UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-QSB
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the securities
Exchange Act of 1934
For the quarterly period ended September 30, 2003
------------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from:_____________ to_________________
Commission File Number 0-15949
INTERNATIONAL MICROCOMPUTER SOFTWARE, INC.
------------------------------------------
(Exact name of Small business issuer in its charter)
CALIFORNIA 94-2862863
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
75 ROWLAND WAY, NOVATO, CALIFORNIA 94945
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(Address of principal executive offices) (Zip code)
(415) 878-4000
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Issuer's telephone number
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES X NO
-- --
As of November 10, 2003, 23,244,668 Shares of Issuer's common stock, no par
value, were outstanding.
Transitional Small Business Disclosure Format: YES NO X
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1
INTERNATIONAL MICROCOMPUTER SOFTWARE, INC.
AND SUBSIDIARIES
Table of Contents
PART I - FINANCIAL INFORMATION 3
ITEM1- CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 3
CONDENSED CONSOLIDATED BALANCE SHEETS 3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) 4
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY 5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS 6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 7
ITEM 2- MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS 12
ITEM 3- CONTROLS AND PROCEDURES 19
PART II - OTHER INFORMATION 19
ITEM 1- LEGAL PROCEEDINGS 19
ITEM 2- CHANGES IN SECURITIES 19
ITEM 3- DEFAULTS UPON SENIOR SECURITIES 19
ITEM 4- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 19
ITEM 5- OTHER INFORMATION 19
ITEM 6- EXHIBITS AND REPORTS ON FORM 8-K 19
SIGNATURES 21
INDEX TO EXHIBITS: 22
2
PART I - FINANCIAL INFORMATION
Item1- Condensed Consolidated Financial Statements
INTERNATIONAL MICROCOMPUTER SOFTWARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
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(Unaudited)
---------------------- ------------------
September 30, 2003 June 30, 2003
---------------------- ------------------
ASSETS
Current assets:
Cash and cash equivalents $6,729 $10,399
Investment in marketable securities 148 --
Receivables, less allowances for doubtful accounts, discounts and returns of 864 734
$586 and $445
Note receivable from related party 350 --
Inventories 332 268
Other current assets 837 240
---------------------- ------------------
Total current assets 9,260 11,641
Fixed assets, net 189 85
Intangible assets
Capitalized software, net 633 87
Domain names, net 72 4
Distribution rights, net 18 36
Capitalized customer lists 106 --
Goodwill 579 179
---------------------- ------------------
Total intangible assets 1,408 306
Other assets
Investment in securities 1,140 998
Assets related to discontinued operations 1,300 1,300
---------------------- ------------------
Total other assets 2,440 2,298
====================== ==================
Total assets 13,297 $14,330
====================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short term debt 345 304
Trade accounts payable 924 564
Income tax payable -- 271
Accrued and other liabilities 704 1,541
Deferred revenue 236 305
---------------------- ------------------
Total current liabilities 2,209 2,985
Liabilities related to discontinued operations 84 84
---------------------- ------------------
Total liabilities 2,293 3,069
Shareholders' equity:
Common stock, no par value; 300,000,000 authorized; Issued and outstanding
23,173,253 35,693 35,546
and 22,818,232 shares
Accumulated deficit (24,623) (24,223)
Accumulated other comprehensive loss (66) (62)
---------------------- ------------------
Total shareholders' equity 11,004 11,261
---------------------- ------------------
====================== ==================
Total liabilities and shareholders' equity $13,297 $14,330
====================== ==================
See Notes to Condensed Consolidated Financial Statements
3
INTERNATIONAL MICROCOMPUTER SOFTWARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS and COMPREHENSIVE INCOME (LOSS)
(In thousands, except per share amounts)
(Unaudited)
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Three Months Ended September 30,
2003 2002
---- ----
Net revenues $1,732 $1,999
Product costs 578 507
---------------- ----------------
Gross margin 1,154 1,492
Costs and expenses:
Sales and marketing 689 690
General and administrative 683 942
Research and development 477 377
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Total operating expenses 1,849 2,009
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Operating loss (695) (517)
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Other income and (expense):
Interest and other, net 80 (14)
Unrealized gain on marketable securities 130 --
Gain on extinguishment of debt 81 178
---------------- ----------------
Loss before income tax (404) (353)
Income tax benefit (4) --
---------------- ----------------
Loss from continuing operations (400) (353)
Income from discontinued operations, net of income tax -- 217
---------------- ----------------
Net loss ($400) ($136)
================ ================
Other comprehensive loss, net of tax:
Foreign currency translation, net of tax (4) 4
---------------- ----------------
Other comprehensive loss, net of tax ($404) ($132)
================ ================
Basic earnings (loss) per share
Net loss per share from continuing operations ($0.02) ($0.02)
Income from discontinued operations, net of income tax -- $0.01
Net loss per share ($0.02) ($0.01)
Diluted earnings (loss) per share
Net loss per share from continuing operations ($0.02) ($0.02)
Income from discontinued operations, net of income tax -- $0.01
Net loss per share ($0.02) ($0.01)
Shares used in computing basic earnings (loss) per share information 22,934 22,789
Shares used in computing diluted earnings (loss) per share information 22,934 22,789
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See Notes to Condensed Consolidated Financial Statements
4
INTERNATIONAL MICROCOMPUTER SOFTWARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Three Months ended September 30, 2003
(In thousands)
(Unaudited)
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Common Stock Accumulated
Other
Comprehensive
Shares Amount Accumulated Deficit Loss Total
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Balance at June 30, 2003 22,818 $35,546 ($24,223) ($62) $11,261
================================================================================
Issuance of common stock related to:
Warrants exercised 250 65 65
Stock options exercised 105 61 61
Issuance of warrants related to:
