<PAGE> 1
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, 1997
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)
CALIFORNIA 94-2862863
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
1895 FRANCISCO BLVD. EAST, SAN RAFAEL, CALIFORNIA 94901
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (415) 257-3000
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 September 19, 1997 was approximately
$76,300,000
As of September 19, 1997, 5,214,114 Shares of Registrant's Common Stock, no
par value, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: None
<PAGE> 2
INTERNATIONAL MICROCOMPUTER SOFTWARE, INC.
FORM 10-K ANNUAL REPORT
FOR THE YEAR ENDED JUNE 30, 1997
TABLE OF CONTENTS
PART I
<TABLE>
<S> <C> <C>
Item 1. Business 3
Item 2. Properties and Facilities 8
Item 3. Legal Proceedings 8
Item 4. Submission of Matters to a Vote of Security Holders 8
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters 9
Item 6. Selected Financial Data 10
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 11
Item 8. Financial Statements and Supplementary Data 17
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 17
PART III
Item 10. Directors and Executive Officers of the Registrant 18
Item 11. Executive Compensation 20
Item 12. Security Ownership of Certain Beneficial Owners and Management 23
Item 13. Certain Relationships and Related Transactions 23
PART IV
Item 14. Exhibits, Financial Statement, Schedules, and Reports on Form 8-K 24
Signatures 44
Exhibit Index 45
</TABLE>
2
<PAGE> 3
PART I
ITEM 1. BUSINESS
GENERAL
International Microcomputer Software, Inc. (IMSI(R) or the "Company") was
incorporated in California in November 1982. The Company's corporate
headquarters are in San Rafael, California, and subsidiary offices are
maintained in the United Kingdom, Germany, Australia, South Africa, France and
Brazil. The Company develops and publishes computer software for personal
computers.
The report on this Form 10-K contains forward-looking statements, including
statements related to industry trends and demand for software products, expected
resolution of legal proceedings, cash commitments, working capital requirements
and expansion in international markets. Discussions containing such
forward-looking statements may be found 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 risk factors on pages 14 through 16, among others, should be
considered in evaluating the Company's prospects and future financial
performance.
PRODUCTS
The Company has over 30 software products operating on the Microsoft Windows and
Apple Macintosh operating platforms, for the business and consumer markets. The
products are organized into four main product groups: CAD (Computer Aided
Design) Group; Office Automation; Desktop Publishing and Consumer products.
IMSI(R) owns the technology and controls development of its key products, and
works with a network of other development companies to provide a stream of new
products, which the Company publishes, on both an exclusive and non-exclusive
basis. The Company's primary software products have been internally developed,
acquired from independent third parties or developed for the Company by software
development companies and individual programmers, in exchange for a development
fee. In cases where the Company has publishing rights for a product, the Company
generally has exclusive marketing arrangements for the products it sells, as
well as ownership of the product name.
COMPUTER AIDED DESIGN
TurboCAD(R) v4 and TurboCAD(R) v4 Professional (approximate street price $100 to
$300) are mid-range and professional Computer Aided Design (CAD) software
products. TurboCAD(R) addresses the design needs for architects, civil,
electrical and mechanical engineers, technical illustrators, and landscape
designers. The products have sold over one million units to date and were ranked
as the best selling mid-range CAD products in terms of unit sales in the U.S.
market according to PC Data, as of April 1997. TurboCAD(R) is offered in both
Windows and Macintosh formats.
TurboCAD(R) Designer for Windows (approximate street price $30) is positioned
for entry level users to learn and use CAD. TurboCAD(R) Designer can be used for
remodeling projects, CAD instruction, and hobby and house plan designs. The
product includes an instruction book for learning and using CAD, over 2,000 CAD
symbols, powerful 2D TurboCAD(R) design features, a full 3D modeler, and over
100 HomeStyles plans.
3
<PAGE> 4
FloorPlan(R) Plus 3D for Windows (approximate street price $30) allows users to
design their homes, offices and gardens with ease. The product is used to design
home and office layouts, landscaping, decks, kitchens and more in 2D, and can
also be used to "view" and walk through their floor plan designs in full 3D.
FloorPlan(R) Plus 3D also includes over 1,000 home plans, a home design book, a
stand-alone garden designer, and Internet accesses to on-line home and garden
resources. Over 600,000 units of FloorPlan(R) Plus 3D have been sold to date.
FloorPlan(R) 3D Deluxe for Windows (approximate street price $50) includes a
Quick and Easy Estimator and a 3D modeler that can be used to create furniture
and design symbols for use in their floor plan.
OFFICE AUTOMATION AND PROJECT MANAGEMENT
TurboProject(TM) 2.0 Professional (approximate street price $295) features
multi-user, multi-project capabilities, resource allocation, leveling, and
in-depth analysis and cost control. Based on the methodology of Top Down
Structured Planning, TurboProject(TM) provides businesses with the ability to
combine WBS, OBS and RBS hierarchical structures in a single project management
model.
TurboProject(TM) 2.0 (approximate street price $49) is a powerful yet
easy-to-use software product for project work. TurboProject(TM) 2.0 was designed
specifically to provide control throughout the entire life of small to
medium-sized projects.
WinDelete(TM) (approximate street price $30) is an uninstaller software product
that allows safe, accurate, and effective removal of programs and files for
computers running on Windows. WinDelete(TM) includes Internet management
features, ZIP compression utility, system optimization, benchmarking and a full
award winning virus protection software.
FormTool(R) 97 (approximate street price $99) is the best selling forms
automation software product in the U.S. retail market, according to PC Data as
of June 1997. FormTool(R)'s powerful, easy-to-use design and editing tools
enable the user to create professional looking forms in a very short time.
FormTool(R) 97 assists businesses to organize and standardize written
communication. The product's relational database and email routing features
ensure seamless integration into the work environment.
NetAccelerator(TM) (approximate street price $30) was recently released in May
1997. NetAccelerator(TM) accelerates Internet Explorer or Netscape Navigator web
browsing by using idle modem time to load pages in the background.
NetAccelerator(TM) includes Symantec's Internet Fast Find and Anawave's Gravity
Lite Newsreader.
DESKTOP PUBLISHING AND ART
MasterClips(R) Premium Image Collections (approximate street price $30) are high
quality images featuring a wide variety of hand-picked clip art, fonts, and
photos for desktop publishing documents as well as web page designs, and are
available on both Windows and Mac platforms.
MasterClips(R)101,000 (approximate street price $50) includes 33,000
vector-based color clip images, 40,000 classic black and white Dover images,
22,500 ink-jet ready photos, 3,500 high resolution photos, 2,000 true type
fonts, and 500 sound effects, video and animation clips. MasterClips(R) 101,000
includes the powerful MediaPaq Browser to easily locate these images.
4
<PAGE> 5
MasterClips(R) 150,000 (approximate street price $70) includes 54,000 vector
based clip art images, 47,000 classic black and white images, 5,200 professional
quality photos, 41,800 ink-jet ready photos, 2,000 TrueType fonts, 1,400 Web
images and 500 sounds, video and animation clips. MasterClips(R) 150,000
includes the powerful MediaPaq Browser to easily locate these images.
MasterPublisher(TM) Premium Publishing Suite for Windows (approximate street
price $30) is a new desktop publishing suite for the small office or home.
MasterPublisher(TM) can be used for high-quality newsletters, brochures, logos,
greeting cards, and more. The suite includes TurboPublisher(R) as a layout tool,
TurboDraw(R) as a drawing, designing and effects tool, with 20,000 clip art
images, 2,000 fonts, a browser and image reference catalog.
MasterPhotos(TM) 25,000 Premium Photo Collection (approximate street price $30)
is a unique photo library designed to enhance multimedia, desktop and Internet
projects, which includes 5,000 BMP high resolution photographs in over 33
categories, with 22,500 ink-jet ready photos. MasterPhotos(TM) 50,000
(approximate street price $50) began shipping in June 1997.
CONSUMER
Easy Language 17 Language Edition(TM) (approximate street price $30) allows
users to start learning their choice of Spanish, French, German, English,
Italian, Greek, Danish, Russian, Portuguese, Japanese, Chinese, Korean, Thai,
Indonesian, Hebrew, and Arabic. It is designed for business and leisure
travelers as well as language students and enthusiasts to learn the most
important words and phrases in another language, with a wide variety of travel
and language Internet links. The product is available both for Windows and
Macintosh in the same package.
Easy Language Conversational Skills(TM) (approximate street price $30) is the
newest addition to the Company's best selling multilingual software line and was
developed in conjunction with top language learning experts from France, a
subsidiary of France Telecom. Conversational Skills offers in-depth grammar,
vocabulary, and pronunciation and reading lessons in Spanish, French, German and
English. It is designed to be a highly interactive and comprehensive language
tutorial that explores critical areas of language learning such as verb
conjugation and sentence structure.
BACKGROUND AND GROWTH STRATEGY
The Company completed its initial public offering in July 1987, raising net
proceeds of approximately $2,600,000. In August 1988, the Company acquired Milan
Systems America, Inc. and the rights to TurboCAD(R). In August 1993, the Company
acquired the rights to FormTool(R), and raised approximately $1,300,000 in a
private placement. In January 1995, the Company acquired the rights to
ViewPoint, a project management software product. In September 1995, the Company
acquired the rights to the FloorPlan(R) Plus product line from
Forte/ComputerEasy International, Inc. In April 1997, the Company acquired the
right to Micro Cookbook(TM), and in July 1997 the rights to MapLinx(R) and
Hijaak(R) product lines, from Computer Concepts Corporation and Quarterdeck
Corporation, respectively. In September 1997, the Company acquired all the
outstanding shares of MediaPaq(TM), Inc.
The Company has consistently expanded its line of software products during the
last few years. The Company's long term goal is to continue to grow during the
next several years, and to either become a major competitor in the markets in
which it competes, or consolidate with a strategic partner in the software or
information industry.
5
<PAGE> 6
Even if the Company is successful in its goal of increasing revenues and
profits, the Company's plans regarding future growth involve several risks to
the Company, including among others, increased financing needs, capital and cash
flow requirements, changing facilities requirements, the possibility that
revenues will not grow at a rate commensurate with increased expenditure levels,
and the need to add additional management and other personnel to manage the
growth. There can be no assurance that the Company will successfully grow in the
future.
SALES AND MARKETING
Sales of the Company's products are primarily to companies for resale, such as
software distributors, computer dealers, and retail outlets (collectively,
"retail channel sales"), and also direct to end-users ("direct sales"). The
majority of the Company's channel sales are to distributors, which in turn
resell the products to computer dealers nationally and internationally. Major
distributors of the Company's products include Ingram Micro, Tech Data and
American Online Inc., among others. The Company also sells directly to a limited
number of computer resellers.
