<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarter ended SEPTEMBER 30, 1999
------------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------------------- -------------------
Commission File Number 0-15949
INTERNATIONAL MICROCOMPUTER SOFTWARE, INC.
------------------------------------------
(Exact name of registrant as specified in its charter)
CALIFORNIA 94-2862863
---------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No.)
75 ROWLAND WAY, NOVATO, CA 94945
---------------------------------------- ----------
(Address of principal executive offices) (Zip code)
(415) 257-3000
(Registrant's telephone number including area code)
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 [ ]
As of November 8, 1999, 7,024,409 shares of Registrant's common stock, no par
value, were outstanding.
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INTERNATIONAL MICROCOMPUTER SOFTWARE, INC.
AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets at September 30, 1999 and June 30, 1999 3
Condensed Consolidated Statements of Operations for the three months ended
September 30, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows for the three months ended
September 30, 1999 and 1998 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Changes in Securities and Use of Proceeds 20
Item 3. Defaults upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 21
</TABLE>
2
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INTERNATIONAL MICROCOMPUTER SOFTWARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
September 30, 1999 June 30, 1999
------------------ -------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,113 $ 3,681
Receivables, less allowances for doubtful
accounts, discounts and returns of $6,296 and $7,445 3,355 4,933
Inventories 2,255 2,895
Prepaid royalties and licenses 1,730 1,858
Income tax refund receivable 2,448 3,751
Other current assets 1,155 758
-------- --------
Total current assets 14,056 17,876
Furniture and equipment 3,310 3,632
Deferred tax assets 525 465
Capitalized software development costs 2,544 2,856
Other assets 2,178 2,315
-------- --------
Total assets $ 22,613 $ 27,144
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Short term borrowings $ 5,735 $ 7,110
Trade accounts payable 1,976 2,256
Accrued and other liabilities 4,502 5,119
Accrued restructuring charges 1,041 1,440
Deferred revenue 3,566 3,178
-------- --------
Total current liabilities 16,820 19,103
Long term debt and other obligations 6,145 6,599
-------- --------
Total liabilities 22,965 25,702
Commitments and contingencies -- --
Shareholders' equity (deficit):
Common stock, no par value; 300,000,000 authorized;
Issued and outstanding 7,024,409 and 7,014,078 shares 27,986 27,965
Accumulated deficit (28,255) (26,402)
Accumulated other comprehensive income 167 129
Notes receivable from shareholders (250) (250)
-------- --------
Total shareholders' equity (deficit) (352) 1,442
======== ========
Total liabilities and shareholders' equity (deficit) $ 22,613 $ 27,144
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
3
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INTERNATIONAL MICROCOMPUTER SOFTWARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
UNAUDITED
<TABLE>
<CAPTION>
Three months ended September 30,
---------------------------------
1999 1998
------------ ------------
(Restated)
<S> <C> <C>
Net revenues $ 5,634 $ 13,695
Product costs 3,182 5,469
------------ ------------
Gross margin 2,452 8,226
Costs and expenses:
Sales and marketing 2,041 5,684
General and administrative 1,914 1,744
Research and development 1,311 2,281
------------ ------------
Total operating expenses 5,266 9,709
------------ ------------
Operating loss (2,814) (1,483)
Gain on product line sale 1,440 --
Interest and other, net (462) (177)
------------ ------------
Income (loss) before income taxes (1,836) (1,660)
Income tax provision (benefit) 17 (554)
------------ ------------
Net loss ($ 1,853) ($ 1,106)
============ ============
Basic and diluted loss per share ($ 0.26) ($ 0.20)
Shares used in computing loss
per share information 7,019 5,667
</TABLE>
See Notes to Condensed Consolidated Financial Statements
4
<PAGE> 5
INTERNATIONAL MICROCOMPUTER SOFTWARE, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION> 1999 1998
------- -------
(Restated)
<S> <C> <C>
Cash flows from operating activities:
------- -------
Net cash (used) provided by operating activities $ (93) $ 573
------- -------
Cash flows from investing activities:
Proceeds from sale of product line 1,500 --
Purchase of equipment (36) (269)
Additions to capitalized software development costs -- (139)
Other (7) --
------- -------
Net cash provided (used) by investing activities 1,457 (408)
------- -------
Cash flows from financing activities:
Credit line borrowings 2,025
Credit line repayments (620) (350)
Repayment of term loan, net (750) (188)
Repayment of capital lease obligations, net (621) (67)
Proceeds from issuance of common stock 21 47
------- -------
Net cash (used) provided by financing activities (1,970) 1,467
------- -------
Effect of exchange rate change on cash and cash equivalents 38 153
------- -------
Net increase (decrease) in cash and cash equivalents (568) 1,785
Cash and cash equivalents at beginning of period 3,681 2,093
------- -------
Cash and cash equivalents at end of the period $ 3,113 $ 3,878
======= =======
SUPPLEMENTAL DISCLOSURES OF NON-CASH
FINANCING AND INVESTING ACTIVITIES
Equipment acquired through capital lease obligations $ -- $ 239
IMSI common stock received in satisfaction of receivable $ -- $ 320
</TABLE>
See Notes to Condensed Consolidated Financial Statements
5
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INTERNATIONAL MICROCOMPUTER SOFTWARE, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The interim condensed consolidated financial statements have been prepared from
the records of International Microcomputer Software, Inc. and Subsidiaries
("IMSI") without audit. In the opinion of management, all adjustments, which
consist only of normal recurring adjustments (other than those described below),
necessary to present fairly the financial position at September 30, 1999 and the
results of operations and cash flows as of and for the three months ended
September 30, 1999 and 1998 have been made. The interim condensed consolidated
financial statements should be read in conjunction with our consolidated
financial statements and notes thereto contained in IMSI's Annual Report on Form
10-K for the fiscal year ended June 30, 1999. The results of operations for the
three months ended September 30, 1999 and 1998 are not necessarily indicative of
the results to be expected for any other interim period or for the full year.
