Document/Exhibit Description Pages Size
1: 10-K Form 10-K for the Fiscal Year Ended June 30, 2000 80 470K
2: EX-21.1 Subsidiaries of the Registrant 1 4K
3: EX-23.1 Consent of Grant Thornton LLP 1 5K
4: EX-23.2 Consent of Deloitte & Touche LLP 1 5K
5: EX-27.1 Financial Data Schedule 1 6K
10-K — Form 10-K for the Fiscal Year Ended June 30, 2000
Document Table of Contents
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended June 30, 2000
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Exchange Act of
1934 for the Transition Period from _____ to _____
Commission File No. 0-15949
INTERNATIONAL MICROCOMPUTER SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
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CALIFORNIA 94-2862863
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
75 ROWLAND WAY, NOVATO, CALIFORNIA 94945
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (415) 878-4000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: common stock,
no par value
Indicate by check mark whether registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months, and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in the definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock of the registrant by
non-affiliates of the registrant as of October 6, 2000 was approximately
$2,714,290.
As of October 6, 2000, 9,693,892 Shares of Registrant's common stock, no
par value, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
3.01 Registrant's Amended and Restated Articles of Incorporation
3.02 Registrant's Bylaws, as amended to date
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INTERNATIONAL MICROCOMPUTER SOFTWARE, INC.
FORM 10-K ANNUAL REPORT
FOR THE YEAR ENDED JUNE 30, 2000
TABLE OF CONTENTS
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PART I
Item 1. Business 3
Item 2. Properties and Facilities 12
Item 3. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of Security Holders 13
PART II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters 14
Item 6. Selected Financial Data 15
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
Item 7a. Quantitative and Qualitative Disclosures
about Market Risk 37
Item 8. Financial Statements and Supplementary Data 38
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 38
PART III
Item 10. Directors and Executive Officers of the Registrant 39
Item 11. Executive Compensation 41
Item 12. Security Ownership of Certain Beneficial
Owners and Management 45
Item 13. Certain Relationships and Related Transactions 46
PART IV
Item 14. Exhibits, Financial Statements, Schedules,
and Reports on Form 8-K 47
Signatures 79
Exhibit Index 80
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PART I
FORWARD-LOOKING INFORMATION
This Annual Report of International Microcomputer Software, Inc ("IMSI") on Form
10-K contains certain forward-looking statements, particularly those identified
with the words, "anticipates," "believes," "expects," "plans," and similar
expressions. These statements reflect management's best judgment based on
factors known to them at the time of such statements. The reader may find
discussions containing such forward-looking statements in the material set forth
under "Legal Proceedings" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations," generally, and specifically therein under
the captions "Liquidity and Capital Resources" and "Future Performance and
Additional Risk Factors" as well as elsewhere in this Annual Report on Form
10-K. Actual events or results may differ materially from those discussed
herein. The reader should carefully consider the risk factors discussed under
"Future Performance and Additional Risk Factors," among others, in evaluating
the Company's prospects and future financial performance.
ITEM 1. BUSINESS
GENERAL
International Microcomputer Software, Inc. ("IMSI") was incorporated in
California in November 1982. IMSI's objective was to develop and publish PC
productivity software that extended the basic functionality of PCs beyond the
word processing, spreadsheet, electronic mail and database applications provided
by standard office productivity software suites. The Company designed its
products to enhance PC functionality by providing and/or expanding capabilities
in areas such as precision drawing, graphics, forms automation, project
management and scheduling. Over the next 16 years, IMSI became a leading
developer and publisher of productivity software in the precision design,
graphic design, business applications and utilities categories. By the end of
1998, IMSI marketed and distributed its products worldwide primarily through the
retail channel. The Company's corporate headquarters were in San Rafael,
California, and the Company also maintained subsidiary and branch offices in the
United Kingdom, Germany, Australia, South Africa, France, Sweden, and Canada.
In 1998 IMSI formulated a new strategy to transition from sales of boxed product
through the retail channel to Internet sales and to migrate the Company's core
products and content in the design and graphics categories to the Internet.
Since 1998, IMSI has accomplished a major restructuring and refined the
Company's strategy to focus on the Company's core capabilities in the design and
graphics software categories and to utilize the marketing expertise developed
over the last eighteen years. Today, IMSI's corporate headquarters are in
Novato, California and the Company maintains a branch office in Australia. The
offices of the Company's wholly owned subsidiary, ArtToday.com, are in Tucson,
Arizona.
BACKGROUND
From the start, IMSI pursued the Company's objective of developing and
publishing PC productivity software. In the early years, IMSI used primarily
direct marketing programs to sell the Company's products. This was consistent
with the nature of the industry and appropriate to the Company's customers,
which were primarily professionals and small to medium-sized businesses in
categories under-served by major software vendors.
In July 1987, IMSI completed its initial public offering, raising net proceeds
of approximately $2,600,000. The Company utilized the proceeds in part to expand
IMSI's efforts to create product franchises by developing, licensing or
acquiring products in categories where it believed it could capture market share
with better technology, lower prices, or a more extensive distribution network.
In August 1988, the Company acquired Milan Systems America, Inc. and the rights
to TurboCAD. In September 1995, IMSI acquired the rights to the FloorPlan
product line from Forte/ComputerEasy International, Inc.. On September 30, 1997,
the Company acquired the rights to established products, Corel Flow, Corel
Family Tree, and Lumiere, and four in-process technologies, CorelCAD, Click and
Create, VisualCADD and Corel Personal Architect in the CAD, diagramming and
consumer categories from Corel.
During this same period of expansion, IMSI began to diversify the Company's
marketing and selling activities. In 1992, IMSI began to pursue sales in the
retail channel. The Company continued to employ direct marketing techniques to
sell the Company's products to software retailers. In addition, IMSI began to
utilize sales representative firms to expand the retail distribution of its
products.
In 1995, IMSI established the objective of becoming a leader in the rapidly
consolidating software market by building an extensive network of domestic and
international distribution. Over the next three years, IMSI achieved significant
success. In
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IMSI's best-known product families, the Company had established well-known,
successful software products. They included TurboCAD and FloorPlan in the
precision design category, MasterClips, in the graphic design category, and Org
Plus and FormTool in the business applications category. IMSI was selling its
products in 10 languages in more than 40 countries, primarily through large
distributors in the retail channel. In addition, the Company sold directly to
the corporate, education and government markets as well as to other consumers
through strategic partners, direct mail and email.
In 1998, IMSI formulated a strategy that focused on two objectives, both related
to the Internet:
- Transition from sales of boxed product through the retail
channel to Internet sales.
- Migrate the Company's core products and content in the design
and graphics categories to the Internet.
This strategy was in response to the rapidly changing environment in the
software development and publishing business and the very significant potential
in the Internet businesses. Increased competition, the growing dominance of
companies much larger than IMSI, and the need to grant large rebates, allowances
and return privileges to retain major customers' business caused very
significant reductions in net sales and in gross profit margins. By moving to an
Internet sales strategy, IMSI believed it could reduce costs, eliminate the
problems associated with selling through large resellers and offer customers
lower prices. In October 1998, IMSI acquired all of the outstanding stock of
Zedcor, Inc., an Internet provider of art and visual content and owner of the
website, ArtToday.com. In November 1999, Zedcor Inc. changed its name to
ArtToday.com.
On June 24, 1999, IMSI announced a plan of restructuring to stem large and
growing losses and to generate cash to meet the Company's operating needs. The
restructuring plan included four major components:
- Outsource manufacturing and warehouse operations
- Consolidate facilities
- Reduce personnel
- Divest non-core products and focus on high margin product lines
In addition, IMSI launched efforts to sell ArtToday.com to generate cash to fund
operations and the development of IMSI's planned precision design Internet site,
Design.NET. While selling ArtToday.com was not consistent with the 1998
strategic plan, the need to generate cash was paramount.
During the next six months, the deterioration of the Company's operating results
and financial condition accelerated. The traditional network of domestic and
international retail relationships, which continued to be IMSI's primary source
of revenues, was generating poor results compared to prior years. In addition,
the costs of selling to large distributors, which included product returns,
price protection, rebates and coop advertising, were increasing. In January
2000, an arbitrator awarded Imageline, Inc. $2.6 million against IMSI for
intellectual property violations and attorneys' fees. The award is comprised of
$1.2 million in actual damages, $1.2 in punitive damages and $0.2 million in
attorneys' fees. This award caused the cancellation of a substantial offer to
purchase ArtToday.com. These events forced IMSI to take even more drastic
measures to reduce costs and conserve cash. On January 28, 2000, IMSI announced
that it was exiting the retail software business, closing the European, Canadian
and South African offices and liquidating those subsidiaries and branch
operations.
In February 2000, the Board of Directors and the President and CEO resigned. A
new Board of Directors and management team initiated efforts to stabilize
operations, re-establish profitability and positive cash flow, grow ArtToday.com
and accelerate the development of Design.NET. In addition, IMSI retained the
investment-banking firm, Heartland Financial, to explore alternatives for
raising capital and increasing shareholder value. In addition to the sale of
product lines, the alternatives explored included the sale of either or both of
the Company's Internet business units, the restructuring of debt, and the
infusion of new capital. On February 18, 2000, under the guidance of CMA
Business Credit Services, IMSI held a formally noticed general meeting of the
Company's creditors. At this meeting, the creditors elected a committee to
represent their interests. The committee agreed to grant IMSI a 120-day
standstill period to prepare and present a plan to the creditors for paying off
its debts. Since August, the committee has extended the standstill period on a
month-by-month basis as long as IMSI continues to demonstrate progress in
resolving the Company's liquidity and capital structure problems.
During the last five months of fiscal 2000, IMSI has stabilized operations,
reduced the rate of operating losses and improved the Company's cash position.
In January IMSI executed cost reduction plans and succeeded in further
reductions of its general operating expenses. By the end of February, IMSI had
terminated 120 employees, 30 more than contemplated in the June 24, 1999
restructuring plan. To re-establish sales, IMSI focused on building
relationships with online resellers and distributors. Also, IMSI executed a
number of licensing and re-publishing agreements to re-establish a presence in
the traditional retail sales channel, but without the product return, price
rebate and coop-advertising problems of selling directly to major resellers. In
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addition, IMSI initiated programs to build an Internet based revenue stream from
the Company's visual content website, ArtToday.com, and the new precision design
websites, FloorPlan.com and Turbocad.com. The fourth quarter results reflect the
Company's progress. IMSI generated an operating profit of $1.4 million for the
quarter ended June 30, 2000, which compares to an operating loss for the
previous quarter of $1.5 million. Of greater importance, during the quarter
ending June 30, 2000, IMSI's cash balance increased by $0.6 million to $1.5
million.
STRATEGY
IMSI's objective is to successfully transition from a productivity software
company to a company that provides a community and destination website in the
graphic design market and web-enables IMSI's precision design software. The
Company will then license this precision design Internet capability to major
companies in the home improvement and related industries. The Company's strategy
to achieve this objective includes the following key elements:
Restore Profitability and Positive Operating Cash Flow - Establish a level of
sales of IMSI's productivity software sufficient to fund the Company's operating
costs and maintain tight control over those operating costs. Since January 2000,
IMSI has executed republishing agreements to re-establish sales through the
retail channel in the United States, Europe, the Middle East and Africa. In
addition, the Company is attempting to grow direct sales to end-users through
the Internet and through email, direct mail and other direct marketing programs.
IMSI will continue to develop new versions of the Company's leading software to
expand sales of these core products.
Graphic Design - Grow ArtToday.com by adding new customers, increasing
advertising and e-direct revenues and expanding the website to offer
pay-per-download sales of high quality, professional images. PC Data Online
ranks the top 10,000 Internet sites and ArtToday.com is ranked number 367
overall, making it the highest-ranking graphics site (January 2000 data).
ArtToday.com has 1.9 million subscribers, over 125,000 paid subscribers and 1.5
million unique visitors per month, and it offers users access to more than 1.4
million graphic images, web art, photos, fonts, and animations. The Company
plans to invest in equipment, content and people to add over 2 million images
and substantially increase its customer base. ArtToday.com has developed the
technology to act as a content broker for design professionals who are
interested in selling their work on a pay-per-image basis, and the Company will
launch this service in October 2000.
Precision Design - Develop an online design and visualization tool, Design.NET,
that will allow users to design homes and offices on the Internet, lay out
floorplans using 3D images of furniture, fixtures and finishes, and perform
photo-realistic walkthroughs using their web browser. The technology is based on
the functionality of IMSI's FloorPlan and TurboCAD software. IMSI's strategy is
to license the Design.NET technology to industry leaders in major market
segments. Target licensees include online and brick-and-mortar businesses with
websites related to home or office design. These include retailers,
manufacturers and distributors of home, office and building products - as well
as furniture, appliances, fixtures and art.
Complete the Transition Out of Non-Core Products - Sell or license non-core
products to generate cash to fund IMSI's transition to the Internet as well as
meet interim operating costs.
PRODUCTS
PRECISION DESIGN
IMSI's precision design products accounted for 26%, 35% and 25% of the Company's
net revenues in fiscal 2000, 1999 and 1998 respectively. IMSI's precision design
products include the following:
- TURBOCAD is a CAD software product that allows a user to create
precision drawings. TurboCAD 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. TurboCAD includes integrated 3D
construction capabilities, file compatibility with other CAD software
(including AutoCAD by Autodesk), and integrated raster-to-vector
conversion. TurboCAD v6 Professional includes a software development kit
that permits end-user and third-party developer customization of the
software.
- TURBOCAD SOLID MODELER is a 3D CAD program that allows users to
conceptualize, construct and revise product models and prototypes.
Designed for engineering professionals, TurboCAD Solid Modeler uses the
industry-standard ACIS drawing engine and includes many advanced
features such as a recordable tree history, 2D and 3D constraint
systems, rendering, programmable scripting language, a customizable user
interface and dimensioning.
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- FLOORPLAN 3D is a software tool for residential and commercial space
layout that allows a user to view and walk through plans in three
dimensions.
GRAPHIC DESIGN.
IMSI's visual content products include art images, photographs, video clips,
animations and fonts stored in electronic form that enhance communication by
making online, onscreen and printed output more visually appealing. Graphic
design products accounted for 31%, 34% and 30% of IMSI's net revenues in fiscal
2000, 1999 and 1998 respectively. The Company's visual content products include
the following:
- MASTERCLIPS PREMIUM IMAGE COLLECTION includes collections of up
to 1,250,000 unique art and photographic images. MasterClips
Premium Image Collection products include a browser, clip art
editor and design guide.
- ARTTODAY ONLINE offers a collection of approximately 1.4 million
downloadable images on line at www.arttoday.com for an annual
subscription fee.
- MASTERPHOTOS is a collection that includes medium to
high-resolution photo images. The MasterPhotos 50,000 and
MasterPhotos 25,000 collections cover categories such as
animals, transportation, sports and foods and include unique
historical images of many subjects, such as famous people and
major events.
- GRAPHICS CONVERTER converts most visual content, sound, font and
video files to one of over 65 file formats and allows users to
organize, browse, manipulate, compress and retrieve an array of
file types and formats. Users can also compress and catalog
files to create custom content libraries.
BUSINESS APPLICATIONS
IMSI's business applications products include business graphics and general
office products. These products accounted for 26%, 21% and 14% of IMSI's net
revenues in fiscal 2000, 1999, and 1998 respectively. The Company's business
applications products include the following:
- ORG PLUS is an application designed for creating professional
organization charts. Org Plus completely automates chart
creation so that no drawing or manual positioning of boxes is
required. Org Plus features automated sorting and drag and drop
capabilities.
- FLOW! enables general business users to create a wide variety of
diagrams, including flowcharts, organization charts, timelines,
block diagrams, geographic maps and marketing charts. Flow! also
includes features that allow the user to enhance the information
content of diagrams. Flow! users can link diagrams to databases
and associate non-graphical data with shapes within a diagram.
- MASTERPUBLISHER is a desktop publishing suite that allows users
to create custom, high-quality publications for both business
and personal use. MasterPublisher's design and layout tools
include fonts, professionally drawn images and hundreds of
useful templates. Completed documents can be published on the
World Wide Web.
- HIJAAK is a professional 32-bit graphics toolkit that allows
users to convert, manage and view over 115 graphics file formats
including 3D and full Postscript files.
- TURBOPROJECT is a sophisticated project management tool that
allows users to create and manage a project schedule, allocate
resources and establish and track project budgets. TurboProject
Professional allows users to divide large projects into
sub-projects and distribute the sub-projects to individual
managers over company networks. The sub-projects can then be
reintegrated to update a master project schedule.
- FORMTOOL is a forms automation product that allows users to
design and print personal forms quickly, or choose from over 400
pre-built templates. The user can then complete and
electronically sign and route the form over a company Intranet
to other users in the organization. Data is automatically stored
in an integrated relational database. FormTool Scan & OCR
includes optical character recognition and scanning features for
easier form design.
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UTILITIES PRODUCTS. The Company's utilities products enable the more efficient
and secure use of PCs. These products accounted for 16%, 10% and 19% of IMSI's
net revenues in fiscal 2000, 1999 and 1998 respectively. The utilities products
include the following:
- NETACCELERATOR is a caching product that speeds up web surfing
by pre-fetching links on a web page and then simultaneously
downloading both the links' text and graphic content. This
process maximizes the efficiency of the PC modem, browser and
Internet connection. When a link is selected, if it has been
pre-fetched, the downloaded page will appear almost immediately.
- WINDELETE uninstalls, archives, moves and transports Windows
applications and manages their Internet cache to free up wasted
hard drive space, prevents accidental deletions and maximizes
hard drive performance. WinDelete also includes virus protection
and compression features.
OTHER PRODUCTS. IMSI also markets other products, including primarily EASY
LANGUAGE (which was sold by IMSI in August 1999 for $1.7 million to Lernout and
Hauspie) and MICROCOOKBOOK for recipe and menu planning, which is now being sold
by the Company's republishers.
SALES AND DISTRIBUTION
Through the second quarter of fiscal 2000, IMSI sold its products worldwide
primarily to small to medium-sized businesses, professionals and consumers
through the retail channel. On January 28, 2000, IMSI announced that it was
exiting the retail software business, and the Company terminated all
distribution agreements. In February, the Company's new management began to seek
licensing and republishing agreements in the United States and Europe to
re-establish sales through the retail channel. In previous years, IMSI utilized
direct mail and email in the consumer, corporate, education and government
markets, and the Company sold product via the Internet. Under the Company's
revised strategy, IMSI is placing much greater emphasis on direct mail and
email. Significantly increasing sales via the Internet is a primary IMSI
objective.
RETAIL. In North America, until January 2000, IMSI sold its products primarily
through a network of distributors, including Ingram Micro, Merisel, GT
Interactive, Tech Data and Navarre, which in turn distributed IMSI's products to
over 12,000 retail stores in North America, such as Staples, Office Depot,
OfficeMax, PriceCostco, Sam's Club, CompUSA, Micro Center, WalMart and Best Buy.
Internationally, IMSI sold its products in more than 40 countries through a
network of subsidiary offices and distributors. In addition, IMSI had direct
purchase agreements with major retailers such as Electronics Boutique, Hastings,
Musicland and Babbages. IMSI and its distributors also sold the Company's
products through catalog resellers and online stores. No customer accounted for
more than 10% of net revenues in fiscal 2000. Ingram Micro represented 18.3% and
20.4% and Tech Data represented 9.0% and 12.7% of IMSI's net revenues for fiscal
1999 and 1998 respectively. No single direct-to-retail customer accounted for
more than 10% of IMSI's net revenues in fiscal 2000, 1999 or 1998.
IMSI's agreements with its distributors were generally non-exclusive and could
be terminated by either party without cause. The Company's distributors could
decide not to continue carrying IMSI's products due to declining sales revenue.
Also, IMSI's distributors were not within the Company's control, were not
obligated to purchase IMSI's products and could represent other vendors' product
lines, including competing products. On September 27, 1999, one of IMSI's
primary distributors, Tech Data, terminated its agreement with IMSI.
IMSI's return policy allowed the Company's distributors, subject to certain
limitations, to return purchased products primarily in exchange for new products
or for credit towards future purchases as part of stock balancing programs. In
addition, IMSI provided price protection to its distributors when it reduced the
price of its products. End users could return products through dealers and
distributors within a reasonable period of time from the date of purchase for a
full refund. Retailers could return older versions of products. Product returns
often occurred when IMSI introduced upgrades and new versions of products or
competitive products were introduced into the market. While IMSI will not be
directly involved with these risks and costs because of the Company's new
distribution strategies, the Company's licensees and republishers will face
these risks, and the costs associated with these risks could significantly
reduce the profitability of these agreements.
In March 2000, IMSI executed an agreement with ValuSoft to republish and sell
the company's software products to major retailers in North America. Under this
agreement, ValuSoft performs all of the manufacturing, assembly, packaging,
sales and distribution of IMSI's products to the retailers. In return, IMSI
receives a 15% royalty payment with a minimum guaranteed royalty of $1.3 million
over the next sixteen months. While the risks described above and the costs
associated with those risks will affect net revenues realized by republishers,
and IMSI's royalties, IMSI no longer must estimate these costs when preparing
the Company's financial statements.
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IMSI executed similar exclusive republishing agreements internationally, during
the second half of fiscal 2000. The company granted the exclusive rights to
manufacture and distribute its products to AB Soft in France and French speaking
countries; MicroBasic in Germany, Austria and Switzerland; MediaGold in all
other European countries, the Middle East and Africa. All of these international
republishing agreements call for royalty payments of 15% of net sales with a
combined minimum guaranteed royalty of $370,000 over the next twelve months.
Net sales are defined as gross sales less any potential returns, rebates, price
protection and other deductions the republisher might provide to retailers.
While the risks associated with these deductions would still affect the
republisher's net revenues and consequently IMSI's royalty income, the
guaranteed royalty payments will set a ceiling to the costs associated with
those risks.
DIRECT MAIL. IMSI conducts direct mail campaigns to existing customers for new
products and upgrades of existing products. These mailings generally offer a
specially priced specific product, as well as complementary or enhanced products
for a further charge. IMSI's database of registered users includes 900,000
customers worldwide. Direct mail sales represented approximately 10%, 11% and
11% of IMSI's net revenues in fiscal 2000, 1999 and 1998, respectively.
CORPORATE. IMSI believes that certain of its products, particularly TurboCAD,
TurboProject, Org Plus and Hijaak are well suited for use within larger
corporations. Over the past year, IMSI has sold site licenses to some large
companies, including Fortune 100 companies. IMSI markets to these corporations
through a combination of telemarketing, mailings and emailing.
INTERNET. A key emphasis of IMSI's revised sales strategy is to significantly
increase the marketing of its products via the Internet. The Company sells from
its own websites, as well as through strategic partnerships with online
resellers such as America Online, Buy.com, Outpost.com, Beyond.com, Egghead.com
and Digital River. Until this year, net revenues from this distribution channel
were not significant. In March, IMSI executed a new agreement with Digital River
with the intent to very significantly increase sales. In the fourth quarter of
fiscal 2000, sales through Digital River accounted for approximately 11% of
total fourth quarter sales.
MARKETING
IMSI's marketing efforts include online retail marketing and merchandising.
These efforts are directed at strengthening IMSI's product and corporate brands,
building customer loyalty, maximizing upgrade and repeat purchases and
developing incremental revenue opportunities. IMSI also seeks to increase market
share and brand recognition through public relations activities and
participation in popular trade and computer shows.
CUSTOMER SUPPORT
IMSI provides customer support to its end-users by telephone, email and through
numerous online options. Telephone technical assistance is available for key
products at no charge for the first 5 minutes and then $5 for each additional
five-minute increment or portion thereof. IMSI also offers quality customer
support on its website by offering answers to frequently asked questions,
providing product discussion forums and making intelligent help and search
engines available. In addition, several newer products released by IMSI contain
an online link to web-based support that automatically updates or patches the
user's software via the web.
PRODUCT DEVELOPMENT
In the past, IMSI maintained a very active product development program. The
Company targeted PC applications that had been under-served by major software
vendors but that had immediate benefits and appeal to a broad variety of users,
particularly professionals and small and medium-sized businesses. IMSI developed
products primarily for the Microsoft Windows platform and, in some cases, for
the Macintosh operating system.
Now, the Company's product development program is focused on a few key software
products and the Internet. In May 2000, IMSI released version 6.5 of the
Company's popular TurboCAD program, and IMSI plans to release version 7 in the
next several months. In addition IMSI is developing TurboCAD for the Linux
operating system.
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Product upgrades and their introduction dates in fiscal year 2000 were:
FormTool v4 September 1999
FormTool v4 Express October 1999
FloorPlan v5 September 1999
HiJaak v5 Professional July 1999
HiJaak v5 Standard July 1999
TurboCAD v6.5 Professional March 2000
TurboCAD v6.5 Standard March 2000
TurboCAD Lofting Tool October 1999
Net Accelerator v3 February 2000
In February 2000, IMSI formed a new product line group to develop Design.NET, a
website that will have the functionality of IMSI's FloorPlan and TurboCAD
software. This new product line group includes six full time development
personnel and four contractors in several locations.
IMSI generally creates product specifications and manages the product
development and quality assurance process from its offices in Novato,
California. Most program coding and quality testing is performed using contract
programmers in development centers in Russia. Contract programmers located
outside the United States are generally dedicated on a full-time basis to IMSI's
products. The cost of programmers in foreign countries is generally lower than
programmers available in the United States. In addition, programming talent is
generally more available outside the United States than in the United States
where the market for programmers is highly competitive. IMSI makes extensive use
of the Internet and Internet-based development tools to facilitate programming
in remote locations.
IMSI's general policy is to own, either through internal development or
acquisition, the core technology of the Company's principal products. Where
appropriate, IMSI augments its core technology with licensed technology. IMSI
possesses and is continually enhancing its core technology in vector graphics,
precision design, and project and time management processes.
As of June 30, 2000, IMSI had 20 employees in the Company's product development
organization, and IMSI contracted with approximately 25 independent contractors,
substantially all of whom were located overseas. IMSI's research and development
expenses totaled $4.0 million, $8.1 million and $8.6 million (excluding
purchased in-process research and development expenses) for fiscal 2000, 1999
and 1998 respectively.
ACQUISITION AND LICENSING
Historically, IMSI created new product franchises in part by licensing and
acquiring products in growing segments of its existing product categories where
it believed it could capture market share with better technology, lower prices
and extensive distribution. The Company sought to acquire or license early stage
products, where it could add value through IMSI's global distribution network
and development resources. The Company targeted product or company acquisitions
or product or technology licenses when time-to-market or cost considerations
outweighed the value of developing the product in-house or where IMSI did not
have the necessary development expertise. Due to the skills, infrastructure and
expense required to market software products effectively, software developers
frequently approached IMSI to license or acquire their products. In addition,
from time to time, larger companies approached IMSI with products that they
wished to divest. However, as part of IMSI's restructuring plan announced on
June 24, 1999, the Company reduced its gross product SKUs by approximately 75%
in order to concentrate more fully on the strongest core products. IMSI plans to
continue to divest non-core products when opportunities to do so are presented.
Toward this end, IMSI sold its Easy Language product line for $1.7 million in
August 1999 and, in February 2000, sold People Scheduler to Adaptive Software
Corporation for $0.1 million. Also, in fiscal 2000, IMSI executed the following
worldwide, non-exclusive licensing agreements: Flow! and TurboProject for $0.7
million to Corel Corporation, Lumiere to Jasc Software for $0.1 million and
Masterclips to Sierra Online for an estimated minimum of $1.2 over the two year
term of the agreement.
The Company acquired the technology for TurboCAD Solid Modeler and 3D Modeler,
Visual CADD, FloorPlan Design Suite, Lumiere and HiJaak. IMSI licenses and
acquires visual content from third parties, including artists, photographic
agencies and visual content aggregators. Where feasible, IMSI endeavors to
acquire images on a perpetual, worldwide basis and with electronic download
rights. The licenses have terms ranging from one year to perpetual and are
generally not exclusive. Licensing fees associated with licensed technology are
generally paid by way of sales-based royalties, which are included in product
costs.
9
OPERATIONS
IMSI controls the purchasing, inventory and marketing associated with its
products from its headquarters in Novato, California. The Company's product
development organization produces master diskettes or CD-ROMs and the
documentation for each product. Until April of fiscal 2000, IMSI warehoused and
shipped the final products from its Vacaville, California facility, as well as
from various international locations. IMSI also contracted with third parties in
Europe to handle the duplication, printing, packaging and fulfillment of a
number of its products intended for international distribution.
As part of its June 1999 restructuring plan, IMSI decided to close the Company's
warehouse facility in Vacaville and to out-source the Company's operations. In
July 1999, IMSI and DisCopyLabs ("DCL") finalized an agreement whereby DCL would
gradually assume all of IMSI's U.S. fulfillment, warehousing, and product
shipping duties. Under this agreement, DCL would charge IMSI per-unit fees for
its services. In March 2000, IMSI terminated the agreement with DCL, because
both companies agreed that the volumes did not support the agreement. The
Company then leased space from MicroWeb, a fulfillment and storage company, and
transferred the inventories to their Benicia facility. A two person IMSI staff
performs the Company's limited fulfillment and shipping activities at MicroWeb.
Also, when required, MicroWeb can provide the services previously performed by
DCL for a fee. In April 2000, IMSI vacated the Vacaville warehouse.
Licensees and republishers are responsible for duplication of diskettes or
CD-ROMs, printing the documentation, packaging the products and fulfilling and
shipping the sales orders for pre-packaged software. Under the Company's
agreement with ValuSoft, IMSI can purchase ValuSoft product for sales to IMSI's
direct customers.
IMSI has multiple sources of supply for substantially all product components. To
date, IMSI has not experienced any material difficulties or delays in the
printing, packaging or assembly of its products.
COMPETITION
The PC productivity software industry and the Internet are both highly
competitive and characterized by rapid changes in technology and customer
requirements. The rapid pace of technological change constantly creates new
opportunities for existing and new competitors and can quickly render existing
technologies less valuable. Important factors in both industries include product
features and functionality, quality and performance, reliability, brand
recognition, ease of understanding and operation and advertising. In the
productivity software industry important factors also include dealer
merchandising, access to distribution channels and retail shelf space,
marketing, pricing, availability and quality of support services. These
competitive factors will require that IMSI enhance its core productivity
software products, successfully execute the Company's Internet strategies and
implement effective marketing and sales programs all on a timely basis. Many of
IMSI's current and potential competitors in both industries have larger
technical staffs, more established and larger marketing and sales organizations,
significantly greater financial resources, greater name recognition and better
access to consumers than does IMSI. The Company's relatively small size and very
limited resources could adversely affect IMSI's ability to compete with these
larger companies.