Consulting services rendered 6 6
Issuance of stock options related to:
Consulting services rendered 2 2
Variable accounting adjustment related to stock 13 13
options previously issued
Net loss (400) (400)
Foreign currency translation adjustment (4) (4)
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Balance at September 30, 2003 23,173 $35,693 ($24,623) ($66) $11,004
================================================================================
See Notes to Condensed Consolidated Financial Statements
5
INTERNATIONAL MICROCOMPUTER SOFTWARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
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Three Months Ended September 30,
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2003 2002
--------------------- ---------------------
Cash flows from operating activities:
Net cash used by operating activities ($2,024) ($870)
--------------------- ---------------------
Cash flows from investing activities:
Acquisition of product line (950) --
Loan to related party (350) --
Investment in marketable securities (160) --
Purchase of equipment and furniture (84) (8)
Purchase of software -- (8)
Cash used by discontinued operations in investing activities -- (16)
--------------------- ---------------------
Net cash used by investing activities (1,544) (32)
--------------------- ---------------------
Cash flows from financing activities:
Settlement of note payable (Imageline) (160) --
Note borrowings -- 58
Note repayments (64) (209)
Warrants exercised 65 --
Options exercised 61 --
Repayment of capital lease obligations -- (37)
Cash used by discontinued operations in financing activities -- (60)
--------------------- ---------------------
Net cash used by financing activities (98) (248)
--------------------- ---------------------
Effect of exchange rate change on cash and cash equivalents (4) 4
Net decrease in cash and cash equivalents (3,670) (1,146)
Cash and cash equivalents at beginning of period 10,399 2,455
--------------------- ---------------------
Cash and cash equivalents at end of the period $6,729 $1,309
--------------------- ---------------------
See Notes to Condensed Consolidated Financial Statements
6
INTERNATIONAL MICROCOMPUTER SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The interim condensed consolidated financial statements have been prepared from
the records of International Microcomputer Software, Inc. and Subsidiaries
("IMSI") without audit. All significant inter-company balances and transactions
have been eliminated in consolidation. In the opinion of management, all
adjustments, which consist of only normal recurring adjustments, to present
fairly the financial position at September 30, 2003 and the results of
operations and cash flows for the three months ended September 30, 2003 and
2002, have been made. The interim condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements and
notes thereto contained in our Annual Report on Form 10-KSB for the fiscal year
ended June 30, 2003. The results of operations for the three months ended
September 30, 2003 are not necessarily indicative of the results to be expected
for any other interim period or for the full year.
2. Discontinued Operations
As previously disclosed in our annual report on Form 10-KSB for the fiscal year
ended June 30, 2003, we sold ArtToday, Inc ("ArtToday"), our wholly owned
subsidiary based in Arizona, to Jupitermedia Corporation ("Jupiter") in June
2003. Under Generally Accepted Accounting Principles ("GAAP") in the United
States, ArtToday's operating results for the period ended September 30, 2002,
have been accounted for as discontinued operations.
3. Product Line and other Acquisitions
DesignCAD
On July 28, 2003, we entered into an agreement to purchase the tangible and
intangible assets of Upperspace Corporation ("Upperspace"), an Oklahoma
corporation, constituting its DesignCAD line of products, several learning aids,
and various smaller design programs.
The purchase price included the following consideration:
o $700,000 cash (of which $100,000 is being held in an escrow account for
a period of twelve months)
o $300,000, 5% simple interest, promissory note payable 12 months from
the date of closing
o An earn-out based on net revenue that could result in an additional
$300,000 during the next three fiscal years
o A license pursuant to which Upperspace shall act for a period as the
exclusive distributor of the purchased products to retail outlets, and
a non-exclusive reseller of the product through direct sales channels
such as the internet, email, telephone and fax.
CADalog
On September 12, 2003, we acquired from CADalog, Inc, CADalog.com, a network of
websites that offers one of the largest mechanical parts symbols libraries
on-line and allows members access to over 8 million 2D and 3D hardware component
symbols. The acquisition also included the purchase of CADalog, Inc.'s
Partsxl.com, Partswork.com and 3DModelsharing.com websites. This acquisition
gives us the opportunity to sell additional CAD content and software plug-ins.
The total consideration for the acquisition was $295,000. A payment of $250,000
was made on September 19, 2003 and the remaining $45,000 will be held in an
escrow account with $15,000 to be released to the seller ninety days after the
closing date, and the remaining $30,000 to be released after a period of twelve
months. The escrow balance of $45,000 was fully funded on October 8, 2003.
4. Note Payable to Imageline
On July 7, 2003, we repaid the note payable to Imageline in the amount of
$160,000 representing the final payment in connection with our mutual settlement
as previously disclosed in our annual report on Form 10-KSB for the fiscal year
ended June 30, 2003.
7
5. Note Receivable from Related Party - DCDC 15% Note
On September 18, 2003, we entered into a 15% one-year note with Digital Creative
Development Corporation ("DCDC") whereby we extended a loan to DCDC in the
amount of $350,000. The note is due, with interest, on September 18, 2004. The
note is secured by 400,000 shares of IMSI's stock held by DCDC. The agreement
also calls for DCDC not to sell any other IMSI common stock which it holds, with
the exception of private sales of IMSI common stock, until February 15, 2004.
Concurrent with this note, DCDC repaid the entire principal portion of a $50,000
note, made in favor of IMSI on February 25, 2003. That note, due on February 25,
2004, was unsecured and carried a 4% interest rate. This note had been
previously recorded as a fully reserved receivable as it was unsecured. The
reversal of the reserve upon the repayment of this note was consequently
accounted for as other income during the quarter ended September 30, 2003. The
interest payable, amounting to $1,162, is still outstanding as of the filing and
is due and payable on February 18, 2004.