The Company's focus in channel sales is to increase sales through its current
distributor network, primarily through the introduction of new products. The
Company also markets products through a combination of telephone sales,
advertising, direct mail, trade shows and sales promotion activities. The
Company has opened the following international sales offices: London, England in
April 1992; Sydney, Australia in April 1993; Munich, Germany in October 1993;
Johannesburg, South Africa in November 1994; Paris, France in April 1995 and Rio
de Janeiro, Brazil in May 1997.
During fiscal 1997, the Company continued its sales transition away from direct
mail in favor of the retail channel, which typically has higher profit margins.
An outside sales force is employed to manage key retail and distribution
accounts directly and solidify and expand these relationships, all of which
broadened IMSI(R)'s overall product distribution. IMSI(R)'s direct mail strategy
remains focused on mining the Company's substantial user database through
cost-effective upgrade and crossgrade mailings. Additionally, new product
introductions such as TurboCAD(R) Professional have afforded expansion
opportunities into the corporate market, which the Company plans to target in
fiscal 1998.
COMPETITION
The microcomputer software and hardware industries are highly competitive and
are characterized by rapid changes in technology and customer requirements. The
Company competes in the acquisition of new products and in the marketing and
sale of its existing products. Important factors in consumer software marketing
include product features, quality, ease of understanding and operation, brand
recognition, advertising and dealer merchandising, access to distribution
channels, hardware compatibility, pricing, and availability and quality of
support services.
The Company competes for new and innovative products primarily on the basis of
brand-name reputation, the terms offered to software developers and the ability
to market new products successfully as demonstrated by past success and current
presence in distribution channels.
The Company faces competition from a large number of sources. The Company's
competitors vary in size from small companies with limited resources to large
corporations, including manufacturers of microcomputers, with substantially
greater financial and management resources than the Company and with the
technical ability to develop or acquire products similar to those offered by the
Company. The Company's size could adversely affect its ability to compete with
larger companies for sales to dealers, distributors, and retail outlets, for
shelf space for its products. Moreover, competition in the Windows applications
segment and the multimedia segment from major software publishers is
intensifying, and the competitive upgrade price discounting between the major
firms is eroding traditional price segmentation that had previously existed in
the software industry. There can be no assurance that
6
<PAGE> 7
price and market share competition will not intensify, or those software or
hardware manufacturers will not market products that may adversely affect the
Company's revenues and income.
Currently, a significant portion of the Company's revenues depends upon sales of
the TurboCAD(R) and MasterClips(R) product lines. A significant decline in sales
with one or more of these product lines could adversely affect the Company's
results of operations. Thus, the Company is more vulnerable to market declines
and competition in the markets for such products than companies with more
diversified sources of revenues.
CHANGES IN TECHNOLOGY FOR PRODUCTS
Changes in technology, product obsolescence, and advances in computer software
and hardware will require the Company to develop or acquire new products and to
enhance its products in a timely manner. There can be no assurance that the
Company will be successful in such efforts or that the Company will have the
resources required to respond to technological changes or to compete
successfully in the future. Because of the Company's small size and capital
resources relative to some of its competitors, its ability to avoid
technological obsolescence through acquisition or development of new products or
upgrades of existing products may be more limited than companies with greater
resources. In addition, there can be no assurance that upgrades or new releases
of the Company's products will be free from program defects, which might reduce
sales of such upgrades or new releases.
Several major microcomputer software companies have continued to reduce the
prices of their products. The Company may be required to reduce the prices of
its products in the future to remain competitive. If the Company significantly
reduced the prices of one or more of its products, there can be no assurance
that such price reductions would result in an increase in unit sales volume or
that prices would not continue to decline in the future, which would result in a
decrease in the revenues from, and gross profits on, sales of such products.
RESEARCH AND DEVELOPMENT
Improvements in microcomputer software products are important to keep the
products competitive in the rapidly changing technological markets for the
Company's products. The Company has significantly increased its expenditures on
research and development to upgrade its existing products and allow its products
to operate in new environments. Research and development costs for the fiscal
years ended June 30, 1997, 1996 and 1995, were $4,565,334, $3,170,937, and
$2,151,069 respectively. The Company significantly increased the level of
research and development expenses in fiscal 1996 and fiscal 1997 from previous
levels and expects such expenses to remain at a high level in fiscal 1998
compared with fiscal 1997.
INTERNATIONAL SUBSIDIARIES
In April 1992, the Company formed IMSI(TM) (UK) Limited as a wholly owned
subsidiary, with an office and warehouse located in London, England. In April
1993, the Company formed IMSI(TM) Australia (PTY) Ltd. as a wholly owned
subsidiary, with an office and warehouse located in Sydney. In October 1993, the
Company formed IMSI(TM) Germany (GmbH) as a wholly owned subsidiary with an
office and warehouse located in Munich. In November 1994, the Company formed
IMSI(TM) South Africa Ltd. as a wholly owned subsidiary, with an office and a
warehouse located in Johannesburg, South Africa. In April 1995, the Company
formed IMSI(TM) France as a wholly owned subsidiary, with an office located in
Paris, France. In May 1997, the Company formed IMSI(TM) Brazil as a wholly
owned subsidiary, with an office located in Rio de Janeiro, Brazil.
EMPLOYEES
As of June 30, 1997, the Company had 215 full-time employees, including
approximately 76 marketing and sales
7
<PAGE> 8
employees, 59 administrative, including accounting, MIS and operations
personnel, and approximately 80 research and development personnel. The Company
also utilizes the services of independent contractors on an as-needed basis.
The Company's ability to market, sell, and support its products and establish
and maintain its competitive position will depend, in part, on its ability to
attract and retain qualified personnel. While the Company believes that it has
been able to attract and retain such personnel, there can be no assurance that
it will continue to be able to do so in the future. The Company is not a party
to any collective bargaining agreements with its employees and considers its
relations with its employees to be satisfactory.
ITEM 2. PROPERTIES AND FACILITIES
The Company's primary facilities include leased corporate office space and
warehouse space located in Northern California. The Company leases offices
consisting of approximately 27,600 and 2,968 square feet of office space at 1895
Francisco Blvd. East, and 2505 Kerner Blvd. in San Rafael, California,
respectively, and approximately 34,000 square feet of warehouse space in
Richmond, California at a combined rate of approximately $50,000.
The Company also leases smaller office and warehouse space in the greater
metropolitan areas of London, England; Munich, Germany; Sydney, Australia;
Johannesburg, South Africa; Paris, France and Rio de Janeiro, Brazil. The
Company expects that its current leased facilities will be sufficient to meet
its needs for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company is a party
to or to which any of its property is subject.
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, 1997 other than the election of nominees to the Company's
Board of Directors and approval of an amendment to the 1993 Incentive Plan,
increasing by 300,000 the number of shares of Common Stock issuable under the
plan.
8
<PAGE> 9
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Presently, the Common Stock is traded on the NASDAQ National Market under the
symbol "IMSI(R)." Historically, trading volume of the Common Stock has been very
small and the market for the Common Stock has been materially less liquid than
that of most other publicly traded companies. Significant sales of Common Stock
by officers and directors or other shareholders could have an adverse effect on
the market price of the Common Stock.
The following table sets forth the quarterly high bid and low asked prices of
the Common Stock for fiscal 1996 and fiscal 1997, 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.
<TABLE>
<CAPTION>
CLOSING SALES PRICES
Fiscal Year 1996 High Bid Low Asked
---------------- -------- ---------
<S> <C> <C>
First Quarter $ 4.55 $3.67
Second Quarter 6.00 4.45
Third Quarter 5.83 4.00
Fourth Quarter 8.00 5.67
Fiscal Year 1997
First Quarter $ 7.42 $5.00
Second Quarter 10.42 6.50
Third Quarter 17.13 7.50
Fourth Quarter 10.75 7.38
</TABLE>
There were approximately 1,077 Holders of record of the Common Stock as of
September 19, 1997. The Company believes that additional beneficial owners of
its Common Stock hold their shares in street names.
The Company 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 the Company's future dividend policy on the basis of many
factors, including results of operations, capital requirements and general
business conditions.
9
<PAGE> 10
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS DATA: (Amounts in thousands except share and per share amounts)
Year ended June 30, 1997 1996 1995 1994 1993
- ------------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Revenues $41,840 $25,679 $20,300 $23,118 $13,193
Operating income (loss) 4,367 1,801 (370) 553 939
Income (loss) before
income taxes 4,237 1,539 (424) 573 857
Cumulative effect of
accounting change -- -- -- 800 --
Extraordinary items:
Utilization of income
tax carry forward -- -- -- -- 274
Net income (loss) 2,597 954 (435) 1,120 760
Net income (loss) per share:
Primary $.47 $.18 ($.09) $.23(a) $.21(b)
Fully-diluted $.47 $.18 ($.09) $.23(a) $.20(b)
Weighted average common
and common equivalent
shares outstanding:
Primary 5,578,552 5,422,445 4,719,186 4,829,558 3,659,846
Fully-diluted 5,578,552 5,422,445 4,719,186 4,829,558 3,801,267
BALANCE SHEET DATA:
As of June 30, 1997 1996 1995 1994 1993
- -------------- ---- ---- ---- ---- ----
Working capital $7,335 $3,092 $1,967 $1,918 $375
Total assets 17,573 11,058 7,470 6,752 3,845
Long term debt and other
obligations 2,042 565 103 110 --
Stockholders' equity 7,495 4,522 3,397 3,674 1,019
</TABLE>
(a) Includes cumulative effect of accounting change of $.17 per share.
(b) Includes extraordinary gain of $.07 per share.
10
<PAGE> 11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
OVERVIEW
IMSI(R) achieved record revenues and profitablility in fiscal 1997. Net revenues
were $41,839,795 in fiscal 1997 compared to $25,679,017 in fiscal 1996 and net
income of $2,596,503 or $.47 per share in fiscal 1997 compared to $953,572 or
$.18 per share in fiscal 1996. In fiscal 1997, IMSI(R) introduced several new
products designed for the corporate user, as well as new consumer products
including MasterClips(R) 150,000 Premium Image Collection, which continued the
success of the Company's MasterClips(R) line of desktop publishing and
electronic art products and upgrades to the Company's flagship computer-aided
design and drafting software, TurboCAD(R). The Company's fiscal 1997 results are
reflective of these new product introductions, its ongoing investment in the
Company's core technologies, its expanded international presence and continued
strength in the retail channel.