There has been a consolidation among competitors in the market for IMSI's
software productivity products. Each of IMSI's major software productivity
products competes with one or more products from one or more major independent
software vendors. IMSI products and their competition are illustrated in the
following table:
[Download Table]
IMSI PRODUCT COMPETING PRODUCTS
------------ ------------------
TurboCAD AutoCAD from Autodesk Inc.
FloorPlan 3D Architect from Mattel
Home Architect from Sierra Online
Punch Software's Home Design Suite
TurboProject Microsoft Project
MasterClips ClickArt from Mattel
MegaGallery from Corel Corporation
Art Explosion from Nova Development
10
The software industry and the Internet have limited barriers to entry. IMSI
believes that competition will continue to intensify as a number of software
companies extend their product lines into additional product categories and as
additional competitors enter both markets. In addition, widespread use of the
Internet has reduced barriers to entry in the software market by allowing
software developers to distribute their products online without relying on
access to traditional distribution networks. As a result of the proliferation of
competing software developers, more products are competing for limited shelf
space. IMSI cannot assure investors that the Company's products will achieve
and/or sustain market acceptance and generate significant levels of revenues in
future periods or that IMSI will have the resources required to compete
successfully in the future.
The markets for IMSI's productivity software products are characterized by
significant price competition, and IMSI expects it will continue to face
increasing pricing pressures. In response to such competitive pressures, IMSI
has reduced the price of some of its products. Product prices may continue to
decline and the Company may not be able to respond to such declines with
additional product price reductions. If IMSI significantly reduces the prices of
one or more of the Company's products, there can be no assurance that such price
reductions would result in an increase in unit sales volume. Prolonged price
competition would have a material adverse effect on IMSI's operating results,
including reduced profit margins and loss of market share.
Approximately 47% of IMSI's revenues were derived from sales of the TurboCAD,
FloorPlan and MasterClips product lines in fiscal year 2000 as compared to 67%
in fiscal year 1999. Sales of TurboCAD and MasterClips significantly declined in
fiscal year 2000, from $20 million to $7.5 million, primarily due to lower unit
sales. A continued decline in TurboCAD and MasterClips sales, a decline in
FloorPlan sales, or a decline in the gross margin on one or more of these
products could worsen IMSI's results of operations. Thus, IMSI may be more
vulnerable to market declines and competition in the markets for such products
than companies with more diversified sources of revenues.
On the Internet, there are approximately 1,000 graphic sites. Approximately 90%
of those sites are vanity sites that do not generate significant revenues. The
remaining 10% can be segmented into those that sell content, those that sell
software and those that leverage traffic for banner advertising revenues.
- Content sellers: Corel, Corbis, Getty PhotToGo, PhotoSpin,
WebSpice, IMSI and ArtToday.com, NOVA, and ZOOM.
- Software sellers: Adobe, Corel, ACDSee and Jasc.
- Advertising: About, CreativePro and many small independent
sites.
While none of the above named competitors can match ArtToday.com in terms of
numbers of visitor/member traffic and page impressions, they are significantly
better funded, have superior technology or higher quality images. There is,
therefore, the risk that these better funded competitors could duplicate
ArtToday.com's strategy and reduce its market share. Recently, Getty expanded
its mission with the acquisition of Eyewire.com, a graphics community and stock
photography catalog reseller.
Possible competition for ArtToday.com could also come from the large
"horizontal" sites, such as Yahoo, AOL and About. While these companies are now
limited by a lack of the content depth that is demanded by graphics
professionals, they have the financial resources, technical capabilities and
market penetration to quickly diminish ArtToday.com's current market advantage.
Competition for Design.NET includes several developers currently selling CAD and
3D home design software applications for desktop PC's. These include AutoCAD,
which is the leader in architectural CAD software; Punch, which is the current
leader in desktop floorplan software and Broderbund, which was the former leader
in desktop floorplan software. Each of these companies with their superior
funding, name brand recognition and market position could beat IMSI to the
market and make it difficult to establish a profitable business. Similarly,
there are several websites selling selected furniture online using 2D design
models with some success. These include www.living.com, which was recently
acquired by Amazon, and www.goodhome.com, which is a spin-off from Mattel
Interactive. These companies have the resources and market position to prevent
IMSI from successfully executing the Design.NET strategy.
PROPRIETARY RIGHTS AND LICENSES
IMSI's ability to compete effectively depends in part on the Company's ability
to develop and maintain proprietary aspects of IMSI's technology. To protect the
Company's technology, IMSI relies on a combination of copyrights, trademarks,
trade secret laws, restrictions on disclosure and transferring title and other
methods. IMSI holds no patents, and existing copyright and trade secret laws
afford only limited protection. IMSI also generally enters into confidentiality
or license agreements with the Company's employees and consultants, and controls
access to and distribution of IMSI's documentation and other proprietary
information.
11
Despite the foregoing precautions, it may be possible for a third-party to copy
or otherwise obtain and use IMSI's products or technologies without
authorization, or to develop similar technologies independently. IMSI does not
include in its products any mechanism to prevent or inhibit unauthorized
copying. Policing unauthorized use of IMSI's technology is difficult, and while
IMSI is unable to determine the extent to which piracy of its products exists,
software piracy can be expected to be a persistent problem. If a significant
amount of unauthorized copying of IMSI's products were to occur, IMSI's
business, operating results and financial condition could be adversely affected.
In addition, effective copyright, trademark and trade secret protection may be
unavailable or limited in certain foreign countries, and the global nature of
the Internet makes it virtually impossible to control the ultimate destination
of IMSI's products. There can be no assurance that the steps taken by IMSI will
prevent misappropriation or infringement of its technology. In addition,
litigation may be necessary to protect IMSI's trade secrets or to determine the
validity and scope of the proprietary rights of others. Such litigation could
result in substantial costs and diversion of resources that could have a
material adverse effect on IMSI's business, operating results and financial
condition.
IMSI provides its products to end users under non-exclusive licenses, which
generally are non-transferable and have a perpetual term. IMSI makes source code
available for certain products. The provision of source code may increase the
likelihood of misappropriation or other misuse of IMSI's intellectual property.
IMSI licenses all of its products pursuant to shrink-wrap licenses, or Internet
click-wrap licenses, that are not signed by licensees and therefore may be
unenforceable under the laws of certain jurisdictions.
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. From time to
time, IMSI has received, and may receive in the future, notice of claims of
infringement of other parties' proprietary rights. Although IMSI investigates
claims and responds as it deems appropriate, there can be no assurance that
infringement or invalidity claims (or claims for indemnification resulting from
infringement claims) will not be asserted or prosecuted against IMSI. Regardless
of the validity or the successful assertion of such claims, IMSI would incur
significant costs and diversion of resources with respect to the defense
thereof, which could have a material adverse effect on IMSI's business,
operating results and financial condition (see Item 3, "Legal Proceedings" on
page 12). If any valid claims or actions were asserted against IMSI, the Company
might seek to obtain a license under a third party's intellectual property
rights. There can be no assurance, however, that under such circumstances a
license would be available on commercially reasonable terms, or at all.
EMPLOYEES
As of June 30, 2000, IMSI had 57 employees, including 19 in sales and marketing,
20 in product development, 5 in operations and 13 in administration and finance.
All of the employees are located in the United States with the exception of one
employee in Australia. In addition, IMSI has approximately 25 Russian software
developers working as contractors under a software development contract. None of
IMSI's employees are represented by a labor union and IMSI has experienced no
work stoppages. Domestically, between July 1, 1999 and June 30, 2000, IMSI
eliminated 66 employees' positions, and subsequently rehired eight to support
efforts to rebuild sales and operations. In addition, during the same period an
additional 75 domestic employees resigned.
IMSI's success depends to a significant extent upon the performance of the
Company's executive officers and key technical personnel. IMSI's large losses,
uncertain financial situation and headcount reduction may have hurt employee
morale and caused employees concern about the Company's viability. IMSI has
lost, and may continue to lose, key personnel due to these events.
ITEM 2. PROPERTIES AND FACILITIES
IMSI's principal administrative, sales and marketing, as well as certain
research and development facilities are located in Novato, California, now
occupying approximately 5,000 square feet of office space. In April 2000, IMSI
shut down its warehouse facility in Vacaville, California and established a
fulfillment services arrangement with MicroWeb in Benecia, California.
ArtToday.com's offices are located in Tucson, Arizona where the Company occupies
approximately 5,000 square feet of office space. IMSI also occupies
approximately 350 square feet of leased office space in Alexandria, Australia in
which is conducts its Australian sales operations.
ITEM 3. LEGAL PROCEEDINGS
On April 23, 1998 IMSI began arbitration proceedings against Imageline, Inc.
before the American Arbitration Association in San Francisco, California. IMSI
requested that all matters within the scope of the agreements between Imageline
and IMSI be resolved by arbitration, including a dispute in which Imageline sued
Mindscape, Inc. for alleged copyright infringement, for which IMSI may be
required to indemnify Mindscape, in whole or in part. IMSI further requested
that the arbitration decide the
12
rights and liabilities of the parties, and the validity of the copyrights under
which Imageline asserted its claims against IMSI. IMSI also requested
compensatory damages and attorney's fees.
On August 12, 1999 Imageline filed a counterclaim in the arbitration, alleging
breach by IMSI of an agreement between the parties, including unauthorized
sublicensing, and instituting arbitration proceedings without notice and the
opportunity to cure. Imageline requested liquidated damages, alleged to be more
than $200,000, compensatory damages of at least $500,000, punitive damages,
legal fees, interest and costs. On January 14, 2000, Imageline, Inc. received a
$2.6 million arbitration award against IMSI for intellectual property violations
and attorney's fees. The award is comprised of $1.2 million in actual damages,
$1.2 in punitive damages and $0.2 million in attorneys' fees. IMSI is appealing
the award in the federal district court in Richmond, VA.
In April 2000, IMSI and Imageline initiated negotiations to settle the award.
The original proposed settlement included a variety of considerations, including
a cash payment of $170,000 upon execution of the agreement, three subsequent
payments of $75,000, a consulting agreement, warrants, payment of legal fees,
and royalties on certain future sales of Masterclips. Since that original
proposal, IMSI and Imageline have continued discussions, and IMSI is now
proposing a larger cash payment but the elimination of the other considerations.
While IMSI and Imageline are continuing negotiations, there can be no assurance
that the Company will successfully settle this matter.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the fiscal
year ended June 30, 2000.
13
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
On November 24, 1999 Nasdaq granted IMSI an exception from the net tangible
asset listing requirement, allowing IMSI to transfer from the Nasdaq National
Market to the Nasdaq Small Cap Market, with the symbol IMSIC. IMSI transferred
to the Nasdaq Small Cap Market on November 30, 1999. To maintain the Company's
listing on the Nasdaq Small Cap Market, IMSI was required to file on or before
January 31, 2000 reports evidencing at least $7 million in net tangible assets
with the Securities Exchange Commission ("SEC") and Nasdaq. IMSI notified Nasdaq
on January 28, 2000 that the Company was not able to achieve this requirement.
On January 31, 2000, IMSI was de-listed from the Nasdaq Small Cap Market and on
February 25, 2000, began trading on the OTC Bulletin Board with the symbol
IMSIE. On March 28, 2000, IMSI was de-listed from the OTC Bulletin Board and
began trading on the National Quotation Bureau Pink Sheets, because the Company
had failed to file its December 31, 1999 Form 10-Q on a timely basis.
The Company's de-listing by Nasdaq may have an adverse and material effect on
the price of IMSI's stock and on the ability of IMSI's shareholders to sell
their shares. Securities laws could impose limitations on the liquidity of the
common stock traded on the Pink Sheets. The de-listing could also adversely
affect IMSI's ability to obtain additional debt and/or equity financing and may
result in the reduction in the amount and quality of securities analyst and news
media coverage of IMSI. De-listing is also a triggering event, allowing the
holder of the convertible subordinated note owing to BayStar to declare all sums
due and payable, as described in Note 4 of the financial statements.
In September 2000, IMSI filed amended reports on Form 10-K for the year ended
June 30, 1999 and Form 10-Q for the quarters ended September 30, 1999, December
31, 1999, and March 31, 2000 with the SEC. The filing of these amendments ended
a year-long examination by the SEC, during which IMSI responded to the SEC's
requests for information, clarification and expanded disclosure. With these
filings IMSI believes it is in compliance with SEC and Nasdaq requirements. Upon
filing this Form 10-K for the year ended June 30, 2000, IMSI will resume efforts
to return to the OTC Bulletin Board.
The following table sets forth the quarterly high bid and low asked prices of
the common stock for fiscal 1999 and fiscal 2000, as quoted on the NASDAQ. Such
prices represent prices between dealers and do not include retail mark-ups,
markdowns or commissions and may not represent actual transactions.
CLOSING SALES PRICES
[Download Table]
Fiscal Year 1999 High Bid Low Asked
First Quarter $15.13 $5.63
Second Quarter 10.25 3.63
Third Quarter 14.00 8.75
Fourth Quarter 11.88 4.79
Fiscal Year 2000
First Quarter $ 4.82 $3.96
Second Quarter 2.40 2.08
Third Quarter 1.47 1.17
Fourth Quarter 0.81 0.67
On September 27, 2000, there were 1,082 registered holders of record of the
common stock. IMSI believes that additional beneficial owners of its common
stock hold shares in street names.
IMSI has not paid any cash dividends on its common stock and does not plan to
pay any such dividends in the foreseeable future. Its Board of Directors will
determine IMSI's future dividend policy on the basis of many factors, including
results of operations, capital requirements and general business conditions.
14
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with the
Consolidated Financial Statements, including the related notes, and Item 7 --
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
Selected financial data for fiscal years ended June 30, 1996 to 2000:
[Enlarge/Download Table]
STATEMENT OF OPERATIONS DATA: (Amounts in thousands except per share amounts)
Year ended June 30, 2000 1999 1998 1997 1996
------------------- ---- ---- ---- ---- ----
Net Revenues $ 19,162 $ 37,679 $62,065 $41,839 $25,679
Operating income (loss) (8,019) (23,890) 86 4,367 1,801
Income (loss) before income taxes
and extraordinary item (16,339) (25,770) (673) 4,237 1,539
Extraordinary item (1) -- (959) -- -- --
Net income (loss) (16,871) (26,966) (370) 2,597 954
Net income (loss) per share:
Basic $ (2.22) $ (4.30) $ (0.07) $ 0.53 $ 0.20
Diluted $ (2.22) $ (4.30) $ (0.07) $ 0.46 $ 0.18
Weighted average common
shares
Basic 7,590 6,275 5,513 4,946 4,795
Diluted 7,590 6,275 5,513 5,682 5,288
[Download Table]
BALANCE SHEET DATA:
As of June 30, 2000 1999 1998 1997 1996
-------------- ---- ---- ---- ---- ----
Working capital $(18,999) $( 1,227) $ 6,572 $ 7,334 $ 3,092
Total assets 8,634 27,144 35,655 17,573 11,058
Long-term debt and other
Obligations 302 6,599 1,682 2,042 565
Stockholders' equity $(14,853) $ 1,442 $13,411 $ 7,495 $ 4,522
(1) Extraordinary item related to debt extinguishment.
15
Selected quarterly financial data for fiscal year ended June 30, 2000:
[Enlarge/Download Table]
STATEMENT OF OPERATIONS DATA: (Amounts in thousands except per share amounts)
Quarter ended JUNE 30 MARCH 31 DECEMBER 31 SEPTEMBER 30
------------- ------- -------- ----------- ------------
Net Revenues $ 4,278 $ 2,968 $ 6,282 $ 5,634
Operating income (loss) 1,354 (1,490) (5,069) (2,814)
Loss before income taxes (186) (5,587) (8,730) (1,836)
Net loss (195) (5,594) (9,229) (1,853)
Net loss per share:
Basic and diluted $ (0.02) $ (0.77) $ (1.30) $ (0.26)
Weighted average common shares
Basic and diluted 9,041 7,286 7,109 7,019
[Enlarge/Download Table]
BALANCE SHEET DATA:
Quarter ended JUNE 30 MARCH 31 DECEMBER 31 SEPTEMBER 30
------------- ------- -------- ----------- ------------
Working capital $(18,999) $(18,989) $(13,900) $ (2,764)
Total assets 8,634 8,133 15,609 22,613
Long-term debt and other obligations 302 395 2,548 6,145
Stockholders' equity $(14,853) $(14,693) $ (9,103) $ (352)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
IMSI reported a net loss of $16,871,000 or $(2.22) per share for the fiscal year
ended June 30, 2000 as compared to a net loss of $26,966,000 or $(4.30) per
share for the fiscal year ended June 30, 1999, representing a decrease in net
loss of $10,095,000. The Company reported an operating loss of $8,019,000 for
the fiscal year ended June 30, 2000 as compared to an operating loss of
$23,890,000 for the previous fiscal year. In the first quarter of fiscal year
2000, IMSI sold the rights to the Easy Language product line and to the People
Scheduler product for $1.7 million and $55,000 in cash respectively and realized
one-time gains of $1.5 million on the sales. These gains offset a portion of the
current fiscal year net loss.
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NET REVENUES
Net revenues were $19.2 million, $37.7 million and $62.1 million in fiscal 2000,
1999, and 1998 respectively. Net revenue for fiscal year 2000 declined $18.5
million, or 49% from fiscal year 1999 net revenue. This followed a decrease of
$24.4 million, or 39% in fiscal 1999 net revenue compared to 1998 net revenue.
Net revenues of each of IMSI's principal product categories in dollars and as a
percentage of total net revenues for the three fiscal years is summarized in the
following table (in thousands except for percentage amounts):
[Enlarge/Download Table]
YEAR ENDED JUNE 30,
----------------------------------------------------------------------------------------
2000 1999 1998
--------------------------------------------- ------------------- -----------------
CHANGE FROM PREVIOUS
YEAR
-------------------- ------------------- -----------------
$ % $ % $ % $ %
-------- ------ -------- ---- -------- ------ -------- ---
PRECISION DESIGN $ 4,944 26% $ (8,224) -62% $ 13,168 35% $ 15,658 25%
GRAPHIC DESIGN 6,022 31% (6,906) -53% 12,928 34% 18,911 30%
BUSINESS APPLICATIONS 4,993 26% (3,020) -38% 8,013 21% 8,981 14%
UTILITIES 3,009 16% (912) -23% 3,921 10% 11,759 19%
OTHER PRODUCTS 883 5% (1,628) -65% 2,511 7% 8,160 13%
PROVISION FOR RETURNS AND
REBATES NOT YET RECEIVED (689) -4% (2,173) 75% (2,862) -8% (1,404) -2%
-------- ------ -------- ---- -------- ------ -------- ---
TOTAL NET REVENUES $ 19,162 100% $(18,517) -49% $ 37,679 100% $ 62,065 100%
======== ====== ======== ==== ======== ====== ======== ===
While a number of competitive factors influenced the very substantial decline in
net revenues in all product categories during the last two fiscal years, IMSI's
serious financial problems and the Company's major change in strategy were
primary causes of the falling revenues.
The serious cash flow problems and large debt burden placed great constraints on
IMSI's ability to develop new and improved versions of its key software
products, and to adequately market and promote them. Also, as part of the
Company's Internet strategy, IMSI was attempting to sell its non-core product
lines to generate cash flow. While IMSI did achieve some success, most notably
the sale of EasyLanguage for $1.7 million, the Company's weak financial
condition constrained its negotiating position and limited its success.
On January 28, 2000, IMSI announced a major change: it was exiting the retail
software business, liquidating the Company's European and South African
subsidiaries, and consolidating domestic operations to reduce operating losses
and focus on its Internet strategy. IMSI terminated all existing distributor
agreements and immediately ceased to support the retail business. As a result,
sales of all products ended abruptly. In February 2000, IMSI's new management
team launched efforts to restore sales through the retail channel by
establishing republishing agreements for the Company's core products. By the end
of fiscal year 2000, IMSI had executed republishing agreements with Valusoft,
for sales in North America, and AB Soft, a French Corporation, MediaGold Ltd., a
British Corporation, and MicroBasic GmbH, a German Corporation, for sales in
Europe, Africa, and the Middle East. The lapse in time and normal start-up
problems limited the revenues from these new agreements before year-end.
Net revenues for fiscal year 2000 from sales of precision design products
declined by $8.2 million or 62% from fiscal year 1999 sales. This followed a
$2.5 million or 16% drop in fiscal 1999 net revenues as compared to fiscal year
1998 sales. As a percentage of net revenues, sales of products in the precision
design category accounted for 26%, 35%, and 25% of total net revenues in fiscal
years 2000, 1999, and 1998 respectively. Major declines in sales of FloorPlan
and IMSI's flagship product, TurboCAD, accounted for most of the decrease in the
sales of precision design products. Sales of these two popular products dropped
by approximately 70% and 52% respectively in fiscal year 2000. The inability to
fund product development and engineering delays in the revision of TurboCAD
negatively impacted both of these products. CAD customers often use these
products in their business or profession and require that the software remain
current and keep pace with the rapidly changing technology. IMSI's limited funds
prevented it from meeting this requirement. The Company's primary competitors
for these products did release new versions of software in fiscal year 2000.
Net revenues from sales of products in the graphic design category fell by $6.9
million or 53% from fiscal year 1999 net revenues. Sales revenue from the most
significant revenue producing product line within this category, MasterClips,
decreased
17
by approximately 70% in fiscal year 2000. On January 14, 2000, an arbitration
ruling against IMSI pertaining to the dispute with Imageline required IMSI to
discontinue manufacturing and distributing all Masterclips products containing
Imageline images. This arbitration ruling, combined with a continuing increase
in competitive product offerings and discount pricing in the visual content
market, contributed to the decline in MasterClips sales. Revenues from IMSI's
wholly owned subsidiary, ArtToday.com are included in this category. Because
ArtToday.com's revenues are based on subscriptions, these amounts are initially
deferred and then amortized over the subscription period, generally over 12
months. As of June 30, 2000, approximately $1,831,000 of revenue related to
ArtToday.com and IMSI's other visual content websites remained deferred.
During 1998 and 1999 market conditions deteriorated for IMSI's products in the
visual content and utilities categories as a result of mergers and strategic
alliances. In June 1998, The Learning Company purchased Broderbund, the
publisher of Click Art, a product competitive to IMSI's MasterClips product. In
subsequent months, Broderbund and Corel aggressively reduced prices and offered
rebates to increase their sales and market share. IMSI responded in some
instances with matching discounts and rebates, but nevertheless experienced a
significant decline in sales due to these competitive pressures.
Net revenues from sales of products in the business application category fell by
$3 million or 38% from fiscal year 1999 sales following an almost $1 million or
11% decrease in fiscal year 1999 sales from fiscal year 1998. Sales of Flow!,
FormTool, Maplinx, MasterPublisher, OrgPlus, People Scheduler and Web Business
Builder all declined in fiscal year 2000. Within this category, only sales of
Hijaak and TurboProject increased during fiscal year 2000, by approximately 26%
and 70% respectively. As a percentage of net revenues, sales of products in the
Business Application category represented 26%, 21% and 14% in fiscal year 2000,
1999 and 1998 respectively. Although net revenues from this category increased
as a percentage of total net sales over the past three fiscal years, revenues in
absolute dollars declined reflecting the general decline in the overall unit
sales.
Net revenues from sales of products in the Utilities category fell by $ 0.9
million or 23% from fiscal year 1999 after decreasing $7.8 million or 67% from
fiscal year 1998. The decrease in net revenues during fiscal 2000 was primarily
due to lower unit sales of CD Copier, NetAccelerator, and Voice Direct.
Increased competition, heavy price discounting, and higher rebates in the
utility market were the primary causes of the declining sales of utilities
products. Certain of IMSI's single product utility offerings were unable to
compete against popular utility suite products offered by larger and
better-known companies such as Network Associates (McAfee) and Symantec. Due to
the sales revenue from UpdateNow and Year2000 Now being based on subscriptions,
these revenue amounts are initially deferred and then amortized over the
subscription, generally over fifteen months. As of June 30, 2000, $554,000 of
UpdateNow and Year2000Now revenue remained deferred.
In September 1998, Network Associates purchased Cybermedia, developer of
Uninstaller, a competitor to IMSI's WinDelete product. In October 1998, Symantec
purchased Quarterdeck, the developer of Cleansweep, a product that is also a
competitor to IMSI's WinDelete product. Symantec and Network Associates are two
of the largest and most formidable competitors in the PC productivity software
market. In both instances Symantec and Network Associates re-launched these
products with aggressive marketing campaigns, and in product bundles with their
other products. The affect of these actions was increased competition and a
reduction in sales of WinDelete, an IMSI utilities product.
Revenues in the other product categories decreased by $1.6 million or 65% as
compared to fiscal year 1999 after decreasing by $5.6 million or 69% from fiscal
year 1998. This decrease was due to a discontinuation of non-core products in
this category.
For the fiscal year ended June 30, 2000, net revenues from domestic sales were
$14.5 million. This represented a decrease of $10.7 million or 42% from net
domestic sales revenues of $25.2 million in fiscal year 1999. During fiscal year
2000 net revenues from domestic sales accounted for 76% of total net revenues as
compared to 67% of total net revenues for the previous fiscal year. This
increase reflects the Company's decision in January to liquidate its European
and South African subsidiaries.
Net revenues from international sales decreased 62% to $4.7 million in fiscal
2000 from $12.4 million in fiscal 1999. As a result, net revenues from
international sales decreased as a percentage of IMSI's net revenues to 24% in
fiscal 2000 from 33% in fiscal 1999. These absolute dollar decreases in net
revenues from international sales were primarily the result of decreased sales
through existing distribution channels during the first half of fiscal year 2000
and the result of the discontinuation of all of the Company's European and South
African operations during the second half of the year. European and South
African subsidiaries contributed $3.5 million to the consolidated net revenue
through December 31, 1999.
Australia accounted for much of IMSI's international net revenues in the second
half of fiscal year 2000. As a result of the decision in January to liquidate
European and South African operations, IMSI no longer controls these
subsidiaries and does not consolidate them in its financial statements. The
liquidation of these subsidiaries resulted in a loss of $2,043,000 from the
write off of the inter-company receivables and investment in subsidiaries that
the Company believes are not recoverable.
With the liquidation of the Company's European and South African subsidiaries,
the risks associated with transactions in
18
foreign currencies have been substantially reduced. Nonetheless, IMSI's
operating results may be affected by the risks customarily associated with
international operations, including a devaluation of the U.S. dollar, increases
in duty rates, exchange or price controls, longer collection cycles, government
regulations, political instability and changes in international tax laws.
The factors discussed above, coupled with unprecedented pricing pressure, and
aggressive competitive market campaigns by larger and more well known
competitors caused a general decline in sales and significant product returns to
IMSI from distributors in fiscal year 1999.
RESERVE FOR RETURNS, PRICE DISCOUNTS AND REBATES
The following table details IMSI's allowances for rebates, sales returns and
price discounts for the periods presented (in thousands):
[Download Table]
Price
Rebates Returns Discounts Total
------- -------- --------- --------
Reserve balance 7/01/97 $-- $ 1,589 $ 546 $ 2,135
Additions to reserve -- 9,355 2,050 11,405
Charges -- (7,946) (2,313) (10,259)
------ -------- ------- --------
Reserve balance 6/30/98 -- 2,998 283 3,281
Additions to reserve 2,474 17,714 6,146 26,334
Charges (2,376) (15,463) (5,610) (23,449)
------ -------- ------- --------
Reserve balance 6/30/99 98 5,249 819 6,166
Additions to reserve 831 2,548 86 3,465
Charges (929) (7,349) (664) (8,942)
------ -------- ------- --------
Reserve balance 6/30/00 $-- $ 448 $ 241 $ 689
====== ======== ======= ========
During fiscal year 2000 IMSI provided an additional $2.5 million for returns and
received actual returns for approximately $7.4 million. The return reserve
balance as of June 30, 2000 is consistent with the reduced level of inventory in
the channel from declining shipment of products, and the effects of the
republishing agreements.
The following table illustrates the percentage impact of returns, rebates, and
price discounts on gross revenues of $22,627,000, $64,013,000 and $73,470,000 in
fiscal 2000, 1999, and 1998 respectively and the resulting net revenues as
reflected in the consolidated statement of operations.
[Download Table]
(in thousands) 2000 1999 1998
------------------- ------------------- -------------------
Amount % Amount % Amount %
------- ----- ------- ----- ------- -----
Gross Revenues $22,627 100.0% $64,013 100.0% $73,470 100.0%
Additions to
reserves for:
Returns 2,548 11.2% 17,714 27.7% 9,355 12.7%
Price discounts 86 0.4% 6,146 9.6% 2,050 2.8%
Rebates 831 3.7% 2,474 3.9% -- --
------- ----- ------- ----- ------- -----
3,465 15.3% 26,334 41.2% 11,405 15.5%
------- ----- ------- ----- ------- -----
Net Revenues $19,162 84.7% $37,679 58.8% $62,065 84.5%
======= ===== ======= ===== ======= =====
IMSI's allowances for returns, price protection and rebates are based upon
management's best judgment and estimates at the time of preparing the financial
statements. Reserves are subjective estimates of future activity, that are
subject to certain risks and uncertainties, which could cause actual results to
differ materially from estimates. Historically, the Company estimated reserves
for returns, price discounts and rebates using, among other things, historical
averages and a consideration of open return requests. Beginning with the quarter
ended December 31, 1998, management supplemented the process by which it
establishes reserve estimates with a consideration of channel inventories in the
U.S., recent product sell-through activity, planned product upgrades, sales
trends, competition from other products, product inventory on hand, and market
conditions.