6. Segment Information
We have three reportable operating segments based on the sales market. Two of
these are geographic segments and generate revenues and incur expenses related
to the sale of our PC productivity software. The third segment comprises the
revenues and expenses related to Keynomics, our business applications subsidiary
which provides ergonomic and keyboard training for worker-enhanced safety,
productivity and ergonomic compliance improvements thru its proprietary software
system, "The KeySoft Performance System".
The following table details segment information (in thousands). The foreign
segment refers to the operations of our German and Australian wholly owned
subsidiaries, IMSI GmbH and IMSI Australia PTY Ltd.
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Quarter Ended September 30, 2003 Keynomics North America Other Foreign Eliminations Total
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Net Revenues $159 $1,412 $161 $-- $1,732
Operating income (loss) (143) (545) (7) -- (695)
Identifiable assets 164 13,889 349 (1,105) 13,297
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Quarter Ended September 30, 2002
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Net Revenues $177 $1,661 $161 $-- $1,999
Operating income (loss) (66) (470) 19 -- (517)
Identifiable assets 476 6,217 746 (1,356) 6,083
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8
7. Net Loss per Share
Basic earnings per share are computed using the weighted average number of
common shares outstanding during the period. Diluted earnings per share are
computed using the weighted average number of common and potentially dilutive
securities outstanding during the period. Potentially dilutive securities
consist of the incremental common shares issuable upon exercise of stock options
and warrants (using the treasury stock method). Potentially dilutive securities
are excluded from the computation if their effect is anti-dilutive.
The following table sets forth the computation of basic and diluted earnings
(loss) per share:
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Three months ended
-------------------------------------
September 30, September 30,
2003 2002
------------------ ------------------
Numerator:
Net loss ($399,841) ($136,144)
(399,841)
Numerator for basic loss per share - loss available to common stockholders (136,144)
Numerator for diluted loss per share - loss available to common stockholders (399,841)
after assumed conversions (136,144)
Denominator:
Denominator for basic loss per share - weighted average shares outstanding 22,933,812 22,788,899
Effect of dilutive securities using the treasury stock method as at September
30, 2003:
5,996,571 Warrants Outstanding -- --
2,096,188 Stock Options Outstanding -- --
Effect of dilutive securities using the treasury stock method as at September
30, 2002:
7,366,577 Warrants Outstanding -- --
2,081,301 Stock Options Outstanding -- --
Dilutive potential common shares -- --
Denominator for diluted loss per share - adjusted weighted average shares and assumed 22,933,812 22,788,899
conversion
Basic loss per share ($0.02) ($0.01)
Diluted loss per share ($0.02) ($0.01)
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8. Stock Based Awards
Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure, an Amendment of FASB Statement No. 123,"
amends the disclosure requirements of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), to
require more prominent disclosures in both annual and interim financial
statements regarding the method of accounting for stock-based employee
compensation and the effect of the method used on reported results.
We account for stock-based compensation plans in accordance with Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees," under which no compensation cost is recognized in the financial
statements for employee stock arrangements when grants are made at fair market
value. The Company has adopted the disclosure only provisions of SFAS No. 123,
"Accounting for Stock Based Compensation".
Under variable plan accounting, we recognize a charge equal to the per share
change in the share value until the underlying options expire or are exercised.
During the quarters ended September 30, 2003 and 2002, we recognized $12,735 and
($5,947) respectively related to variable awards.
9
Had compensation cost for the stock-based compensation plans been determined
based upon the fair value at grant dates for awards under those plans consistent
with the method prescribed by SFAS 123, net income would have been reduced to
the pro forma amounts indicated below:
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(in thousands, except per share amounts) Three Months Ended September 30,
---------------------------------------- --------------------------------
2003 2002
---- ----
Net loss, as reported ($400) ($136)
Intrinsic compensation charge recorded under APB 25 8 482
Pro Forma compensation charge under SAS 123 (252) (609)
----------------------------------------------------------------------------------- ----------------------- ---------------------
Pro Forma net loss ($644) ($263)
Net loss Per Share:
Basic--as reported ($0.02) ($0.01)
Basic--pro forma ($0.03) ($0.01)
Diluted--as reported ($0.02) ($0.01)
Diluted--pro forma ($0.03) ($0.01)
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The fair value of each option granted was estimated on the date of the grant
using the Black-Scholes option-pricing model using the following weighted
average assumptions:
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Quarter Ended September 30,
2003 2002
---- ----
Risk-free interest rates N/A 1.65%
Expected dividend yields N/A --
Expected volatility N/A 142%
Expected option life (in years) N/A 5
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The weighted average fair value as of the grant date for grants made
in the quarters ended September 30, 2003 and 2002 were $0 and $127,000
respectively.
9. New Accounting Standards
Accounting for Revenue Arrangements with Multiple Deliverables
In November 2002, the EITF reached a consensus on Issue No. 00-21, Revenue
Arrangements with Multiple Deliverables. Issue 00-21 provides guidance on how to
account for arrangements that involve the delivery or performance of multiple
products, services and/or rights to use assets. The provisions of Issue 00-21
will apply to revenue arrangements entered into in fiscal periods beginning
after June 15, 2003. We do not believe that the adoption of Issue 00-21 will
have a material effect on our consolidated financial position, results of
operations or cash flows.
Amendment of Statement 133 on Derivative Instruments and Hedging Activities
On April 30, 2003, the FASB issued Statement No. 149, Amendment of Statement
133 on Derivative Instruments and Hedging Activities. Statement 149 is intended
to result in more consistent reporting of contracts as either freestanding
derivative instruments subject to Statement 133 in its entirety, or as hybrid
instruments with debt host contracts and embedded derivative features. In
addition, Statement 149 clarifies the definition of a derivative by providing
guidance on the meaning of initial net investments related to derivatives.