NET REVENUES
Net revenues were $41,839,795, $25,679,017 and $20,300,361 in fiscal 1997, 1996,
and 1995 respectively. This represented a 63% increase in fiscal 1997 revenue
over fiscal 1996 and a 27% increase in fiscal 1996 over fiscal 1995. Increased
sales in fiscal 1997 compared to fiscal 1996 were primarily the result of a 112%
increase in retail channel sales with a decrease of 38% in direct mail sales.
The increased sales in fiscal 1996 compared with fiscal 1995 was primarily due
to a 41% increase in retail channel sales, in combination with an increase of
4% in direct mail sales.
Net revenues from retail channel were $36,607,000 or 87% of total revenues,
compared to $17,265,000 or 67%, and $12,202,000 or 60% in fiscal 1997, 1996 and
1995, respectively. Net revenues from direct mail sales were $5,336,000,
$5,233,000 and $8,098,000 in fiscal 1997, 1996 and 1995, respectively.
Approximately 68%, 65%, and 48% of the Company's total net revenues in fiscal
1997, 1996 and fiscal 1995, respectively, were comprised of the TurboCAD(R) and
MasterClips(R) product lines.
International net revenues accounted for $17,208,000, or 41% of total net
revenues in fiscal 1997, compared to $8,614,000 or 34%, and $7,399,000 or 36% in
fiscal 1996 and 1995, respectively. The increases in international net revenues
over the previous periods were primarily the result of increased sales through
distribution channels, as well as continued penetration into international
markets where the Company had no prior presence.
PRODUCT COSTS
Product costs were $16,893,342 or 40%, $8,261,583 or 32%, and $7,143,795 or 35%
of net revenues in fiscal 1997, 1996 and 1995 respectively. The increase in
product cost as a percentage of revenue from fiscal 1996 to 1997 is attributed
to a shift from direct mail to retail channel sales. This is due to the pricing
structure associated with selling directly to consumers, compared to sales
through software distributors. During fiscal 1995, the Company reevaluated and
changed the economic lives of capitalized software acquisition and development
costs. Beginning with the quarter ending March 31, 1995, the Company reduced the
amortization period from 36 months to 18 months, resulting in additional
amortization of approximately $500,000 during fiscal 1995. Amortization of
capitalized software development costs and software acquisition costs charged to
product costs were $357,886, $375,206 and $939,507 for fiscal 1997, 1996 and
1995, respectively. As a result of the shift from direct mail sales to retail
channel
11
<PAGE> 12
sales, and the acceleration of amortization costs in fiscal 1995, gross margins
were 60% in fiscal 1997, compared to 68% and 65% in fiscal 1996 and 1995
respectively.
SALES AND MARKETING
Sales and marketing expenses were $12,025,941 or 29%, $9,888,558 or 39%, and
$8,918,867 or 44% of net revenue for fiscal 1997, 1996 and 1995 respectively.
The decrease in fiscal 1997 sales and marketing expenses as a percent of net
revenues was primarily a result of increased revenue in channel sales and
decreased direct mail personnel and direct mail promotional activities compared
to fiscal 1996. The decrease in fiscal 1996 sales and marketing expenses as a
percentage of net revenues was primarily a result of decreased direct mail
personnel and direct mail promotional activities from fiscal 1995. There were
76, 57 and 35 sales and marketing personnel at June 30, 1997, 1996 and 1995.
Direct mail sales expenses comprised 10%, 46%, and 61% of total sales and
marketing expenses in fiscal 1997, 1996 and 1995, respectively. The decrease in
direct mail sales expense was primarily a result of the Company's decision to
focus its operations upon retail channel sales.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $3,987,747 or 10%, $2,556,757 or 10%,
and $2,456,990 or 12% of net revenues for fiscal 1997, 1996 and 1995
respectively. General and administrative absolute dollar expenses increased in
fiscal 1997 as a result of increased personnel hiring due to company growth
domestically and internationally. The Company had 59, 32 and 31 administrative
personnel at June 30, 1997, 1996 and 1995 respectively.
RESEARCH AND DEVELOPMENT
Research and development expenses were $4,565,334 or 11%, $3,170,937 or 12%, and
$2,151,069 or 11% of net revenues for fiscal 1997, 1996, and 1995 respectively.
The increase in absolute dollars is due to domestic headcount increases,
utilization of additional software development contractors in Russia and other
third party development costs resulting from a large fiscal 1997 product release
schedule. The decrease in percent of sales is due to the Company's growth in
revenue.
At June 30, 1997, 1996 and 1995 the Company had 80, 41, and 28 research and
development employees, respectively. In addition, the Company uses independent
research and development contractors located in Russia. The additional
contractors hired were primarily engaged both in enhancing and modifying
products that the Company has acquired from third parties as well as developing
new products internally. For fiscal 1997, 1996 and 1995, the Company capitalized
software acquisition and development costs of $43,697, $402,469 and $191,460
respectively. The amortization of such costs is included in product costs.
OTHER EXPENSE, NET
Other expense was $130,033, $262,374, and $53,925 for fiscal 1997, 1996 and
1995, respectively. Other expense is comprised primarily of interest expense on
short and long-term borrowings and foreign currency transaction gains and
losses. In fiscal 1997 there was $34,226 of foreign exchange gain and $164,259
of interest expense compared to $81,879 foreign exchange loss and $180,495 of
interest expense in fiscal 1996.
12
<PAGE> 13
PROVISION FOR INCOME TAXES
The Company's provision for income tax was $1,640,895, $585,236 and $10,548 for
fiscal 1997, 1996 and 1995, respectively. The Company's effective income tax
rate was 39%, 38%, and 2% in fiscal 1997, 1996 and 1995, respectively. The
Company's effective income tax rate for fiscal 1995 was reduced due to the
non-deductibility of significant charges in 1995 for write-offs.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its business primarily from cash flows from operations,
short-term bank borrowings, and proceeds from the sale of stock. Working capital
increased to $7,334,515 at June 30, 1997 from $3,092,310 at June 30, 1996,
resulting primarily from growth in receivables and inventories related to
increased retail channel sales, offset by an increase in accounts payable and
contracts payable.
The Company used cash generated from operations and short-term borrowings to
fund its working capital requirements (including income tax payments of
$1,910,447 in fiscal 1997) and to acquire software products and furniture and
equipment. The Company's operating activities used net cash of $486,114, and
provided net cash of $716,657 and $277,553 in fiscal 1997, 1996 and 1995,
respectively. The Company's investing activities used cash of $367,566,
$1,089,135, and $598,339 in fiscal 1997, 1996 and 1995, respectively. These
expenditures were primarily for the acquisition and development of software,
trademarks and the purchase of additional office equipment. At June 30, 1997,
the Company had no material commitments for capital expenditures. Net cash
proceeds provided by financing activities was $1,592,316, $236,649 and $322,840
in fiscal 1997, fiscal 1996 and fiscal 1995, respectively. Fiscal 1997 cash
inflows from financing activities included term loan borrowings of $1,476,249
and proceeds from the issuance of common stock of $480,638.
As of June 30, 1997, the Company had a credit agreement with a bank under which
it can borrow the lesser of $2,500,000 or 25% of eligible inventory up to a cap
of $500,000 and 80% of eligible accounts receivable, at the bank's index rate
(8.50% at June 30, 1997). The amount of the unused credit line at June 30, 1997
was $2,500,000. The line of credit agreement requires the Company to maintain
certain financial ratios including net worth and working capital. Under terms of
the agreement, all assets not subject to liens of other financial institutions
have been pledged as collateral against the line of credit. The credit line
expires October 31, 1997. Management believes that the Company will be able to
renew or replace such credit agreement with the bank or another financial
institution on substantially similar terms.
The Company has experienced, and expects to continue to experience, significant
fluctuations in operating results due to a variety of factors, including the
size and rate of growth of the consumer software market, market acceptance of
the Company's products and those of its competitors, development and promotional
expenses relating to the introduction of new products or new versions of
existing products, projected and actual changes in computing platforms, the
timing and success of product introductions, product returns, changes in pricing
policies by the Company and its competitors, difficulty in securing retail shelf
space for the Company's products, the accuracy of retailers' forecasts of
consumer demand, the timing of orders from major products, order cancellations
and delays in shipment. In response to competitive pressures, the Company may
take certain pricing or marketing actions that could materially adversely affect
the Company's business, operating results and financial condition. The Company
may be required to pay fees in advance or to guarantee royalties, which may be
substantial, or to obtain licenses to intellectual properties from third parties
before such properties have been introduced or achieved market acceptance. A
significant portion of the Company's operating expenses is relatively fixed, and
planned expenditures are based in part on sales forecasts. If net sales do not
meet the Company's expectations, the Company's business, operating results and
financial condition could be materially adversely affected.
13
<PAGE> 14
The Company believes that cash flow from operations, together with existing
sources of liquidity, will satisfy the Company's working capital and capital
expenditure requirements for at least the next twelve months. The Company
believes that these sources will also be sufficient to satisfy its working
capital and capital expenditure requirements beyond the next 12 months at the
Company's current level of operations. The Company's long term goal, however, is
to grow substantially. Expansion of the Company's current business may involve
significant financial risk and require significant capital investment.
Significant expansion of the Company's operations, future acquisitions of
products or companies, unexpected increases in expenses or other factors might
lead the Company to seek additional debt or equity financing. While the Company
believes it will be able to raise any necessary funds, there can be no
assurances that the Company will be able to do so, and failure to obtain
sufficient capital could have a material adverse effect on the Company or
adversely affect the Company's ability to continue to grow. In order to finance
future growth or for other reasons, the Company may consider an offering of its
equity securities within the next year or thereafter. The decision to undertake
such an offering, and the size of such an offering, would depend upon many
factors, such as the market price of the common stock, the working capital and
capital expenditure needs of the Company, the availability of alternative
sources of capital, and general market conditions.
FUTURE PERFORMANCE AND ADDITIONAL RISK FACTORS
FLUCTUATIONS IN OPERATING RESULTS. The company has experienced and may in the
future experience significant quarterly and annual fluctuations in revenues and
results of operations. The Company's revenues and results of operations
fluctuate as a result of a variety of factors which include acceptance of the
Company's products, the amount of revenue generated from products which require
third party royalty payments, changes in product mix, competitive conditions in
the industry and general economic conditions. Furthermore, the revenue growth
rates experienced during fiscal 1997 may not continue into fiscal 1998 and
beyond. Shortfalls in revenues or earnings from levels expected by the financial
market could have an immediate and significant adverse effect on the trading
price of the Company's common stock.