19
Prior to December 31, 1998, the Company did not consider separately the effect
of product upgrades in determining the reserve for returns because it believed
that the impact of product upgrades on returns was already appropriately
reflected in the historical estimates. Information available in regards to
channel inventory and sell through activity was and is still limited. This
information, generated by third parties from whom IMSI purchases the data, does
not cover all customers and is unaudited. Management is required to exercise
judgment in estimating future returns, price discounts and rebates. Total
reserves for returns, price discounts and rebates, not including reserves for
bad debt, were 34%, 50%, and 20% of gross receivables at June 30, 2000, 1999 and
1998, respectively.
For traditional boxed product sales, IMSI recognizes revenue net of estimated
returns and allowances for returns, price discounts and rebates, upon shipment
of a product and only when no significant obligations remain and collection is
probable. IMSI's return policy generally allows its 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. In addition, foreign distributors
can return product for payment if return amounts exceed amounts owed.
On September 27, 1999, Tech Data notified IMSI that it would terminate its
distribution agreement within 60 days as a result of a disagreement over payment
terms. Based on reports received from Tech Data, it was estimated that Tech Data
held $566,000 of IMSI product in its inventory. Because the distributorship
agreement with Tech Data allowed for product returns upon termination of the
agreement, IMSI included an allowance of $566,000 return reserve representing
Tech Data's entire reported inventory. After September 30, 1999, Tech Data
requested to return $575,000 of IMSI inventory. On December 19, 1999, the
Company received inventory of approximately $265,000. IMSI's agreement with Tech
Data required that the Company accept returns of the products in Tech Data's
inventory at the price paid by Tech Data less any subsequent returns or credits,
provided that the products were unopened and in their original factory sealed
packages. IMSI concluded that most of the product inventory returned by Tech
Data did not meet these conditions. Therefore, the Company credited Tech Data
for only $25,000 of the product returned. On January 27, 2000, Tech Data
returned an additional $257,000 of product. IMSI refused to accept this second
shipment and returned the product to Tech Data. Tech Data has contested IMSI's
right to issue only partial credit for the first shipment and to refuse the
second return shipment. As of June 30, 2000 the balance owed to IMSI by Tech
Data was approximately $262,000. IMSI has fully reserved this amount. IMSI has
not received any additional returns from Tech Data as of or subsequent to June
30, 2000.
In December 1998, IMSI's primary distributor in Germany exited the software
distribution business. On May 27, 1999, as a result of the termination, the
German distributor returned $248,000 of previously paid resalable product and
IMSI refunded the full $248,000. In March 1999, IMSI decided to terminate its
relationship with its primary distributor in Australia and sell directly to
retail outlets. The previously paid resalable product returned by the Australian
distributor upon termination was valued at $304,000. IMSI paid $189,000 in June
1999 to the Australian distributor and relieved $115,000 in receivables as a
result of that termination. As of June 30, 2000, IMSI had no current liability
to any foreign or domestic distributor for resalable product returned on
termination.
IMSI provided price protection to its distributors when it reduced the prices of
its products. End users may return products through dealers and distributors
within 60 days from the date of purchase for a full refund, and retailers may
return older versions of products for a full refund. Generally, distributors and
retailers have no time limit to return merchandise, except that distributors
have 60-90 days to return merchandise upon termination of the distributorship
agreement.
During the second half of fiscal 2000, IMSI executed several new republishing
agreements in an effort to revitalize the sales of its core products.
On March 14, 2000, the Company granted to ValuSoft, the exclusive rights to
reproduce and distribute its products in North America in exchange for royalty
payments of 15% on net sales of these products. The agreement also provides for
a $1.3 million minimum guaranteed royalty over the next sixteen months.
On the international side, IMSI executed similar exclusive republishing
agreements during the second half of fiscal 2000. IMSI granted the exclusive
rights to manufacture and distribute its products to AB Soft in France and
French speaking countries; MicroBasic in Germany, Austria and Switzerland;
MediaGold in all other European countries, the Middle East and Africa. All of
these international republishing agreements call for royalty payments of 15% of
net sales with a combined minimum guaranteed royalty of $370,000 over the next
twelve months.
20
These agreements define net sales as gross sales less any potential returns,
rebates and price protection the republisher might provide to distributors and
end users. While the risks associated with returns, rebates and price protection
will still affect the republishers' net revenues and consequently IMSI's royalty
income, they will be minimized because of the guaranteed royalty payments.
Management believes that these republishing agreements will substantially reduce
reserves for returns, rebates and discounts. Reserves are subjective estimates
of future activity, that are subject to certain risks and uncertainties, which
could cause actual results to differ materially from estimates.
PRODUCT COSTS
IMSI's product costs include the costs of diskette and CD-ROM duplication,
printing of manuals, packaging and fulfillment, freight-in, license fees,
royalties that IMSI pays to third parties based on sales of published software
and amortization of capitalized software acquisition and development costs.
Costs associated with the return of products, such as refurbishment and the
write down in value of returned goods are also included in Product Costs.
Product costs represented 53%, 67% and 38% of net revenues in fiscal 2000, 1999,
and fiscal 1998 respectively. The decrease in product costs as a percentage of
net revenues in fiscal year 2000 was primarily attributable to a lower fixed
manufacturing burden and overhead costs, lower costs associated with product
returns, decreased purchase discounts offered to customers and decreased
end-user rebates.
IMSI reviews its product inventories for obsolescence at the end of each
reporting period. IMSI reserves a portion of its recorded inventory book value
to account for its anticipated inability to sell certain products or the
anticipated inability to sell certain products at a net realizable value that is
greater than their recorded cost. Products that are in IMSI's inventory but are
not currently being sold are fully reserved. As part of its restructuring plan
in fiscal year 1999, IMSI identified a limited number of core products that it
planned to continue to sell on a long-term basis. Reserves for non-core products
were increased as part of the Company's restructuring. During fiscal year 2000,
the Company reversed $287,000 of these inventory reserves due to better than
anticipated sell-down of discontinued products. As of June 30, 2000, IMSI had
net inventories of $189,000 after a reserve for obsolete inventory of $311,000.
IMSI amortizes capitalized software development costs on a product-by-product
basis. The amortization recorded for each product is the greater of the amount
computed using (a) the ratio of current gross revenues to the total of current
and anticipated future gross revenues for the product or (b) the economic life
of such product. Aggregate amortization of such costs was $979,000, $2,429,000,
and $1,196,000 in fiscal 2000,1999 and 1998, respectively.
SALES AND MARKETING EXPENSES
IMSI's sales and marketing expenses consist primarily of salaries and benefits
of sales and marketing personnel, commissions, advertising, printing and direct
mail expenses. Sales and marketing expenses represented 28%, 49% and 30% of net
revenues in fiscal year 2000, 1999 and 1998 respectively. These expenses
decreased by $13 million or 71% to $5.4 million in fiscal 2000 from $18.4
million in fiscal 1999, which represented a decline of 1% from $18.6 million in
fiscal 1998. Cost reduction efforts associated with IMSI's fiscal year 1999
restructuring plan significantly reduced sales and marketing expenses in fiscal
year 2000. In addition, the significant decrease in sales and marketing expenses
during fiscal year 2000 was due to lower headcount resulting from the layoffs of
employees in this department in January 2000 and to the substantial reduction of
marketing and advertising activities. IMSI had 19, 69 and 141 sales and
marketing personnel at June 30, 2000, 1999 and 1998, respectively.
GENERAL AND ADMINISTRATIVE EXPENSES
IMSI's general and administrative expenses consist primarily of salaries and
benefits for employees in the legal, finance, accounting, human resources,
information systems and operations departments and fees to IMSI's legal and
professional advisors. General and administrative expenses decreased 4% or
$333,000 in fiscal 2000 to $7.8 million from $8.2 million in fiscal 1999. The
fiscal 1999 expenses were $3.2 million or 60% greater than the $5.0 million in
fiscal 1998. At the beginning of fiscal 1999, IMSI was in a growth pattern,
increasing general and administrative expenses. When market conditions
deteriorated for its products, IMSI was not able to effectively reduce these
expenses due to their fixed nature and to an increase in the legal expenses.
During fiscal years 2000, IMSI had significant increases in accounting, legal
and consulting fees paid to outside third parties, particularly in connection
with litigation and in responding to SEC comments, IMSI had 18, 35, and 56
administrative personnel at June 30, 2000, 1999 and 1998 respectively. The
decrease in fiscal year 2000 headcount was related to IMSI's downsizing and
should contribute to reducing general and administrative expenses in future
reporting periods. General and administrative expenses represented 42%, 22% and
8% of net revenues in fiscal 2000, 1999 and 1998 respectively. Despite the
slight decrease in general and administrative expenses in absolute dollars, the
sharp increase in these expenses as a percentage of net revenues from fiscal
year 1999 to fiscal year 2000 was primarily attributable to the steep decline in
fiscal year 2000 revenue.
21
RESEARCH AND DEVELOPMENT EXPENSES
IMSI's research and development expenses consist primarily of salaries and
benefits for research and development employees and payments to independent
contractors. In fiscal year 2000 research and development expenses decreased
$4.1 million or 50% to $4 million as compared to $8.1 million for the previous
year, which was $0.5 million lower than the $8.6 million in fiscal 1998. IMSI
had 20, 76 and 115 research and development employees at June 30, 2000, 1999 and
1998, respectively. The fiscal year 2000 decrease in research and development
expenses was due to a domestic headcount decrease, termination of some of the
software development contractors outside the United States and to the
substantial reduction in the development costs relating to expansion of IMSI's
product offering. During fiscal year 2000 IMSI capitalized $159,000 of software
acquisition and development costs relating to acquisitions made by ArtToday.com.
Software acquisition and development costs in the amount of $3.2 million were
capitalized during both fiscal years 1999 and 2000. Research and development
expenses accounted for 21%, 21% and 14% of net revenues in fiscal 2000, 1999 and
1998, respectively. As a result of the relative steep decline in fiscal 2000
revenues and a corresponding decrease in research and development expenses this
percentage remained unchanged during fiscal year 2000 compared to fiscal year
1999.
RESTRUCTURING CHARGE
In response to its large losses in fiscal year 1999, after approval by IMSI's
Board of Directors, IMSI announced a plan of restructuring on June 24, 1999, and
the Company initiated a company-wide restructuring of its operations. The four
major components of the restructuring plan were manufacturing and warehouse
outsourcing, facilities consolidation, personnel reductions, and divestiture of
non-core products to focus on high margin product lines.
All appropriate costs associated with implementing the restructuring plan,
whether paid in fiscal year 1999 or beyond, were recognized as a cost or expense
during IMSI's fiscal year ended June 30, 1999. A portion of the restructuring
costs represented a write-off of existing assets. Costs recognized related to
the restructuring that were not from write-offs of existing assets or were not
paid by June 30, 1999, $1,440,000 in total, were accrued and recognized as a
liability at June 30, 1999.
IMSI began its restructuring in June 1999 and completed its restructuring by end
of fiscal year 2000 with the exception of $62,000 relating to manufacturing and
warehouse outsourcing, $59,000 relating to facilities consolidation, and $8,000
relating to personnel reductions. Restructuring costs of $3,271,000 that would
have been recognized through cost of sales in the normal course of business
(inventory, royalties, license fees, capitalized software, warehouse costs,
warehouse outsourcing costs) were recognized in 1999 as a component of costs of
goods sold. Restructuring costs of $1,508,000 that would have been reported as
operating expenses in the normal course of business were recognized in 1999
under the caption "restructuring charge."
During fiscal 2000, IMSI reversed $280,000 of the restructuring accrual:
$177,000 in accrued severance costs as estimated costs were greater than actual
costs due to employee attrition, and $103,000 in broker's fees for the Vacaville
facility as the lease will be terminated, not subleased.
22
The following table summarizes these restructuring costs by segment:
[Enlarge/Download Table]
(in thousands) COST OF GOODS SOLD OPERATING EXPENSE
---------------------- -------------------
North North
America UK America UK Total
------- ---------- --------- -------- ------
Write down of inventory of non-core
products $2,096 $88 $2,184
Write down of intangibles associated with
Non-core products, total:
License Fees 217 217
Goodwill $5 5
Prepaid Royalties 143 143
Capitalized Software 159 159
Write down of furniture, fixtures,
equipment and leasehold improvements:
Novato -
Computers and peripherals 150 150
Tenant improvements 139 139
Furniture and fixtures 109 109
Vacaville & Albuquerque -
Furniture and fixtures 25 25
U.K. -
Furniture and fixtures 41 41
Abandoned leases and associated costs:
Novato -
Rent 180 180
Broker's fee 65 65
Excess furniture lease 14 14
Additional walls and doors 29 29
Miscellaneous charges 3 3
Vacaville warehouse -
Rent 249 249
Broker's fee 103 103
Albuquerque tech support facility 110 110
U.K. -
Rent 6 6
Labor cost for shutdown of office 19 19
Warehouse transition costs 284 284
Personnel reduction and severance costs:
U.S. 35 470 505
U.K. 41 41
------ --- ------ ---- ------
$3,183 $88 $1,402 $107 $4,780
The following table details the classification of cash and non-cash amounts
related to the restructuring:
[Download Table]
Cash Non-Cash Total
---------- ---------- ----------
Restructuring Charge $ 956,000 $ 552,000 $1,508,000
Product Costs 657,000 2,615,000 3,272,000
---------- ---------- ----------
$1,613,000 $3,167,000 $4,780,000
========== ========== ==========
Non-cash restructuring charges relate to the write off or write down of fixed
assets, inventory, license fees, goodwill, prepaid royalties and capitalized
software.
23
Write down of inventory of non-core products. In the restructuring, IMSI
identified products in the Company's precision design and graphic design
categories, or those in the business application category sold in combination
with the design products, such as TurboProject, as "core products" that IMSI
would continue to sell and support. "Non-core products" consist of those
products in the Company's inventory that, due to the restructuring plan, the
Company would continue to sell, but no longer support with upgrades,
improvements, or marketing programs. "Other products" refers to products that
IMSI would no longer sell.
In addition to older versions of FloorPlan, MasterClips, and TurboCAD. non-core
products included current and previous versions of:
[Download Table]
3D Artist Graphics Converter Org Plus
CD Copier Hijaak People Scheduler
Conversational Skills Lumiere Solid Modeler
Cookbook MapLinx TurboSketch
Email animator MasterPhotos UpdateNow
EZ Language MasterPublisher VoiceDirect
Family Home Collection MultiMedia Fusion WebArt
Flow! Mouse Web Business Builder
FormTool Net Accelerator Year 2000
The restructuring charge included $2,184,000 in inventory write-downs related to
non-core products, $2,096,000 of which was included in the U.S. segment. IMSI
based this impairment of the value of the inventory on a subjective estimate,
product by product, of how much the inventory exceeded customer demand, looking
at factors such as inventory levels at IMSI facilities and as reported by
distributors, sales data from internal sources and PC Data, and marketing and
sales department estimates based on historical and current market trends.
Write down of intangible assets associated with non-core products. At June 30,
1999, IMSI reviewed the intangible assets associated with non-core product lines
for impairment in accordance with SFAS 121 and adjusted the carrying value of
these assets as necessary. These intangible assets included license fees,
capitalized goodwill and brand names, prepaid royalties, and capitalized
software. The Company believed these assets were impaired because it no longer
manufactured or actively marketed the non-core products with which they were
associated. IMSI did not write-off the intangible assets associated with Easy
Language and the business utility product lines in the restructuring. The
Company determined that the net realizable value of these intangible assets
associated with the remainder of the non-core product lines was $0, and
accordingly wrote down $525,000 in the U.S. segment. The fair value of the
intangible assets associated with the non-core product lines held for sale,
including EZ Language and business utility product lines, was determined from
then pending discussions with potential purchasers of these product lines.
24
The following table provides a summary of the carrying value of all assets
associated with the Company's non-core products as of June 30, 1999:
[Download Table]
Write-down in
connection Adjusted cost
Cost basis at with basis at June 30,
June 30, 1999 restructuring 1999
------------- ------------- -----------------
Inventory $3,263 $2,184 $1,079
License fees 217 217 --
Goodwill 5 5 --
Prepaid royalties 224 143 81
Capitalized software 336 159 177
------ ------ ------
$4,045 $2,708 $1,337
====== ====== ======
Write down of furniture, fixtures, equipment and leasehold improvements. Because
the restructuring plan called for the reduction of employees and the
consolidation of facilities, IMSI wrote-down $464,000 of furniture, fixtures,
equipment and leasehold improvements at the Company's Novato headquarters,
Vacaville, California and Albuquerque, New Mexico facilities, and the U.K.
office. The write down of $398,000 of fixed assets in Novato consisted of
$150,000 of computers and peripherals, $139,000 of tenant improvements, and
$109,000 of furniture and fixtures. The write down of $25,000 and $41,000 of
fixed assets in Vacaville and Albuquerque and the U.K., respectively, consisted
of furniture and fixtures. These assets were abandoned and are no longer being
used in the operation of the business. The fair value of furniture, fixtures,
equipment and leasehold improvements not associated with specific product lines
was based on current market prices for used equipment and furniture, less
disposal costs.
Abandoned leases and associated costs. IMSI expensed a total of $778,000 for
abandoned leases and associated costs in the U.S. and U.K. segments. As part of
the restructuring, IMSI vacated a major portion of the office space leased at
the Company's Novato headquarters and succeeded in subleasing this space and
reducing monthly rental expense by $60,000. The charge of $291,000 in Novato
consisted of four months rent for the space to be subleased of $180,000, the
broker's fee to sublease the space of $65,000, an excess furniture lease of
$14,000, the cost of additional walls and doors to partition the space of
$29,000, and miscellaneous charges of $3,000.
The Company estimated that about 50% of the future rental costs for the
Vacaville warehouse should be accrued at June 30, 1999 ($249,000), along with a
broker's fee to sublet the unoccupied space ($103,000). Because of the reduction
in product lines and corresponding reduction in the need for technical support,
IMSI accrued 50% ($110,000) of the future rent for the Albuquerque technical
support facility. Because the restructuring included the consolidation of the
foreign offices, IMSI also accrued $25,000 in expenses associated with vacating
the U.K. office.
Warehouse transition costs. As IMSI made the transition to outsourcing of the
warehouse, fulfillment, and shipping functions, the Company provided for
warehouse transition costs of $284,000 in the restructuring. This accrual
assumed that the warehouse would remain open for four months during the
transition and that 50% of the operating expenses were associated with shutting
down the facility. IMSI accrued 50% estimated cost of operating the warehouse
for this four-month period as an operating expense and recognized the remaining
costs as cost of sales as incurred. In April 2000, IMSI vacated the Vacaville
warehouse.
Personnel reduction and severance costs. As part of the restructuring plan, IMSI
planned to terminate 90 employees in the following departments: sales and
marketing (22); general and administrative (8); manufacturing (23); and research
and development (37), all of whom have been terminated as of June 30, 2000. The
total restructuring charge relating to personnel reduction and severance costs
was $546,000, of which $505,000 applied to the U.S. segment and $41,000 to the
U.K. segment. These costs were recorded as operating expenses. IMSI also forgave
a $35,000 note receivable from a shareholder and company executive who was
terminated as part of the restructuring.
As a result of the restructuring, IMSI anticipated reduced future costs and
reduced future revenues. IMSI expected to reduce payroll costs by approximately
$266,000 per month and to reduce rent costs by approximately $71,000 per month
as a result of the its warehouse closing, the closing of its U.K. office, and
the subleasing of half of its headquarters office space, and corresponding
reduction in employees. Due to the write off of approximately $464,000 in
furniture and equipment assets,
25
depreciable over 3 to 5 years, future periods will not include the related
depreciation charge. As anticipated, revenues declined substantially in fiscal
year 2000 because IMSI is marketing and selling fewer products and the demand
for current products is declining.
GAIN ON PRODUCT LINE SALE
Pursuant to the execution of its restructuring plan, IMSI sold the rights to the
Easy Language product line to Learnout & Hauspie for $1.7 million in August
1999, of which $1.5 million was recognized in fiscal year 2000. The Company also
sold the rights to People Scheduler to Adaptive Software Corporation for $55,000
in February 2000. As of June 30, 2000, the Company collected the entire $55,000
relative to the People Scheduler sale and $1.5 million of the $1.7 million
relating to the Easy Language sales. The remaining balance was held in an escrow
account as of June 30, 2000, and was subsequently collected in August 2000.
INTEREST AND OTHER EXPENSE, NET
Interest and other expenses, net include interest accrued on debt instruments,
amortization of the fair value of warrants issued in connection with debt,
foreign currency transaction gains and losses, and other non-recurring items.
Interest and other expense, net was $3,725,000, $1,880,000 and $759,000 fiscal
2000, fiscal 1999 and fiscal 1998, respectively.
Although IMSI reduced its total bank obligations during fiscal 2000, the
accelerated write-off of warrant values and penalty interest rates were the
primary causes of a $1.8 million or 98% increase in interest and other expenses
as compared to fiscal year 1999. During fiscal 2000, IMSI repaid the $750,000
balance of its term note payable to Union Bank of California, and the Company
also reduced the line of credit owed to the same bank by $0.8 million from $5.4
million to $4.6 million. The following table summarizes the causes of the
increase in interest (in $ million):
[Download Table]
Increase
Description (Decrease)
----------- ----------
Accelerated Write-off of Warrant Values $1.7
BayStar Penalties 0.5
Imageline Interest 0.1
Silicon Valley Bank Penalty Interest 0.1
Other, Net (0.6)
----
Total Increase $1.8
Because IMSI is in default with respect to the Silicon Valley Bank loan and the
BayStar subordinated note, the Company accelerated the amortization of the
warrants issued and yet to be amortized. The BayStar agreement calls for a 1%
penalty per month for each month subsequent to September 21, 1999 until the
shares to be issued to BayStar are included in an effective registration
statement. As of June 30, 2000 the Company recorded $456,000 related to this
penalty. The Company accrued interest in the amount of $107,000 related to the
Imageline arbitration award. In accordance with the agreement with Silicon
Valley Bank, the bank added 5% of penalty interest above the normal nominal rate
of 12% applicable on the balance of the loan upon default, which occurred on
December 29, 1999. This added $51,000 of interest expenses during fiscal 2000.
Foreign currency transaction loss was $7,000 in fiscal 2000 and $235,000 in
fiscal 1999. In the past, IMSI did not attempt to hedge its foreign currency
positions. In view of the very substantial reduction in international business
and denominating foreign contracts in U.S dollars, foreign currency translation
losses will be negligible going forward.
LOSS ON DISPOSITION OF FIXED ASSETS
During fiscal year 2000, The Company wrote off $1,607,000 of leasehold
improvements, warehouse equipment, tradeshow equipment, computer equipment, and
office furniture, which were disposed of or abandoned during the Company's
continued downsizing..
LOSS ON DISPOSITION OF FOREIGN SUBSIDIARIES
On January 28, 2000, IMSI announced that it was exiting the retail software
business, closing its German office and liquidating its European subsidiaries.
Earlier, in the first quarter of fiscal year 2000, the Company closed its United
26
Kingdom and French offices. Upon appointment, liquidators assumed control of
IMSI's European subsidiaries. Therefore, the Company is no longer consolidating
these subsidiaries within its financial statements
The loss as a result of liquidating the Company's European subsidiaries was
$2,043,000. This loss includes the $1,562,000 write-off of the parent Company
inter-company accounts receivable, the $68,000 write-off of the parent Company
investment in the foreign subsidiaries and the $393,000 write-off of the foreign
subsidiaries net assets. IMSI does not expect to realize any of these assets.
The liquidation process, which is proceeding according to the legal requirements
of the respective countries, may take up to one year to complete. Future sales
of the Company's products in Europe will occur primarily through third party
licenses with IMSI receiving royalties for such sales. The Company does not
anticipate any additional costs pertaining to the closure of the European
subsidiaries.
ADVERSE AWARD IN IMAGELINE ARBITRATION
On January 14, 2000, Imageline, Inc. received a $2.6 million arbitration award
against IMSI for intellectual property violations and attorneys' fees. The award
is comprised of $1.2 million in actual damages, $1.2 in punitive damages and
$0.2 million in attorneys' fees. IMSI is appealing the award in the federal
district court in Richmond, VA.
PROVISION (BENEFIT) FOR INCOME TAXES
IMSI's effective tax rate was 3.2%, 0.1% and (45.0%) in fiscal 2000, fiscal 1999
and fiscal 1998, respectively. The Company recorded a valuation allowance of
($17,592,000) in fiscal year 2000, and $11,126,000 in fiscal year 1999 due to
the uncertainty of realizing deferred tax assets, consisting primarily of loss
carryforwards. The income tax expense recognized in fiscal year 2000 represents
the increase in the valuation allowance in fiscal year 2000 provided against net
deferred tax assets recorded as of June 30, 1999.
THE LEARNING COMPANY/ORG PLUS AGREEMENT
In August 2000, IMSI, The Learning Company ("TLC") and Human Concepts, a company
owned by the former CEO of IMSI, drafted agreements that provide that IMSI and
TLC would terminate all existing agreements between the parties and that IMSI
and TLC would be released from all of their respective claims and obligations
between each other. In return, IMSI would license WinDelete to TLC, TLC would
sell OrgPlus to Human Concepts, Human Concepts would pay TLC $400,000 and IMSI
and Mindscape, a subsidiary of TLC, would release each other from all possible
indemnity claims in connection with the Imageline litigation. All parties desire
to consummate this agreement, and it is expected to be executed before the end
of October 2000. When the agreement is executed, IMSI will no longer have
control of the Org Plus product and will write-off the capitalized software and
related goodwill which amounted to $1.2 million at June 30, 2000, and is being
amortized over 5 years at $30,000 per month. IMSI will also eliminate an accrued
liability to TLC of $300,000. Net revenues from sales of OrgPlus were
approximately $1.2 million during fiscal year 2000. While IMSI will no longer
have control of OrgPlus, the Company expects to retain the right to sell the
product to defined customers. In addition, IMSI expects to receive royalty
income from Human Concepts as a percentage of its sales of OrgPlus. While net
revenue could be adversely affected by the above agreements, management believes
that the effect on operating income will not be material.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operating activities used net cash of $253,000, $2.7 million
and $1.6 million, respectively in fiscal 2000, 1999, and 1998. Despite IMSI's
large net loss in fiscal year 2000, net cash used by operating activities was
minimized. This was attributable to the significant decrease in net accounts
receivable, net inventories and the collection of $3.8 million of income tax
refunds. During fiscal year 2000, accounts payable increased by $522,000 as IMSI
slowed its payments pursuant to the standstill agreement with its creditors.
Accrued liabilities also increased by $1.5 million during this fiscal year as a
result of the adverse arbitration award pertaining to the Imageline ruling.
These increases in accounts payable and accrued liabilities were offset by the
decrease in accrued restructuring charges and deferred revenues. Non cash
expenses relating to the depreciation and amortization of fixed assets and
capitalized software, the write off of fixed assets and the loss on liquidation
of foreign subsidiaries contributed in minimizing the cash effects of the $16.9
million net loss in fiscal year 2000. During fiscal year 1999 large reductions
in accounts receivable and inventories and an increase in accrued and other
liabilities minimized the use of cash caused by IMSI's large net loss. IMSI
slowed its payments as a result of declining cash receipts. Accrued liabilities,
and especially, accrued rebates payable increased significantly because of the
intense price competition and increase in rebates offered during the past fiscal
year. In fiscal year 1998, net cash used by operating activities resulted
primarily from a $6.6 million increase in receivables, a $3.5 million increase
in inventories and a $3.3 million increase in prepaid royalties and licenses,
which were not entirely offset by IMSI's net income before depreciation and
amortization of $3.7 million.
27
IMSI's investing activities provided net cash of $130,000 in fiscal year 2000
and consumed net cash of $5.7 million and $3.9 million in fiscal 1999 and
fiscal 1998, respectively. The sale of the Easy Language product line in fiscal
2000 for $1.7 million dollars contributed $1.5 million dollars to net cash
provided by investing activities. The remaining $200,000 was held in escrow and
deferred. This cash has been collected subsequent to June 30, 2000. The Company
also sold the People Scheduler program during fiscal year 2000 for $55,000 in
cash. The cash collected in connection with the Easy Language and People
Scheduler sales was in part offset by the purchase of $314,000 of equipment and
the acquisition of $159,000 of goodwill, trademark and brand. During fiscal
2000, the Company also collected approximately $40,000 relating to the sale of
part of its fixed assets. In fiscal 1999, net cash used by investing activities
resulted primarily from the purchase of $1.2 million of equipment, the
acquisition of $2.2 million of software development costs and $2.4 million of
goodwill, trademark and brand. These amounts are primarily associated with the
Zedcor, Inc. acquisition and the Org Plus acquisition. In fiscal year 1998, net
cash used by investing activities resulted primarily from the addition of $2.7
million to capitalized software acquisition and development costs and $1.0
million of equipment purchases.
Net cash consumed by financing activities in fiscal 2000 was $2.1 million.
Financing activities provided net cash of $10.1 million and $6.6 million in
fiscal 1999 and fiscal 1998, respectively. In fiscal 2000, net cash used by
financing activities was primarily the result of payments to Union Bank of
California. IMSI reduced the credit line owed to Union Bank by $804,000 to $4.6
million. The Company also paid off the $750,000 remaining balance of the term
loan owed to Union Bank during fiscal 2000. IMSI issued stock for $3,000 and
made payments relating to capital lease obligations of $530,000 in fiscal 2000.
In fiscal 1999, net cash provided by financing activities resulted primarily
from term loan borrowings of $7.5 million and the issuance of $6.2 million of
common stock. This inflow of cash was partially offset by a net repayment of
$2.5 million on IMSI's credit line from Union Bank of California. In fiscal
1998, net cash provided by financing activities resulted primarily from $16.4
million of borrowings under IMSI's credit line, offset in part by $10.3 million
of repayments under capital leases, term loans and other obligations, and
$526,000 from the issuance of common stock. On November 3, 1998, IMSI borrowed
$2.5 million under a three-year subordinated loan facility with Silicon Valley
Bank. On May 26, 1999, IMSI issued to BayStar Capital, LP a three-year $5
million principal amount 9% subordinated convertible note.
On March 3, 1999, IMSI entered into a stock purchase agreement and related
agreements with Capital Ventures International ("CVI"). Under the terms of the
agreement, CVI paid IMSI $5 million and for 437,637 shares of common stock.