Statement 149 is effective for contracts entered into or modified after June 30,
2003. At September 30, 2003, we do not hold any derivative instruments. We do
not believe the adoption of Statement 149 will have a material effect on our
consolidated financial position, results of operations or cash flows.
Financial Instruments with Characteristics of Both Liabilities and Equity
On May 15, 2003, the FASB issued Statement No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity.
Statement 150 establishes standards for classifying and measuring as liabilities
certain financial instruments that embody obligations of the issuer and have
characteristics of both liabilities and equity. Statement 150 represents a
significant change in practice in the accounting for a number of financial
instruments, including mandatory redeemable equity instruments and certain
equity derivatives that frequently are used in connection with share repurchase
programs. Statement 150 is effective for all financial instruments created or
modified after May 31, 2003, and to other instruments as of July 1, 2003. We
adopted Statement 150 on July 1, 2003 and do not believe the effect of adopting
this statement will have a material impact on our financial position, results of
operations or cash flows.
10
10. Goodwill
Total goodwill at September 30, 2003 related to the acquisitions of Keynomics
and DesignCAD was $579,000. In accordance with SFAS No. 142, Goodwill and
Intangible Assets, we will assess the underlying goodwill for impairment
annually or more frequently if circumstances indicate impairment.
11. Subsequent Events
CADKEY Acquisition Termination
On October 27, 2003, we terminated our bid to acquire substantially all of the
assets of CADKEY Corporation ("CADKEY") a Massachusetts corporation through an
auction sale. CADKEY was acquired by Kubotek Corporation of Japan when we
decided not to increase our initial bid of $2,500,000 based on our evaluation of
CADKEY's recent performance and the potential for future litigation. As a result
of the termination, we will receive a break up fee of $45,000 and expect to be
reimbursed for $225,000 of professional fees advanced to CADKEY.
As previously disclosed, on August 22, 2003, we entered into an agreement with
CADKEY to purchase substantially all of its assets. The proposed purchase price
was $2,500,000 and the assumption of CADKEY customer obligations. The
acquisition was conditioned upon court approval pursuant to Section 363 of the
U.S. Bankruptcy Code after CADKEY filed a voluntary petition under Chapter 11 of
the Bankruptcy Code on August 22, 2003 in the U.S. Bankruptcy Court in
Worcester, Massachusetts.
CADsymbols Acquisition
On October 27, 2003, we entered into an asset license and purchase agreement
with Cardiff Consultants, Limited, a New York corporation ("Cardiff"), whereby
Cardiff granted to us the exclusive, non-transferable right to use the domain
names and trademark cadsymbols.com and cadsymbols.net until September 30, 2006,
at which date Cardiff is to assign the domain names and trademark to us. The
total consideration for the acquisition ($845,000) is comprised of the
following:
o Three Hundred Thirty-Five Thousand Dollars ($335,000) upon the
execution of the agreement;
o One Hundred Fifty-Five Thousand Dollars ($155,000) on January 15, 2004;
o One Hundred Thousand Dollars ($100,000) on July 31, 2004;
o Royalty payments to Cardiff equal to Two percent (2.00%) of the net
revenues generated from sales from the websites, in the minimum amounts
and according to the following schedule:
o For the period from the execution of the agreement through
September 30, 2004: Fifty Thousand Dollars ($50,000);
o For the period of October 1, 2004 through September 30, 2005:
Eighty Thousand Dollars ($80,000);
o For the period of October 1, 2005 through September 30, 2006:
One Hundred Twenty-Five Thousand Dollars ($125,000).
In addition, we granted to Cardiff a warrant to purchase Twenty-Five Thousand
(25,000) shares of IMSI's common stock at any time within the three year period
following the execution of the agreement at $1.14 per share.
Upon the execution of the agreement, Cardiff deposited in an escrow account the
assignment agreement of each domain name, and the assignment agreement of the
trademark. The escrow agreement calls for release of the assignment documents to
us on September 30, 2006 subject to the cumulative payment to Cardiff of all
amounts due.
11
CADsymbol Acquisition
On November 6, 2003, we entered into an asset purchase agreement with Assisto
GmbH ("Assisto"), a German company, whereby we acquired title and interest in
certain tangible and intangible assets of Assisto including the CAD Symbol
content and custom developed software and all related assets including
inventory, web sites and domain names.
The total purchase price ((euro)285,000) will be paid according to the following
schedule:
o (euro)$143,000 at closing;
o The remaining(euro)$142,000 of the purchase price will be held in the
escrow account, and released as follows:
o Five payments of (euro)25,000.00 each to be paid to the
Assisto 90, 180, 270, 360, and 450 days after the date of
closing;
o (euro)17,000 held in the account for a period of twelve months
from the closing to be used to fund any indemnity claims
should they arise.
In addition, we granted to Ane Gyldholm and Michael Heckmann, principals of
Assisto, warrants, each to purchase Twenty Thousand (20,000) shares of IMSI's
common stock at any time within the three year period following the closing at
an exercise price equal to the price of IMSI's common stock as of the closing
date.
Item 2- Management's Discussion and Analysis or Plan of Operations
The following information should be read in conjunction with the consolidated
financial statements and the notes thereto and in conjunction with Management's
Discussion and Analysis or Plan of Operations in our Fiscal 2003 Form 10-KSB.
This quarterly report on Form 10-QSB, and in particular this "Management's
Discussion and Analysis or Plan of Operations," may contain forward-looking
statements regarding future events or our future performance. These future
events and future performance involve certain risks and uncertainties including
those discussed in the "Other Factors That May Affect Future Operating Results"
section of this Form 10-QSB, as well as in our Fiscal 2003 Form 10-KSB, as filed
with the Securities and Exchange Commission ("SEC"). Actual events or our actual
future results may differ materially from any forward-looking statements due to
such risks and uncertainties. We assume no obligation to update these
forward-looking statements to reflect actual results or changes in factors or
assumptions affecting such forward-looking statements. This analysis is not
intended to serve as a basis for projection of future events.
