ |
12,246 |
|
$ |
46,667 |
|
Chief Executive Officer |
|
|
|
|
2003 |
|
|
175,000 |
|
|
175,000 |
|
|
7,976 |
|
|
(2,000,000 |
) |
- |
|
|
|
|
2002 |
|
|
100,000 |
|
|
25,000 |
|
|
4,458 |
|
|
2,000,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gordon Landies |
|
|
|
|
2004 |
|
|
180,000 |
|
|
|
|
|
12,246 |
|
|
150,000 |
|
President |
|
(3 |
) |
|
2003 |
|
|
156,000 |
|
|
221,500 |
|
|
7,976 |
|
|
30,025 |
|
|
|
|
|
|
2002 |
|
|
130,000 |
|
|
40,000 |
|
|
65,670 |
|
|
1,250,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert Mayer |
|
|
|
|
2004 |
|
|
133,500 |
|
|
44,000 |
|
|
16,465 |
|
|
|
|
Executive Vice President, |
|
|
|
|
2003 |
|
|
120,000 |
|
|
18,000 |
|
|
28,708 |
|
|
57,500 |
|
Precision Design |
|
|
|
|
2002 |
|
|
120,000 |
|
|
66,044 |
|
|
3,827 |
|
|
382,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
William Bush |
|
|
|
|
2004 |
|
|
123,542 |
|
|
6,000 |
|
|
|
|
|
100,000 |
|
Chief Financial Officer |
|
|
|
|
2003 |
|
|
99,279 |
|
|
106,000 |
|
|
|
|
|
162,426 |
|
|
|
|
|
|
2002 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Amounts stated above are the actual amounts received. Amounts paid in fiscal 2004 are based upon the following annual salaries: Wade $200,000, Landies $180,000, Mayer $138,000, and Bush $125,000. |
(2) |
Includes payments of medical and dental insurance premiums by the Company on behalf of the named officers dependants. |
(3) |
Includes $55,000 of consulting fees. |
Option Grants
There were no SAR grants of stock options made during the last fiscal year to any of the named executive officers.
Warrant Grants
The following table sets forth the individual grants of warrants made during the last fiscal year to each of the named executive officers.
Table 17
Officer |
|
Number of securities underlying options/SARS granted |
|
Percent of total warrants granted to employees in fiscal year |
|
Exercise or base price |
|
Expiration Date |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bush, William |
|
|
100,000 |
|
|
13.48 |
% |
|
|
|
|
10/29/2013 |
|
Landies, Gordon |
|
|
150,000 |
|
|
20.22 |
% |
|
1.15 |
|
|
10/29/2013 |
|
Wade, Martin |
|
|
46,667 |
|
|
6.29 |
% |
|
|
|
|
7/3/2013 |
|
Options Exercised
The following table sets forth the option exercises made during the last fiscal year by each of the named executive officers and information with respect to the number of shares covered by both exercisable and non-exercisable stock options as of June 30, 2004. Also reported are the values for "in-the-money" options, which represent the positive spread between the exercise price of any such existing stock option and the fiscal year-end price of the Common Stock.
Table 18
Aggregated Option/SAR Exercises In Last Fiscal Year and FY-End Option/SAR Values |
|
|
|
Number of Unexercised Options/SARs At June 30, 2004 (1) |
Value of Unexercised In-The-Money Options At June 30, 2004 ($) (2) |
Name |
Exercise # |
Value Realized ($) |
Exercisable / Unexercisable |
Exercisable / Unexercisable |
|
|
|
|
|
Bush, William |
|
|
149,933 / 12,493 |
$70,299 / $4,248 |
Landies, Gordon |
|
|
30,025 / |
$23,722 / $ |
Mayer, Robert |
|
|
107,500 / |
$88,050 / $ |
(1) |
These options, which typically have a four-year vesting period, become exercisable over time based on continuous employment with the Company; and, in certain cases, are subject to various performance criteria or vest in full immediately. |
(2) |
Based on the difference between the market price of the common stock at June 30, 2004 ($1.27 per share) and the aggregate exercise prices of the options. |
FINANCIAL STATEMENTS
See the Consolidated Financial Statements beginning on page F-1 , "Index to Consolidated Financial Statements."
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
On the recommendation of the Audit Committee, the Board of Directors has appointed Grant Thornton LLP, independent auditors, to audit the consolidated financial statements of IMSI for the fiscal year ended June 30, 2004, and our stockholders voted for ratification of such appointment. Grant Thornton LLP has audited our financial statements annually since the fiscal year ended June 30, 1999.
There were no disagreements between us and Grant Thornton LLP, whether resolved or not resolved, on any matter of accounting principles or practices, financial statement disclosure or auditing, scope or procedure which, if not resolved, would have caused them to make reference to the subject matter of the disagreement in connection with their reports.
WHERE TO FIND ADDITIONAL INFORMATION
We have filed with the SEC a Registration Statement on Form SB-2 under the Securities Act for the common stock offered by this prospectus. This prospectus, which is a part of the Registration Statement, does not contain all of the information in the Registration Statement and the exhibits filed with it, portions of which have been omitted as permitted by SEC rules and regulations. For further information concerning us and the securities offered by this prospectus, please refer to the Registration Statement and to the exhibits filed with it. Statements contained in this prospectus as to the content of any contract or other document referred to are not necessarily complete. In each instance, we refer you to the copy of the contracts and/or other documents filed as exhibits to the Registration Statement and these
statements are qualified in their entirety by reference to the contract or document.
The Registration Statement, including all exhibits, may be inspected without charge at the SECs Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the SECs regional offices located at the Woolworth Building, 233 Broadway, New York, New York 10279 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of these materials may also be obtained from the SECs Public Reference at 450 Fifth Street, N.W., Room 1024, Washington D.C. 20549, upon the payment of prescribed fees. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The Registration Statement, including all exhibits and schedules and amendments, has been filed with the SEC through the Electronic Data Gathering, Analysis
and Retrieval system, and is publicly available through the SECs Website located at http://www.sec.gov.
INTERNATIONAL MICROCOMPUTER SOFTWARE, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Description |
|
|
|
|
|
|
Documents filed as part of this Registration Statement on Form SB-2: |
|
|
Financial Statements |
|
|
|
Independent Registered Public Accounting Firm's 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, |
|
|
|
2004 |
|
2003 |
|
|
|
|
|
|
|
|
|
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