Depending on the market price of the common stock at certain future dates, the
agreement provided price protection to CVI. Accordingly, IMSI issued an
additional 2,023,363 shares to CVI in March 2000. This new issuance brought
CVI's ownership of IMSI's stock to a total of 2,500,000 shares for its $5
million investment. IMSI has no further obligation to issue any additional
adjustment shares or to pay other consideration to CVI and is relieved of making
any further payments to CVI in connection with not yet registering the shares of
stock issued to CVI. CVI also received a warrant to purchase 131,291 shares of
common stock expiring March 5, 2003. The warrant is currently exercisable at
$14.8525 per share. The exercise price and number of shares issued is subject to
adjustment with anti-dilution provisions similar to the provisions for the
optional additional share purchase.
On May 4, 1998 IMSI entered into a line of credit agreement with Union Bank
under which it could borrow the lesser of $13,500,000 or 80% of eligible
accounts receivable, at Union Bank's reference rate plus _% or LIBOR plus 2%, at
IMSI's option. IMSI borrowed approximately $10.0 million under the line of
credit agreement. Union Bank also provided a $1.5 million term loan at the same
interest rate. The line of credit was to expire on October 31, 1999 and the
repayment of the term loan was due by the same date. Due to IMSI's defaults
under the agreements, the line of credit was changed to a non-revolving,
reducing loan with no further borrowings available. The interest rate is
adjusted to Union Bank's reference rate plus 3%. Under the terms of the
agreements, all assets not subject to liens of other financial institutions were
pledged as collateral against the loans.
As of September 30, 1999, IMSI had made payments to Union Bank that decreased
the amount owed to $4,600,000; however, the loan agreements provided that all
loan amounts were due as of that date. As of result of the failure to pay off
the loan and because IMSI was not in compliance with certain financial
covenants, the Company is now in default. Union Bank can declare all loans and
the obligations under the agreements, to be immediately due and payable and can
commence immediate enforcement and collection actions. Enforcement and
collection actions by Union Bank could have a material adverse effect on IMSI's
business, operating results and financial condition.
On May 26, 1999 IMSI announced a private placement transaction with BayStar
Capital, L.P. ("Baystar"). The Company issued a three year $5 million principal
amount 9% Senior Subordinated Convertible Note, and a warrant to acquire 250,000
shares of IMSI's common stock, to BayStar. The note is convertible into shares
of common stock at an initial conversion price of $7.5946 per share. The
conversion price is subject to adjustment, including adjustment to a reset
conversion price on May 24, 2000, or lower if defined events occur, such as the
issuance of common stock, or grant rights to purchase stock, at a price lower
than the then existing conversion price. These conditions are designed to
prevent dilution of the conversion feature of the convertible
28
note and dilution of the exercise price of the warrant. The trading value of
IMSI's common stock on the date of issuance of the subordinated convertible debt
was $6.50. The value of the contingent beneficial conversion feature at the date
of commitment, and the potential charge to earnings is $432,000 See Note 4 to
the consolidated financial statements, "Convertible Subordinated Debt."
IMSI is in default on its senior subordinated convertible note with BayStar
because of failure to pay a penalty for failing to have a registration statement
effective no later than September 21, 1999 covering the resale of shares
issuable to BayStar. The penalty is 1% per month of the principal balance
outstanding. IMSI has accrued a liability of $456,000 for this penalty through
June 30, 2000 in the financial statements. BayStar has the right under the note
to declare all sums due and payable but has not done so. Accordingly, the full
amount of the note is recorded as a current liability. Because of the default,
BayStar received the right to convert its convertible note at the price of $2
per share. BayStar converted $500,000 of the note on December 2, 1999 into
common stock of IMSI at a price of $2 per share.
The Company's cash and cash equivalents decreased by $2.2 million to $1.5
million at June 30, 2000 from $3.7 million at June 30, 1999. Working capital
declined to a negative $19 million at June 30, 2000 from a negative $1.2 million
at June 30, 1999.
Current assets declined by $13.7 million during fiscal year 2000. This sharp
decline was the result of the decrease in cash and cash equivalents and
operating losses incurred.
Current liabilities increased by $4.1 million in fiscal year 2000 to $23.2
million from $19.1 million at June 30, 1999. Although IMSI paid down the term
loan owed to Union Bank and despite the significant decrease in accounts
payable, current liabilities increased by 22%. During fiscal year 2000 IMSI
recorded $2.7 million relating to the adverse arbitration award to Imageline as
a current liability. Also due to the default with respect to various covenants
with BayStar Capital and Silicon Valley Bank, IMSI re-classed the remaining
balances of these loans to current. These re-classes contributed to the increase
of the current liabilities.
If IMSI fails to raise additional capital, the negative working capital position
could have a material adverse effect on its liquidity over the next year.
IMSI defers revenues from ArtToday.com's subscriptions. ArtToday.com recognizes
these revenues over twelve months from the date of purchase. Deferred revenues
also include revenues related to licenses or prepaid contracts. IMSI also sells
ArtToday.com subscriptions in combination with subscriptions to utility
programs, which the Company recognizes over fifteen months. Deferred revenue
decreased from $3,178,000 in fiscal 1999 to $2,385,000 in fiscal 2000. Deferred
revenues from ArtToday.com's subscriptions increased to $1.1 million from
$785,000 as compared to fiscal year 1999. Most of the decrease in the
consolidated deferred revenue balance was attributable to the decline in
revenues from the combined subscriptions. Fiscal year-end 1999 deferred revenues
included a $200,000 receivable from TLC. In fiscal 2000, IMSI reserved for the
full amount of the receivable and re-classed the deferred revenue amount to
offset the charge to reserves.
The financial statements have been prepared on a basis that contemplates IMSI's
continuation as a going concern and the realization of the Company's assets and
liquidation of IMSI's liabilities in the ordinary course of business. The
Company has an accumulated deficit of $42.8 million at June 30, 2000, and
negative cash flows from operations of $1.1 million in fiscal 2000. IMSI is also
in default of various loan covenants. These matters, among others, raise
substantial doubt about IMSI's ability to remain a going concern for a
reasonable period of time. The financial statements do not include any
adjustments relating to the recoverability or classification of assets or the
amounts and classification of liabilities that might result from the outcome of
this uncertainty. IMSI's continued existence is dependent on its ability to
obtain additional financing sufficient to allow it to meet its obligations as
they become due and to achieve profitable operations. See Note 1 to the
consolidated financial statements, "Basis of Presentation and Realization of
Assets."
IMSI will require additional working capital to meet its ongoing operating
expenses, to execute its planned transition to the Internet, to develop new
products, and to conduct other activities. Historically, IMSI has financed its
working capital and capital expenditure requirements primarily from retained
earnings, short-term and long-term bank borrowings, capitalized leases and sales
of common stock. During fiscal year 2000, IMSI relied primarily on the
collection of receivables and sales of non-core product lines to fund
operations. During fiscal 2000 short-term net credit line borrowing decreased by
$804,000. Long-term debt of $6.3 million has been re-classed to current
liabilities due to IMSI's defaults with BayStar Capital and Silicon Valley Bank.
Common stock increased by $745,000, of which $3,000 was issued for cash. The
large accumulated losses of IMSI and the negative amount of shareholder's equity
as of June 30, 2000 will make it difficult for IMSI to obtain new debt financing
or to obtain equity financing at attractive prices.
To a large extent, IMSI plans to meet its working capital needs in the coming
fiscal year through continued sales or license of
29
the rights to its non-core products, the sale or license of part of its assets
and through equity financing. As part of its restructuring strategy, announced
during fiscal year 1999, IMSI planned to reduce the number of its product
categories by approximately 75% through sales of its non-core product lines. To
this end, IMSI sold the rights to the EZ Language product for $1.7 million in
August 1999. Moreover, IMSI has engaged in, and expects to engage in,
discussions with third parties concerning sale or license of a material part of
its remaining non-core product lines, sale or license of part of its assets and
concerning raising additional capital through the issuance of stock. The sale of
the rights to its non-core products is consistent with IMSI's strategy of
focusing on its core products while transitioning to the Internet.
As of June 30, 2000, IMSI had $1.5 million of cash and cash equivalents. During
fiscal 2000, IMSI received $3.8 million in tax refunds. The cash derived from
the sale of the Easy Language product and from the tax refunds was not
sufficient to improve the Company's working capital position during fiscal year
2000 mainly because of the substantial reclassification of the long-term
obligations to current, in connection with the defaults under the Baystar and
Silicon Valley Bank agreements. If IMSI succeeds in improving its financial
performance, management believes it will be able to obtain the additional
financing to meet the working capital needs of the Company. There can be no
assurance that IMSI will be successful in its efforts.
The forecast period of time through which the Company's financial resources will
be adequate to support working capital and capital expenditure requirements is a
forward-looking statement that involves risks and uncertainties, and actual
results could vary. The factors described in "Risk Factors" will affect future
capital requirements and the adequacy of available funds. IMSI can provide no
assurance that needed financing will be available. Furthermore, any additional
equity financing, if available, may be dilutive to shareholders, and debt
financing, if available, may involve restrictive covenants. If IMSI fails to
raise capital when needed, then lack of capital will have a material adverse
effect on IMSI's business, operating results, financial condition and ability to
continue as a going concern.
IMSI had no material commitments for capital expenditures. As of June 30, 2000,
the Company has no long-term debt. Over the next five years, IMSI has
obligations totaling $1.1 million under capital leases, and $1.1 million under
operating leases.
With the liquidation of the Company's European and South African subsidiaries,
the risks associated with transactions in foreign currencies have been
substantially reduced. Nonetheless, IMSI's operating results may be affected by
the risks customarily associated with international operations, including a
devaluation of the U.S. dollar, increases in duty rates, exchange or price
controls, longer collection cycles, government regulations, political
instability and changes in international tax laws.
FUTURE PERFORMANCE AND ADDITIONAL RISK FACTORS
PERFORMANCE AND OPERATING RESULTS CONTINUE TO DECLINE DURING FISCAL 1999 AND
2000. IMSI has experienced, and may continue to experience, deteriorating
operating results due to a variety of factors. The following table shows IMSI's
operating income (loss) and net income (loss) for the periods presented (in
thousands):
[Download Table]
FISCAL 2000 FISCAL 1999
----------------------------- -----------------------------
OPERATING NET INCOME OPERATING NET INCOME
QUARTER ENDING INCOME(LOSS) (LOSS) INCOME(LOSS) (LOSS)
-------------- ------------ ---------- ------------ ----------
September 30 $ (2,814) $( 1,853) $( 1,719) $( 1,106)
December 31 (5,069) (9,229) (6,033) (4,274)
March 31 (1,490) (5,594) (6,231) (10,739)
June 30 1,354 (195) (9,907) (10,847)
-------- -------- -------- --------
$( 8,019) $(16,871) $(23,890) $(26,966)
======== ======== ======== ========
Starting in fiscal year 1998, IMSI's operating results began to deteriorate. For
the quarter ended September 30, 1997, IMSI reported a net loss of approximately
$3.1 million, reflecting in part, charges related to the write-off of in-process
research and development, amounting to approximately $6.4 million from several
product acquisitions and licensing transactions. Although the Company was
profitable for the remaining quarters of fiscal year 1998, the amount of profits
declined after the quarter ending December 31, 1997. This negative trend
continued in 1999. During fiscal 1999, IMSI recorded an extraordinary expense of
$959,000 related to the issuance of its common stock at a discount for the
repayment of debt and for settlement of other contractual obligations. In fiscal
2000, the net losses continued, although IMSI did succeed in reducing the loss
for the quarter ended June 30, 2000. While IMSI is attempting to increase
revenues and return to profitability, there is no assurance that the Company
will achieve this objective. The cumulative operating losses of the last two
years and IMSI's large debt raise the question of the Company's ability to
continue as a going concern.
30
Factors that may cause fluctuations of, or a continuing decline in, operating
results in the future include, but are not limited to,
- Market acceptance of IMSI's products or those of it's
competitors;
- Timing of introductions of new products and new versions of
existing products;
- Expenses relating to the development and promotion of such new
products and new version introductions;
- Intense price competition and numerous end-user rebates;
- Projected and actual changes in platforms and technologies;
- Accuracy of forecasts of, and fluctuations in, consumer demand;
- Extent of third party royalty payments;
- Rate of growth of the consumer software and internet markets;
- Timing of orders or order cancellation from major customers;
- Changes or disruptions in the consumer software distribution
channels;
- Economic conditions, both generally and within the software or
internet industries.
IMSI may pay fees in advance or guarantee royalties, which may be substantial,
to obtain software licenses from third parties. Because of these and other
factors, the Company's operating results in any given period are difficult to
predict. As occurred in fiscal year 1999, any significant shortfall in revenues
and earnings from the levels expected by securities analysts and stockholders
could result in a substantial decline in the market price of the Company's
common stock.
Although IMSI suffered a general decline in revenues during fiscal year 1999 and
2000, historically the Company's business has been affected somewhat by seasonal
trends. These trends include higher net revenues in the fiscal quarter ended
December 31 as a result of strong calendar year-end holiday purchases by end
users of the Company's products. As a result, IMSI may experience lower net
revenues in the fiscal quarters ended March 31, June 30 and September 30. IMSI
normally ships products as the Company receives orders. Therefore, IMSI has
historically operated with little order backlog. Sales and operating results for
any quarter have depended on the volume and timing of orders received during
that quarter, which IMSI cannot predict with any degree of certainty. A
significant portion of IMSI's operating expenses are relatively fixed. Planned
expenditures are based on sales forecasts. If revenue levels are below
expectations, operating results are likely to be materially adversely affected.
Without growth in revenues in any particular quarter, IMSI's fixed operating
expenses could cause net income to decline when compared to the same period in
the previous year or the immediately preceding quarter. In such event, the
market price of the Company's common stock might be materially adversely
affected. Due to all of the foregoing factors, IMSI believes that
quarter-to-quarter comparisons of its operating results are not necessarily
meaningful and should not be relied upon as indications of future performance.
IMSI's relatively small size in an intensely competitive, rapidly changing
marketplace and its less recognized brand compared to larger and better
recognized competitors, creates the risk that IMSI may not be able to compete
successfully in the future. IMSI faces competition from a large number of
sources, and from larger competitors. Many of IMSI's current and potential
competitors have larger technical staffs, more established and larger marketing
and sales organizations, significantly greater financial resources, greater name
recognition, and better access to consumers than IMSI. IMSI's relatively small
size could adversely affect the Company's ability to compete with larger
companies, for sales to dealers, distributors, and retail outlets, and to
acquire products from third parties, who may desire to have their products sold
or published by larger entities. Larger companies may be more successful in
obtaining shelf space in retail outlets, and in competing for sales to dealers
and distributors.
Technological change constantly creates new opportunities, and can quickly
render existing technologies less valuable. Change requires IMSI to enhance the
Company's existing products and to offer new products on a timely basis. IMSI
has limited resources and therefore must restrict its product development
efforts to a relatively small number of projects.
31
IMSI competes with other software companies to acquire products or companies,
and to publish software developed by third parties. Competition to publish
software developed by third parties is primarily on the basis of brand-name
reputation, the terms offered to software developers, and the ability to market
new products.
The PC productivity software market is highly competitive. Important factors in
the market include product features and functionality, quality and performance,
reliability, brand recognition, ease of understanding and operation, rapid
changes in technology, advertising and dealer merchandising, access to
distribution channels and retail shelf space, marketing, pricing and
availability and quality of support services.
Each of IMSI's major products competes with products from major
independent software vendors:
- TurboCAD competes with AutoCAD from Autodesk Inc.
- FloorPlan competes with 3D Architect from Broderbund Software,
Inc., Home Architect from Sierra On-Line, Home Design 3D from
Expert Software, Inc. and Super Home Suite from Punch! Software.
- MasterClips competes with ClickArt from Broderbund Software
Inc., MegaGallery from Corel Corporation, Holy Cow! from
Macmillan Digital Publishing USA and Art Explosion from Nova
Development.
- TurboProject competes with Microsoft Project.
- WinDelete competes with Uninstaller from CyberMedia, Inc. and
CleanSweep and Norton Uninstaller from Symantec Corporation.
- Net Accelerator competes with SurfExpress from Connectix, Speed
Surfer from Kissco and Net.jet from Peak Technologies.
IMSI's strategy has been to develop productivity and utility applications that
do not compete directly with applications or features included in operating
systems and applications suites, offered by major software vendors such as
Microsoft, Lotus Development Corp. and Corel. However, such software vendors may
in the future choose to expand the scope and functionality of their products to
support some or all of the features currently offered by certain of IMSI's
products, which could adversely affect demand for the Company's products.
The software industry has limited barriers to entry. The availability of
personal computers with continuously expanding capabilities, at progressively
lower prices, contributes to the ease of market entry. IMSI believes that
competition in the industry will continue to intensify as a number of software
companies extend their product lines into additional product categories and as
additional competitors enter the market.
Use of the Internet reduces barriers to entry in the software market. Software
developers distribute their products online without relying on access to
traditional distribution networks. Because of the proliferation of competing
software developers, an increasingly large number of products compete for
limited shelf space.
There can be no assurance that IMSI's products will achieve or sustain market
acceptance, and generate significant levels of revenues in subsequent quarters,
or that the Company will have the resources required to compete successfully in
the future.
IMSI HAS REDUCED AVAILABILITY OF BANK FINANCING, CREATING A RISK OF LACK OF
LIQUIDITY. As discussed under "Liquidity and Capital Resources," IMSI is in
default under the Company's line of credit agreement with Union Bank of
California and under the loan agreements with Silicon Valley Bank and BayStar.
IMSI currently has no borrowing availability under these or any other credit
facilities. No assurance can be given that IMSI will be successful in obtaining
new sources of credit in the future. The Company's reduced availability of bank
financing could have a material adverse effect on management's ability to
execute its operating plans.
IMSI MUST RAISE ADDITIONAL FUNDS. ADDITIONAL DILUTION, OR SENIOR RIGHTS,
PREFERENCES OR PRIVILEGES MAY RESULT FROM ADDITIONAL EQUITY OR CONVERTIBLE DEBT
ISSUES. IMSI anticipates that available funds and cash flows generated from
operations will not be sufficient to meet the needs for working capital and
capital expenditures for the next twelve months. Therefore, the Company will
need to raise significant new working capital in the near future, to support
operations and fund its plans. Plans include the issuance of equity, sale or
licensing of product lines and the sale of assets, including IMSI's wholly-owned
subsidiary, ArtToday.com.
32
To raise funds, IMSI may issue equity or convertible debt. Also, the Company
intends to continue to sell or license product lines to generate funds. If IMSI
issues equity or convertible debt, the percentage of ownership of current
stockholders will be reduced. Stockholders will experience additional dilution,
and such securities may have rights, preferences or privileges senior to those
of the holders of IMSI's common stock. The Company may also raise funds by
selling assets.
IMSI does not know whether additional financing will be available on favorable
terms, or at all. If adequate funds are not available, or are not available on
acceptable terms, or if the Company is not able to sell assets, IMSI may not be
able to meet existing obligations, fund its Internet plans, develop or enhance
services or products, or respond to competitive pressures. Lack of funds could
have a material adverse effect on IMSI's business, operating results and
financial condition. See "Liquidity and Capital Resources."
POTENTIAL PENALTIES FOR AGREEMENTS RELATING TO REGISTRATION OF SHARES. IMSI
agreed to file one or more registration statements covering the resale of the
shares issued in 1999, including shares issued or issuable under agreements with
The Learning Company (now Mattel, Inc.), Capital Ventures International, BayStar
Capital, AmericDisc and Homestyles. The Company filed registration statements
pursuant to these agreements. The SEC Division of Corporate Finance had lengthy
and detailed comments related to the registration statements. As a result IMSI
has not been able to obtain the effectiveness of these registration statements,
and the Company may be liable for financial penalties or other payments under
the terms of the agreements. The aggregate amount of one or more of these
penalties or other payments could be a material amount. IMSI is negotiating with
some of these entities, including negotiations for the issuance of additional
shares of common stock, but there is no guarantee that such negotiations will be
successful. See Notes 5 and 6 to the consolidated financial statements.
IMSI BEARS RISKS ASSOCIATED WITH SOFTWARE DEVELOPMENT THAT CAN ADVERSELY AFFECT
FINANCIAL PERFORMANCE. IMSI's small size and limited resources, in a market with
rapidly changing technology, creates the risk of lack of customer acceptance of
the Company's products, because of potential failure to upgrade existing
products, or potential failure to develop new products. New products are
introduced frequently. New and emerging technologies create uncertainty.
Customer requirements and preferences change frequently. Product obsolescence
and advances in computer software and hardware require that the Company develops
new products and enhances existing products to remain competitive. The pace of
change is accelerating in both hardware and software. PC hardware steadily
advances in power and function. Software is increasingly complex and flexible.
Software development costs increase, and development takes longer.
Despite testing, errors or "bugs" may still be found in new software releases.
Delays in shipping new products or upgrades, as well as the discovery of errors
or "bugs" after release may result in adverse publicity, customer
dissatisfaction and delay or loss of product revenues. Errors or "bugs" could
require significant design modification or corrective releases, and could result
in an increase in product returns. IMSI cannot provide assurance that future
products and upgrades will be released in a timely manner or that they will
receive market acceptance, if and when released.
New products, capabilities or technologies may replace or shorten the life
cycles of IMSI's existing products. The announcement of new products by IMSI or
by the Company's competitors may cause customers to defer the purchase of
existing products. Rapid changes in the market, and availability of new products
increase the degree of consumer acceptance risk for IMSI's products.
There is a risk of failure in the Company's product development efforts. IMSI
may not have the resources required to respond to technological changes or to
compete successfully in the future. Delays or difficulties associated with new
product introductions or upgrades could have a material adverse effect on IMSI's
business, operating results and financial condition.
Because software development costs increase, and software market introduction
costs increase, the financial risks for new product development will increase.
The risks of delays in the introduction of such new products will also increase.
If IMSI fails to develop or acquire new products in a timely manner, as revenues
decrease from products reaching the end of their natural life cycles, the
Company's operating results will be adversely affected.
Because of IMSI's small size and capital resources relative to some of the
Company's competitors, IMSI's ability to avoid technological obsolescence
through acquisition or development of new products or upgrades of existing
products may be more limited than companies with more funds.
The Company's distribution channels carry competing product lines. There is
substantial pressure from distributors and retailers to obtain marketing and
promotional funds, price discounts and favorable return policies in connection
with access to shelf space, and in-store promotions and sales of products. These
pressures have an adverse impact on the net revenues and profitability of the
Company. Consolidation among the companies within IMSI's distribution channels
has reduced the number
33
of available distributors, which has increased the competition for shelf-space.
The Company cannot provide any assurance that these pressures will not continue
or increase.
Intense competition and continuing uncertainties characterize the distribution
channels through which consumer software products are sold. New resellers have
emerged, such as general mass merchandisers and superstores. New channels have
developed, such as the Internet. Large customers, such as retail chains and
corporate users, seek to purchase directly from software developers, instead of
purchasing from distributors or resellers. Although IMSI is attempting to take
advantage of these new distribution channels, no assurance can be given that
these efforts will be successful. Consolidations, and financial difficulties of
some distributors and resellers, are additional uncertainties.
In the past, IMSI allowed distributors to return products in exchange for new
products, or for credit towards future purchases, as part of stock balancing
programs. Also, IMSI provided price protection to distributors when the Company
reduced the price of products. End users may return products through dealers and
distributors within a reasonable period from the date of purchase for a full
refund. Retailers may return older versions of products. These practices are
standard in the software industry. IMSI made these allowances to remain
competitive with other software manufacturers. Also, there are shipping,
handling and refurbishment costs associated with receiving returns and
processing them for resale. While IMSI will not be directly involved with these
risks and costs because of the Company's new distribution strategies, the
Company's licensees and republishers will face these risks, and they could
significantly reduce the profitability of these agreements.
BECAUSE A SUBSTANTIAL AMOUNT OF THE COMPANY'S REVENUE DEPENDS ON A FEW LICENSEES
AND REPUBLISHERS, AN ADVERSE CHANGE IN THESE RELATIONSHIPS COULD MATERIALLY
AFFECT THE COMPANY. Sales through a limited number of licensees and republishers
are, and are expected to continue to be, a substantial amount of IMSI's
revenues. In fiscal year 1999, IMSI's top two customers were national
distributors and accounted for 27% of net revenues. In fiscal year 2000, the
Company's top two customers changed and at fiscal year end were comprised of an
online retailer and a software republisher. For the quarter ended June 30, 2000,
these top two customers accounted for approximately 18% of net revenues.
If IMSI is unable to collect receivables from any of the Company's largest
customers, then IMSI's operating results and financial condition could be
materially adversely affected. The loss of, or reduction in sales to, or any
other adverse change in IMSI's relationship with any of the Company's principal
customers, or principal accounts sold through such customers, could materially
adversely affect IMSI's operating results and financial condition.
A portion of IMSI's sales to end-users, Digital River, and several other large
customers are made on credit, with varying credit terms. IMSI's customers
compete in a volatile industry and are subject to the risk of bankruptcy or
other business failure. Some of IMSI's customers have experienced difficulties.
Although IMSI maintains a reserve for uncollectible receivables, the Company
cannot provide any assurance that the reserve will prove to be sufficient or
that the difficulties for these larger customers will not continue or will not
have an adverse effect on IMSI's business, operating results and financial
condition.
IMSI'S INTELLECTUAL PROPERTY MAY BE VULNERABLE TO UNAUTHORIZED USE, AND THE
RISKS OF INFRINGEMENT OR LAWSUITS. IMSI's ability to compete effectively depends
in part on the Company's ability to develop and maintain proprietary aspects of
IMSI's technology. To protect IMSI's technology, the Company relies on a
combination of copyrights, trademarks, trade secret laws, restrictions on
disclosure and transferring title, and other methods. IMSI holds no patents.
Copyright and trade secret laws afford limited protection. IMSI also generally
enters into confidentiality or license agreements with employees and
consultants. The Company generally controls access to and distribution of
documentation and other proprietary information.
Despite precautions, it may be possible for a third party to copy or otherwise
obtain and use IMSI's products or technologies without authorization, or to
develop similar technologies independently. IMSI does not include in its
products any mechanism to prevent or inhibit unauthorized copying. Policing
unauthorized use of the Company's technology is difficult. IMSI is unable to
determine the extent to which piracy of the Company's products exists. Software
piracy is a persistent problem. If a significant amount of unauthorized copying
of IMSI's products were to occur, the Company's business, operating results and
financial condition could be adversely affected.
In addition, effective copyright, trademark and trade secret protection may be
unavailable or limited in certain foreign countries. The global nature of the
Internet makes it virtually impossible to control the ultimate destination of
IMSI's products. There can be no assurance that the steps IMSI takes will
prevent misappropriation or infringement of IMSI's technology. Litigation may be
necessary to protect IMSI's trade secrets or to determine the validity and scope
of the proprietary rights of others. Such litigation could result in substantial
costs and diversion of resources that could have a material adverse effect on
IMSI's business, operating results and financial condition. See Note 13 to the
consolidated financial statements.
34
Software developers and publishers are increasingly subject to infringement
claims. From time to time, IMSI has received, and may receive in the future,
notice of claims of infringement of other parties' proprietary rights. IMSI
investigates claims and respond, as the Company deems appropriate. IMSI cannot
provide any assurance that infringement or invalidity claims, or claims for
indemnification resulting from infringement claims, will not be asserted or
prosecuted against the Company.
Defending such claims is expensive and diverts resources. If any valid claims or
actions were asserted against the Company, IMSI might seek to obtain a license
under a third party's intellectual property rights. IMSI cannot provide any
assurance, however, that under such circumstances a license would be available
on commercially reasonable terms, or at all.
IMSI provides its products to end users under non-exclusive licenses, which
generally are non-transferable and have a perpetual term. IMSI makes source code
available for certain of the Company's products. Providing source code increases
the likelihood of misappropriation or other misuse of IMSI's intellectual
property. IMSI licenses all of its products pursuant to shrink-wrap licenses, or
click-wrap licenses on the Internet, that are not signed by licensees and
therefore may be unenforceable under the laws of certain jurisdictions.
IMSI'S DEPENDENCE ON THIRD PARTY DEVELOPERS COULD HAVE A MATERIAL ADVERSE EFFECT
ON THE COMPANY'S BUSINESS, BECAUSE OF THE RISK OF LOSS OF LICENSES TO SOFTWARE
DEVELOPED BY THIRD PARTIES, OR LOSS OF SUPPORT FOR THOSE LICENSES. IMSI's
business strategy has historically depended in part on the Company's
relationships with third-party developers, who provide products that expand the
functionality of IMSI's software. Many of these licenses require payment of
royalties based on the number of products sold. In other cases, IMSI may be
required to pay substantial up-front royalties and development fees to software
developers before the commercial viability of their products has been tested.
If such products fail to achieve success, then IMSI could have substantial
charges against the Company's earnings. Licenses from third parties for several
of IMSI's products have limited terms and are non-exclusive. IMSI cannot provide
any assurance that these third-party software licenses for current products or
for new products will continue to be available on commercially reasonable terms,
or that the software will be appropriately supported, maintained or enhanced by
the licensors.
If IMSI were to lose licenses for software developed by third parties, then the
Company would have increased costs and lost sales. Product shipments would be
delayed or reduced until equivalent software could be developed, which would
have a material adverse effect on IMSI's business, operating results and
financial condition.
Talented development personnel are in high demand. IMSI cannot provide any
assurance that independent developers will be able to provide development
support to the Company in the future. If sales of software utilizing third-party
technology increase disproportionately, operating income as a percent of revenue
may be below historical levels due to third-party royalty obligations.
THE COMPANY'S USE OF DEVELOPMENT TEAMS OUTSIDE THE UNITED STATES INVOLVES RISK,
INCLUDING CONTROL AND COORDINATION RISKS. IMSI programs code and quality tests
most of the Company's products outside the United States. IMSI uses contract
programmers in development centers in Russia, and has also used programmers in
Ukraine, India, and other countries. The cost of programmers outside of the
United States is lower than the cost of programmers in the United States.
Relying on foreign contractors presents a number of risks. Managing, overseeing
and controlling the programming process are more difficult because of the
distance between IMSI management and the contractors. IMSI's contractors have
different cultures and languages from the Company's managers, making
coordination more difficult.