Critical Accounting Policies
In accordance with recent Securities and Exchange Commission guidance, those
material accounting policies that we believe are the most critical to an
investor's understanding of our financial results and condition have been
expanded and are discussed below. Certain of these policies are particularly
important to the portrayal of our financial position and results of operations
and require the application of significant judgment by our management to
determine the appropriate assumptions to be used in the determination of certain
estimates.
Revenue Recognition
Revenue is recognized in accordance with American Institute of Certified Public
Accountants Statement of Position ("SOP") 97-2, Software Revenue Recognition,
and SOP 98-9, Modification of SOP 97-2, With Respect to Certain Transactions.
Revenue is recognized when persuasive evidence of an arrangement exists
(generally a purchase order), product has been delivered, the fee is fixed and
determinable, and collection of the resulting account is probable.
o Revenue from packaged product sales to resellers and end users is
recorded at the time of the sale net of estimated returns. o Revenue
from sales to distributors is recognized when the product sells through
to retailers and end users. Sales to distributors permit limited rights
of return according to the terms of the contract.
o For software delivered via the Internet, revenue is recorded when the
customer downloads the software.
o Revenue from post contract customer support (PCS) is recognized ratably
over the contract period.
12
o Training fees are recognized when the service is performed.
o Subscription revenue is recognized ratably over the contract period.
o Revenue from hybrid products is allocated to the underlying components
based on the ratio of the value of each component to the total price
and each portion is recognized accordingly.
o Non-refundable advanced payments received under license agreements with
no defined terms are recognized as revenue when the customer accepts
the delivered software.
o Revenue from software licensed to developers, including amounts in
excess of non-refundable advanced payments, is recorded as the
developers ship products containing the licensed software.
o Revenue from minimum guaranteed royalties in republishing agreements is
recognized ratably over the term of the agreement. Royalties in excess
of the guaranteed minimums are recognized when collected.
o Revenue from Original Equipment Manufacturer (OEM) contracts is
recognized upon completion of our contractual obligations.
Reserve for returns, price discounts and rebates
Reserves for returns, price discounts and rebates are estimated using historical
averages, open return requests, channel inventories, recent product sell-through
activity and market conditions. Our allowances for returns, price discounts and
rebates are based upon management's best judgment and estimates at the time of
preparing the financial statements. Reserves are subjective estimates of future
activity that are subject to risks and uncertainties, which could cause actual
results to differ materially from estimates.
Our return policy generally allows our distributors to return purchased products
primarily in exchange for new products or for credit towards future purchases as
part of stock balancing programs. These returns are subject to certain
limitations that may exist in the contract with an individual distributor,
governing, for example, aggregate return amounts, and the age, condition and
packaging of returned product. Under certain circumstances, such as terminations
or when a product is defective, distributors could receive a cash refund if
returns exceed amounts owed.
Inventories
Inventories are valued at the lower of cost or market and are accounted for on
the first-in, first-out basis. Management performs periodic assessments to
determine the existence of obsolete, slow moving and non-salable inventories,
and records necessary provisions to reduce such inventories to net realizable
value. As of September 30, 2003, approximately $40,000 of our inventory was held
by certain of our distributors under consignment arrangements.
Impairment
Property, equipment, intangible and certain other long-lived assets are
amortized over their useful lives. Useful lives are based on management's
estimates of the period that the assets will generate revenues. Long-lived
assets are written down to fair value whenever events or changes indicate that
the carrying amount of an asset may not be recoverable. Our policy is to review
the recoverability of all long-lived assets at a minimum of once per year and
record an impairment loss when the fair value of the assets does not exceed the
carrying amount of the asset.
In accordance with SFAS No. 142, Goodwill and Intangible Assets, we will assess
the underlying goodwill for impairment annually or more frequently if
circumstances indicate impairment.
Recent Events
DesignCAD Product Line Acquisition
On July 28, 2003, we entered into an agreement to purchase the tangible and
intangible assets of Upperspace Corporation, an Oklahoma corporation,
constituting its DesignCAD line of products, several learning aids, and various
smaller design programs.
The purchase price included the following consideration:
o $700,000 cash (of which $100,000 to be held in escrow for a period of
12 months);
13
o $300,000, 5% simple interest, promissory note payable 12 months from
the date of closing;
o An earn-out based on net revenue that could result in an additional
$300,000 during the next three fiscal years;
o A license pursuant to which Upperspace shall act for a period as the
exclusive distributor of the purchased products to retail outlets, and
a non-exclusive reseller of the product through direct sales channels
such as the internet, email, telephone and fax.
CADalog Acquisition
On September 12, 2003, we acquired from CADalog, Inc, CADalog.com, a network of
websites that offers one of the largest mechanical parts symbols libraries
on-line and allows members access to over 8 million 2D and 3D hardware component
symbols. The acquisition also included the purchase of CADalog, Inc.'s
Partsxl.com, Partswork.com and 3DModelsharing.com websites. This acquisition
gives us the opportunity to sell additional CAD content and software plug-ins.
The total consideration for the acquisition was $295,000. A payment of $250,000
was made on September 19, 2003 and the remaining $45,000 will be held in an
escrow account with $15,000 to be released to the seller ninety days after the
closing date, and the remaining $30,000 to be released after a period of twelve
months. The escrow balance of $45,000 was fully funded on October 8, 2003.
Results of Operations
The following table sets forth our results of operations for the three months
ended September 30, 2003 and 2002 in absolute dollars and as a percentage of net
revenues. It also details the changes from the prior fiscal year in absolute
dollars and in percentages. On June 30, 2003, we sold ArtToday, our wholly owned
subsidiary based in Arizona, to Jupitermedia Corporation. Under Generally
Accepted Accounting Principles in the United States, ArtToday's operating
results for the period ended September 30, 2002, have been accounted for as
discontinued operations.