Future operating results will continue to heavily depend on the level of
software sales. Although the Company experienced growth during fiscal years 1997
and 1996, 1995 did show a loss. Due to the acceptance and demand associated with
the Company's software products, revenues are difficult to forecast and may
fluctuate dramatically between reporting periods. Future prices the Company will
be able to obtain for its software products may decrease from historical levels
depending on competitive factors. There can be no assurances that the Company
will continue the software revenue growth trend experienced in fiscal 1997 or
that the Company will achieve historical levels of software revenue.
The Company plans to increase its presence in international markets. Risks
associated with such pursuits include, but are not limited to, the following:
changing market demands, economic and political conditions in foreign markets,
foreign exchange fluctuations, longer collections cycles and changes in
international tax laws. During fiscal 1997, the Company experienced an increase
in revenues in all international subsidiaries. There can be no assurances that
the Company's international subsidiaries will continue to increase.
The Company generates revenue from internally developed software products, some
of which utilize technology licensed from third parties. The Company expects to
continue utilizing third party technology and may enter into agreements with
additional business partners. 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. There can
be no assurances that the third parties will renew or not cancel existing
agreements with the Company or require financial conditions which are
unfavorable to the Company.
14
<PAGE> 15
The Company expects product development expenses to grow in future periods to
fund development efforts on new and existing products. However, there can be no
assurances that revenues will be sufficient to support the future product
development which is required for the Company to be competitive. Although the
Company may be able to release new products in addition to enhancements to
existing products, there can be no assurances that the Company's new or upgraded
products will be accepted, will not be delayed or canceled, or will not contain
errors or "bugs" that could affect the performance of the product or cause
damage to users' data.
The Company expects sales and marketing expenses to increase in the future as
the Company releases and promotes new products, increases promotions of existing
product lines and continues to build its sales force. However, because of the
lengthy sales cycle associated with software applications, the Company believes
that the impact of these activities, if any, on future license revenues will not
be immediate and there can be no assurances that increased sales, business and
consumer, and marketing expenditures will result in increased revenues.
COMPETITION. The business and consumer software market is intensely competitive
and rapidly changing. A number of competitors offer products similar to the
Company's products and target the same customers. The Company believes that its
ability to compete depends upon many factors within and outside its control,
including the timing and market acceptance of new products and enhancements
developed by the Company and its competitors, product functionality,
performance, price, reliability, customer service and support, sales and
marketing efforts and product distribution. The Company has many competitors
including Visio Corporation, Learning Company, Inc., Autodesk, Inc., Corel
Corporation, Broderbund Software, Inc., and Expert Software, Inc. The Company's
products also compete with products offered by other vendors, with systems
integrators and with consulting companies that offer custom software development
services. In addition, the Company competes with in-house management information
services and programming resources of its potential customers. Many of the
Company's competitors have substantially greater financial, technical marketing
and sales resources than the Company. Some of these competitors also offer
business application products not offered by the Company. There can be no
assurances that the Company will be able to compete successfully in the future.
RAPID TECHNOLOGICAL CHANGE. The software industry is characterized by rapid
technological change. The pace of change has accelerated due to advances in
mainframe and client/server technology and the growth in internet, intranet and
extranet utilization. The Company expects to evaluate potential opportunities
and may invest in those which are compatible with the Company's strategic
direction. However, there can be no assurances that any such investments will be
profitable. The introduction of products embodying new technologies and the
emergence of new industry standards can render existing products obsolete.
Accordingly, the Company's future success will depend in part upon its ability
to continue to enhance its current products and to develop and introduce new
products that respond to evolving customer requirements and keep pace with
technological development and emerging industry standards, such as new operating
systems, hardware platforms, interfaces and third party applications software.
There can be no assurances that the Company will be successful in developing and
marketing product enhancements or new products that respond to technological
change, changes in customer requirements or emerging industry standards, that
the Company will not experience difficulties that could delay or prevent the
successful development, introduction and marketing of such products and
enhancements, or that any new products or enhancements that it may introduce
will achieve market acceptance.
PROPRIETARY RIGHTS. The Company regards its products as proprietary. Through its
license agreements with customers and its internal security systems,
confidentiality procedures and employee agreements, the Company has taken steps
to maintain the trade secrecy of its products. However, there can be no
assurances that misappropriation will not occur. In addition, the laws of some
countries do not protect the Company's proprietary rights to the same extent as
do the laws of the United States.
15
<PAGE> 16
The Company is not aware of any claims that its products infringe on the
proprietary rights of third parties, however, there can be no assurances that
third parties will not assert infringement claims against the Company in the
future with respect to current or future products or that any such assertions
may not require the Company to enter into royalty arrangements or result in
costly litigation.
EMPLOYEES. The Company's success depends on a number of its key employees. The
loss of the services of the Company's key employees could have a material
adverse effect on the Company. The Company believes that its future success will
also depend in large part on its ability to attract and retain highly-skilled
technical and management personnel. Competition for such personnel in the
software industry is intense and the supply is limited. There can be no
assurances that the Company will be successful in attracting and retaining such
personnel.
NEW ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 "Earnings per Share" (SFAS 128). The
Company is required to adopt SFAS 128 in the December 31, 1997 quarter and will
restate at that time earnings per share (EPS) data for prior periods to conform
with SFAS 128. Earlier application is not permitted.
SFAS 128 replaces current EPS reporting requirements and requires a dual
presentation of basic and diluted EPS. Basic EPS excludes dilution and is
computed by dividing net income by the weighted average of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock.
If SFAS 128 had been in effect during the current and prior year periods, basic
EPS would have been $0.53, $0.20, and $(0.09) for fiscal years ended June 30,
1997, 1996, and 1995, respectively. Diluted EPS under SFAS 128 would not have
been significantly different than fully diluted EPS currently reported for the
periods.
In June 1997, the Financial Accounting Standard Board issued Statements of
Financial Accounting Standards No. 130 (Reporting Comprehensive Income), which
requires that an enterprise report, by major components and as a single total,
the change in its net assets during the period from non-owner sources; and No.
131 (Disclosures about Segments of an Enterprise and Related Information), which
establishes annual and interim reporting standards for an enterprise's operating
segments and related disclosures about its products, services, geographic areas,
and major customers. Adoption of these statements will not impact the Company's
consolidated financial position, results of operations or cash flows, and any
effect will be limited to the form and content of its disclosures. Both
statements are effective for fiscal years beginning after December 15, 1997,
with earlier application permitted.
QUARTERLY TRENDS
The Company's consolidated results of operations to date have not been
materially affected by seasonal trends. However, the Company believes that in
the future its results may be impacted by such factors as order deferrals in
anticipation of new product releases, delays in shipments of new products, a
slower growth rate in the software markets in which the Company operates, or
adverse general economic and industry conditions in any of the countries in
which the Company does business. In addition, with significant portions of net
revenues contributed by international operations, fluctuations of the U.S.
dollar against foreign currencies and the seasonality of the European,
Asia/Pacific, and other international markets could impact the Company's results
of operations and financial position in a particular quarter. Rapid
technological change and the Company's ability to develop, manufacture, and
market products that successfully adapt to the change may also impact results of
operations. Further, increased market competition from competitors either known
or unknown to the Company could also
16
<PAGE> 17
negatively impact the Company's results of operations. Due to these factors, the
Company's future earnings and stock price may by subject to significant
volatility, particularly on a quarterly basis. Any shortfall in revenues or
earnings from anticipated levels could have an immediate and adverse effect on
the trading price of the Company's common stock.
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 December 20, 1995, the Company terminated Coopers & Lybrand LLP as
independent auditors for the Company. Coopers & Lybrand provided the Company
with a letter dated November 1, 1995 which explained that because of
independence concerns arising from the recent hiring by the Company of a new
employee who had a family relationship to a member of Coopers & Lybrand's San
Francisco office, it was transferring responsibility for the audit of the
Company from the San Francisco office to the Portland office. Coopers &
Lybrand's reports on the consolidated financial statements of the Company as of
and for the fiscal years ended June 30, 1994 and 1995 did not contain an adverse
opinion or a disclaimer of opinion and the reports were not qualified or
modified as to uncertainty, audit scope or accounting principles. The decision
to change accountants was approved by the Company's Board of Directors. During
the Company's two prior fiscal years (June 30, 1994 and 1995) and subsequent
interim period (through December 20, 1995), there have been no disagreements
with Coopers & Lybrand on any matter of accounting principles or practice,
financial statement disclosure, or auditing scope or procedure, which, if not
resolved to the satisfaction of Coopers & Lybrand, would have caused Coopers &
Lybrand to make a reference to the subject matter of the disagreement in
connection with its report. During the Company's two prior fiscal years (June
30, 1994 and 1995) and subsequent interim period (through December 20, 1995),
there did not occur any kind of event listed in paragraphs (a)(1)(v)(A) through
(D) of Regulation S-K, Item 304.
Effective December 20, 1995, the Company engaged Deloitte & Touche LLP as
independent auditors to audit the Company's financial statements for the fiscal
year ended June 30, 1996. During the Company's two prior fiscal years (1994 and
1995) and subsequent interim period (through December 20, 1995), neither the
Company nor any person acting on behalf of the Company consulted Deloitte &
Touche 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 the Company's financial statements; or (ii)
any matter that was either the subject of a disagreement (as defined in
paragraph (a)(1)(iv) of Regulation S-K, Item 304 and the related instructions)
or a reportable event (as described in paragraph (a)(1)(v) of Regulation S-K,
Item 304).
17
<PAGE> 18
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Ken Fineman 37 Vice President of Finance and CFO
Charles Federman 40 Director
Geoffrey Koblick 43 Chairman of the Board of Directors,
Secretary, General Counsel
Robert Mayer 43 Executive Vice President, Director
Earl Hamlin 58 Director
Gordon Landies 41 Director
Martin Sacks 37 President and CEO, Director
</TABLE>
Directors are elected at the annual meeting of shareholders and hold office
until the next annual meeting and until their successors are elected and
qualified. Directors employed by the Company do not receive any monetary fees
for director services performed for the Company; directors are however, eligible
to participate in the Company's stock option plans. The Company may pay monetary
fees to other directors in the future. Officers serve at the pleasure of the
Board of Directors.
Mr. Ken Fineman began serving as the Company's Vice President of Finance and
Chief Financial Officer in September, 1996. Mr. Fineman was previously
President and CEO of ActivCard Networks, Inc. where he founded the North
American subsidiary of a European interactive technology company. Prior to
joining ActivCard Networks, Inc., Mr. Fineman co-founded a subsidiary of
Wasserstein Perella & Company where he executed asset-based mergers,
acquisitions and related financings. Additionally, he has previously held
positions at Bankers Trust Company and Arthur Anderson & Co. Mr. Fineman
attended University of California at Berkeley where he received his
undergraduate degree in accounting and finance. He later received an MBA from
Harvard Business School.