IMSI's agreements provide that the Company owns the source code developed by the
programmers. But the location of the source code outside the United States makes
it more difficult for IMSI to ensure that access to the Company's source code is
protected. If IMSI loses the services of these programmers, then IMSI's
business, operating results and financial condition would be materially
adversely affected. The Company probably could find other programmers in the
United States or in other countries, but the costs could significantly increase
IMSI's expenses.
IMSI'S INTERNET STRATEGY CREATES ADDITIONAL COSTS AND INTRODUCES NEW
UNCERTAINTIES WITH NO ASSURANCE OF RESULTS. IMSI's marketplace now has a higher
emphasis on the Internet, on Internet-related services, and on content tailored
for the Internet. The Company plans to take advantage of opportunities created
by the Internet and online networks. During fiscal year 1999 and 2000, IMSI
incurred, and expects in the future to incur, significant costs for the
Company's Internet infrastructure. These costs include additions to hardware,
increases in Internet personnel, acquisitions and cross licenses to drive
traffic to IMSI's websites, and a transition to an Internet sales and marketing
strategy.
IMSI cannot provide any assurance that the Company's Internet strategy will be
successful, or that the costs and investments in
35
this area will provide adequate, or any, results. Delivery of software using the
Internet will necessitate some changes in IMSI's business. These changes include
addressing operational challenges such as improving download time for pictures,
images, and programs, ensuring proper regulation of content quality and
developing sophisticated security for transmitting payments. If IMSI fails to
adapt to and utilize such technologies and media successfully and in a timely
manner, then the Company's competitive position and financial results could be
materially and adversely affected.
IMSI MAY NOT BE ABLE TO ATTRACT AND RETAIN KEY PERSONNEL. IMSI's success depends
to a significant extent on the performance and continued service of the
Company's senior management and key employees. IMSI maintains no key person
insurance. The Company does not have employment agreements or non-competition
agreements with all of its key employees. Competition for highly skilled
employees with technical, Internet, management, marketing, sales, product
development and other specialized training is intense, and the supply is
limited.
The strong demand for these skills in the United States continued during fiscal
2000. IMSI cannot provide any assurance that the Company will be successful in
attracting, motivating and retaining such personnel. IMSI's significant losses
in fiscal 2000 and 1999 and the decline in IMSI's stock price are additional
risks that have contributed to high staff turnover in areas such as accounting
and research and development. This turnover has contributed to disruption in
continuity in IMSI's knowledge base and may continue to do so in the future.
IMSI's board of directors and management experienced significant changes in
fiscal 2000. As previously reported in a press release and in the quarterly
Report on Form 10-Q for the period ended March 31, 2000, IMSI announced the
appointment of Geoffrey Koblick as the Company's Chief Executive Officer
replacing Mr. Costa John who resigned.
IMSI has historically experienced difficulty in attracting highly qualified
programmers and software engineers in the U.S. The Company cannot provide any
assurance that it will be successful in attracting, motivating and retaining
such personnel. IMSI cannot provide any assurance that one or more key employees
will not leave the Company or compete against IMSI. If the Company fails to
attract qualified employees or to retain the services of key personnel, then
IMSI's business, operating results and financial condition could be materially
adversely affected.
DIRECTORS AND OFFICERS HAVE A SIGNIFICANT INFLUENCE OVER THE COMPANY, BECAUSE
THEY BENEFICIALLY OWN A SIGNIFICANT PERCENTAGE OF SHARES. As of June 30, 2000,
the present directors and executive officers of IMSI and their respective
affiliates, in the aggregate, beneficially own approximately 19% of the
outstanding common stock. As a result, these shareholders may possess influence
over IMSI. Such influence may have the effect of delaying or preventing a change
in control of IMSI, impeding a merger, consolidation, takeover or other business
combination involving IMSI or discouraging a potential acquirer from making a
tender offer or otherwise attempting to obtain control of IMSI.
IMSI'S RELIANCE ON OUTSOURCING COULD MATERIALLY ADVERSELY AFFECT OPERATING
RESULTS BECAUSE OF LACK OF SUPPLY. IMSI outsources most of the production of the
Company's products. Production primarily involves duplication of media and
printing user manuals and packaging materials. In July 1999, IMSI and
DisCopyLabs ("DCL") finalized an agreement under which DCL assumed most of
IMSI's fulfillment, warehousing, and shipping functions. Due to this change,
IMSI closed its primary warehouse in Vacaville, California during April 2000.
Subsequently, IMSI terminated the DCL agreement and entered into a similar
agreement with MicroWeb. IMSI intends to continue outsourcing in the future, as
long as it is economical to do so. IMSI believes that the Company has adequate
alternative suppliers of outsourcing services. But the loss of a supplier, or
the inability to obtain contract services, could materially adversely affect
IMSI's operating results.
Systems integration risks and inventory and fulfillment risks may affect the
ability to ship products effectively and cause costly delays or cancellation of
customer orders. IMSI's divestiture of non-core products may reduce unit sales
to the point that outsourced costs of production may increase.
IMSI'S COMMON STOCK PRICE IS HIGHLY VOLATILE AND IS SUBJECT TO WIDE FLUCTUATIONS
AND MARKET RISK. The market price of the Company's common stock is highly
volatile. IMSI's stock is subject to wide fluctuations in response to factors
such as:
- Actual or anticipated variations in operating results,
- Announcements of technological innovations,
- New products or services introduced by the Company or its
competitors,
- Changes in financial estimates by securities analysts,
36
- Conditions and trends in the software market,
- General market conditions, and
- Other factors, such as recessions, interest rates or
international currency fluctuations.
Historically, the trading volume of IMSI's common stock has been very small. The
market for the Company's common stock has been materially less liquid than that
of most other publicly traded companies. Small trading volume and a less liquid
market may amplify price changes in IMSI's stock. If a significant amount of
IMSI's common stock is sold, then the Company's stock price could decline
significantly.
The NASDAQ Stock Market experiences extreme price and volume fluctuations that
have particularly affected the market prices for stock in technology companies.
Price fluctuations in technology stock prices are often unrelated or
disproportionate to the operating performance of technology companies. Although
the trading prices of many technology companies' stocks have retreated from the
historical highs achieved earlier this year, they continue to reflect price to
earnings ratios substantially above historical levels. IMSI cannot provide any
assurance that these trading prices and price to earnings ratios will be
sustained. The market price of the Company's common stock may be adversely
affected by these broad market factors.
On March 28, 2000, IMSI was de-listed from the OTC Bulletin Board and began
trading on the National Quotation Bureau Pink Sheets ("Pink Sheets"), because
the Company had failed to file its December 31, 1999 Form 10-Q on a timely
basis. As a result, investors could find it more difficult to dispose of, or to
obtain accurate quotations of the market value of, the stock as compared to
securities that are traded on the NASDAQ trading market or on an exchange. In
addition, trading in IMSI's common stock is covered by what is are commonly
known as the "Penny Stock Rules." These rules require brokers to provide
additional disclosure in connection with any trades involving a stock defined as
a "penny stock," including the delivery, prior to any penny stock transaction,
of a disclosure schedule explaining the penny stock market and the risks related
to trading in these stocks.
IMSI'S REGISTRATION OF A SIGNIFICANT NUMBER OF SHARES FOR POSSIBLE PUBLIC RESALE
COULD ADVERSELY AFFECT THE MARKET PRICE OF THE COMPANY'S COMMON STOCK. On June
8, 1999, IMSI filed a registration statement covering the possible resale from
time to time of approximately 1,100,857 outstanding shares of common stock held
by, and approximately 1,223,966 shares that may be issued in the future to, the
selling stockholders named in that registration statement. On June 25, 1999,
IMSI filed another registration statement covering possible resale of
approximately 85,677 outstanding shares held by the selling stockholders,
263,000 shares that may be issued if warrants are exercised by the selling
stockholders, 658,362 shares issuable on conversion of a note held by the
selling stockholders, and 490,151 shares issuable because of price adjustments
in agreements with the selling stockholders named in that registration
statement. On October 6, 2000 IMSI had 9,693,892 shares outstanding. The total
shares covered by those two registration statements, 3,822,013 shares, represent
about 39% of the currently outstanding shares. While the Company failed in its
attempts to obtain effectiveness of these registration statements, IMSI will
have to file registration statements in the future and the resale of the shares
covered by those registration statements could adversely affect the market price
of the Company's common stock.
IMSI'S BOARD OF DIRECTORS MAY ISSUE PREFERRED STOCK TO PREVENT A TAKEOVER. The
Board of Directors is authorized to issue up to 20,000,000 shares of Preferred
Stock and to determine the price, rights, preferences, privileges and
restrictions, including voting rights, of those shares without any further vote
or action by the shareholders. The rights of the holders of common stock will be
subject to, and may be adversely affected by, the rights of the holders of any
Preferred Stock that may be issued in the future. The issuance of Preferred
Stock, while providing desirable flexibility in connection with possible
acquisitions and other corporate purposes, could have the effect of delaying,
deferring or preventing a change in control of IMSI. IMSI has no current plans
to issue shares of Preferred Stock.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the past, IMSI was exposed to the impact of interest rate and foreign
currency fluctuations. IMSI's objective in managing its exposure to interest
rate changes and foreign currency fluctuations was to limit the impact of
interest rate changes on earnings and cash flow and to lower its overall
borrowing costs. IMSI's major market risk exposure is changing interest rates in
the United States, which would change interest expense on IMSI's line of credit
and term loan. Most of IMSI's international revenues are now denominated in U.S.
Dollars. Consequently the exposure to the impact of foreign currency
fluctuations is minimal.
IMSI does not hedge interest rate or foreign currency exposure.
37
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements and the financial statement schedule are attached as an
exhibit at Item 14(a).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On April 19, 1999, Deloitte & Touche LLP ("D&T") informed IMSI that it had
resigned as IMSI's independent accounting firm. D&T's audit report on IMSI's
financial statements for the fiscal year ended June 30, 1998 did not contain an
adverse opinion or a disclaimer of opinion and was not qualified or modified as
to uncertainty, audit scope or accounting principles.
In connection with the audits of IMSI's consolidated financial statements for
the fiscal year ended June 30, 1998, and in the interim periods subsequent to
June 30, 1998, preceding the date of D&T's resignation, there were no
"reportable events," as that term is defined in the instructions to Form 8-K and
the applicable regulations. In connection with the audit of IMSI's consolidated
financial statements for the fiscal year ended June 30, 1998, and in the interim
periods subsequent to June 30, 1998, preceding the date of D&T's resignation,
there were no "disagreements" with D&T on any matter of accounting principles or
practices, financial statement disclosure or auditing scope or procedure which,
if not resolved to the satisfaction of D&T would have caused D&T to make
reference to the matter in their report, except as follows:
On September 29, 1998, The Learning Company ("TLC") paid IMSI
approximately $1.69 million, representing amounts due to IMSI from the
sale of the Family Heritage line of software products by IMSI to TLC
($1.26 million) and other existing contractual agreements ($430,000).
IMSI had not recorded revenues or receivables for such amounts due from
TLC in its financial statements for prior periods. On October 2, 1998,
TLC and IMSI entered into a software license agreement whereby TLC sold
Org Plus, a software program, to IMSI in exchange for $3.5 million as
follows: $1.7 million paid by IMSI on October 2, 1998, and $450,000 due
on each of January 1, 1999, April 1, 1999, July 1, 1999 and October 1,
1999. IMSI initially believed that revenue should be recognized on a
cash basis in the quarter ended September 30, 1998 for the $1.69 million
TLC payment, and that the full acquisition price of $3.5 million, for
IMSI's acquisition of Org Plus should be accounted for separately in the
quarter ended December 31,1998. D&T's position was that the two
transactions should be treated as one transaction in the quarter ended
December 31, 1998 due to several factors. The audit committee of the
Company's Board of Directors discussed the subject matter of the
accounting disagreement with Deloitte & Touche. IMSI discussed the
subject matter of the accounting disagreement with other independent
accounting firms. After these discussions with D&T, the Company agreed
and accounted for the above transactions in accordance with D&T's
position. Accordingly, IMSI did not recognize revenue for the quarter
ended September 30, 1998 for the cash receipt from TLC. In the quarter
ending December 31, 1998, IMSI recorded the acquisition of OrgPlus at a
net amount of $1,810,000.
On May 5, 1999, the Board of Directors of IMSI, pursuant to the recommendation
of the audit committee, approved a resolution authorizing management to engage
Grant Thornton LLP ("Grant Thornton") as IMSI's independent auditor, upon such
terms as may be negotiated by management. On May 5, 1999, the Company appointed
Grant Thornton as IMSI's independent auditor. IMSI previously reported on a Form
8-K filed April 26, 1999, that on April 19, 1999, IMSI received a letter from
Deloitte & Touche LLP ("D&T"), resigning as IMSI's independent accounting firm.
During IMSI's two most recent fiscal years and the subsequent interim period
before engaging Grant Thornton, neither IMSI nor anyone acting on its behalf
consulted Grant Thornton regarding (i) either: the application of accounting
principles to a specified transaction, either completed or proposed; or the type
of audit opinion that might be rendered on IMSI's financial statements; or (ii)
any matter that was either the subject of a disagreement or a reportable event
(as defined in Item 304 of Regulation S-K).
38
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
On February 15, 2000, Geoffrey Koblick was named president, chief executive
officer, chief financial officer and a member of the IMSI's board of directors.
Geoffrey Koblick replaced Costa John, who served as president, chief executive
officer and chief financial officer. Mr. Koblick, who founded IMSI in 1983, had
stepped down as chief operating officer and chairman of the board in May 1999.
Also on February 15, 2000, Mark Boyer, a principal in ROI capital, one of IMSI's
largest shareholders, was appointed to the board of directors. Additionally,
IMSI's other directors, Costa John, Bill Lane, Abe Ostrovsky and Lisa Crane
resigned on February 15, 2000. See Form 8-K dated February 15, 2000. On February
17, 2000, Jeffrey Morgan joined IMSI as chief financial officer, assuming those
responsibilities from Geoffrey Koblick.
DIRECTORS
The names of all members of the Board of Directors of IMSI, and information
about them as of June 30, 2000 are set forth below:
[Download Table]
NAME AGE OCCUPATION SINCE
Mark T. Boyer(1)(2) 43 President and Director of ROI 2000
Capital Management
Richard M. Hall(1)(2) 46 Vice President and General 2000
Manager of Miadora
Robert Mayer(1)(2) 46 Vice President of Adventa.com, 2000
Inc.
Geoffrey B. Koblick 46 President and Chief Executive 2000
Officer of the Company
Michael Gariepy 48 Vice President of the Company 2000
(1) Member of the Compensation Committee. (2) Member of the Audit Committee.
Mark Boyer became a director in February 2000. Mr. Boyer has been the President
and Director of ROI Capital Management since 1992. Previously, Mr. Boyer was
General Partner and Portfolio Manager with Volpe, Welty & Company in San
Francisco, California and he also worked as an analyst and fund manager with
Fidelity Management Research, Inc. in Boston, Massachusetts. Mr. Boyer received
his Bachelor of Arts degree, magna cum laude, in finance, accounting and
computer sciences from American University in 1980 and earned his MBA degree in
finance and accounting from Columbia University in 1982.
Richard Hall became a director in February 2000. Mr. Hall has served as Vice
President and General Merchandise Manager of Miadora since October 1999. From
1976 to 1999, Mr. Hall was with the Macy's West Division of Federated Department
Stores, most recently as Vice President and Divisional Merchandise Manager. Mr.
Hall received his Bachelor of Science degree in economics from the University of
Santa Clara in 1976.
Robert Mayer became a director in February 2000. Mr. Mayer served as the
Company's Vice President of Sales from 1990 until 1995 and then as Executive
Vice President of Worldwide Sales until March 2000. Since then, Mr. Mayer has
continued to serve the Company as a part-time consultant assisting IMSI in
international sales. Mr. Mayer also served as a director from 1985 until May
1999. Mr. Mayer received a Bachelors of Arts degree from the University of
California, and Masters of Science degree from the University of Washington.
On February 15, 2000 Mr. Koblick was named President, Chief Executive Officer,
Chief Financial Officer and a member of IMSI's Board of Directors. Mr. Koblick
was Chairman of the Board of Directors and Secretary of IMSI from the Company's
inception in 1982 until May 1999. In addition, Mr. Koblick served as the
Company's President from 1982 through September 1987 and then again from July
1988 to June 1990. Also, Mr. Koblick served as General Counsel from 1982 until
May 1999, and as Chief Operating Officer from 1988 to May 1999. From July 1999
until January 2000, Mr. Koblick was a consultant to IMSI. From 1981 to 1982, Mr.
Koblick was legal counsel at MicroPro International Corporation (which later
changed its name to WordStar International). Between 1979 and 1981, he practiced
law in San Francisco with the firm of Gunheim & Yturbide.
Michael Gariepy became a director in May 2000. Mr. Gariepy founded Zedcor, Inc.
a publisher of software including
39
DeskGallery, DeskPaint, DeskWorks, and FutureBASIC. In 1996, Zedcor created
ArtToday.com, which was acquired by IMSI in 1998. In March 2000, IMSI appointed
Mr. Gariepy as Vice President and General Manager of the Company's home design
visualization group, which is responsible for developing Design.NET.
All directors hold office until the next annual meeting of shareholders and
until their successors are elected and qualified, or until their earlier
resignation, removal or death. Executive officers are chosen by, and serve at
the discretion of, the Board.
EXECUTIVE OFFICERS
The names of the Executive Officers of IMSI during fiscal 2000 and information
about them are set forth below:
Geoffrey Koblick was Chairman of the Board of Directors and Secretary of IMSI
from its inception in 1982 until May 1999. Mr. Koblick served as President of
IMSI from 1982 through September 1987, and from July 1988 to June 1990, as
General Counsel from 1982 to May 1999, and as Chief Operating Officer from 1988
to May 1999. From July 1999 until January 2000 Mr. Koblick served as a
consultant to IMSI. On February 15, 2000 Mr. Koblick returned to IMSI as
President and Chief Executive Officer.
Michael Gariepy co-founded Zedcor, Inc., a publisher of software including
DeskGallery, DeskPaint, DeskWorks, and FutureBASIC. In 1996 Zedcor created
ArtToday.com, which was acquired by IMSI in 1998. In March 2000, IMSI appointed
Mr. Gariepy as Vice President and General Manager of the Company's home design
visualization group, which is responsible for developing Design.NET. In May
2000, Michael Gariepy was appointed as a director of IMSI.
Peter Gariepy co-founded Zedcor, Inc. a publisher of software including
DeskGallery, DeskPaint, DeskWorks, and FutureBASIC. In 1996, Zedcor created
ArtToday.com, which was acquired by IMSI in 1998. Before co-founding Zedcor,
Peter Gariepy established Software Unlimited, one of the nation's first software
stores. He later managed computer retail stores for Valmont Industries and Bell
Atlantic Corporation. In August 1999, ArtToday appointed Peter Gariepy as
President.
Jeffrey B. Morgan joined IMSI in February 2000 as Chief Financial Officer. Mr.
Morgan has over 25 years of experience in finance and operations with both large
and small companies. This experience includes eleven years of progressively
increasing financial responsibilities with Chevron Corporation culminating with
responsibility for Accounting Principles and Policy and Regulatory Reporting and
Analysis for this multi-national company. Mr. Morgan earned his B.S. degree and
an MBA, with an emphasis in finance, from the University of California at
Berkeley.
Kathleen Mountanos has been with IMSI for the last 7 of her 12 years in the
software industry. During her tenure, Kathleen expanded the IMSI sales
department to include corporate, government, and educational sales divisions.
She is currently Vice President of North American Sales. Ms. Mountanos received
her BA in Liberal Arts from St. Mary's College, and her Master's Degree from the
University of San Francisco.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's directors and executive
officers, and persons who own more than ten percent of a registered class of the
Company's equity securities, to file with the Commission initial reports of
ownership and reports of changes in ownership of the Company's Common Stock and
other equity securities of the Company. Officers, directors and greater than ten
percent shareholders are required by the Commission's regulations to furnish the
Company with copies of all Section 16(a) forms they filed.
The Company has not been provided with copies of any forms filed by officers,
directors, or ten percent shareholders. The Company has informed the officers,
directors, and ten percent shareholders of the filing requirements. Each
delinquent filer has represented that they will file the required forms and
provide the copies to the company within three days of such filings.
40
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth all compensation awarded, earned or paid for
services rendered in all capacities to the Company and its subsidiaries during
each of the fiscal years ended June 30, 2000, 1999 and 1998 to (i) the Company's
chief executive officers during fiscal 2000; (ii) the Company's four most highly
compensated executive officers other than the CEO who were serving as executive
officers at the end of fiscal 2000, and (iii) the two additional individuals
(Martin Sacks and Robert Mayer) who would have been highly compensated
individuals but were no longer employees at the end of fiscal 2000
(collectively, "Named Persons").
SUMMARY COMPENSATION TABLE
[Enlarge/Download Table]
ANNUAL COMPENSATION LONG-TERM
------------------------------------------------------------- COMPENSATION
OTHER AWARDS
NAME AND FISCAL ANNUAL SECURITIES
PRINCIPAL POSITIONS YEAR SALARY($)(1) BONUS($)(1) COMPENSATION($)(2) UNDERLYING OPTIONS(11)
------ ------------ ----------- ------------------ -----------------------
Geoffrey B. Koblick(3) 2000 222,099 -- 7,661 280,750
President and Chief 1999 200,000 9,706 7,252 --
Executive Officer 1998 176,667 38,937 6,256 --
Michael Gariepy(4) 2000 77,682 -- -- 191,672
Vice President and General 1999 127,421 -- 2,990 --
Manager of Design.net 1998 87,465 -- 5,980 --
Project
Peter Gariepy(5) 2000 133,000 5,000 -- 10,672
President of ArtToday.com 1999 177,816 -- 2,990 --
1998 66,672 -- 5,980 15,000
Jeffrey Morgan(6) 2000 43,901 -- -- 125,000
Kathleen Mountanos(7) 2000 130,516 56,987 -- 132,625
Vice President North 1999 68,282 68,554 -- --
American Sales 1998 55,997 57,168 -- --
Costa John(8) 2000 154,202 35,000 4,355 --
President and Chief 1999 66,667 -- -- --
Executive Officer
Martin Sacks(9) 2000 140,761 -- 2,901 2,000
Chairman of the Board of 1999 220,000 9,706 5,141 --
Directors and President of 1998 200,000 48,137 7,346 --
ArtToday.com
Robert Mayer(10) 2000 162,763 -- 5,032 132,500
Executive Vice President, 1999 180,009 4,162 7,367 --
Worldwide Sales 1998 141,250 62,001 7,603 --
(1) Amounts stated above are the actual amounts received. Amounts paid are
based upon the following annual salaries: Koblick $220,000, M. Gariepy
$180,000, P. Gariepy $149,000, Mountanos $144,000, Morgan $130,000, John
$220,000, Sacks $220,000 and Mayer $180,000. Mr. Koblick's salary for
2000 includes $108,333 of severance.
(2) Includes payments of medical and dental insurance premiums by the
Company.
(3) Mr. Koblick was the previous Chief Operating Officer, Chairman of the
Board of Directors and General Counsel until May 1999. From July 1999
until January 2000, Mr. Koblick was paid severance, and he served as a
Consultant to the Company. Mr. Koblick rejoined the Company as President
and Chief Executive Officer on February 15, 2000.
(4) Mr. Michael Gariepy served as Vice President of Sales for ArtToday.com
until August 2, 1999. Mr. Gariepy rejoined the Company in his current
role on February 28, 2000.
(5) Mr. Peter Gariepy has been with ArtToday.com since the company's
founding in 1987 and was named President in July
41
1999.
(6) Mr. Morgan joined IMSI in February 2000 as Chief Financial Officer.
(7) Ms. Mountanos has been employed by IMSI for 7 years, and currently
serves as Vice President of North American Sales.
(8) Mr. John served as President and Chief Executive Officer from May 1999
until February 15, 2000.
(9) Mr. Sacks acted as President and Chief Executive Officer until May 1999.
At that time Mr. Sacks became Chairman of the Board of Directors and
President of ArtToday.com until January 26, 2000.
(10) Mr. Mayer worked for IMSI on a full-time basis through March 31, 2000,
at which time he became a consultant to the Company.
(11) Includes the following number of options to acquire shares of the
Company's subsidiary ArtToday.com: Koblick 2,000; M. Gariepy 6,672; P.
Gariepy 10,672; Sacks 2,000; all exercisable at $15.43 per share.
42
OPTION GRANTS
The following table sets forth information regarding individual grants of
options to acquire the Company's Common Stock during fiscal 2000 to each Named
Person.
OPTION GRANTS IN LAST FISCAL YEAR
[Enlarge/Download Table]
RATES OF STOCK PRICE
APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM(5)
----------------- --------------------
% OF TOTAL EXERCISE
OPTIONS GRANTED OR
OPTIONS TO EMPLOYEES BASE PRICE EXPIRATION
NAME GRANTED(1)(2) IN FISCAL YEAR(3) ($/SHR)(4) DATE 5%($) 10%($)
------------------- ------------- ----------------- ---------- ---------- ------- -------
Geoffrey B. Koblick 278,750 11% 0.75 2/26/10 131,000 333,000
Michael Gariepy 185,000 8% 0.75 2/26/10 87,000 221,000
Robert Mayer 132,500 5% 0.75 2/26/10 62,000 158,000
Jeffrey Morgan 125,000 5% 0.75 2/26/10 59,000 149,000
Kathleen Mountanos 35,625 2% 1.625 12/13/09 36,000 92,000
Kathleen Mountanos 97,000 4% 0.75 2/26/10 46,000 116,000
(1) Options vest over four years.
(2) Does not include options held by Geoffrey B. Koblick and Michael Gariepy
in the Company's subsidiary, ArtToday.com, exercisable at $15.43 per
share.
(3) The Company granted options to purchase 3,130,883 shares of Common Stock
to employees during fiscal 2000. The Company also cancelled 2,761,402
options during fiscal 2000. Most of these cancellations related to
employees who were terminated or resigned. A portion of the cancelled
options related to continuing IMSI employees and IMSI replaced these
options at reduced exercise prices. The options granted during fiscal
year 2000, net of the cancellation of these options, were 2,472,274.
(4) The exercise price may be paid in cash, or the Administrator of the Plan
may in its discretion authorize the acceptance of full recourse notes,
securities, surrender of shares issuable upon exercise with a fair
market value equal to the exercise price, or any other property.
(5) The 5% and 10% assumed compound rates of stock appreciation are mandated
by the rules of the Securities and Exchange Commission and do not
represent the Company's estimate or projection of future Common Stock
prices.
43
OPTIONS EXERCISED
The following table sets forth information with respect to the options exercised
during fiscal 2000 by the Named Persons, including the aggregate value of gains
on the date of exercise. In addition, this table includes the number of shares
covered by both exercisable and non-exercisable stock options as of June 30,
2000. Also reported are the values for "in-the-money" options, which represent
the positive spread between the exercise price of any such existing stock
options and the fiscal year-end price of the Common Stock.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
FY-END OPTION/SAR VALUES
[Enlarge/Download Table]
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS/SARS IN-THE-MONEY OPTIONS
AT JUNE 30, 2000(1)(2) AT JUNE 30, 2000($)(3)
---------------------- ----------------------
VALUE
NAME EXERCISE # REALIZED($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- ---------- ----------- ------------------------- -------------------------
Geoffrey B. Koblick -- -- 0/410,000 0/20,500
Michael Gariepy -- -- 0/200,000 0/10,000
Robert Mayer 0/132,500 0/6,625
Kathleen Mountanos -- -- 19,400/131,100 0/4,850
Jeffrey Morgan -- -- 0/125,000 0/6,250
(1) These options, which have a four-year vesting period, become exercisable
over time based on continuous employment with the Company and in certain
cases are subject to various performance criteria or vest in full upon
acquisition of the Company.
(2) Does not include options held by Geoffrey B. Koblick and Michael Gariepy
in the Company's subsidiary, ArtToday.com, exercisable at $15.43 per
share.
(3) Based on the difference between the market price of the Common Stock at
June 30, 2000 ($.80 per share), and the aggregate exercise prices of
options shown in the table.
44
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of September 20, 2000, the beneficial
ownership of the Company's Common Stock by (i) 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, (ii) each director or nominee, (iii) each other
executive officer named in the Summary Compensation Table, above in Item 11, and
(iv) 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 business address of Capital Ventures International is in
care of Heights Capital Management, 425 California Street, Suite 1100, San
Francisco, California 94104. The business address of BayStar Capital L.P. is 505
Montgomery Street, 20th Floor, San Francisco, California 94111. The business
address of ROI Capital Management is 17 East Sir Francis Drake Boulevard, Suite
225, Larkspur, California 94939. The business address of Messrs. Mayer, Koblick,
Michael Gariepy, Mr. Morgan, and Ms. Mountanos is 75 Rowland Way, Novato,
California 94945. The business address of Mr. Sacks is 20 Sunnyside Avenue,
Suite G, Mill Valley, California, 94941. The business address of Mr. Peter
Gariepy is 3720 North Dodge, Suite Z, Tuscon Arizona, 85716. The business
address of Mr. Boyer is 17 East Sir Francis Drake Boulevard, Suite 225,
Larkspur, California 94939. The business address of Mr. Hall is 2600 Campus
Drive, Suite 205, San Mateo, California, 94413.
[Enlarge/Download Table]
NAME AND ADDRESS
OF BENEFICIAL OWNER SHARES BENEFICIALLY OWNED(1) PERCENTAGE OF CLASS(1)
------------------- ---------------------------- ----------------------
Capital Ventures, Inc.(2) 2,631,291 27.41%
BayStar Capital, L.P.(3) 734,004 7.38%
ROI Capital Management 521,765 5.51%
Robert Mayer(4) 464,694 4.88%
Geoffrey Koblick(5) 454,600 4.76%
Michael Gariepy(6) 402,306 4.23%
Martin Sacks(7) 281,404 2.96%
Peter Gariepy(8) 194,954 2.06%
Mark Boyer 40,500 *
Kathleen Mountanos(9) 24,125 *
Richard Hall 7,663 *
Jeffrey Morgan -- --
All directors and executive
officers as a group (8 persons)(10) 1,870,246 19.25%
---------------------------------------------------
* Less than one percent of the Company's outstanding common stock.