Fiscal Quarter ended September 30,
------------------------------------------ ----------------------
$ Change from
previous year
----------------------
2003 2002
-------------------- ------------------
$ As % of $ As % $ Increase %
sales of /
sales (Decrease)
---------- --------- --------- -------- ------------ ---------
Net revenues $ 1,732 100% $ 100% $ (267) -13%
1,999
Product cost 578 33% 507 25% 71 14%
-------------------------------------------------------- ---------- --------- --------- -------- ------------ ---------
Gross margin 1,154 67% 1,492 75% (338) -23%
Operating expenses
Sales & marketing 689 40% 690 35% (1) 0%
General & administrative 683 39% 942 47% (259) -27%
Research & development 477 28% 378 19% 100 26%
-------------------------------------------------------- ---------- --------- --------- -------- ------------ ---------
Total operating expenses 1,849 107% 2,009 101% (160) -8%
-------------------------------------------------------- ---------- --------- --------- -------- ------------ ---------
Operating loss (695) -40% (517) -26% (178) 34%
-------------------------------------------------------- ---------- --------- --------- -------- ------------ ---------
Other Income (expenses)
Interest and other, net 80 5% (14) -1% 94 -690%
Unrealized gain on marketable securities 130 8% -- -- 130 100%
Gain on extinguishment of debt 81 5% 178 9% (97) -54%
-------------------------------------------------------- ---------- --------- --------- -------- ------------ ---------
Total other income (expenses) 291 17% 164 8% 127 77%
-------------------------------------------------------- ---------- --------- --------- -------- ------------ ---------
loss before income tax (404) -23% (353) -18% (51) 14%
-------------------------------------------------------- ---------- --------- --------- -------- ------------ ---------
Income tax benefit (4) 0% -- -- (4) 100%
-------------------------------------------------------- ---------- --------- --------- -------- ------------ ---------
loss from continuing operations (400) -23% (353) -18% (47) 13%
-------------------------------------------------------- ---------- --------- --------- -------- ------------ ---------
Income from discontinued operations, net of income tax -- 217 11% (217) -100%
-------------------------------------------------------- ---------- --------- --------- -------- ------------ ---------
Net Loss $ (400) -23% $ (136) -7% $ (264) 194%
-------------------------------------------------------- ---------- --------- --------- -------- ------------ ---------
14
Net Revenues
Net revenues of each of our principal product categories in dollars and as a
percentage of total net revenues for the three months ended September 30, 2003
and 2002 are summarized in the following table (in thousands except for
percentage amounts):
Fiscal Quarter Ended September 30,
----------------------------------------------------------------------------------
2003 2002
---------------------- -----------------------
$ % $ % $ Change % change
----------- ---------- ------------ ---------- -------------- --------------
Precision Design $ 664 38% $ 967 48% $ (303) -31%
Business Applications and Other 1,068 62% 1,032 52% 36 4%
--------------------------------------------- ----------- ---------- ------------ ---------- -------------- --------------
Net Revenues $ 1,732 100% $ 1,999 100% $ (267) -13%
--------------------------------------------- ----------- ---------- ------------ ---------- -------------- --------------
Sales of our flagship product, TurboCAD(R), decreased in the three months ended
September 30, 2003 as compared to the same reporting periods in the previous
fiscal year, resulting in an overall decrease in revenues in the precision
design category. The introduction of the "DesignCAD" line of products during the
first quarter of fiscal 2004 and the slight increase in the sales of FloorPlan
slightly offset the overall decrease in sales in the precision design category
as compared to the same period from the previous fiscal year.
Overall revenues in the business applications and other category increased
slightly during the three months ended September 30, 2003 as compared to the
same periods of the previous fiscal year. Revenues from Keynomics, our
productivity software subsidiary are included in this category and amounted to
$160,000 during the quarter ended September 30, 2003 as compared to $177,000 in
the comparable quarter from the previous fiscal year. The introduction of new
titles during this quarter (PhotoObject) in addition to the release of newer
version of our existing products (EasyLanguage and Net Accelerator) offset the
decline in sales of other products comprising this segment.
Internationally, we distribute our products through our wholly owned German and
Australian subsidiaries and republishing partners in Europe and Asia. During the
previous fiscal year, we stopped the liquidation of our German subsidiary with a
petition to the German Court, which allowed us to utilize the wholly owned
subsidiary to sell directly into the European Union. Total net sales from our
German sub accounted for $183,000 during the quarter ended September 30, 2003.
The following table details the revenue breakdown between the domestic and
international markets for the periods indicated.
--------------------------------- ----------------------------------------------------------------------------------------------
Quarter ended September 30,
----------------------------------------------------------------------------------------------
2003 2002
------------------------ ------------------------
$ % $ % $ Change % change
------------ ----------- ------------ ----------- ----------------- ------------------
Domestic sales $1,324 76% $1,685 84% ($361) -21%
International sales 408 24% 314 16% 94 30%
--------------------------------- ------------ ----------- ------------ ----------- ----------------- ------------------
Net Revenues $1,732 100% $1,999 100% (267) -13%
--------------------------------- ------------ ----------- ------------ ----------- ----------------- ------------------
We are currently serving the domestic and international retail markets using
direct sales methods and republishing agreements. Low barriers to entry, intense
price competition, and business consolidations continue to characterize the
consumer software industry. Any one of these factors along with the intermittent
unfavorable retail conditions, including erosion of margins from competitive
marketing and high rates of product returns, may adversely affect our revenues
in the future.