Mr. Charles Federman became a director in May 1996. Mr. Federman is the Chairman
of the Executive Committee and a Managing Director of Broadview Associates of
Fort Lee, New Jersey. Broadview is an information and technology mergers &
acquisitions firm. Federman holds a Bachelor of Science degree from the
University of Pennsylvania's Wharton School of Business.
18
<PAGE> 19
Mr. Geoffrey Koblick has been the Chairman of the Board of Directors, Secretary
and General Counsel of the Company since its inception and served as the
Company's President from its inception through September 15, 1987, and then
again from July 1, 1988 to June 30, 1990. From 1981 to 1982, Mr. Koblick was
legal counsel at MicroPro International Corporation (which later changed its
name to WordStar International Incorporated). Between 1979 and 1981, he
practiced law in San Francisco with Gunheim & Yturbide.
Mr. Robert Mayer has served as the Company's Vice President of Sales since 1990
and as a director since 1985. Prior to 1990 he served as Vice President of
Operations. Before joining the Company, Mr. Mayer worked at Gundlach Bundschu
Winery in Sonoma from 1980 to 1983, where he was the assistant wine maker and
oversaw day-to-day operations.
Mr. Earl Hamlin became a director in 1995. Mr. Hamlin is a private investor.
From 1989 to 1994, he was a portfolio manager at Volpe, Welte and Company, and
an investment-banking firm. From 1973 to 1989, he was employed at Hambrect &
Quist, where he held several positions, including financial analyst. He has been
a director of 800 Software, a distributor of personal computer software and
hardware, and is currently a director of Data Storage Systems, Inc. and National
Employment wire service, Inc., which are both private companies.
Mr. Gordon Landies became a director in 1995. Mr. Landies has held several
managerial positions with Mindscape (formerly known as The Software Toolworks)
since 1989, most recently as Executive Vice President of Domestic Sales. Between
1984 and 1989, Mr. Landies was the President and founder of Design Software.
Prior to founding Design Software, he was employed by several firms in various
financial management capacities.
Mr. Martin Sacks has been a director of the Company since 1988 and the Company's
President and Chief Executive Officer since June 30, 1990. He was the founder of
Milan Systems America, Inc. which was acquired by the Company in 1988. Mr. Sacks
served as a consultant for Arthur Young and Company. Mr. Sacks also founded a
software training company in 1984 and received a Bachelor of Commerce and a
Bachelor of Accounting degree from the University of Witwatersrand, South Africa
in 1981.
19
<PAGE> 20
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION OF EXECUTIVE OFFICERS
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, 1997, 1996 and 1995 to the Company's
Chief Executive Officer and the Company's most highly compensated executive
officers other than the Chief Executive Officer who were serving as executive
officers at the end of the fiscal year ending June 30, 1997 whose compensation
exceeded $100,000 for the most recently completed fiscal year.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------- ----------------------
Other Annual Stock All Other
Name & Principal Position Year Salary($) Bonus($) Compensation(1) Options(#) Compensation($)
- ------------------------- ---- --------- -------- --------------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Martin Sacks, 1997 200,000 22,500 5,249 -- --
President and 1996 182,000 5,178 5,412 50,000 --
Chief Executive 1995 166,375 28,609 5,324 75,000 --
Officer
Geoff Koblick, 1997 160,000 16,000 5,249 -- --
Chairman of the 1996 111,665 3,178 5,412 35,000 --
Board and General 1995 94,997 229 5,324 52,500 --
Counsel
Robert Mayer, 1997 138,000 8,511 5,249 -- --
Executive Vice President 1996 120,000 6,728 5,412 15,000 --
1995 120,229 12,790 5,324 15,000 --
</TABLE>
(1) Consists of payment of medical premiums by the Company.
There are no employment agreements between the Company and any of the named
executive officers.
20
<PAGE> 21
OPTION GRANTS IN FISCAL 1997
The following table sets forth further information regarding individual grants
of options to acquire the Company's Common Stock during fiscal 1997 to each
person named in the Summary Compensation Table above.
<TABLE>
<CAPTION>
Individual Grants
% of Total Options Granted To
Options Employees In Exercise or Base Expiration
Name Granted Fiscal Year Price ($/Shr) Date
- ---- ------- ----------- ------------- ----
<S> <C> <C> <C> <C>
Martin Sacks -- -- -- --
Geoff Koblick -- -- -- --
Robert Mayer -- -- -- --
</TABLE>
The following table sets forth information with respect to the options exercised
during fiscal 1997 by the executive officers named in the Summary Compensation
Table, including the aggregate value of gains on the date of exercise. In
addition, this table includes the number of shares covered by both exercisable
and non-exercisable stock options as of June 30, 1997. Also reported are the
values for "in-the-money" options, which represent the positive spread between
the exercise price of any such existing stock options and the year-end price of
the Common Stock.
OPTION/SAR EXERCISES AND YEAR-END VALUE TABLE
<TABLE>
<CAPTION>
Number of Unexercised Value of Unexercised
Shares Acquired Options/ SARs at In-The-Money Options at
June 30, 1997(#) June 30, 1997($)
Name Exercise (#) Value Realized Exercisable/Unexercisable Exercisable/Unexercisable
- ---- ------------ -------------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Martin Sacks -- -- 84,521/142,500(1) $729,180/$951,510(2)
Geoff Koblick -- -- 31,500/99,750(1) $240,723/$666,057(2)
Robert Mayer 66,529 $550,992 22,608/36,000(1) $201,442/$233,870(2)
</TABLE>
(1) These options which have a five-year vesting period become exercisable over
time based on continuous employment with the Company.
(2) Based on the difference between the market price of the Common Stock at June
30, 1997 ($9.975 per share) and the aggregate exercise prices of options shown
in the table.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
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.
21
<PAGE> 22
To the Company's knowledge, based soley on review of the copies of such reports
furnished to the Company, during the last fiscal year all Section 16(a) filing
requirements applicable to the Company's officers, directors, and greater than
ten percent beneficial owners were complied with.
22
<PAGE> 23
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of June 30, 1997 the ownership of the
Company's Common Stock by (i) each person who is known by the Company to be
owners of record or beneficially own more than 5% of the Company's Common Stock,
(ii) each of the Company's directors (or nominees to be directors) and (iii) all
directors and executive officers as a group. Except as otherwise indicated, the
shareholders listed in the table have sole voting and investment powers with
respect to the shares indicated, subject to community property laws where
applicable.
<TABLE>
<CAPTION>
Name and Address Number of Shares Percentage of
of Beneficial Owner Beneficially Owned Common Stock (1)
- ------------------- ------------------ ----------------
<S> <C> <C>
Geoffrey Koblick (2)
P.O. 776
Ross, CA 94957 503,696 9.82%
Robert Mayer (3)
1895 Francisco Blvd. East
San Rafael, CA 94901 465,524 9.08%
Martin Sacks (4)
1895 Francisco Blvd. East
San Rafael, CA 94901 562,651 10.97%
Earl Hamlin (5)
1895 Francisco Blvd. East
San Rafael, CA 94901 39,132 .76%
Gordon Landies (6)
1895 Francisco Blvd. East
San Rafael, CA 94901 84,625 1.65%
Charles Federman
1 Bridge Plaza
Fort Lee, NJ 07024 66,125 1.29%
All directors and executive
officers as a group (6 persons) 1,721,753 36.02%
</TABLE>
(1) Does not give effect to the exercise of outstanding options held by persons
other than the named individuals of the group.
(2) Includes 131,250 shares issuable upon the exercise of stock options held by
Mr. Koblick.
(3) Includes 58,608 shares issuable upon the exercise of stock options held by
Mr. Mayer.
(4) Includes 227,021 shares issuable upon the exercise of stock options held by
Mr. Sacks.
(5) Includes 22,500 shares issuable upon the exercise of stock options held by
Mr. Hamlin.
(6) Includes 67,500 shares issuable upon the exercise of stock options held by
Mr. Landies.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
23
<PAGE> 24
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(A) DOCUMENTS FILED AS PART OF THIS ANNUAL REPORT ON FORM 10-K:
<TABLE>
<S> <C>
1. Financial Statements
Independent Auditors' Reports 25
Consolidated Balance Sheets at June 30, 1997 and 1996 27
Consolidated Statements of Operations for the years ended
June 30, 1997, 1996 and 1995 28
Consolidated Statements of Shareholders' Equity for the
years ended June 30, 1997, 1996 and 1995 29
Consolidated Statements of Cash Flows for the years ended
June 30, 1997, 1996 and 1995 30
Notes to Consolidated Financial Statement 31
2. Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts for the years
ended June 30, 1997, 1996 and 1995 43
(B) REPORTS ON FORM 8-K: NONE.
(C) EXHIBITS: SEE EXHIBIT INDEX 45
</TABLE>
24
<PAGE> 25
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,
1997 and 1996 and the related consolidated statements of operations,
shareholders' equity, and cash flows for the fiscal years then ended. Our audits
also included the financial statement schedule for the fiscal years ended June
30, 1997 and 1996, listed in the Index at Item 14(a) 2. These financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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, such fiscal 1997 and 1996 consolidated financial statements
present fairly, in all material respects, the financial position of
International Microcomputer Software, Inc. and subsidiaries as of June 30, 1997
and 1996, and the results of their operations and their cash flows for the
fiscal years then ended in conformity with generally accepted accounting
principles. Also, in our opinion, the 1997 and 1996 financial statement
schedule, 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 8, 1997 (September 24, 1997 as to Note 10)
25
<PAGE> 26
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
International Microcomputer Software, Inc.
San Rafael, California
We have audited the accompanying consolidated statements of operations,
shareholders' equity and cash flows and financial statement schedule of
International Microcomputer Software, Inc. and Subsidiaries for the year ended
June 30, 1995. These financial statements and financial statement schedule are
the responsibility of the Company'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 generally accepted auditing
standards. 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 financial statements referred to above present fairly, in
all material respects, the consolidated results of operations and cash flows of
International Microcomputer Software, Inc. and Subsidiaries for the year ended
June 30, 1995 in conformity with generally accepted accounting principles. In
addition, in our opinion, the financial statement schedule referred to above,
when considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
/s/ COOPERS & LYBRAND L.L.P.
- --------------------------------------------
Coopers & Lybrand L.L.P.