(1) Assumes that the person has exercised, to the extent exercisable on or
before 60 days from the date of the table, all options, convertible
securities, and warrants to purchase Common Stock held by such person
and that no other person has exercised any outstanding options,
convertible securities or warrants.
(2) Includes 131,291 shares issuable to Capital Ventures, Inc. on the
exercise of a warrant.
(3) Includes 230,120 shares issuable to BayStar on the conversion of a note
and 250,000 shares issuable to BayStar on the exercise of a warrant.
(4) Includes 62,608 shares issuable upon the exercise of stock options held
by Mr. Mayer within 60 days from the date of the table.
(5) Includes 82,000 shares issuable upon the exercise of stock options held
by Mr. Koblick within 60 days from the date of the table.
(6) Includes 40,000 shares issuable upon the exercise of stock options held
by Mr. Michael Gariepy within 60 days from the date of the table.
(7) Includes 39,521 stock options exercised by Mr. Sacks in the first
quarter of fiscal year 2001.
(8) Includes 3,000 shares issuable upon the exercise of stock options held
by Mr. Peter Gariepy within 60 days from the date of the table.
(9) Includes 20,525 shares issuable upon the exercise of stock options held
by Ms. Mountanos within 60 days from the date of the table.
(10) Includes 247,654 shares subject to options so exercisable held by all
officers and directors as a group.
45
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There was a severance agreement between IMSI and Geoffrey Koblick. Between May
1999 and January 2000, Mr. Koblick acted as a consultant to the Company and
received $150,000 as separation payments. IMSI also forgave a promissory note in
the amount of $35,000 owed by Mr. Koblick. During the severance period, Mr.
Koblick was entitled to exercise his stock options and vesting continued. Mr.
Koblick returned as President and CEO on February 15, 2000.
46
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
[Download Table]
(a) DOCUMENTS FILED AS PART OF THIS ANNUAL REPORT ON FORM 10-K:
1. Financial Statements
Independent Auditors' Report for the years ended June 30, 2000 and 1999 50
Independent Auditors' Report for the year ended June 30, 1998 51
Consolidated Balance Sheets at June 30, 2000 and 1999 52
Consolidated Statements of Operations for the years ended June 30, 2000,
1999, and 1998 53
Consolidated Statements of Shareholders' Equity for the years ended June
30, 2000, 1999, and 1998 54
Consolidated Statements of Cash Flows for the years ended June 30, 2000,
1999, and 1998 55-56
Notes to Consolidated Financial Statements 57
2. Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts for the years ended
June 30, 2000, 1999, and 1998 81
(b) REPORTS ON FORM 8-K: 82
(c) EXHIBITS: SEE EXHIBIT INDEX 84
47
INDEPENDENT AUDITORS' REPORT
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,
2000 and 1999, and the related consolidated statements of operations,
shareholders' equity, and cash flows for each of the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
International Microcomputer Software, Inc. and subsidiaries as of June 30, 2000
and 1999, and the consolidated results of their operations and their
consolidated cash flows for the years then ended in conformity with accounting
principles generally accepted in the United States of America.
We have also audited Schedule II as listed in the Index at Item 14(a) 2 for the
years ended June 30, 2000 and 1999. In our opinion, this schedule presents
fairly, in all material respects, the information required to be set forth
therein.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As shown in the financial statements,
the Company incurred a net loss of $16,871,000 during the year ended June 30,
2000, and, as of that date, the Company's current liabilities exceeded its
current assets by $18,999,000 and it was in default under its lending
agreements. These factors, among others, as discussed in Note 1 to the financial
statements, raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note 1. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ GRANT THORNTON LLP
----------------------------------
San Francisco, California
September 22, 2000
48
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
International Microcomputer Software, Inc.
We have audited the accompanying consolidated statements of operations,
shareholders' equity, and cash flows of International Microcomputer Software,
Inc. and subsidiaries (the "Company") for the fiscal year ended June 30, 1998.
Our audit also included the financial statement schedule for the year ended June
30, 1998, listed in the Index at Item 14(a) 2. These financial statements and
financial statement schedule are the responsibility of IMSI's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above, present
fairly, in all material respects, the results of operations and cash flows of
International Microcomputer Software, Inc. and subsidiaries for the fiscal year
ended June 30, 1998 in conformity with accounting principles generally accepted
in the United States of America. Also, in our opinion, such financial statement
schedule for the year ended June 30, 1998, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein.
/s/ DELOITTE & TOUCHE LLP
----------------------------------
San Francisco, California
August 5, 1998
49
INTERNATIONAL MICROCOMPUTER SOFTWARE, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
[Download Table]
2000 1999
---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 1,477 $ 3,681
Receivables, less allowances for doubtful accounts,
discounts and returns of $995 and $7,445 1,043 4,933
Inventories 189 2,895
Prepaid royalties and licenses 760 1,858
Income tax receivable -- 3,751
Other current assets 717 758
-------- --------
Total current assets 4,186 17,876
Fixed assets, net 770 3,632
Deferred tax assets -- 465
Capitalized software development costs, net 1,918 2,856
Other assets, net 1,760 2,315
-------- --------
Total assets $ 8,634 $ 27,144
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt $ 12,430 $ 7,110
Trade accounts payable 2,514 2,256
Accrued and other liabilities 3,010 5,119
Accrued restructuring charges 129 1,440
Accrued arbitration award 2,717 --
Deferred revenue 2,385 3,178
-------- --------
Total current liabilities 23,185 19,103
Long-term debt and other obligations 302 6,599
-------- --------
Total liabilities 23,487 25,702
Commitments and contingencies -- --
Shareholders' Equity (Deficit):
Common stock, no par value; 300,000,000 authorized;
issued and outstanding 9,469,366 in 2000 and
7,014,078 shares in 1999 28,271 27,526
Accumulated deficit (42,834) (25,963)
Accumulated other comprehensive income (loss) (3) 129
Notes receivable from shareholders (250) (250)
Deferred compensation (37) --
-------- --------
Total shareholders' equity (deficit) (14,853) 1,442
-------- --------
Total liabilities and shareholders' equity (deficit) $ 8,634 $ 27,144
======== ========
See Notes to Consolidated Financial Statements
50
INTERNATIONAL MICROCOMPUTER SOFTWARE, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
[Enlarge/Download Table]
2000 1999 1998
Net revenues $ 19,162 $ 37,679 $ 62,065
Product costs 10,190 25,424 23,382
-------- -------- --------
Gross margin 8,972 12,255 38,683
Costs and expenses:
Sales and marketing 5,420 18,387 18,611
General and administrative 7,848 8,181 5,005
Research and development 4,003 8,069 8,614
Restructuring charge (280) 1,508 --
Write off purchased in-process research and
development -- -- 6,367
-------- -------- --------
Total operating expenses 16,991 36,145 38,597
Operating income (loss) (8,019) (23,890) 86
Other income (expense)
Gain on product line sales 1,490 -- --
Interest and other expense, net (3,725) (1,880) (759)
Loss on disposition of fixed assets (1,607) -- --
Loss on liquidation of foreign subsidiaries (2,043) -- --
Arbitration award, net of insurance reimbursement (2,435) -- --
-------- -------- --------
Total other expense (8,320) (1,880) (759)
Loss before income taxes and -------- -------- --------
extraordinary item (16,339) (25,770) (673)
Income tax expense (benefit) 532 237 (303)
-------- -------- --------
Loss before extraordinary item (16,871) (26,007) (370)
Extraordinary loss on extinguishment of
debt -- (959) --
-------- -------- --------
Net loss $(16,871) $(26,966) $ (370)
======== ======== ========
Basic and diluted loss per share $ (2.22) $ (4.30) $ (0.07)
======== ======== ========
Shares used in calculating basic and diluted per share
information: 7,590 6,275 5,513
See Notes to Consolidated Financial Statements
51
INTERNATIONAL MICROCOMPUTER SOFTWARE, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED JUNE 30, 2000, 1999, AND 1998
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
[Enlarge/Download Table]
Retained Accumulated
Earnings Other
Common Stock (Accumulated Comprehensive
Shares Amount Deficit) Income(Loss)
---------- -------- ------------ --------------
BALANCE AT JULY 1, 1997 5,128,759 $ 6,453 $ 1,373 $ (46)
Issuance of common stock under stock bonus and
option plans and for exercise of warrants 189,400 623
Issuance of common stock for acquisitions
- Corel 346,020 5,000
- MediaPaq 20,000 240
Deferred compensation amortization 30
Tax benefit from exercise of stock options 372
Net loss (370)
Foreign currency translation adjustment 21
Comprehensive loss
-------------------------------------------------------
BALANCE AT JUNE 30, 1998 5,684,179 12,718 1,003 (25)
Issuance of common stock under stock bonus and
option plans 163,365 960
Issuance of common stock related to:
Acquisitions 194,508 1,107
Settlement of debt 503,913 5,696
Art Today.com agreement 50,476 311
Capital Ventures agreement 437,637 5,000
Value attributed to warrants:
Silicon Valley Bank 776
Baystar Capital, L.P. 1,162
Common stock received in satisfaction of
receivable (20,000) (320)
Forgiveness of notes receivable from
shareholder
Deferred compensation amortization 116
Net loss (26,966)
Foreign currency translation adjustment 154
Comprehensive Loss
-------------------------------------------------------
BALANCE AT JUNE 30, 1999 7,014,078 27,526 (25,963) 129
-------------------------------------------------------
Issuance of common stock under stock bonus and
option plans 7,000 3
Issuance of common stock related to:
Price Protection agreement with Capital
Ventures International 2,062,363
Settlement of debt 385,925 628
Liquidation of subsidiaries (139)
Issuance of new warrants 114
Net loss (16,871)
Foreign currency translation adjustment 7
Comprehensive Loss
-------------------------------------------------------
BALANCE AT JUNE 30, 2000 9,469,366 $ 28,271 $(42,834) $ (3)
=======================================================
[Enlarge/Download Table]
Comprehensive Notes
Income Receivable from Deferred
(Loss) Shareholders Compensation Total
------------- --------------- ------------ --------
BALANCE AT JULY 1, 1997 $ -- $(285) $ -- $ 7,495
Issuance of common stock under stock bonus and
option plans and for exercise of warrants 623
Issuance of common stock for acquisitions
- Corel 5,000
- MediaPaq 240
Deferred compensation amortization 30
Tax benefit from exercise of stock options 372
Net loss (370) (370)
Foreign currency translation adjustment 21 21
--------
Comprehensive loss $ (349)
-------------------------------------------------------
BALANCE AT JUNE 30, 1998 (285) -- 13,411
Issuance of common stock under stock bonus and
option plans 960
Issuance of common stock related to:
Acquisitions 1,107
Settlement of debt 5,696
Art Today.com agreement 311
Capital Ventures agreement 5,000
Value attributed to warrants:
Silicon Valley Bank 776
Baystar Capital, L.P. 1,162
Common stock received in satisfaction of
receivable (320)
Forgiveness of notes receivable from
shareholder 35 35
Deferred compensation amortization 116
Net loss (26,966) (26,966)
Foreign currency translation adjustment 154 154
--------
Comprehensive Loss $(26,812)
-------------------------------------------------------
BALANCE AT JUNE 30, 1999 (250) -- 1,442
-------------------------------------
Issuance of common stock under stock bonus and
option plans 3
Issuance of common stock related to:
Price Protection agreement with Capital
Ventures International --
Settlement of debt (37) 591
Liquidation of subsidiaries (139) (139)
Issuance of new warrants 114
Net loss (16,871) (16,871)
Foreign currency translation adjustment 7 7
--------
Comprehensive Loss $(17,003)
-------------------------------------------------------
BALANCE AT JUNE 30, 2000 $(250) $(37) $(14,853)
=====================================
See Notes to Consolidated Financial Statements
52
INTERNATIONAL MICROCOMPUTER SOFTWARE, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30
(IN THOUSANDS )
[Enlarge/Download Table]
2000 1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(16,871) $(26,966) $ (370)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET
CASH USED BY OPERATING ACTIVITIES:
Depreciation and amortization 2,750 4,308 4,147
Liquidation of subsidiaries, net of cash 2,043 -- --
Bad debt reserve 306 479 (8)
Returns reserve 448 2,251 1,409
Rebates reserve -- 98 0
Price discounts reserve 241 536 (263)
Provision for inventory obsolescence 311 238 472
Deferred taxes 465 4,128 (2,855)
Forgiveness of notes receivable from shareholders -- 35 --
Loss on disposal of fixed assets, net of cash 1,607 232 --
Write-off of purchased in-process research and development -- -- 6,367
Restructuring charges (280) 3,167 --
Foreign currency translation 7 235 153
Charges related to stock issuance and warrant amortization 1,887 1271 402
Gain on product line sale (1,490) -- --
CHANGES IN ASSETS AND LIABILITIES:
Receivables 1,791 4,568 (6,581)
Inventories 1,511 1,232 (3,533)
Prepaid royalties and licenses 1,098 196 (3,277)
Income taxes receivable 3,751 (3,751) --
Other current assets 7 51 (281)
Trade accounts payable 522 (422) 943
Accrued and other liabilities 1,467 1,162 1,289
Accrued restructuring charges (1,031) 1,440 --
Deferred revenue (793) 2,771 407
-------- -------- --------
Net cash used by operating activities (253) (2,741) (1,579)
-------- -------- --------
Cash flows from investing activities:
Liquidation of subsidiaries (992) -- --
Proceeds from product line sales 1,555 -- --
Purchase of equipment (314) (1,190) (1,026)
Proceeds from sale of fixed assets 40 -- --
Software development
costs and in-process technologies (159) (2,171) (2,708)
Purchase of goodwill, trademark and brand -- (2,404) --
Other -- 36 (170)
-------- -------- --------
Net cash provided (used) by investing activities 130 (5,729) (3,904)
-------- -------- --------
Cash flows from financing activities:
Credit line borrowings -- 2,025 16,358
Credit line repayments (804) (4,573) (8,410)
Borrowings (repayments) under term loans - net (750) 7,496 (1,282)
Capital lease and other obligations repayment - net (530) (992) (611)
Proceeds from issuance of common stock 3 6,183 526
-------- -------- --------
Net cash provided (used) by financing activities (2,081) 10,139 6,581
-------- -------- --------
Effect of exchange rate change on cash and cash equivalents -- (81) (131)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents (2,204) 1,588 967
Cash and cash equivalents at beginning of year 3,681 2,093 1,126
-------- -------- --------
Cash and cash equivalents at end of the year $ 1,477 $ 3,681 $ 2,093
======== ======== ========
See Notes to Consolidated Financial Statements
53
[Enlarge/Download Table]
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $1,100 $1,584 $ 552
Income taxes paid $ 11 $ 308 $2,592
SUPPLEMENTAL DISCLOSURES OF NON-CASH FINANCING AND INVESTING ACTIVITIES
Equipment acquired through capital lease obligations $-- $ 984 $1,462
Common stock received in satisfaction of receivable -- 320 --
Repayment of payables and accrued and other liabilities with IMSI common 128 3,090 --
stock
Equipment disposals subject to capital lease obligations 187 -- --
Repayment of term loans with IMSI common stock 500 2,606 --
Acquisition of technology and assets in exchange for:
Long-term debt -- -- 300
Accrued Liabilities -- -- 383
Notes payable -- 4,030 1,034
Common stock -- 1,107 5,240
See Notes to Consolidated Financial Statements
54
INTERNATIONAL MICROCOMPUTER SOFTWARE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
International Microcomputer Software, Inc. ("IMSI" or the "Company") was
incorporated in California in November 1982. IMSI has wholly-owned subsidiaries
located in Tucson, Arizona and Australia. IMSI develops and publishes software
in the precision design (computer assisted drawing), graphic design (visual
content), business applications, and utilities categories targeted to small to
medium-size businesses, professionals, and consumers.
BASIS OF PRESENTATION AND REALIZATION OF ASSETS
The financial statements have been prepared on a basis that contemplates IMSI's
continuation as a going concern and the realization of assets and liquidation of
liabilities in the ordinary course of business. The Company has an accumulated
deficit of $42,834,000 and negative working capital of $18,999,000 at June 30,
2000. In January 2000, IMSI ceased interest and principal payments on all
borrowings, debt or other interest bearing obligations, with the exception of
monthly interest payments to Union Bank of California on the non-revolving
reducing loan. Accordingly, the Company is in default of various covenants of
these agreements. On February 18, 2000, under the guidance of CMA Business
Credit Services, IMSI held a formally noticed general meeting of its creditors.
At that meeting, the creditors elected a committee to represent creditor
interests. The committee agreed to give IMSI a 120-day standstill period that
has been subsequently extended on a month-to-month basis so long as IMSI
demonstrates progress in achieving a debt settlement acceptable to the
creditors. In July 2000 IMSI presented a plan to the creditors committee for
paying off its obligations. There can be no assurance that IMSI will be
successful in this plan, or that it will be accepted by the creditors committee.
These matters, among others, raise substantial doubt about IMSI's ability to
remain a going concern for a reasonable period of time. The financial statements
do not include any adjustments relating to the recoverability or classification
of assets or the amounts and classification of liabilities that might result
from the outcome of this uncertainty. IMSI's continued existence is dependent on
its ability to achieve profitable operations and positive operating cash flow
and to obtain additional financing sufficient to allow an acceptable debt
settlement.
In June 1999 IMSI announced a restructuring plan that was intended to end the
large losses and restore profitable operations. This plan included the
outsourcing of operations, consolidation of facilities, reduction of personnel
and the divestiture of non-core products. In January 2000, IMSI announced it was
taking more drastic actions to resolve the Company's very serious financial
problems. During fiscal 2000, IMSI accomplished the announced changes to reduce
costs. The Company was successful in selling products from non-traditional
product lines to generate cash. In August 1999, IMSI sold the rights to the Easy
Language product line for $1,700,000, and, in March 2000, the Company sold the
rights to People Scheduler for $55,000. In March 2000, IMSI executed
republishing agreements with firms in Europe and the United States to
manufacture and sell IMSI products. As part of these agreements, IMSI received
$300,000 in guarantees, which the Company will recognize over the term of the
agreements. All of these efforts stabilized the Company's situation and resulted
in a cash balance of $1,477,000 million at June 30, 2000.
Management believes that the efforts during this last year and the resultant
year-end cash balance have provided a sufficient basis to maintain operations so
long as the creditors continue to standstill. Also, IMSI is implementing direct
marketing and internet marketing programs to increase revenues. In fiscal 2001,
IMSI will release TurboCAD 7.0, which management believes will increase
revenues. Management believes the combination of last year's actions and this
year's initiatives could return IMSI to profitability. However, IMSI
acknowledges that it is very unlikely that the Company can internally generate
sufficient funds in time to resolve the large debt problem. The Company's
secured creditors have stated that they cannot extend the standstill period
indefinitely, and they are looking for the situation to be resolved before the
end of fiscal 2001.
Therefore, IMSI's continuation as a going concern through the end of fiscal 2001
depends on the Company's ability to obtain additional financing to settle the
debt. In January 2000, IMSI retained the investment banking firm of Heartland
Financial to explore alternatives to raise capital. The alternatives explored
included the sale of either or both of IMSI's Internet business units, the
restructuring of debt, and the infusion of new capital. While Heartland's
efforts did result in several preliminary discussions, none were successful. In
August, IMSI received a proposal from independent investors and suspended the
retention of Heartland Financial. This proposal includes the purchase of IMSI
stock conditioned upon an agreement by the
55
Company's creditors to settle all debt at a discount. The Company will continue
to pursue this proposal and is continuing to solicit other proposals. If IMSI
cannot consummate the current proposal, the Company will resume the retention of
Heartland Financial to explore all possible alternatives to raise the capital to
settle the debt. There can be no assurance that IMSI will be successful in these
efforts to raise additional funds.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of IMSI and its
wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation. During the third quarter of
fiscal year 2000, the Company began the liquidation of its European and South
African subsidiaries. Upon appointment of a liquidator over the assets of the
subsidiaries, the Company no longer had control, and therefore ceased
consolidating these subsidiaries in its financial statements.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and the accompanying notes. Significant estimates used in the
consolidated financial statements include the estimates of (i) doubtful
accounts, sales returns, price protection and rebates (ii) anticipated future
gross revenues from products for which software development costs have been
capitalized, (iii) provision for income taxes and realizability of the deferred
tax assets, (iv) the life and realization of identifiable intangible assets, (v)
restructuring costs and (vi) provisions for obsolete inventory. The amounts IMSI
will ultimately incur or recover could differ materially from IMSI's current
estimates.
REVENUE RECOGNITION
Revenue is recognized when earned. Beginning in fiscal 1999 the Company adopted
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. Prior to fiscal 1999 the Company followed SOP
91-1. Revenue from packaged product sales to distributors, resellers and end
users is recorded when related products are shipped. For software delivered via
the Internet, revenue is recorded when the customer downloads the software.
Subscription revenue is recognized ratably over the contract period, generally
12 to 15 months. Revenue from hybrid products is allocated to the underlying
components based on the ratio of the value of each component to the total price
and that portion is recognized accordingly. Non-refundable advanced payments
received under license agreements are recognized as revenue when the customer
accepts the delivered software. Revenue from software licensed to developers,
including royalties earned 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. Costs related to
post-contract customer support, which are minimal and include limited telephone
support and online maintenance for certain products, are accrued. Sales to
distributors permit limited rights of return upon termination or when a product
is defective. Reserves for returns, price discounts and rebates are estimated
using historical averages and a consideration of open return requests. Beginning
with the quarter ended December 31, 1998, the Company also began to consider
channel inventories, recent product sell-through activity and market conditions
in establishing the reserves.
CONCENTRATIONS
Financial instruments that potentially subject IMSI to concentrations of credit
risk consist of cash and cash equivalents and accounts receivable. IMSI places
its cash and cash equivalents at well-known, quality financial institutions. At
times, cash balances held at financial institutions were in excess of federally
insured limits. IMSI sells a majority of its products to end-users through
republishers and telemarketing efforts. Although IMSI attempts to prudently
manage and control accounts receivable and performs ongoing credit evaluations
in the normal course of business, the Company generally requires no collateral
on its product sales.
Ingram Micro represented 18.3% and 20.4% and Tech Data represented 9.0% and
12.7% of IMSI's net revenues for fiscal 1999 and 1998 respectively. No single
customer accounted for more than 10% of IMSI's revenue for fiscal year 2000.
56
ROYALTY AGREEMENTS
IMSI has entered into certain agreements whereby it is obligated to pay
royalties on software published. IMSI generally pays royalties based on a
percentage of sales on respective products or on a fee per unit sold basis. The
Company expenses software royalties as product costs during the period in which
the related revenues are recorded.
CASH AND CASH EQUIVALENTS
IMSI considers all highly liquid investments purchased with an original maturity
of three months or less to be cash equivalents.
CAPITALIZED SOFTWARE DEVELOPMENT COSTS AND LICENSE FEES
Costs incurred in the initial design phase of software development are expensed
as incurred in research and development. Once the point of technological
feasibility is reached, direct production costs are capitalized in compliance
with Statement of Financial Accounting Standards ("SFAS") No. 86, "Accounting
for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed."
IMSI ceases capitalizing computer software costs when the product is available
for general release to customers. Costs associated with acquired completed
software are capitalized. Total capitalized software development costs at June
30, 2000 and 1999 were $3,841,000 and $8,289,000 respectively, less accumulated
amortization of $1,923,000 and $5,433,000 respectively.
IMSI amortizes capitalized software development costs on a product-by-product
basis. The amortization for each product is the greater of the amount computed
using (a) the ratio of current gross revenues to the total of current and
anticipated future gross revenues for the product or (b) 18 or 36 months,
depending on the product. IMSI evaluates the net realizable value of each
software product at each balance sheet date and records write-downs to net
realizable value for any products for which the carrying value is in excess of
the estimated net realizable value.
Effective April 1, 1998, IMSI increased the amortization period from 18 to 36
months for costs related to visual content license fees. IMSI now adheres to a
thirty-six month amortization period for all visual content license fees,
excluding those visual content assets obtained in the Art Today.com (Formerly
Zedcor Inc.) acquisition (see Note 3). These ArtToday.com acquisition costs are
being amortized over sixty months. Total amortization expense of capitalized
software and license fees, all of which was charged to product costs, was
$731,000, $3,000,000 and $1,196,000 in fiscal years 2000, 1999, and 1998,
respectively.
INVENTORIES
Inventories, consisting primarily of diskettes, manuals, hardware, freight in,
production costs and packing supplies, are valued at the lower of cost or market
and are accounted for on the first-in, first-out basis. Management performs
periodic assessments to determine the existence of obsolete, slow moving and
non-salable inventories, and records necessary provisions to reduce such
inventories to net realizable value. Current reserves are $311,000, which
represents 62% of the inventory on hand at fiscal year end 2000. IMSI recognizes
all inventory reserves as a component of product costs.
FIXED ASSETS
Furniture and equipment are stated at cost. Depreciation of furniture and
equipment is computed using the straight-line method over the estimated useful
lives of the respective assets of 3 to 5 years. Depreciation of software and
computer equipment is computed using the straight-line method over an estimated
useful life of 3 years.
57
INCOME TAXES
Income taxes are accounted for using the asset and liability approach for
financial reporting. IMSI recognizes deferred tax liabilities and assets for the
expected future tax consequences of temporary differences between the financial
statement carrying amount and the tax basis of assets and liabilities and net
operating loss and tax credit carry forwards. Valuation allowances are
established when necessary to reduce deferred tax assets to the amounts expected
to be realized.
FOREIGN CURRENCY TRANSLATION
The asset and liability accounts of foreign subsidiaries are translated from
their respective functional currencies at the rates in effect at the balance
sheet date, and revenue and expense accounts are translated at weighted average
rates during the periods. Foreign currency translation adjustments are included
in other comprehensive income. Foreign currency transaction gains and losses are
included in the Statement of Operations.
LONG LIVED ASSETS
IMSI follows SFAS No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets To Be Deposed Of, which requires that long-lived
assets, certain identifiable intangibles, and goodwill related to those assets
be written down to fair value whenever events or changes indicate that the
carrying amount of an asset may not be recoverable. IMSI's policy is to review
the recoverability of all intangible assets at a minimum of once per year and
record an impairment loss when the undiscounted cash flows do not exceed the
carrying amount of the asset.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of cash and cash equivalents, accounts receivable and accounts
payable approximates carrying value due to the short-term nature of such
instruments. The fair value of debt obligations is not determinable due to
covenant defaults.
2. RESTRUCTURING CHARGE
In response to its large year-to-date losses in fiscal year 1999, IMSI initiated
a company-wide restructuring of its operations. After approval by IMSI's Board
of Directors, IMSI announced on June 24, 1999 that it had completed development
of its plan of restructuring. The major actions of the restructuring plan were
as follows:
- Manufacturing and warehouse outsourcing.
- Facilities consolidation.
- Personnel reductions.
- Divestiture of non-core products and focus on core product
lines.
IMSI began its restructuring in June 1999 and at the end of the fiscal year
2000, the restructuring is substantially complete. Restructuring costs of
$3,271,000 that would have been recognized through product cost in the normal
course of business (inventory, royalties, license fees, capitalized software,
warehouse costs, warehouse outsourcing costs) were included in the 1999 income
statement as a component of costs of goods sold. Restructuring costs of
$1,508,000 that would have been reported as operating expenses in the normal
course of business were reported in the 1999 income statement under the
"restructuring charge" line item.
58
The following table details the restructuring charge by segment and the
components that comprised the operating expense and products costs of goods
sold. For a complete description of the items in the table, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
[Enlarge/Download Table]
(in thousands) COST OF GOODS SOLD OPERATING EXPENSE
-------------- --------------------- --------------------
North North
America UK America UK Total
------- ---- ------- ---- ------
Write down of inventory of non-core products $2,096 $88 $2,184
Write down of intangibles associated with
non-core products, total:
License Fees 217 217
Goodwill $5 5
Prepaid Royalties 143 143
Capitalized Software 159 159
Write down of furniture, fixtures,
equipment and leasehold improvements:
Novato -
Computers and peripherals 150 150
Tenant improvements 139 139
Furniture and fixtures 109 109
Vacaville & Albuquerque -
Furniture and fixtures 25 25
U.K. -
Furniture and fixtures $41 41
Abandoned leases and associated costs:
Novato -
Rent 180 180
Broker's fee 65 65
Excess furniture lease 14 14
Additional walls and doors 29 29
Miscellaneous charges 3 3
Vacaville warehouse -
Rent 249 249
Broker's fee 103 103
Albuquerque tech support facility 110 110
U.K. -
Rent 6 6
Labor cost for shutdown of office 19 19
Warehouse transition costs 284 284
Personnel reduction and severance costs:
U.S. 35 470 505
U.K. 41 41
------- ---- ------- ---- ------
$3,183 $88 $1,402 $107 $4,780
In accordance with EITF 94-3, the restructuring charges recognized as of June
30, 1999 were not associated with or did not benefit activities that were
continued, and were not associated with or were not incurred to generate
revenues after the restructuring plan's commitment date. These costs were either
incremental to other costs incurred by IMSI in the conduct of its activities
prior to the commitment date and were incurred as a direct result of the
restructuring plan or represented amounts under a contractual obligation that
existed prior to the commitment date and either continued after the
restructuring plan was completed, with no economic benefit to the enterprise, or
IMSI would incur a penalty to cancel the contractual obligation.
As part of the restructuring plan, IMSI planned to terminate 90 employees by the
end of fiscal year 2000 in the following departments: sales and marketing (22);
general and administrative (8); manufacturing (23); and research and development
(37).
59
As of June 30, 2000, all planned terminations have been completed. The Company's
total restructuring charge relating to personnel reduction and severance costs
was $546,000, of which $505,000 applied to the U.S. segment and $41,000 to the
U.K. segment. These costs were recorded as operating expenses. IMSI also forgave
a $35,000 note receivable from a shareholder and company executive who was
terminated as part of the restructuring. IMSI recorded this amount as a cost of
goods sold.
The fair value of furniture, fixtures, equipment and leasehold improvements not
associated with specific product lines was based on current market prices for
used equipment and furniture, less disposal costs. The fair value of the
intangible assets associated with the non-core product lines held for sale,
including EZ Language and business utility product lines, was determined from
pending discussions with potential purchasers of these product lines.