Our international revenues may be affected by the risks customarily associated
with international operations, including fluctuations of the U.S. dollar,
increases in duty rates, exchange or price controls, longer collection cycles,
government regulations, political instability and changes in international tax
laws.
Reserve for Returns, Price Discounts and Rebates
During the first quarter of fiscal 2004 we provided $165,000 for returns and
received actual returns of approximately $30,000. The return reserve balance as
of September 30, 2003 of $514,000 is consistent with the level of our estimate
of excess inventory in the channel.
15
Product Costs
Our product costs include the costs of CD-ROM duplication, printing of manuals,
packaging and fulfillment, freight-in, freight out, license fees, royalties that
we pay to third parties based on sales of published software and amortization of
capitalized software acquisition and development costs. Costs associated with
the return of products, such as refurbishment and the write down in value of
returned goods are also included in product costs. The increase in product costs
in absolute dollars and as a percentage of net revenues for the three months
ended September 30, 2003 as compared to the same period from the previous fiscal
year was primarily attributable to increased royalty expenses and to a change in
product mix.
Gross Margin
During the quarter ended September 30, 2003, gross margin declined to 67% from
75% in the comparable quarter from the previous fiscal year. This decrease in
gross margin is mainly attributable to additional royalty expenses, sales
returns and provisions and a shift in our product mix towards the "business
application and other" segment from the "precision design" segment.
Given the uncertain product lifecycle for some of our historically high margin
products and depending on the success of newer versions launches, we may see our
gross margin decline further in future reporting periods.
Sales and Marketing
Our sales and marketing expenses consist primarily of salaries and benefits of
sales and marketing personnel, commissions, advertising, printing and direct
mail expenses. Sales and marketing expenses during the quarter ended September
30, 2003 remained flat as compared to the same period from the previous fiscal
year.
General and Administrative
Our general and administrative expenses consist primarily of salaries and
benefits for employees in the legal, finance, accounting, human resources,
information systems and operations departments, fees to our professional
advisors, rent and other general operating costs.
The decrease in general and administrative expenses during the quarter ended
September 30, 2003 as compared to the same quarter from the previous year was
primarily due to the absence of amortization of the intrinsic value of warrants
issued to Mr. Martin Wade III, our CEO, as part of his initial employment
agreement during the previous fiscal year. These amortization charges totaled
$260,000 during the quarter ended September 30, 2002. During the second quarter
of fiscal 2003, we amended Mr. Wade's employment agreement whereby IMSI and Mr.
Wade agreed to the full and complete cancellation of all outstanding warrants
granted to Mr. Wade. Consequently, we reversed, during the second quarter of
2003, $432,000 of already incurred amortization expense of the intrinsic value
of warrants issued to Mr. Wade but were unvested.
Research and Development
Our research and development expenses consist primarily of salaries and benefits
for research and development employees and payments to independent contractors.
The increase in research and development expenses in the three months ended
September 30, 2003 as compared to the same period from the previous fiscal year
resulted mainly from increased personnel costs.
16
Interest and Other, Net
Interest and other expenses, net, include interest and penalties on debt
instruments, foreign currency transaction gains and losses, and other
non-recurring items. The following table summarizes the components of interest
and other, net for the three-month period ended September 30, 2003 and 2002:
---------------------------------------------------------------- --------------------------------- -------------- ----------
Quarter ended September 30,
---------------------------------
2003 2002 Change
-------------- -------------- -------------------------
Interest & other expense, net
Interest expense $ (3) $ (48) $ 45 -94%
Interest income 26 6 20 314%
Foreign exchange gain (loss) 6 (14) 20 -144%
Other income 51 42 9 21%
---------------------------------------------------------------- -------------- -------------- -------------- ----------
Total $ 80 $ (14) $ 94 -690%
---------------------------------------------------------------- -------------- -------------- -------------- ----------
Unrealized gain on marketable securities
During the quarter ended September 30, 2003, we recorded a $130,000 gain on
marketable securities when we marked to market value the composition of our
portfolio. The following table summarizes the net gain on marketable securities:
---------------------------------------------------------------------------------- ------------------------------
Description Amount
Gain on Jupitermedia common stock $142,500
Loss on professionally managed portfolio (12,205)
---------------------------------------------------------------------------------- ------------------------------
Total $130,295
---------------------------------------------------------------------------------- ------------------------------
Gain on extinguishment of debt
During the quarter ended September 30, 2003, we recognized a gain of $81,000
from the extinguishment of debt primarily relating to the settlement of
liabilities related to assets under a capital lease.
During the fiscal quarter ended September 30, 2002, we recognized a gain of
$178,000 from the extinguishment of debt representing the difference between the
carrying balances and the settlement amounts payable to a variety of unsecured
creditors. $84,000 was attributable to the extinguishment of debt owed to
Baystar Capital, $10,000 to Broderbund and $84,000 to various other unsecured
creditors.
Provision for Income Taxes
In the three months ended September 30, 2003, we recorded a tax benefit of
$4,000 related to the refund of our estimated state income tax paid in prior
fiscal years.
We have not recorded a tax benefits for domestic tax losses because of the
uncertainty of realization. We adhere to Statement of Financial Accounting
Standards No. 109 "Accounting for Income Taxes," which requires an asset and
liability approach to financial accounting and reporting for income taxes.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realized.
Income from Discontinued Operations
In June 2003, we sold ArtToday, our wholly owned subsidiary based in Arizona, to
Jupitermedia Corporation. Under Generally Accepted Accounting Principles
("GAAP") in the United States, ArtToday's operating results for the period ended
September 30, 2002, totaling $217,000 have been accounted for as discontinued
operations.
Liquidity and Capital Resources
As of September 30, 2003, we had $6,729,000 in cash and cash equivalents. This
represents a $3,670,000 decline from the $10,399,000 balance at June 30, 2003.