San Francisco, California
August 28, 1995, except for the first paragraph of Note 9, for
which the date is September 21, 1995
26
<PAGE> 27
INTERNATIONAL MICROCOMPUTER SOFTWARE, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, 1997 June 30, 1996
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,126,042 $ 387,406
Receivables, less allowances for doubtful
accounts and returns of $2,943,149 and $1,301,509 7,535,634 4,121,210
Inventories, net 3,472,526 2,538,093
Prepaid royalties and licenses 1,285,221 746,677
Deferred tax assets, net 1,472,513 791,301
Other current assets 477,907 479,621
----------- -----------
Total current assets 15,369,843 9,064,308
Furniture and equipment, net 1,693,514 1,101,306
Deferred tax assets, net 264,712 344,067
Other assets, net 244,505 548,697
=========== ===========
Total assets $17,572,574 $11,058,378
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short term debt and other obligations 401,598 231,641
Trade accounts payable 4,500,715 3,076,822
Current portion of notes payable 558,336 333,778
Wages, benefits and sales tax payable 515,092 263,728
Contracts payable 1,318,121 1,054,911
Income taxes payable 741,466 1,011,118
----------- -----------
Total current liabilities 8,035,328 5,971,998
Long term debt and other obligations 2,042,124 564,571
----------- -----------
Total liabilities 10,077,452 6,536,569
Commitments and contingencies
Shareholders' equity:
Common stock, no par value; 300,000,000 authorized;
issued and outstanding 5,128,759 and 4,834,689 shares 6,453,488 5,972,850
Retained earnings (accumulated deficit) 1,372,706 (1,223,797)
Cumulative translation adjustment (45,614) 66,214
Notes receivable from shareholders (285,458) (293,458)
----------- -----------
Total shareholders' equity 7,495,122 4,521,809
----------- -----------
Total liabilities and shareholders' equity $17,572,574 $11,058,378
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
27
<PAGE> 28
INTERNATIONAL MICROCOMPUTER SOFTWARE, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended June 30, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
-------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
Net revenues $41,839,795 100.0% $25,679,017 100.0% $20,300,361 100.0%
Product costs 16,893,342 40.4% 8,261,583 32.2% 7,143,795 35.2%
----------- ----- ----------- ----- ----------- -----
Gross margin 24,946,453 59.6% 17,417,434 67.8% 13,156,566 64.8%
----------- ----- ----------- ----- ----------- -----
Costs and expenses:
Sales and marketing 12,025,941 28.7% 9,888,558 38.5% 8,918,867 44.0%
General and administrative 3,987,747 9.5% 2,556,757 10.0% 2,456,990 12.1%
Research and development 4,565,334 10.9% 3,170,937 12.3% 2,151,069 10.6%
----------- ----- ----------- ----- ----------- -----
20,579,022 49.2% 15,616,252 60.8% 13,526,926 66.7%
----------- ----- ----------- ----- ----------- -----
Operating income (loss) 4,367,431 10.5% 1,801,182 7.0% (370,360) (1.9)%
Other expense, net 130,033 0.3% 262,374 1.0% 53,925 0.3%
----------- ----- ----------- ----- ----------- -----
Income (loss) before income taxes 4,237,398 10.1% 1,538,808 6.0% (424,285) (2.2)%
Provision for income taxes 1,640,895 3.9% 585,236 2.3% 10,548 0.1%
----------- ----- ----------- ----- ----------- -----
Net income (loss) $ 2,596,503 6.2% $ 953,572 3.7% $ (434,833) (2.1)%
=========== ===== =========== ===== =========== =====
Net income (loss) per common and
common equivalent share: $0.47 $0.18 ($0.09)
Weighted average common and common
equivalent shares used to
compute earnings per share: 5,578,552 5,422,445 4,719,186
</TABLE>
See Notes to Consolidated Financial Statements
28
<PAGE> 29
INTERNATIONAL MICROCOMPUTER SOFTWARE, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
Retained Notes
Common Stock Earnings Cumulative Receivable
------------------- (Accumulated Translation from
Shares Amount Deficit) Adjustment Shareholders Total
------ ------ -------- ---------- ------------ -----
<S> <C> <C> <C> <C> <C> <C>
Balance at July 1, 1994 4,649,076 $5,771,749 $(1,742,536) $(61,890) $(292,958) $3,674,365
Issuance of common
stock under stock
bonus plan 4,982 11,629 -- -- -- 11,629
Issuance of common
stock under stock
bonus plan 105,899 80,398 -- -- -- 80,398
Forgiveness of
principal on
notes receivable -- -- -- -- 27,500 27,500
Net loss -- -- (434,833) -- -- (434,833)
Foreign currency
translation -- -- -- 38,166 -- 38,166
--------- ---------- ----------- -------- --------- ----------
Balance at June 30, 1995 4,759,957 $5,863,776 $(2,177,369) $(23,724) $(265,458) $3,397,225
Issuance of common
stock under stock
bonus plan 4,589 14,607 -- -- -- 14,607
Stock issued for
notes receivable 3,333 20,000 -- -- (20,000) --
Issuance of common
stock for options
exercised 66,810 74,467 -- -- -- 74,467
Net income -- -- 953,572 -- -- 953,572
Foreign currency
translation -- -- -- 89,938 -- 89,938
Loan to shareholder
-- -- -- -- (8,000) (8,000)
--------- ---------- ----------- -------- --------- ----------
Balance at June 30, 1996 4,834,689 $5,972,850 $(1,223,797) $ 66,214 $(293,458) $4,521,809
Issuance of common
stock under stock
bonus plan 5,192 8,486 -- -- -- 8,486
Issuance of common
stock for options
exercised 288,878 472,152 -- -- -- 472,152
Net income -- -- 2,596,503 -- -- 2,596,503
Foreign currency
translation -- -- -- (111,828) -- (111,828)
Payment of note -- -- -- -- 8,000 8,000
--------- ---------- ----------- -------- --------- ----------
Balance at June 30, 1997 5,128,759 $6,453,488 $ 1,372,706 $(45,614) $(285,458) $7,495,122
========= ========== =========== ======== ========= ==========
</TABLE>
See Notes to Consolidated Financial Statements
29
<PAGE> 30
INTERNATIONAL MICROCOMPUTER SOFTWARE, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended June 30, 1997, 1996, and 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 2,596,503 $ 953,572 ($434,833)
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities
Depreciation and amortization 857,938 845,480 1,327,463
Deferred taxes (601,857) (402,285) (225,721)
Other -- -- 115,921
Changes in:
Receivables, net (3,414,424) (1,530,888) (934,551)
Inventories (934,433) (912,462) (337,863)
Prepaid royalties and licenses (538,544) (410,624) (102,547)
Other current assets (8,284) 61,414 308,937
Trade accounts payable 1,423,893 879,482 167,760
Wages, benefits and sales tax payable 251,364 75,384 23,591
Contracts payable 263,210 301,536 70,773
Income taxes payable (269,652) 766,110 260,457
Currency translation adjustment (111,828) 89,938 38,166
----------- ----------- -----------
Net cash provided (used) by operating activities (486,114) 716,657 277,553
----------- ----------- -----------
Cash flows from investing activities:
Purchase of equipment (323,869) (342,826) (356,969)
Capitalized software development costs (43,697) (58,719) (191,460)
FloorPlan(R)acquisition -- (687,500) --
Other -- (90) (49,910)
----------- ----------- -----------
Net cash (used) by investing activities (367,566) (1,089,135) (598,339)
----------- ----------- -----------
Cash flows from financing activities:
Credit line borrowings 4,869,000 1,525,000 2,245,000
Credit line repayments (4,869,000) (1,925,000) (1,845,000)
Borrowings through term loan, net 1,476,249 768,750 --
Capital lease and other obligations repayment (372,571) (241,175) (118,211)
Notes receivable from shareholders 8,000 -- --
Proceeds from issuance of common stock 480,638 109,074 40,885
----------- ----------- -----------
Net cash provided by financing activities 1,592,316 236,649 322,674
Net increase (decrease) in cash and cash equivalents 738,636 (135,829) 1,888
Cash and cash equivalents at beginning of period 387,406 523,235 521,347
----------- ----------- -----------
Cash and cash equivalents at end of the period $ 1,126,042 $ 387,406 $ 523,235
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid $ 177,733 $ 180,484 $ 53,958
Income taxes paid $ 1,910,447 $ 165,000 $ 7,619
SUPPLEMENTAL DISCLOSURES OF NON-CASH
FINANCING AND INVESTING ACTIVITIES
Equipment acquired through capital lease obligations $ 768,390 $ 401,263 $ 206,291
Other -- -- $ 78,642
</TABLE>
See Notes to Consolidated Financial Statements
30
<PAGE> 31
INTERNATIONAL MICROCOMPUTER SOFTWARE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
International Microcomputer Software, Inc. (IMSI(R) or the "Company") was
incorporated in California in November 1982. The Company has wholly-owned
subsidiaries located in Munich, Germany; Sydney, Australia; London, England;
Johannesburg, South Africa; Paris, France and Rio de Janeiro, Brazil.
The Company develops and publishes premium productivity software for corporate,
business and home markets sold through a network of dealers and distributors.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of IMSI(R) and its
wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amount of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Significant estimates used in the consolidated financial statements include the
estimates of (i) anticipated future gross revenues from products for which
software development costs have been capitalized, (ii) provision for income
taxes, (iii) the life of identifiable intangible assets from acquisitions, and
(iv) realizability of the deferred tax asset. The amounts the Company will
ultimately incur or recover could differ materially from the Company's current
estimates. The underlying assumptions and facts supporting these estimates could
change in fiscal 1998 or thereafter.
REVENUE RECOGNITION
The Company recognizes revenue, net of estimated returns and allowances, upon
shipment of a product and only when no significant obligations remain and
collectability is probable. Certain of the Company's sales are made to customers
under agreements permitting rights of return for stock balancing.
CONCENTRATIONS OF CREDIT RISK
The Company sells its products principally through a network of distributors and
also on a direct customer basis. The Company performs ongoing credit evaluations
of its distributors and customers' financial condition and generally requires no
collateral.
31
<PAGE> 32
ROYALTY AGREEMENTS
The Company has entered into certain agreements whereby it is obligated to pay
royalties on software published. Software royalties are expensed as product
costs during the period in which related revenues are recorded.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an original
maturity of 90 days or less to be cash equivalents.
CAPITALIZED SOFTWARE DEVELOPMENT COSTS
Costs incurred in the initial design phase of software development are expensed
as incurred as research and development. Once the point of technological
feasibility is reached, direct production costs (programming and testing) are
capitalized. Costs associated with acquired completed software are capitalized.
Total capitalized software development costs at June 30, 1997, 1996 and 1995
were $2,056,304, $2,012,607 and $1,610,138 respectively, less accumulated
amortization of $1,964,601, $1,740,505 and $1,365,299, respectively. Capitalized
costs are being amortized ratably, as revenues are recognized, but not less than
on the straight-line basis over an eighteen-month period.