The following chart summarizes the cash and non-cash portions of the
restructuring charge (in thousands):
[Enlarge/Download Table]
CASH NON-CASH TOTAL
------- -------- -------
Write down of inventory for non-core products $ -- $2,096 $2,096
Write down of furniture, fixtures, equipment and leasehold improvements -- 423 423
Write down of intangibles associated with non-core products -- 525 525
Abandoned leases and associated costs 753 -- 753
Warehouse transition costs 284 -- 284
Personnel reduction and severance costs 469 35 504
====== ====== ======
U.S. Segment Subtotal 1,506 3,079 4,585
------ ------ ------
Foreign 107 88 195
------ ------ ------
Total restructuring charge: $1,613 $3,167 $4,780
====== ====== ======
The following table details the roll-forward activity during fiscal 2000 in the
accrued restructuring liability account (in thousands):
[Enlarge/Download Table]
BALANCE BALANCE
JUNE 30,1999 REVERSALS PAID JUNE 30,2000
------------ --------- ------ ------------
Warehouse closure:
Accrued rent $ 249 $ -- ($187) $62
Broker's fees (1) 103 (103) -- --
Warehouse transition costs 284 (284) --
Facilities consolidation:
Novato:
Rent 180 (180) --
Broker's fee 65 (65) --
Excess furniture lease 14 (14) --
Additional walls and doors 29 (29) --
Miscellaneous charges 3 (3) --
Tech support facility 110 (51) 59
Consolidation of Foreign Offices 6 (6) --
Personnel reductions (2) 397 (177) (212) 8
====== ===== ======= ====
Total accrued restructuring liability $1,440 $(280) $(1,031) $129
====== ===== ======= ====
(1) IMSI is in the process of finalizing a lease termination agreement for
the warehouse facilities in Vacaville, CA with Mattel Inc., the
successor to the original lease between the Company and Mindscape, Inc.
IMSI vacated these facilities in April 2000, and reversed its estimated
broker fees based on negotiations with the landlord, as these costs will
not be incurred.
(2) During the quarter ended December 31, 1999, the Company decreased the
restructuring accrual for personnel reductions by $139,000 primarily due
to the re-hire of and cessation of termination benefits payable to
formerly terminated executive
60
Geoffrey Koblick. During the quarter ended March 31, 2000, the Company
decreased this accrual by an additional $38,000 due to actual severance
costs being lower than estimated as a result of employee attrition.
3. ACQUISITIONS
Art Today.com
In October 1998, IMSI acquired all the outstanding common stock of ArtToday.com,
an Internet provider of art and animations. The total purchase price of $3.5
million consisted of $970,000 in IMSI stock (176,455 shares at $5.50 per share),
$300,000 in cash (paid by IMSI in November 1998), and $2,230,000 payable
pursuant to an 8% secured promissory note. The original repayment terms for the
promissory note called for quarterly payments of $188,000 of principal, plus
interest accrued as of the date of payment. The note also called for full
payment on the sooner of: (1) thirty-six months from the closing, (2) any
increase in the capital of IMSI by a new stock offering in excess of 20% of the
then outstanding shares of common stock, (3) the sale of substantially all of
the assets of IMSI or (4) the merger of IMSI with another entity. As of June 30,
1999, the note balance was satisfied by IMSI (see Note 6, "ArtToday.com Fee
Agreement"). The operating results of ArtToday.com are included in the statement
of operations from the date of acquisition. The purchase price for ArtToday.com
was allocated as follows:
[Download Table]
Net working capital $ 93,000
Capitalized software development costs (visual content products) 3,000,000
Goodwill 407,000
----------
$3,500,000
Org Plus
On March 13, 1998, IMSI sold the rights to Family Heritage, a product acquired
from Corel Corp. in September 1997, to Mindscape, Inc., which was subsequently
acquired by The Learning Company ("TLC"), for a purchase price of $2.5 million
(plus $115,000 for inventories and prepaid royalties). The purchase price was
split into four equal payments of $625,000, the first of which was paid upon
closing and the second payment was paid July 15, 1998. The remaining
installments were due October 15, 1998, and January 15, 1999. However, no
separate notes payable for such amounts were issued by Mindscape. On September
29, 1998, TLC paid IMSI approximately $1.7 million representing amounts due to
IMSI for the Family Heritage sale ($1,250,000) and other existing contractual
agreements ($430,000). On October 2, 1998, TLC and IMSI entered into a software
license agreement whereby TLC sold Org Plus to IMSI in exchange for $3.5 million
as follows: $1.7 million paid by IMSI on October 2, 1998, and $450,000
installment payments due on each of January 1, 1999, April 1, 1999, July 1,
1999, and October 1, 1999. The September 29, 1998, $1.7 million cash receipt
from TLC and the $3.5 million October 2, 1998 purchase of Org Plus from TLC were
accounted for as one transaction; accordingly, IMSI recorded the acquisition of
Org Plus at a net amount of $1.8 million, with $900,000 allocated to goodwill
and $900,000 allocated to capitalized brand names. No gain or loss was
recognized by IMSI as a result of these transactions. At June 30, 2000 the net
intangible assets related to OrgPlus on the balance sheet were $1,200,000, which
IMSI is amortizing at the rate of $30,000 per month.
In January 1999, IMSI and TLC agreed to amend the terms of the Org Plus
agreement to allow IMSI to settle the $1.8 million installment obligation by the
issuance of 200,000 shares of IMSI common stock. This January Fee Agreement
required IMSI to file a registration statement by February 28, 1999, but it did
not specify a remedy if IMSI failed to do so.
In April 1999, IMSI agreed that if TLC sells any shares within 30 days following
the effectiveness of a registration statement covering the 200,000 shares, IMSI
will pay TLC the difference between the sales price and $8.50 per share, such
payment to be made either in cash, or by issuing additional shares based on the
average share price during the thirty day price protection period, at IMSI's
option. This April amendment required IMSI to file a registration statement by
May 15, 1999 and to use its "best efforts" to have the registration statement
declared effective by July 31, 1999. The April Amendment did not specify any
remedy if IMSI did not file the registration statement or have it declared
effective by the respective dates. IMSI filed a registration statement on June
8, 1999 for the 200,000 shares, but that registration statement is not yet
effective.
On August 27, 1999, TLC (now owned by Mattel) served upon IMSI an arbitration
demand based on allegations that IMSI failed to timely file the registration
statement and asserting that the original obligation was revived.
IMSI is attempting to reach a negotiated settlement with TLC. However, there is
no binding agreement in place. Based on the June 30, 2000 share price of $0.80,
IMSI was contingently liable to pay TLC $1,540,000 under the April Amendment
protection clause.
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Fiscal Year 1998
During the first quarter of fiscal year 1998, IMSI completed the following four
acquisitions accounted for using purchase accounting. The aggregate purchase
prices for the acquisitions were comprised, and allocated, as follows:
COMPONENTS OF PURCHASE PRICES FOR ACQUISITIONS
[Enlarge/Download Table]
NUMBER OF
SHARES OF ASSUMPTION AGGREGATE
COMMON VALUE OF COMMON NOTES OF NET PURCHASE
SELLER STOCK STOCK PAYABLE CASH LIABILITIES PRICE
------ --------- --------------- ------- ---------- ----------- ----------
Quarterdeck $ -- $ -- $ -- $1,000,000 $ -- $1,000,000
MapLinx -- -- 233,500 233,500 383,000 850,000
MediaPaq 20,000 240,000 -- -- 160,000 400,000
Corel 346,020 5,000,000 640,000 -- -- 5,640,000
------- --------- ------- ---------- -------- ----------
366,020 $5,240,000 $873,500 $1,233,500 $543,000 $7,890,000
======= ========== ======== ========== ======== ==========
ALLOCATION OF AGGREGATE PURCHASE PRICES OF ACQUISITIONS
[Download Table]
PURCHASED IN-PROCESS
RESEARCH AND
SELLER DEVELOPMENT CAPITALIZED SOFTWARE GOODWILL
------ -------------------- -------------------- --------
Quarterdeck................ $ 517,000 $ 483,000 $ --
MapLinx.................... 506,000 331,000 13,000
MediaPaq................... 300,000 100,000 --
Corel...................... 5,044,000 517,000 79,000
---------- ---------- -------
$6,367,000 $1,431,000 $92,000
========== ========== =======
ACQUISITION OF PRODUCTS AND IN-PROCESS TECHNOLOGIES FROM COREL CORPORATION
On September 30, 1997, the Company acquired the rights to three completed
products (CorelFlow, Lumiere and Family Heritage(formerly, Corel Family Tree))
and four in-process technologies (CorelCAD, Corel Click and Create, Visual CADD
and Corel Personal Architect) in the CAD, diagramming and consumer categories
from Corel (the "Acquisition"), for $5 million in IMSI common stock (346,020
shares valued at approximately $14.45 per share) and $640,000 in notes payable
due in two installments, $140,000 due in March 1998 (which was paid on June 3,
1998 with the proceeds from the Company's borrowings under its new May 4, 1998
bank credit line), and $500,000 due in September 1998. The Company allocated the
$5,640,000 as described below, based upon a discounted net cash flow analysis
utilizing management's estimates and costs to enable such technologies to reach
technological feasibility and upon a valuation.
The discounted net cash flow analysis as of September 30, 1997 was based upon
management's estimates of future net revenues from each of the three products
and four in-process technologies over the next four fiscal years, based upon
expected product costs and other operating expenses. The expected future net
cash flows were discounted using a 23% rate from in process technologies and 18%
for existing products.
As of September 30, 1997, the Company estimated that total future revenues from
all seven products/technologies acquired from Corel could exceed approximately
$20 million (approximately $17 million related to the in-process technologies
and approximately $3 million related to the developed technologies) over the
next four fiscal years. This is a forward-looking statement. There can be no
assurance that revenues from such products and technologies will be generated by
the Company.
- $5,044,000 relating to the four in-process technologies was
expensed as purchased in-process research and development in the
quarter ended September 30, 1997. At the time of the
Acquisition, the Company determined that the technological
feasibility of the four in-process technologies had not yet been
established and that, as of September 30, 1997, such
technologies had no alternative future uses. These technologies
required additional research and developmental efforts to
develop these products into commercially viable products. From
September 30, 1997 through June 30, 1998, the Company spent
approximately $300,000 on research and development to have the
four in-process technologies reach technological feasibility.
CorelCAD products (now called TurboCAD Solid Modeler and
TurboCAD 3D Modeler) were released in March 1998. Sales for the
two products for fiscal year ended June 30, 1998
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were approximately $700,000 and approximately $100,000 in fiscal
year 1999. Products called Click and Create and Personal
Architect were released in June 1998. Click and Create, now
called Multimedia Fusion, had sales of $244,000 in fiscal year
1998 and $340,000 in fiscal year 1999. The relevant technology
in Personal Architect was included in the new version of
FloorPlan. FloorPlan sales totaled $13,166,000 in fiscal year
1999. Visual CADD (version 3) was released in the second quarter
of fiscal year 1999 and had fiscal year 1999 sales of $419,000.
- $517,000 relating to the three completed products was allocated
to capitalized software to be amortized over the shorter of the
period of expected revenues or eighteen months, pursuant to the
Company's amortization policy for capitalized software
development costs discussed in Note 1. The Family Heritage
product was released in two versions, Family Heritage and Family
Heritage Deluxe, which were released in November and December
1997, respectively. The Company had net revenues of
approximately $300,000 from Family Heritage products during the
fiscal year 1998. The Family Heritage product was sold on March
13, 1998. The Company released products formerly known as
Lumiere and Flow in June 1998. Sales of Lumiere and Flow in
fiscal year 1999 were $385,000 and $634,000, respectively.
- $79,000 was allocated to goodwill to be amortized over 3 years.
ACQUISITION OF PRODUCTS AND IN-PROCESS TECHNOLOGIES FROM QUARTERDECK CORPORATION
On July 1, 1997, the Company acquired certain products and in-process
technologies from Quarterdeck, who was subsequently purchased by Symantec, for a
cash payment of $1 million. The Company utilized a discounted net cash flow
model with various estimates and assumptions to allocate the purchase price. The
discounted net cash flow analysis as of July 1, 1997 was based upon management's
estimates of future net revenue from the products/technologies over the next
three fiscal years, based upon expected unit sales and average selling prices of
comparable products, expected product costs and other operating expenses. The
expected future net cash flows were discounted using a 23% rate for in-process
technologies and 18% for existing products. Based upon the Company's estimates
of future cash flows and costs to have certain of these technologies reach
technological feasibility and based upon a valuation, the Company allocated the
purchase price as follows:
- $517,000 was allocated to purchased in-process research and
development related to Quarterdeck's "EZ Impact" technology. At
the time of the acquisition, management believed that
technological feasibility of EZ Impact had not yet been
established and that, as of July 1, 1997, this technology had no
alternative future uses. The most significant estimate made by
the Company in determining the amount to be allocated to
in-process research and development was that the Company
estimated future net revenues from EZ Impact over the next three
years, based upon expected unit sales and average selling prices
of comparable products. After the Company's in-depth review of
the competitive marketplace and the state of the EZ Impact
technology acquired in late calendar 1997, the Company
determined that EZ Impact would not ever become an economically
viable product and abandoned further development efforts.
- $483,000 was allocated to capitalized software to be amortized
over the shorter of the life of the products' expected revenues
or eighteen months, pursuant to the Company's amortization
policy for capitalized software development costs discussed in
Note 1. Such capitalized software related to Quarterdeck's
product Hijaak Pro. During the fiscal year ended June 30, 1998
and 1999, the Company had net revenues from Hijaak Pro of
approximately $2.0 million and $1.2 million, respectively.
ACQUISITION OF PRODUCTS AND IN-PROCESS TECHNOLOGIES FROM MAPLINX CORPORATION
On July 1, 1997, the Company acquired certain products and in-process
technologies from MapLinx Corporation for a total purchase price of $850,000 as
follows: $233,500 in cash, a note payable for $233,500 and $383,000 in assumed
net liabilities. The Company utilized a discounted net cash flow model with
various estimates and assumptions to allocate the purchase price. The discounted
net cash flow analysis as of July 1, 1997 was based upon management's estimates
of future net revenues from the product/technologies over the next three fiscal
years, based upon expected unit sales and average selling prices of comparable
products, expected product costs and other operating expenses. The expected
future net cash flows were discounted using a 23% rate for in-process
technologies and 18% for existing products. Based upon the Company's estimates
of future cash flows and costs to have certain technologies reach technological
feasibility and based upon a valuation, the Company allocated the purchase price
between two products, MapLinx Mail Manager and MapLinx, and goodwill as follows:
- $506,000 was allocated to purchased in-process research and
development related to MapLinx Mail Manager. At the time of the
acquisition, management believed that technological feasibility
of MapLinx Mail Manager had not yet been established and that,
as of July 1, 1997, these technologies had no alternative future
uses. This technology required additional research and
developmental efforts to develop these products into
commercially viable products. During the fiscal years ended June
30, 1998 and 1999, the Company spent approximately $120,000 and
$80,000, respectively, on
63
research and development. MapLinx Mail Manager was released in
the second quarter of fiscal 1999. Revenue from MapLinx Mail
Manager totaled $394,000 in fiscal year 1999.
- $331,000 was allocated to capitalized software related to the
MapLinx product, to be amortized over the shorter of the life of
the period of expected revenues or eighteen months, pursuant to
the Company's amortization policy for capitalized software
development costs discussed in Note 1. During the fiscal year
ended June 30, 1998, the Company had net revenues from MapLinx
of approximately $1.5 million. MapLinx had revenues of $439,000
in fiscal year 1999.
- $13,000 was allocated to goodwill to be amortized over three
years.
ACQUISITION OF MEDIAPAQ, INC.
On August 22, 1997, the Company acquired 100% of the common stock of MediaPaq
for a total purchase price of $400,000 as follows: $240,000 in IMSI common stock
(20,000 shares at $12.00 per share) and $160,000 in assumed liabilities.
MediaPaq's products and in-process technologies consisted primarily of browser
software features that the Company believed it could incorporate into existing
products and future products under development in the Company's MasterClips
family of products. The expected future net cash flows as of August 22, 1997
were based upon management's estimates of future net revenues from the
product/technologies, based upon expected unit sales and average selling prices
of comparable products, expected product costs and other operating expenses. The
expected future net cash flows were discounted using a 23% rate for in-process
technologies and 18% for existing products. Based upon the Company's estimates
of future cash flows and costs to have certain of MediaPaq's products and
in-process technologies reach technological feasibility, the Company allocated
the purchase price as follows:
- $300,000 was allocated to purchased in-process research and
development related to browser software features that were
expected to be incorporated into the next version of
MasterClips. At the time of the acquisition, management believed
that technological feasibility of certain of the acquired
technologies had not yet been established and that, as of August
22, 1997, these technologies had no alternative future uses.
This technology required additional research and developmental
efforts to develop these products into commercially viable
products. From August 22, 1997 through March 1998, the Company
spent approximately $100,000 on research and development to have
the in-process technologies reach technological feasibility. In
March 1998, the Company released MasterClips 303,000
incorporating such browser software features.
- $100,000 was allocated to capitalized software related primarily
to browser software features that were incorporated into
existing products MasterClips 202,000 and MasterClips 150,000 to
be amortized over the shorter of the products' expected revenues
or eighteen months, pursuant to the Company's amortization
policy for capitalized software development costs discussed in
Note 1.
- Sales of MasterClips family products totaled $17 million in
fiscal 1998, $12 million in fiscal 1999 and $3.6 million in
fiscal 2000.
4. DEBT
IMSI's short-term borrowings and long-term debt and other obligations consist of
the following (in thousands):
[Enlarge/Download Table]
JUNE 30, JUNE 30,
SHORT-TERM BORROWINGS 2000 1999
--------------------- -------- --------
Non-revolving, reducing loan with interest at bank's
reference rate plus 3%, 12.50% at June 30, 2000 $4,600 $5,400
Term loan with interest at bank's reference rate plus 3% -- 750
Subordinated loan facility due November 2001 with interest at 12%, net of 2,500 --
unamortized warrant cost at June 30, 2000 of $0(1)
Senior subordinated convertible note due May 2002
with interest at 9%, net of unamortized warrant cost at June 30, 2000 of $0(1) 4,500 --
Unsecured Notes Payable - Simeon Commercial Properties 95
Capital lease obligations 735 960
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[Enlarge/Download Table]
======= ======
Total short-term borrowings $12,430 $7,110
======= ======
LONG-TERM DEBT AND OTHER OBLIGATIONS
Subordinated loan facility due November 2001
with interest at 12% net of unamortized warrant cost at June 30, 1999 of $604 (1) $ -- $1,896
Senior subordinated convertible note due May 2002
with interest at 9% net of unamortized warrant cost at June 30, 1999 of $1,100 (1) 3,900
--
Capital lease obligations 302 803
======= ======
Total long-term debt and other obligations $ 302 $6,599
======= ======
(1) Due to default, entire loan recognized as short-term borrowing.
Amended Bank Line of Credit and Term Loan
On May 4, 1998 IMSI entered into a line of credit agreement with Union Bank of
California ("Union") under which it could borrow the lesser of $13.5 million or
80% of eligible accounts receivable, at Union's reference rate plus _% or LIBOR
plus 2%, at IMSI's option. The Company borrowed up to approximately $10.0
million under the line of credit agreement. Union also provided IMSI a $1.5
million term loan at the same interest rate. The line of credit was to expire on
October 31, 1999 and the repayment of the term loan was due on the same date.
Due to IMSI's defaults under the agreements, the line of credit was revised as
of September 24, 1998 to a non-revolving, reducing loan with no further
borrowings available. The interest rate was set at Union's reference rate plus
3%. The amended loan agreements require IMSI to comply with certain financial
covenants including maintenance of net worth and working capital requirements.
The revised loans were due on September 30, 1999. Under the terms of the
agreements, all assets not subject to liens of other financial institutions have
been pledged as collateral against the loans. As of June 30, 2000, IMSI is in
default under the loan agreements. IMSI has paid in full the $1.5 million term
loan and reduced the non-revolving reducing loan to Union Bank $4.6 million.
Under the terms of the loan agreement, Union can declare the loan to be
immediately due and payable and can commence immediate enforcement and
collection actions.
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Subordinated Loan Facility with Warrants
On November 3, 1998, IMSI borrowed $2.5 million under a three-year subordinated
loan facility with Silicon Valley Bank. The interest rate is 12%. As part of the
loan facility, detachable warrants, which have a five-year term, are issuable to
purchase shares of IMSI's common stock as follows:
[Download Table]
If loan not paid in full prior to: Warrants to be issued Exercise price per share
---------------------------------- --------------------- ------------------------
November 3, 1998 30,000 $7.00
October 31, 1999 5,000 7.00
January 31, 2000 25,000 7.00
April 30, 2001 65,000 6.00
October 31, 2001 125,000 5.00
When IMSI first recorded the loan, management estimated that the fair value of
the warrants, using the Black-Scholes option-pricing model, was $776,000. The
valuation assumed that the loan would not be repaid until November 3, 2001 and
that all warrants would be issued. The valuation also assumed the exercise of
the warrants at expiration, 57% volatility and a risk-free interest rate of
5.5%. It was originally intended that this value would be amortized as
additional interest expense over the life of the loan.
IMSI is in default under the subordinated loan facility with Silicon Valley Bank
for failure to make interest payments beginning in the quarter ended March 31,
2000 and the entry of the Imageline arbitration award. The bank notified IMSI of
the defaults and stated that it reserves all rights, powers and remedies under
the loan agreement. Therefore, IMSI has recorded the full amount of the
subordinated loan as a current liability and expensed the remaining warrant
value of $604,000 as interest expense. Also, under the subordinated loan
agreement, IMSI must accrue additional penalty interest at the rate of 5%, which
resulted in an additional $51,000 of interest expense in fiscal 2000.
Subordinated Convertible Debt
On May 24, 1999, IMSI entered into a securities purchase agreement and related
agreements with BayStar Capital, L.P. ("BayStar"). The Company issued BayStar a
three year $5 million principal amount 9% Senior Subordinated Convertible Note,
due May 24, 2002 with interest payable quarterly. The note is convertible, at
BayStar's option, into shares of common stock at any time at an initial
conversion price of $7.5946 per share, which is 115% of the market price of the
common stock on the closing date of the transaction. Under the BayStar
agreement, IMSI may be required to issue additional shares depending on the
occurrence of specified events, including the failure to make timely interest
payments on the convertible note. For failure to pay interest on time, BayStar
may demand that IMSI issue shares of common stock to BayStar equal to 200% of
the amount of the late interest payment divided by the closing price of the
common stock on the day prior to the payment. In addition the agreement provides
for the payment of a penalty if IMSI failed to obtain, by September 21, 1999, an
effective registration statement, which included the shares to be issued to
BayStar. The penalty is defined as 1% of the principal amount per month for each
month subsequent to September 21, 1999 until the shares are included in an
effective registration statement. On June 25, 1999 IMSI filed a registration
statement on Form S-3, which included 1,375,000 shares of stock issuable to
BayStar, but that registration statement is not effective. In November 1999,
BayStar notified IMSI that the Company had breached its obligation to pay the
cash penalty fees. On December 2, 1999, to settle the breach, BayStar converted
$500,000 of principal plus accrued interest of $7,767 into common stock of IMSI
at a price of $2.00 per share, which was the closing bid price of IMSI stock on
December 1, 1999. In addition, IMSI has accrued a liability of $456,000 for this
penalty through June 30, 2000 in the financial statements.
IMSI is in default, under several provisions of the agreement, on its senior
subordinated convertible note with BayStar. BayStar has the right under the note
to declare all sums due and payable but has not done so. Due to the default,
IMSI has recorded the full amount of the subordinated loan as a current
liability and expensed the remaining warrant value of $1,100,000 as interest in
the quarter ending June 30,2000.
The conversion price is subject to adjustment if the Company issues or sells
stock in defined transactions for less than the conversion price. Additionally,
on the twelve month anniversary of the closing date, if the market price of the
common stock is lower than $6.604, then the conversion price will be adjusted to
the greater of (i) 115% of the average of the price of the common stock for the
twenty (20) trading days immediately preceding May 24, 2000 or (ii) $4.6228. The
trading value of its common stock on the date of issuance of the subordinated
convertible debt was $6.50. The terms of the BayStar agreement limit the total
number of shares issuable to BayStar to 4.99% of the total outstanding shares of
the Company. Based on these terms, the value of the contingent beneficial
conversion feature as of June 30, 2000 and the potential charge to earnings is
$432,000.
66
BayStar also received a warrant to purchase 250,000 shares of common stock at an
initial exercise price of $7.5946. Management estimated that the fair value of
the warrants, using the Black-Scholes option-pricing model, was $1,162,000. The
valuation assumed the exercise of the warrants at expiration, 105% volatility
and a risk-free interest rate of 5.5%.
5. COMMON STOCK
Corel Corporation
On June 30, 1999, IMSI sold images to Corel Corporation in consideration for
20,000 of shares of IMSI common stock, out of a total of 346,020 shares Corel
acquired in September 1997 in connection with the purchase of several product
lines. The value attributed to the 20,000 shares ($320,000), and the images
sold, was the trading price of the shares on June 30, 1998. The shares were
received by IMSI in fiscal 1999.
ArtToday.com Fee Agreement
On February 25, 1999, IMSI entered into a fee agreement with the former
shareholders of ArtToday.com. Under the terms of the Fee Agreement, IMSI issued
150,321 shares of common stock, with a market value of $11.44 per share, in
satisfaction of $1,503,000 owed to the former shareholders of ArtToday.com under
the terms of the acquisition described in Note 3. In May 1999, IMSI agreed with
the former ArtToday.com shareholders to issue an additional 40,476 shares of
common stock, valued pursuant to a renegotiation of the Fee Agreement and 10,000
shares at the market price of $6.56 per share in consideration of the release of
a security interest held by the former ArtToday.com shareholders. IMSI
recognized a charge of $311,000 upon the issuance of the 50,476 shares.
The May 1999 amendment to the ArtToday.com Fee Agreement provided for the
issuance of additional shares if the average market price of IMSI stock was less
than $8 for the three days before the effective date of the registration of the
shares. In May 2000, IMSI and the former ArtToday.com shareholders executed a
Settlement Agreement and Mutual Release. This agreement stipulates that IMSI
will issue to the former ArtToday.com shareholders an additional 185,005 shares
in settlement and release of all claims between the parties. Under this
agreement, the former ArtToday.com shareholders have no right or option to
require any payment in cash or to receive additional shares. The Company issued
these shares a recorded a charge on July 11, 2000 amounting to $187,490 for the
value of the shares issued.
Asset Purchase Agreement
On December 24, 1998, IMSI purchased certain assets of Clipartconnection.com, an
Internet provider of art and animation, for a purchase price of 18,053 shares of
common stock valued at $150,000.
Garay Fee Agreement
On January 11, 1999, IMSI entered into a fee agreement with the Law Offices of
Mark Garay, Inc. ("Garay"). Under the terms of the Garay Fee Agreement, IMSI
issued 11,112 shares of common stock, valued at $10.25 per share, in
satisfaction of a $100,000 debt owed for legal services performed. Although the
original shares were issued without recourse, subsequent to June 30, 1999, IMSI
has been approached by Garay with a claim for the issuance of additional shares.
TLC Fee Agreement
On October 2, 1998, The Learning Company ("TLC") and IMSI entered into a
software license agreement whereby TLC sold Org Plus to IMSI in exchange for
current and future cash payments. In January 1999, IMSI and TLC agreed to amend
the terms of the Org Plus agreement to allow IMSI to settle the $1.8 million
portion of the unpaid purchase price by the issuance of 200,000 shares of common
stock, valued at $12.00 per share.
See Note 3.
Greentree Fee Agreement
On February 18, 1999, IMSI entered into a fee agreement with Greentree to
satisfy a $150,000 debt owed to Greentree under the terms of a software license
agreement between IMSI and Greentree. In settlement of this debt, IMSI issued to
Greentree 18,053 shares, valued at $11.00 per share. The original shares were
issues without recourse, but subsequent to June 30, 1999, Greentree has claimed
additional shares due.
67
Capital Ventures International Agreement
On March 3, 1999, IMSI entered into a stock purchase agreement with Capital
Ventures International ("CVI"). CVI paid the Company $5 million, and IMSI issued
437,637 shares of the Company's common stock, valued at $11.42 per share. CVI
also received a warrant to purchase 131,291 shares of common stock expiring
March 5, 2003. The warrant is currently exercisable at $14.8525 per share. The
exercise price and number of shares issued is subject to adjustment with
anti-dilution provisions similar to the provisions for the optional additional
share purchase.
The agreement required IMSI to issue additional shares to CVI if the market
price of the Company's common stock fell below $11.42 prior to March 4, 2000 or
if IMSI completed a capital transaction as defined in the agreement. As a result
of the partial conversion of the BayStar note in December 1999, CVI was entitled
to an adjustment of the purchase price under its stock purchase agreement. In
March 2000, CVI and IMSI agreed to an adjusted price of $2.00 per share,
equivalent to the value at which Bay Star converted a portion of its convertible
debt to common shares. As a result of this agreement, CVI was entitled to a
total of 2,500,000 shares for its $5 million investment. Accordingly, IMSI
issued CVI an additional 2,023,363 shares. Because the lowest trading price of
IMSI's common stock from March 1999 to March 2000 was $0.625 per share, CVI
could have been entitled to a total of 8,000,000 shares pursuant to the price
adjustment provisions of the original agreement, not the 2,500,000 ultimately
received. Since this resolution provided CVI with fewer shares than it was
entitled to under the original agreement, IMSI did not record a charge for the
issuance of the shares. IMSI has no further obligation to issue any additional
adjustment shares or to pay other consideration to CVI and is relieved of making
any further payments to CVI in connection with not yet registering for resale
the shares issued to CVI.
Homestyles Agreement
On January 11, 1999, IMSI entered into a fee agreement with Homestyles to
satisfy a $90,000 debt IMSI owed under the terms of various software license
agreements. IMSI issued 10,000 shares of common stock, valued at $10.25 per
share to extinguish the debt. In the fourth quarter of 2000, Homestyles claimed
that the debt was still outstanding due to the decline IMSI's stock price. As
disruption in the relationship between Homestyles and the Company would affect
the ability to carry out future operations, IMSI agreed to pay $90,000 to
Homestyles as settlement. Homestyles will retain all shares previously issued.