Working capital at September 30, 2003 was $7,051,000. This represents a decline
of $1,605,000 over the working capital at June 30, 2003 of $8,656,000.
17
Our operating activities used net cash of $2,024,000 during the three months
ended September 30, 2003. This compares to net cash used from operations of
$870,000 in the three months ended September 30, 2002. Our increased net loss,
combined with payments we made relating to accrued taxes and accrued payroll
expenses contributed to the increased usage of cash in the three months ended
September 30, 2003 as compared to the same period from the previous fiscal year.
Our investing activities consumed net cash of $1,544,000 during the three months
ended September 30, 2003, as compared to net cash used of $32,000 during the
comparable period from the previous fiscal year. The cash was mainly used to
acquire new product lines. We made payments of $700,000 relating to the
acquisition of the DesignCAD product line and $250,000 relating to the
Cadalog.com acquisition. During the quarter ended September 30, 2003, we
invested $160,000 in marketable securities and we extended a $350,000 loan to
DCDC as disclosed in note 5 to our condensed consolidated financial statements.
Our financing activities consumed net cash of $98,000 for the three-month period
ended September 30, 2003. This compares to $248,000 of net cash used by
financing activities during the comparable quarter from the previous fiscal
year. As disclosed in note 4 to our consolidated financial statements, we paid
$160,000 to Imageline on July 7, 2003, which represents the final payment in
connection with our mutual settlement of previous infringements claims. This
payment accounted for most of the cash used in our financing activities during
the quarter ended September 30, 2003 and was in part offset by cash received
from the exercise of warrants and options in the amounts of $65,000 and 61,000,
respectively.
Historically, we have financed our working capital and capital expenditure
requirements primarily from retained earnings, short-term and long-term notes
and bank borrowings, capitalized leases and sales of common stock. To support
future growth, we may seek additional equity and/or debt financing. However, we
believe that we have sufficient funds to support our operations at least for the
next twelve months, based on our current cash position and equity sources. If we
are successful in improving our financial performance, we believe that we will
be able to obtain any additional financing required at competitive terms. In
addition, we will continue to engage in discussions with third parties
concerning the sale or license of certain product lines and/or the sale or
license of part of our assets.
To achieve our growth objectives, we are considering different strategies,
including growth through mergers and/or acquisitions. As a result, we are
evaluating other companies and businesses for potential synergies that would add
value to our existing operations.
The forecast period of time through which our financial resources will be
adequate to support working capital and capital expenditure requirements is a
forward-looking statement that involves risks and uncertainties, and actual
results could vary. Furthermore, any additional equity financing may be dilutive
to shareholders, and debt financing may involve restrictive covenants.
Other Factors that May Affect Future Operating Results
Factors that may affect operating results in the future include, but are not
limited to:
o Market acceptance of our products or those of our competitors
o Timing of introductions of new products and new versions of existing
products
o Expenses relating to the development and promotion of such new products
and new version introductions
o Intense price competition and numerous end-user rebates
o Projected and actual changes in platforms and technologies
o Accuracy of forecasts of, and fluctuations in, consumer demand
o Extent of third party royalty payments
o Rate of growth of the consumer software and Internet markets
o Timing of orders or order cancellation from major customers
o Changes or disruptions in the consumer software distribution channels
o Economic conditions, both generally and within the software or Internet
industries
18
Item 3- Controls and Procedures
(a) Under the supervision and with the participation of IMSI's management,
including IMSI's principal executive officer and principal financial officer, we
conducted an evaluation of our disclosure controls and procedures, as such term
is defined under Rule 13a-14(c) promulgated under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), within 90 days of the filing date of this
report. Based on their evaluation, our principal executive officer and principal
financial officer concluded that our disclosure controls and procedures are
effective.
(b) We have evaluated our accounting procedures and control processes related to
material transactions to ensure they are recorded timely and accurately in the
financial statements. There have been no significant changes in our internal
controls or in other factors that could significantly affect these controls
subsequent to the date of the evaluation referenced in paragraph (a) above.
PART II - OTHER INFORMATION
Item 1- Legal Proceedings
Not Applicable
Item 2- Changes in Securities
Not Applicable
Item 3- Defaults upon Senior Securities
Not Applicable
Item 4- Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5- Other Information
Not Applicable
Item 6- Exhibits and Reports on Form 8-K
(a) Exhibits and Financial Statements:
The following documents are filed as a part of this Report:
Financial Statements
The following consolidated financial statements of International Microcomputer
Software, Inc., and Subsidiaries are incorporated by reference in Part I, Item
1:
Consolidated Balance Sheet at September 30, 2003 and June 30, 2003
Consolidated Statements of Operations for the interim periods ended
September 30, 2003 and 2002
Consolidated Statements of Shareholders' Equity for the interim
period ended September 30, 2003
Consolidated Statements of Cash Flows for the interim periods
ended September 30, 2003 and 2002
Notes to Consolidated Financial Statements
Exhibits
19
The following exhibits are filed as part of, or incorporated by reference into
this Report:
31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
o On July 18, 2003, we filed a Form 8-K to disclose the details of the
sale of our wholly owned subsidiary ArtToday to Jupitermedia
Corporation.
o On August 26, 2003, we filed a Form 8-K to disclose our intention to
purchase CADKEY pending bankruptcy court approval.
o On September 25, 2003 we filed a Form 8-K to announce our financial
results for the fiscal year ended June 30, 2003.
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTERNATIONAL MICROCOMPUTER SOFTWARE, INC.
Date: November 13, 2003
By: /s/ Martin Wade, III
Martin Wade, III
Director & Chief Executive Officer
By: /s/ William J. Bush
William J. Bush
Chief Financial Officer (Principal Accounting Officer)
21
INDEX TO EXHIBITS:
Number Exhibit Title Page
31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 23
31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 24
32.1 Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 25
32.2 Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 26
22