During the fiscal year ended June 30, 1995, due to rapid technology
enhancements, the Company reevaluated the economic lives of products for which
it capitalized software acquisition or development costs. As a result, beginning
with the quarter ending March 31, 1995, the Company reduced the amortization
period from 36 to 18 months. Amortization expense, charged to product costs, was
$224,096, $375,206 and $939,507 in fiscal years 1997, 1996 and 1995,
respectively. The Company evaluates the estimated net realizable value of each
software product at each balance sheet date and records writedowns to net
realizable value for any products for which the carrying value is in excess of
the net estimated realizable value.
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.
FURNITURE AND EQUIPMENT
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.
32
<PAGE> 33
INCOME TAXES
The Company adheres to Statement of Financial Accounting Standards (SFAS) 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.
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 reflected
as a separate component of shareholders' equity. The gain resulting from foreign
currency transactions was $34,226 in fiscal 1997, a loss in fiscal 1996 of
$81,879, and was not material in fiscal 1995.
STOCK-BASED COMPENSATION
The Company accounts for stock-based awards to employees using the intrinsic
value method in accordance with APB No. 25, Accounting for Stock Issued to
Employees.
NET INCOME (LOSS) PER SHARE
Net income (loss) per share is computed based on the weighted average number of
common stock and dilutive common stock equivalents outstanding during the
periods.
In December 1996, the Company's Board of Directors authorized a 3 for 2 stock
split in the form of a stock dividend. The stock split was payable to
shareholders of record on December 25, 1996 and was effective and distributed to
shareholders on January 24, 1997. All share information in the consolidated
financial statements have been restated to give retroactive recognition to the
stock split.
33
<PAGE> 34
NEW ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued SFAS No. 128
"Earnings per Share". The Company is required to adopt SFAS 128 in the December
31, 1997 quarter and will restate at that time earnings per share (EPS) data for
prior periods to conform with SFAS 128. Earlier application is not permitted.
SFAS 128 replaces current EPS reporting requirements and requires a dual
presentation of basic and diluted EPS. Basic EPS excludes dilution and is
computed by dividing net income by the weighted average of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock.
If SFAS 128 had been in effect during the current and prior year periods, basic
EPS would have been $0.53, $0.20, and $(0.09) for fiscal years ended June 30,
1997, 1996, and 1995, respectively. Diluted EPS under SFAS 128 would not have
been significantly different than fully diluted EPS currently reported for the
periods.
In June 1997, the Financial Accounting Standard Board issued SFAS No. 130
"Reporting Comprehensive Income", which requires that an enterprise report, by
major components and as a single total, the change in its net assets during the
period from nonowner sources; and No. 131 ("Disclosures about Segments of an
Enterprise and Related Information"), which establishes annual and interim
reporting standards for an enterprise's operating segments and related
disclosures about its products, services, geographic areas, and major customers.
Adoption of these statements will not impact the Company's consolidated
financial position, results of operations or cash flows, and any effect will be
limited to the form and content of its disclosures. Both statements are
effective for fiscal years beginning after December 15, 1997, with earlier
application permitted.
RECLASSIFICATIONS
Certain fiscal 1996 and 1995 amounts have been reclassified to conform to the
fiscal 1997 presentation.
34
<PAGE> 35
2. INFORMATION ABOUT FOREIGN OPERATIONS
Total assets, net revenues and net income (loss) of U.S., United Kingdom (UK),
Australia, Germany, and Rest of World (which includes France, South Africa,
Japan, the Pacific rim and Latin America) as of and for the years ended June 30
were as follows:
<TABLE>
<CAPTION>
Total Assets: 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
U.S $ 12,799,164 $ 8,901,078 $ 5,545,653
U.K 1,279,656 789,591 667,294
Australia 1,146,759 541,245 335,335
Germany 1,334,158 276,074 425,539
Rest of World 1,012,837 550,390 496,570
------------ ------------ ------------
$ 17,572,574 $ 11,058,378 $ 7,470,391
============ ============ ============
Net Revenues:
U.S $ 24,631,815 $ 17,064,530 $ 12,900,924
U.K 3,922,656 2,911,292 2,894,521
Australia 2,684,642 1,891,285 1,798,258
Germany 5,724,348 2,095,072 1,864,341
Rest of World 4,876,334 1,716,838 842,317
------------ ------------ ------------
$ 41,839,795 $ 25,679,017 $ 20,300,361
============ ============ ============
Net Income
(loss):
U.S $ 2,328,794 $ 1,021,305 $ (323,446)
U.K 49,037 (3,673) 16,383
Australia (36,927) (29,465) (694)
Germany 75,866 74,892 (12,306)
Rest of World 179,733 (109,487) (114,770)
------------ ------------ ------------
$ 2,596,503 $ 953,572 $ (434,833)
============ ============ ============
</TABLE>
35
<PAGE> 36
3. INVENTORIES
At June 30, inventories consist of:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Raw materials $ 1,379,177 $ 775,026
Finished goods 2,252,078 1,959,248
----------- -----------
3,631,255 2,734,274
Reserves for obsolescence (158,729) (196,181)
----------- -----------
$ 3,472,526 $ 2,538,093
=========== ===========
</TABLE>
4. FURNITURE AND EQUIPMENT
At June 30, furniture and equipment consist of:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Computer and office equipment $2,824,174 $1,912,873
Software 354,666 173,707
---------- ----------
3,178,840 2,086,580
Accumulated depreciation (1,485,326) (985,274)
---------- ----------
$1,693,514 $1,101,306
========== ==========
</TABLE>
Included in computer and office equipment at June 30, 1997 and 1996 is equipment
acquired under capital leases of $768,390 and $401,263, respectively, with
accumulated depreciation of $464,503 and $234,419, respectively.
5. LONG TERM DEBT AND BANK CREDIT LINE
As of June 30, 1997, the Company had a credit agreement with a bank under which
it can borrow the lesser of $2,500,000 or 25% of eligible inventory up to a cap
of $500,000 and 80% of eligible accounts receivable, at the bank's index rate
(8.50% at June 30, 1997). The amount of the unused credit line at June 30, 1997
was $2,500,000. The line of credit agreement requires the Company to maintain
certain financial ratios including net worth and working capital. Under terms of
the agreement, all assets not subject to liens of other financial institutions
have been pledged as collateral against the line of credit. The credit line
expires October 31, 1997. Management believes that the Company will be able to
renew or replace such credit agreement with the bank or another financial
institution on substantially similar terms.
In September 1995, the Company entered into a term loan for $675,000 payable
over a three year period in equal monthly installments at an annual rate of 1
percent over the bank's prime rate (9.50% at June 30, 1997).
In June 1997, the Company entered into a term loan for $1.5 million, payable
over a three-year period in equal monthly installments at an annual rate of 1/4
percent over the bank's index rate (8.75% at June 30, 1997).
As of June 30, 1997, principal repayments on the term loans under these credit
agreements are required as follows:
<TABLE>
<S> <C>
1998 $1,016,670
1999 556,250
2000 541,666
----------
Total $2,114,586
==========
</TABLE>
36
<PAGE> 37
6. INCOME TAXES
Taxes on income based on income (loss) before taxes as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Domestic $4,134,101 $ 1,382,808 $(394,239)
Foreign 103,297 156,000 (30,406)
---------- ----------- ---------
$4,237,398 $ 1,538,808 $(424,645)
========== =========== =========
</TABLE>
The provision for taxes on income for the years ended June 30, 1997, 1996, and
1995 comprised the following:
<TABLE>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Current:
Federal $ 1,778,766 $ 821,104 $ 123,026
State 323,671 132,417 57,341
Foreign 140,315 34,000 55,947
----------- --------- ---------
$ 2,242,752 $ 987,521 $ 236,314
Deferred
Federal $ (284,786) $(334,454) $(170,834)
State (62,904) (67,831) (54,932)
Foreign (254,167)
----------- --------- ---------
$ (601,857) (402,285) $(225,766)
Total tax provision 1,640,895 585,236 10,548
=========== ========= =========
</TABLE>
37
<PAGE> 38
Deferred tax balances consisted of the following:
<TABLE>
<CAPTION>
JUNE 30,
--------
1997 1996
----------- -----------
<S> <C> <C>
Current assets
Accrued vacation $ 69,719 $ --
Allowance for doubtful accounts and returns 1,016,588 733,304
Foreign reserves and other 426,960 145,241
----------- -----------
1,513,267 878,545
Noncurrent assets
Package design costs 77,003 76,796
NOL carryforward 116,312 280,039
Purchased intangibles 151,664 116,771
Other 158,656 25,585
----------- -----------
503,635 499,191
Total assets 2,016,902 1,377,736
----------- -----------
Current liabilities (40,754) (54,566)
Noncurrent liabilities
Capitalized software development costs (166,077) (50,100)
Deferred state taxes (72,846) --
----------- -----------
(238,923) (50,100)
Total liabilities (279,677) (104,666)
----------- -----------
Net assets, before allowance 1,737,225 1,273,070
Valuation allowance -- (137,702)
----------- -----------
Net deferred tax assets $ 1,737,225 $ 1,135,368
=========== ===========
</TABLE>
In fiscal 1996, the Company recorded a valuation allowance for foreign deferred
tax assets due to the uncertainty of the realization of the assets during the
ultimate benefit period. In fiscal 1997, the valuation allowance was reversed
due to the likelihood of foreign earnings
At June 30, 1997, the Company had an operating loss carryforward of
approximately $342,000 for federal tax
38
<PAGE> 39
purposes, which expires in various amounts in 2000 - 2005.
The effective tax rate differs from the federal statutory rate of 34% for the
years ended June 30 as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Federal tax at statutory rate on
net income (loss) before taxes
and cumulative effect of
accounting change $1,440,715 34.0% $523,260 34.0% ($144,257) (34.0)%
State tax provision, net of
federal benefit 172,107 4.1% 94,464 6.1% (2,409) (0.6)%
Change in valuation allowance (137,702) (3.3)% 73,624 4.8% 64,078 15.1%
International cost sharing 335,046 7.9% -- -- -- --
agreement
Foreign sales corporation benefit (68,000) (1.6)% -- -- --
Other (101,271) (2.4)% (106,112) (6.9)% 93,136 21.9%
---------- ---- -------- ---- --------- -----
Total $1,640,895 38.7% $585,236 38.0% $10,548 2.4%
========== ==== ======== ==== ========= =====
</TABLE>
7. STOCK OPTIONS AND EMPLOYEE STOCK INCENTIVE PLANS
On April 21, 1992, the shareholders approved the 1992 Stock Option Plan,
authorizing the issuance of up to 900,000 shares of common stock under the Plan.