Minnevich Agreement
On January 11, 1999, IMSI entered into a fee agreement with Minnevich to satisfy
a $45,000 debt owed under the terms of various software license agreements. In
settlement of this debt, IMSI issued 5,000 shares of common stock, valued at
$10.25 per share. IMSI issued an additional 10,000 shares of common stock on
April 18, 2000, valued at $0.66 per share to settle the claim brought by
Minnevich related to the January 11, 1999 fee agreement.
Gateway Agreement
On March 1, 1999, IMSI entered into a fee agreement with Gateway to satisfy a
$72,000 debt owed under the terms of various manufacturing agreements. In
settlement of this debt, IMSI issued 8,000 shares of common stock, valued at
$11.438 per share.
Spatial Agreement
On March 25, 1999, IMSI entered into a fee agreement with Spatial to satisfy a
$45,000 debt owed under the terms of various software license agreements. In
settlement of this debt, IMSI issued 5,000 shares of common stock, valued at
$11.25 per share.
StarBase Agreement
On March 26, 1999, IMSI entered into a fee agreement with StarBase to satisfy a
$121,000 debt owed under the terms of various software license agreements. In
settlement of this debt, IMSI issued 10,750 shares of common stock, valued at
$10.25 per share. On April 5, 2000, IMSI received a letter from StarBase seeking
a reinstatement of the debt due to the lack of registration of the shares
issued. The Company has reviewed this claim and believes that the agreement does
not provide StarBase with the requested remedy. The Company has received no
further communications from StarBase.
AmericDisc Agreement
On April 5, 1999, IMSI entered into a stock transfer agreement with AmericDisc
to satisfy a $700,000 debt owed for an outstanding balance relating to
duplication services. In settlement of this debt, IMSI issued 63,987 shares of
common stock, valued at $10.94 per share. Additionally, AmericDisc received
warrants to purchase 13,000 shares at $14.23 exercisable for a
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period of four years. AmericDisc was issued the shares without recourse, per the
agreement. AmericDisc has subsequently claimed that additional shares are due.
Software Syndicate Fee Agreement
On June 7, 1999, IMSI entered in a fee agreement with Software Syndicate to
satisfy a $152,000 debt owed under terms of various license agreements. In
settlement, IMSI issued 21,690 shares of common stock, valued at $7.00 per
share. An additional 20,000 shares of common stock were issued to Software
Syndicate by IMSI on April 18, 2000, valued at $0.66 per share to settle claims
brought by Software Syndicate related to the June 7, 1999 agreement.
Extraordinary Charge
Pursuant to the agreements described above, IMSI issued 503,913 shares, whose
cumulative value based on the closing price of the common stock on the date of
settlement was $5,696,000, to retire debt totaling $4,778,000. Because the value
of the shares issued was $918,000 greater than the face value of the respective
debt retired, IMSI recorded an extraordinary charge for the extinguishment of
debt of $959,000, or $0.15 per share, after including $41,000 for the costs
incurred to issue and register the shares. The extraordinary charge recognized
in fiscal year 1999 is summarized in the following table:
[Enlarge/Download Table]
Face Difference
Number of Closing Closing Value of in
Shares Issued Price Value Debt Values
------------- ------- ---------- ---------- ----------
ArtToday.com Fee Agreement 150,321 $11.44 $1,720,000 $1,503,000 $217,000
Garay Fee Agreement 11,112 10.25 114,000 100,000 14,000
TLC Fee Agreement 200,000 12.00 2,400,000 1,800,000 600,000
Greentree Fee Agreement 18,053 11.00 199,000 150,000 49,000
Homestyles Agreement 10,000 10.25 103,000 90,000 13,000
Minnevich Agreement 5,000 10.25 51,000 45,000 6,000
Gateway Agreement 8,000 11.44 91,000 72,000 19,000
Spatial Agreement 5,000 11.25 56,000 45,000 11,000
StarBase Agreement 10,750 10.25 110,000 121,000 (11,000)
Americ Disc Agreement 63,987 10.94 700,000 700,000 0
Software Syndicate 21,690 7.00 152,000 152,000 0
------- ---------- ---------- --------
Total: 503,913 $5,696,000 $4,778,000 $918,000
------- ---------- ---------- --------
Cost of registration/issuance 41,000
========
Total extraordinary charge $959,000
========
6. SEGMENT INFORMATION AND LIQUIDATION OF EUROPEAN SUBSIDIARIES
Until January 2000, IMSI had four reportable operating segments based on
geography: North America, the United Kingdom, Germany and Australia, and each of
these segments generated revenues and incurred expenses related to the sale of
the Company's PC productivity software. In January 2000, ArtToday.com met the
operating segment disclosure requirements of SFAS No. 131. Previously, the
Company included the results of this graphic design Internet subsidiary in the
North America geographic segment because ArtToday.com's separate results were
not material.
On January 28, 2000, IMSI announced that it was exiting the retail software
business, and liquidating its European and South African subsidiaries. In the
first quarter of fiscal year 2000, the Company closed its United Kingdom and
French offices. The loss on the disposition of the Company's foreign
subsidiaries was $2,023,000. This loss includes the $1,562,000 write-off of the
parent Company inter-company accounts receivable, the $68,000 write-off of the
parent Company investment in the foreign subsidiaries and the $393,000 write-off
of the foreign subsidiaries net assets. The liquidation process, which is
proceeding according to the legal requirements of the respective countries, may
take up to one year to complete. The Company does not anticipate any additional
costs pertaining to the closure of the European subsidiaries.
69
The following table details segment information as of and for the years ended
June 30 as follows (in thousands):
[Enlarge/Download Table]
NORTH ARTTODAY ELIMIN-
AMERICA .COM UK GERMANY AUSTRALIA OTHER ATIONS TOTAL
-------- -------- -------- -------- --------- -------- -------- --------
Fiscal year 2000:
Net Revenues - external customers $ 11,410 $ 3,083 $ 687 $ 1,696 $ 1,205 $ 1,081 $ -- $ 19,162
- inter-segment 712 -- -- -- -- -- (712) --
Operating Income (loss) (8,385) 355 130 (124) (92) 97 -- (8,019)
Interest and other expense, net 8,309 19 -- -- (2) (6) -- 8,320
Identifiable assets 8,014 794 -- -- (23) -- (151) 8,634
Depreciation and amortization
expense 2,460 199 -- -- 23 68 -- 2,750
Income tax expense (benefit) 514 -- -- -- 18 -- -- 532
Extraordinary item -- -- -- -- -- -- -- --
Net Income (loss) (17,209) 336 130 (124) (108) 104 -- (16,871)
Fiscal year 1999:
Net Revenues - external customers $ 24,533 $ 716 $ 3,188 $ 4,199 $ 2,471 $ 2,572 $ -- $ 37,679
- inter-segment 2,736 -- -- -- -- -- (2,736) --
Operating Income (loss) (22,187) (1,072) 42 (1,152) 414 65 -- (23,890)
Interest and other expense, net (1,901) 1 0 1 6 13 -- (1,880)
Identifiable assets 21,807 639 827 1,757 1,038 1,076 -- 27,144
Depreciation and amortization
expense 3,958 175 62 72 23 18 -- 4,308
Income tax expense (benefit) 22 -- 113 0 34 68 -- 237
Extraordinary item (959) -- -- -- -- -- -- (959)
Net Income (loss) (24.956) (1,071) (71) (1,151) 386 (103) -- (26,966)
Fiscal year 1998:
Net Revenues - external customers $ 43,593 $-- $ 5,193 $ 7,195 $ 3,585 $ 2,499 $ -- $ 62,065
- inter-segment 5,294 -- -- -- -- -- (5,294) --
Operating Income (loss) (5,444) -- 1,585 1,742 1,498 705 -- 86
Interest income (expense) (766) -- (15) 12 3 7 -- (759)
Identifiable assets 29,435 -- 1,224 2,787 1,453 756 -- 35,655
Depreciation and amortization
expense 3,979 -- 77 46 27 18 -- 4,147
Income tax expense (benefit) (334) -- 0 0 31 0 -- (303)
Net Income (loss) (5,812) -- 1,551 1,754 1,465 672 -- (370)
Each segment generates revenues from all product categories. Revenues by
categories are as follows (in thousands):
[Download Table]
YEAR ENDED JUNE 30 2000 1999 1998
------------------ ------- ------- ------
Precision Design $ 4,944 $13,168 $15,658
Graphic Design 6,022 12,928 18,911
Business Applications 4,993 8,013 8,981
Utilities 3,009 3,921 11,759
Other Products 883 2,511 8,160
Sales Reserves (689) (2,862) (1,404)
------- ------- ------
Net Revenues $19,162 $37,679 $62,065
======= ======= =======
70
7. INVENTORIES
At June 30, inventories consist of (in thousands):
[Download Table]
2000 1999
----- -------
Raw materials $ 386 $ 2,343
Finished goods 114 3,897
----- -------
500 6,240
Reserves for obsolescence (311) (3,345)
===== =======
$ 189 $ 2,895
===== =======
As of June 30, 1999, IMSI's inventory reserves for obsolescence included charges
of $2,184,000 related to the Company's restructuring and its plan to divest
non-core product lines in order to focus on a limited number of core product
lines.
8. FIXED ASSETS
At June 30, furniture and equipment consist of (in thousands):
[Download Table]
2000 1999
------- -------
Computer and office equipment $ 1,439 $ 5,575
Software 568 944
------- -------
2,007 6,519
Accumulated depreciation (1,237) (2,887)
------- -------
$ 770 $ 3,632
======= =======
9. INCOME TAXES
The provision (benefit) for taxes on income for the years ended June 30 was
comprised of the following (in thousands):
[Download Table]
2000 1999 1998
------- ------- -------
Current:
Federal $ -- $(3,990) $ 2,065
State 13 -- 397
Foreign 18 215 211
------- ------- -------
31 (3,775) 2,673
------- ------- -------
Deferred
Federal 395 3,565 (2,424)
State 70 447 (431)
Foreign 36 -- (121)
------- ------- -------
501 4,012 (2,976)
------- ------- -------
Total tax provision (benefit) $ 532 $ 237 $( 303)
======= ======= =======
71
Deferred tax balances consisted of the following (in thousands):
[Download Table]
JUNE 30 JUNE 30
2000 1999
-------- --------
CURRENT TAX ASSETS
Accrued arbitration award $ 1,083 $ --
Standstill accounts payable 918 --
Standstill royalties payable 256 --
Allowance for doubtful accounts and returns 394 2,125
Accrued employee liabilities 260 97
Inventory reserve 117 386
Accrued restructuring costs 51 574
-------- --------
Total current tax assets 3,079 3,182
-------- --------
NON-CURRENT ASSETS
Package design costs -- 154
Net Operating Loss carryforward 10,162 4,396
Fixed assets taken out of service 321 --
Purchased intangibles 3,955 3,790
Loss on investment in subsidiaries in liquidation 75 --
Research and development credit -- 95
-------- --------
Total non-current assets 14,513 8,435
-------- --------
VALUATION ALLOWANCE (17,592) (11,126)
-------- --------
TOTAL ASSETS -- 491
NON-CURRENT LIABILITIES
Other -- (26)
-------- --------
TOTAL LIABILITIES -- (26)
======== ========
NET DEFERRED TAX ASSETS $ -- $ 465
======== ========
At June 30, 2000, IMSI had an operating loss carryforward of approximately
$25,500,000 for federal tax purposes, which expires in various amounts from 2001
to 2019 and related carryforwards for state purposes. During the year there were
transactions that may be considered to be an "ownership change" within the
meaning of Internal Revenue Code section 382 whereby the net operating loss
carryforward available to offset future taxable income could be effectively
limited.
72
The effective tax rate differs from the federal statutory rate for the years
ended June 30 as follows (in thousands):
[Download Table]
2000 1999 1998
------- ------- ------
Federal tax at 34% statutory rate $(5,556) $(8,762) $(229)
State tax provision, net of
federal benefit (954) (1,504) (56)
Change in valuation allowance 6,466 11,126 --
Cost (benefit) related to offshore
intellectual property -- -- (335)
In-process technology write off,
nondeductible for tax -- -- 102
Other 576 (623) 215
------- ------- -----
Total income tax provision (benefit) $ 532 $ 237 $(303)
======= ======= =====
10. EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income (loss) by the
weighted average number of common shares outstanding for the period. Diluted
earnings per share reflects the potential dilution that could occur from common
shares issuable as a result of the exercise or conversion of stock options,
warrants or other convertible securities. A total of 3,420,029 potentially
dilutive securities for the year ending June 30, 2000, 2,357,548 shares for the
year ending June 30, 1999 and 627,517 shares for the year ending June 30, 1998
have been excluded from the computation of diluted earnings per share as their
inclusion would be anti-dilutive.
11. STOCK OPTIONS AND EMPLOYEE STOCK INCENTIVE PLANS
IMSI
IMSI's 1992 Stock Option Plan authorizes the issuance of up to 900,000 shares of
common stock. The 1993 Employee Incentive Plan, as amended, permits IMSI to
grant options to purchase up to 2,925,000 shares of common stock to employees,
directors and consultants at prices not less than the fair market value at date
of grant for incentive stock options and not less than 85% of fair market value
for nonstatutory stock options. These options generally expire 10 years from the
date of grant and become exercisable ratably over a 4 to 5-year period. At June
30, 2000, 629,262 shares were available for future grants under the 1993 plan.
73
Option activity under the plans is as follows:
[Download Table]
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
--------- --------
Outstanding, July 1, 1997 1,267,620 $ 4.27
Granted (weighted average fair value of $7.58) 925,525 13.13
Exercised (171,952) 2.77
Canceled (173,055) 11.39
---------- ------
Outstanding, June 30, 1998 1,848,138 $ 8.18
Granted (weighted average fair value of $5.39) 1,049,825 7.60
Exercised (164,150) 4.92
Canceled (800,556) 10.81
---------- ------
Outstanding, June 30, 1999 1,933,257 $ 7.00
Granted (weighted average fair value of $1.56) 3,130,883 1.75
Exercised (7,000) 0.38
Cancelled (2,761,402) 5.95
---------- ------
Outstanding, June 30, 2000 2,295,738 $ 1.17
========== ======
Additional information regarding options outstanding as of June 30, 2000 is as
follows:
[Enlarge/Download Table]
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------------------ -------------------------------------
WEIGHTED AVG.
REMAINING
RANGE OF NUMBER CONTRACTUAL WEIGHTED AVG. WEIGHTED AVG.
EXERCISE PRICES OUTSTANDING LIFE (yrs) EXERCISE PRICE NUMBER EXERCISABLE EXERCISE PRICE
--------------- ----------- ------------- -------------- ------------------ --------------
$0.11- 0.75 1,863,579 9.9 $0.73 204,832 $0.59
$0.76- 3.56 294,363 9.0 1.51 72,988 2.25
$3.57-13.13 137,796 8.0 6.47 46,547 6.58
========= =======
2,295,738 324,367
========= =======
IMSI continues to account for stock-based awards issued to employees using the
intrinsic value method in accordance with Accounting Principles Board No. 25,
Accounting for Stock Issued to Employees and its related interpretations.
Accordingly, no compensation expense has been recognized in the financial
statements for employee stock arrangements as all grants have been made at fair
market value. Financial Accounting Interpretation No. 44 ("FIN 44") addresses
the accounting for certain provisions and transactions pertaining to employee
stock options. The provisions of FIN 44 are effective for fiscal periods ending
after July 1, 2000. Certain provisions of FIN 44 apply to transactions occurring
after December 15, 1998, primarily related to the definition of an employee and
accounting for option re-pricings. In February 2000, IMSI canceled approximately
870,000 options held by existing employees and replaced those options with new
options with a revised expiration date. The canceled options had a weighted
average exercise price of $3.51 per share, and the reissued options are
exercisable at $0.75 per share. This cancellation and re-grant meets the
definition of a re-pricing under FIN 44. Accordingly, the reissued options will
adopt variable plan accounting beginning July 1, 2000. Under variable plan
accounting the Company will recognize a charge equal to the per share change in
the share value until the underlying option is exercised.
SFAS No. 123, Accounting for Stock-Based Compensation, requires the disclosure
of pro forma net income and earnings per share had IMSI adopted the fair value
method in SFAS No. 123. Under this method, the fair value of stock-based awards
to employees is calculated through the use of option pricing models, even though
such models were developed to estimate the fair value of freely tradable, fully
transferable options without vesting restrictions, which significantly differ
from IMSI's stock option awards. These models also require subjective
assumptions, including future stock price volatility and expected time to
exercise, which greatly affect the calculated values. IMSI's calculations were
made using the Black-Scholes option pricing model with the following weighted
average assumptions: expected life of 5 years in 2000, 1999 and 1998; stock
volatility, 136% in fiscal 2000, 105% in fiscal 1999, and 57% in fiscal 1998;
risk free interest rates, 6.0% in fiscal 2000, 5.5% in 1999, and 5.77% in 1998;
and no dividends during the expected term. IMSI's calculations are based on a
single option valuation approach and forfeitures are recognized as they occur.
74
If the computed fair values of the awards had been amortized to expense over the
vesting period of the awards, pro forma amounts would have been:
[Download Table]
2000 1999 1998
----------- ----------- -----------
Net income (loss)
As reported $(16,872,000) $(26,966,000) $ (370,000)
Pro forma (17,359,000) (27,306,000) (1,839,000)
Diluted earnings (loss) per share
As reported $ (1.78) $ (4.30) $ (0.07)
Pro forma (1.83) (4.35) (0.33)
ArtToday.com
In February 2000, ArtToday adopted a stock option plan to attract, retain and
motivate eligible persons. If all outstanding options were exercised, it would
create a minority interest in ArtToday of 12.7%. The options vest and are
exercisable under certain conditions, which may vary depending on the options,
over periods not to exceed ten years from the date the option is granted,
provided the employee is still employed by the Company at the time of exercise.
Participants who are not officers, directors or consultants of ArtToday or of a
Parent or Subsidiary of ArtToday have the right to exercise an option at the
rate of not less than 20% per year over five years from the date the option is
granted. Upon termination of employment, the employee generally has 90 days to
exercise vested options otherwise the options are forfeited. The exercise price
of each option is determined by the Board of Directors when the option is
granted and may not be less than 85% of the fair market value of the shares on
the grant date; provided that the exercise price of an incentive stock option or
any option granted to a ten percent stockholder will not be less than 100% of
the fair market value of the shares on the date of the grant. All grants under
the plan have been at 100% of the fair market value of the shares.
75
A summary of the activity in the ArtToday stock option plan during fiscal year
2000 is as follows:
[Download Table]
Weighted
Average
Shares Exercise Price
------ --------------
Outstanding at beginning of year -- $ --
Net grants during the year 33,019 15.43
====== -----
Outstanding at end of year 33,019 15.43
====== =====
Weighted average remaining life (years) 9.7
12. COMMITMENTS
IMSI leases its facilities and certain equipment under various non-cancelable
operating lease agreements expiring through 2004. IMSI also leases equipment
under capital leases, which expire at various dates through 2002. IMSI is
required to pay property taxes, insurance, and normal maintenance costs on most
property leases. Future minimum payments for capital leases and rental
commitments for non-cancelable operating leases with remaining terms of over one
year at June 30, 2000 are as follows (in thousands):
[Download Table]
CAPITAL LEASE
FISCAL YEAR OBLIGATIONS OPERATING LEASES
----------- ----------- ----------------
2001 $ 756 $ 347
2002 306 281
2003 -- 243
2004 -- 122
2005 -- 83
------ ------
Total minimum lease payments 1,062 $1,076
=======
Less amount representing interest 25
------
Capital lease obligations 1,037
Less current portion 735
------
Long-term portion $ 302
======
Capital lease obligations consist primarily of computer equipment, furniture and
fixtures and leasehold improvements. The average term is 3 years. Total rent
expense for all operating leases was $701,000, $1,294,000 and $965,000 for the
fiscal years ended June 30, 2000, 1999, and 1998 respectively.
13. ARBITRATION AWARD
On April 23, 1998 IMSI began arbitration proceedings against Imageline, Inc.
before the American Arbitration Association in San Francisco, California. IMSI
requested that all matters within the scope of the agreements between Imageline
and IMSI be resolved by arbitration, including a dispute in which Imageline sued
Mindscape, Inc. for alleged copyright infringement, for which IMSI may be
required to indemnify Mindscape, in whole or in part. IMSI further requested
that the arbitration decide the rights and liabilities of the parties, and the
validity of the copyrights under which Imageline asserted its claims against
IMSI. IMSI also requested compensatory damages and attorney's fees.
On August 12, 1999 Imageline filed a counterclaim in the arbitration, alleging
breach by IMSI of an agreement between the parties, including unauthorized
sublicensing, and instituting arbitration proceedings without notice and
opportunity to cure. Imageline requested liquidated damages, alleged to be more
than $200,000, compensatory damages of at least $500,000, punitive damages,
legal fees, interest and costs. IMSI cannot provide any assurance as to the
outcome of the arbitration. An adverse outcome on this matter could require IMSI
to pay a large amount of damages to Imageline. On January 14, 2000, Imageline,
Inc. received a $2.6 million arbitration award against IMSI for intellectual
property violations and attorneys' fees. The award is comprised of $1.2 million
in actual damages, $1.2 in punitive damages and $.2 million in attorneys' fees.
IMSI is appealing the award in the federal district court in Richmond, VA.
76
On January 14, 2000, Imageline, Inc. received a $2.6 million arbitration award
against IMSI for intellectual property violations and attorneys' fees. The award
is comprised of $1.2 million in actual damages, $1.2 in punitive damages and
$0.2 million in attorneys' fees. Interest is being accrued on the award at an
annual rate of 9%. IMSI is appealing the award in the federal district court in
Richmond, VA.
SCHEDULE II
INTERNATIONAL MICROCOMPUTER SOFTWARE, INC.
AND SUBSIDIARIES
Valuation and Qualifying Accounts
Years ended June 30, 2000, 1999 and 1998 (in thousands)
[Enlarge/Download Table]
Additions
Balance at charged to
beginning of costs and Balance at
Description period expenses Deductions end of period
----------- ------------ ---------- ---------- -------------
Year ended June 30, 2000
Allowance for doubtful accounts $1,279 $ 602 $ 1,575 $ 306
Return reserve 5,249 2,548 7,349 448
Price discounts reserve 819 86 664 241
Rebates reserve 98 831 929 --
Inventory reserve 3,345 -- 3,034 311
Year ended June 30, 1999
Allowance for doubtful accounts 800 623 144 1,279
Return reserve 2,998 17,714 15,463 5,249
Price discounts reserve 283 6,146 5,610 819
Rebates reserve 2,474 2,376 98
Inventory reserve 615 3,555 825 3,345
Year ended June 30, 1998
Allowance for doubtful accounts 808 1,610 1,618 800
Return reserve 1,589 9,355 7,946 2,998
Price discounts reserve 546 2,050 2,313 283
Rebates reserve -- -- -- --
Inventory reserve 436 526 347 615
77
(b) Reports on Form 8-K
One report on Form 8-K was filed during the last quarter of the fiscal year, on
May 25, 2000, to discuss the status of the Company's communications with the
SEC.
78
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Novato, State of
California on , 2000.
INTERNATIONAL MICROCOMPUTER SOFTWARE, INC.
By: /s/ GEOFFREY KOBLICK
-----------------------------
Geoffrey Koblick
Chief Executive Officer
By: /s/ JEFFREY MORGAN
-----------------------------
Jeffrey Morgan
Chief Financial Officer
(Principal Accounting Officer)
POWER OF ATTORNEY
KNOW ALL BY THESE PRESENTS that each individual whose signature appears below
constitutes and appoints Geoffrey Koblick and Jeffrey Morgan, and each of them,
his attorneys-in-fact, and agents, each with the power of substitution, for him
and in his name, place and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this Report, and to file the
same, with all exhibits thereto and all documents in connection therewith, with
the Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents or any of them, or his or their substitute or substitutes, may lawfully
do or cause to be done by virtue hereof.
Pursuant to the Requirement of the Securities Exchange Act of 1934, the
following persons in the capacities and on August 10, 2000 have signed this
report below.
By: /s/ Geoffrey Koblick
-----------------------------
Geoffrey Koblick
Chairman of the Board of Directors
By: /s/ Mark Boyer
-----------------------------
Mark Boyer
Director
By: /s/ Richard Hall
-----------------------------
Richard hall
Director
By: /s/ Robert Mayer
-----------------------------
Robert Mayer
Director
By: /s/ Michael Gariepy
-----------------------------
Michael Gariepy
Direct
79
INTERNATIONAL MICROCOMPUTER SOFTWARE, INC.
2000 FORM 10-K ANNUAL REPORT
EXHIBIT INDEX
[Download Table]
Exhibit
Number EXHIBIT TITLE PAGE
-------- ------------- ----
3.01 Registrant's Amended and Restated Articles of Incorporation (1)
3.02 Registrant's Bylaws, as amended to date (1)
21.1 Subsidiaries of the Registrant 81
23.1 Independent Auditors' Consent 82
23.2 Independent Auditors' Consent 83
27.1 Financial Data Schedule
(1) Incorporated by reference to exhibits of the same number to Registrant's
Registration Statement on Form S-3 (File No. 33-69206) filed on
September 22, 1993.
80
Dates Referenced Herein and Documents Incorporated by Reference
| Referenced-On Page |
|---|
| This ‘10-K’ Filing | | Date | | First | | Last | | | Other Filings |
|---|
| |  |
| | 3/5/03 | | 28 | | 68 |
| | 5/24/02 | | 66 |
| | 11/3/01 | | 66 |
| Filed on: | | 10/11/00 |
| | 10/6/00 | | 1 | | 37 |
| | 9/27/00 | | 14 |
| | 9/22/00 | | 48 |
| | 9/20/00 | | 45 |
| | 8/10/00 | | 79 |
| | 7/11/00 | | 67 |
| | 7/1/00 | | 74 |
| For Period End: | | 6/30/00 | | 1 | | 77 | | | NT 10-K |
| | 5/25/00 | | 78 | | | | | 8-K |
| | 5/24/00 | | 28 | | 66 |
| | 4/18/00 | | 68 | | 69 |
| | 4/5/00 | | 68 |
| | 3/31/00 | | 14 | | 66 | | | 10-Q, 10-Q/A, NT 10-Q |
| | 3/28/00 | | 14 | | 37 |
| | 3/14/00 | | 20 |
| | 3/4/00 | | 68 |
| | 2/28/00 | | 41 |
| | 2/25/00 | | 14 |
| | 2/18/00 | | 4 | | 55 |
| | 2/17/00 | | 39 |
| | 2/15/00 | | 39 | | 46 | | | 8-K, NT 10-Q |
| | 1/31/00 | | 14 |
| | 1/28/00 | | 4 | | 69 |
| | 1/27/00 | | 20 |
| | 1/26/00 | | 42 |
| | 1/14/00 | | 13 | | 77 |
| | 12/31/99 | | 14 | | 60 | | | 10-Q, 10-Q/A, NT 10-Q |
| | 12/29/99 | | 26 |
| | 12/19/99 | | 20 |
| | 12/2/99 | | 29 | | 66 |
| | 12/1/99 | | 66 |
| | 11/30/99 | | 14 |
| | 11/24/99 | | 14 |
| | 10/31/99 | | 28 | | 65 |
| | 10/1/99 | | 38 | | 61 |
| | 9/30/99 | | 14 | | 65 | | | 10-Q, 10-Q/A |
| | 9/27/99 | | 7 | | 20 |
| | 9/21/99 | | 26 | | 66 |
| | 8/27/99 | | 61 |
| | 8/12/99 | | 13 | | 76 |
| | 8/2/99 | | 41 |
| | 7/31/99 | | 61 |
| | 7/1/99 | | 12 | | 61 |
| | 6/30/99 | | 14 | | 77 | | | 10-K/A, 10-K405, 10-K405/A |
| | 6/25/99 | | 37 | | 66 | | | S-3 |
| | 6/24/99 | | 4 | | 58 |
| | 6/8/99 | | 37 | | 61 | | | S-3 |
| | 6/7/99 | | 69 |
| | 5/27/99 | | 20 |
| | 5/26/99 | | 28 |
| | 5/24/99 | | 66 | | | | | 8-K |
| | 5/15/99 | | 61 |
| | 5/5/99 | | 38 | | | | | 8-K |
| | 4/26/99 | | 38 | | | | | 8-K |
| | 4/19/99 | | 38 | | | | | 8-K |
| | 4/5/99 | | 68 |
| | 4/1/99 | | 38 | | 61 |
| | 3/26/99 | | 68 |
| | 3/25/99 | | 68 |
| | 3/3/99 | | 28 | | 68 |
| | 3/1/99 | | 68 |
| | 2/28/99 | | 61 |
| | 2/25/99 | | 67 |
| | 2/18/99 | | 67 |
| | 1/15/99 | | 61 |
| | 1/11/99 | | 67 | | 68 |
| | 1/1/99 | | 38 | | 61 |
| | 12/31/98 | | 19 | | 56 | | | 10-Q |
| | 12/24/98 | | 67 |
| | 12/15/98 | | 74 |
| | 11/3/98 | | 28 | | 66 |
| | 10/15/98 | | 61 |
| | 10/2/98 | | 38 | | 67 |
| | 9/30/98 | | 38 | | | | | 10-Q |
| | 9/29/98 | | 38 | | 61 |
| | 9/24/98 | | 65 |
| | 8/5/98 | | 49 |
| | 7/15/98 | | 61 |
| | 6/30/98 | | 20 | | 77 | | | 10-K, 10-K/A |
| | 6/3/98 | | 62 |
| | 5/4/98 | | 28 | | 65 |
| | 4/23/98 | | 12 | | 76 |
| | 4/1/98 | | 57 |
| | 3/13/98 | | 61 | | 63 |
| | 12/31/97 | | 30 | | | | | 10-Q |
| | 9/30/97 | | 3 | | 62 | | | 10-Q, 8-K |
| | 8/22/97 | | 64 |
| | 7/1/97 | | 52 | | 63 |
| | 6/30/96 | | 15 | | | | | 10-K |
| | 9/22/93 | | 80 |
| List all Filings |
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