Under the 1993 Employee Incentive Plan, as amended, (the Option Plan) the
Company may grant options to purchase up to 1,927,200 shares of common stock to
employees, directors and consultants at prices not less than the fair market 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 5-year period.
The Company has qualified and non-qualified employee stock option plans, as
amended, that reserves shares of common stock for issuance to employees and
consultants. Under the terms of the Plan, the Board may grant stock options to
purchase common stock of the Company over a period of ten years at the fair
market value at the time of grant.
39
<PAGE> 40
Option activity under the plans is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
--------- -----
<S> <C> <C>
Outstanding, July 1, 1994 388,340 $ .66
Granted 549,000 2.86
Exercised (105,899) 2.72
Canceled (36,000) 2.72
--------- -----
Outstanding, June 30, 1995 (169,128 exercisable at a weighted 795,441 $2.24
average price of $.60)
Granted (weighted average fair value of $3.18) 742,433 $4.60
Exercised (66,810) 3.04
Canceled (147,402) 5.23
--------- -----
Outstanding, June 30, 1996 (259,567 exercisable at a weighted 1,323,662 $3.19
average price of $1.27)
Granted (weighted average fair value of $5.65) 316,914 $7.69
Exercised (133,456) 1.80
Canceled (239,500) 4.21
--------- -----
Outstanding, June 30, 1997 (298,693 exercisable at a weighted
average price of $2.13) 1,267,620 $4.27
========= =====
</TABLE>
Additional information regarding options outstanding as of June 30, 1997 is as
follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------- -------------------
WEIGHTED AVG.
REMAINING
RANGE OF NUMBER CONTRACTUAL WEIGHTED AVG. NUMBER WEIGHTED AVG.
EXERCISE PRICES OUTSTANDING LIFE (YRS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
--------------- ----------- ------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$0.23 - 3.56 461,306 6.4 $1.84 242,578 $1.38
$3.66 - 5.92 555,588 8.6 $4.59 37,740 $4.96
$6.00 - 12.08 250,726 9.3 $8.03 18,375 $6.17
---------
1,267,620
=========
</TABLE>
At June 30, 1997, 433,912 shares were available for future grants under the
Option Plan.
40
<PAGE> 41
ADDITIONAL STOCK PLAN INFORMATION
As discussed in Note 1, the Company continues to account for its stock-based
awards 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. SFAS No. 123, Accounting
for Stock-Based Compensation, requires the disclosure of pro forma net income
and earnings per share had the Company adopted the fair value method as of the
beginning of fiscal 1996. Under SFAS 123, 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 the Company'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. The Company's calculations
were made using the Black-Scholes option pricing model with the following
weighted average assumptions: expected life, 24 months following vesting; stock
volatility, 72% in 1997 and 73% in 1996; risk free interest rates, 6.70% in 1997
and 6.61% in 1996; and no dividends during the expected term. The Company's
calculations are based on a multiple option valuation approach and forfeitures
are recognized as they occur. If the computed fair values of the 1997 and 1996
awards had been amortized to expense over the vesting period of the awards, pro
forma net income would have been $2,073,869 ($.37 per share) in 1997 and
$648,549 ($.12 per share) in 1996. However, the impact of outstanding non-vested
stock options granted prior to 1996 has been excluded from the pro forma
calculation; accordingly, the 1997 and 1996 pro forma adjustments are not
indicative of future period pro forma adjustments, when the calculation will
apply to all applicable stock options.
41
<PAGE> 42
8. COMMITMENTS
The Company leases its facilities and certain equipment under various
noncancelable operating lease agreements. The Company also leases equipment
under capital equipment leases, which expire at various dates through 2001. The
Company is required to pay property taxes, insurance, and normal maintenance
costs on certain leases. Future minimum payments for capital leases and other
obligations and rental commitments for noncancelable operating leases with
remaining terms of over one year at June 30, 1997 are as follows:
<TABLE>
<CAPTION>
Year ending June 30:
Capital
Lease Operating
Obligations Leases
------------ -----------
<S> <C> <C> <C>
1998 $ 489,183 $ 838,796
1999 398,251 629,190
2000 167,319 183,967
2001 10,851 15,553
2002 -- 15,553
---------- ----------
Total minimum lease payments 1,065,604 $1,683,059
==========
Less amount representing interest 141,901
----------
Capital lease obligations 923,703
Less current portion 401,598
----------
Long term portion $ 522,105
==========
</TABLE>
Total rent expense for all operating leases were $726,699, $467,214, and
$402,124 for the fiscal years ended June 30, 1997, 1996, and 1995 respectively.
9. ACQUISITIONS
In September 1995 the Company entered into an agreement with Forte/ComputerEasy
International, Inc. to acquire certain assets including the software assets
known as FloorPlan(R), FloorPlan(R) 3D, and 3D Design for approximately
$687,500. The acquisition was accounted for as a purchase with $343,750
allocated to capitalized software development costs and $343,750 allocated to
intangibles (amortized over three years).
In July 1997 the Company entered into an agreement with Computer Concepts
Corporation to acquire certain assets including the software assets known as
MapLinx(R) for approximately $850,000.
Also, in July 1997 the Company entered into a license agreement with Quarterdeck
Corporation to acquire full rights and trademarks to the Hijaak(R) graphics
product line.
10. SUBSEQUENT EVENT
On September 24, 1997 the Company entered into an agreement to acquire rights
and related technology to certain products in the CAD, diagramming and consumer
categories of Corel Corporation, in exchange for shares of IMSI(R) common stock
and cash totaling approximately $5,600,000, and certain future royalty and
development payments. The transaction is expected to close by September 30,
1997.
42
<PAGE> 43
SCHEDULE II
INTERNATIONAL MICROCOMPUTER SOFTWARE, INC.
AND SUBSIDIARIES
Valuation and Qualifying Accounts
Years ended June 30, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
Additions
Balance at charged to
beginning of costs and Balance at
Description period Expenses Deductions end of period
- ------------ ------------ ----------- ---------- -------------
<S> <C> <C> <C> <C>
Year ended June 30, 1997
Allowance for doubtful
accounts and returns $1,301,509 $6,792,727 $5,151,087 $2,943,149
---------- ---------- ---------- ----------
Year ended June 30, 1996
Allowance for doubtful
accounts and returns $ 777,718 $4,016,890 $3,493,099 $1,301,509
---------- ---------- ---------- ----------
Year ended June 30, 1995
Allowance for doubtful
accounts and returns $ 163,437 $3,172,028 $2,557,747 $ 777,718
---------- ---------- ---------- ----------
</TABLE>
43
<PAGE> 44
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 San
Rafael, State of California on September 29, 1997.
INTERNATIONAL MICROCOMPUTER SOFTWARE, INC.
By: /s/ MARTIN SACKS
--------------------------
Martin Sacks
Chief Executive Officer, President and Director
Pursuant to the requirement of the Securities Exchange Act of 1934, the
following persons in the capacities and on September 29, 1997 have signed this
report below.
By: /s/ MARTIN SACKS
--------------------------
Martin Sacks
Chief Executive Officer, President and Director
By: /s/ GEOFFERY KOBLICK
--------------------------
Geoffery Koblick
Chairman of the Board of Directors, Secretary and General Counsel
By: /s/ ROBERT MAYER
--------------------------
Robert Mayer
Executive Vice President Sales and Director
By: /s/ KENNETH FINEMAN
--------------------------
Kenneth Fineman
Vice President of Finance and Chief Financial Officer
(Principal Financial and Accounting Officer)
By: /s/ CHARLES FEDERMAN
--------------------------
Charles Federman
Director
By: /s/ EARL HAMLIM
--------------------------
Earl Hamlin
Director
By: /s/ GORDON LANDIES
--------------------------
Gordon Landies
Director
44
<PAGE> 45
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
- -------
<S> <C>
21.1 Subsidiaries of the Registrant
23.1 Independent Auditors' Consent
23.2 Consent of Independent Accountants
27 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
IMSI (UK) Limited
IMSI Australia (PTY) Ltd.
IMSI Germany (GmbH)
IMSI South Africa Pty Ltd.
IMSI France
IMSI Brazil
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements of
International Microcomputer Software, Inc. and Subsidiaries on Form S-8 (No.
33-67208, 33-52480 and 33-71872) and Form S-3 (No. 33-69206 and 33-80394) of our
report dated August 8, 1997 (September 24, 1997 as to Note
10) appearing the Annual Report on Form 10-K of International Microcomputer
Software, Inc. and Subsidiaries for the year ended June 30, 1997.
DELOITTE & TOUCHE LLP /s/ Deloitte & Touche LLP
San Francisco, California --------------------------
September 29, 1997 Deloitte & Touche LLP
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
International Microcomputer Software, Inc. and Subsidiaries on Form S-3 (File
No. 33-69206 and 33-80394) and Form S-8 (File No. 33-67208, 33-52480 and
33-71872) of our report dated August 28, 1995, except for the first paragraph
of Note 9 for which the date is September 21, 1995, on our audit of the
consolidated statements of operations, shareholders' equity and cash flows and
financial statement schedule of International Microcomputer Software, Inc. and
Subsidiaries for the year ended June 30, 1995, which report is included in this
Annual Report on Form 10-K.
/s/ COOPERS & LYBRAND L.L.P.
- -------------------------------
Coopers & Lybrand L. L. P.
San Francisco, California
September 29, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 1,126,042
<SECURITIES> 0
<RECEIVABLES> 10,478,783
<ALLOWANCES> 2,943,149
<INVENTORY> 3,472,526
<CURRENT-ASSETS> 15,369,843
<PP&E> 3,178,840
<DEPRECIATION> 1,485,326
<TOTAL-ASSETS> 17,572,574
<CURRENT-LIABILITIES> 8,035,328
<BONDS> 0
0
0
<COMMON> 6,453,488
<OTHER-SE> 1,041,634
<TOTAL-LIABILITY-AND-EQUITY> 17,572,574
<SALES> 41,839,795
<TOTAL-REVENUES> 41,839,795
<CGS> 16,893,342
<TOTAL-COSTS> 16,893,342
<OTHER-EXPENSES> 20,579,022
<LOSS-PROVISION> 1,000,216
<INTEREST-EXPENSE> 130,033
<INCOME-PRETAX> 4,237,398
<INCOME-TAX> 1,640,895
<INCOME-CONTINUING> 2,596,503
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,596,503
<EPS-PRIMARY> .47
<EPS-DILUTED> .47
</TABLE>