2. REALIZATION OF ASSETS
The financial statements have been prepared on a basis that contemplates IMSI's
continuation as a going concern and the realization of our assets and
liquidation of our liabilities in the ordinary course of business. We have an
accumulated deficit of $28.3 million and negative working capital of $2.8
million at September 30, 1999. IMSI is also in default of various loan
covenants. These matters, among others, raise substantial doubt about our
ability to remain a going concern for a reasonable period of time. The financial
statements do not include any adjustments relating to the recoverability or
classification of assets or the amounts and classification of liabilities that
might result from the outcome of this uncertainty. IMSI's continued existence is
dependent on its ability to obtain additional financing sufficient to allow it
to meet its obligations as they become due and to achieve profitable operations.
To a large extent, IMSI plans to meet its working capital needs in the coming
fiscal year through sales or license of the rights to non-core product lines. As
part of its restructuring strategy, IMSI plans to reduce the number of its
product categories by approximately 75%. To this end, IMSI sold the rights to
the Easy Language product for $1.7 million in cash in August 1999 and recorded a
gain of $1.4 million in the quarter ended September 30, 1999. IMSI has engaged
in, and expects to engage in, discussions with third parties concerning the sale
or licensing of a material part of its remaining non-core product lines. The
sale or licensing of the rights to these product lines is consistent with our
restructuring strategy of focusing on our core products while transitioning to
the Internet. This strategy also includes reducing our costs through
manufacturing and warehouse outsourcing, facilities consolidation, and personnel
reductions.
IMSI received $1.3 million in tax refunds in the first quarter of fiscal year
2000 and an additional $2.1 million up to the date of filing this Form 10-Q. We
anticipate that we will receive about $300,000 in further income tax refunds in
fiscal year 2000. We believe that the cash derived from the sale or license of
non-core product lines and tax refunds will improve our balance sheet and
working capital position. If our restructuring efforts succeed in improving our
operating performance, we believe we will be able to obtain the additional
financing we will require to continue in business. There can be no assurance
that we will be successful in our efforts. If these efforts are unsuccessful,
IMSI will consider selling one or more of its core product lines.
6
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3. RESTATEMENT OF FISCAL 1998 FINANCIAL STATEMENTS
On October 12, 1999, the last day that IMSI's Annual Report on Form 10-K for the
fiscal year ended June 30, 1999 (the "Fiscal 1999 Form 10-K") was due, IMSI and
its independent auditors identified a $320,000 royalty transaction recorded in
fiscal 1998, which appeared more appropriately recorded in the first quarter of
fiscal 1999.
IMSI's management, after review of certain licensing agreements and consultation
with our current and former auditors, determined that we should have deferred
the recognition of revenue related to three advanced royalty payments recorded
in fiscal 1998 for certain technology-licensing agreements. Previously, IMSI
recognized revenue in the amount of these advanced payments upon execution of
the licensing agreement. The revenue related to these advance payments should
have been recognized as it was earned as royalties under the terms of the
agreements. As a result, the financial statements as of and for the year ended
June 30, 1998, including for the quarter ended September 30, 1999, have been
restated from amounts previously reported to defer recognition of revenue until
earned as royalties in subsequent periods. Because of the delay caused by the
restatement, IMSI's fiscal 1999 Form 10-K was filed on October 28, 1999. See
Note 16 to the June 30, 1999 consolidated financial statements included in
IMSI's fiscal 1999 Form 10-K.
A total of $407,000 of royalty income was deferred from fiscal year 1998 to
fiscal year 1999. Royalty income of $335,000 has been added to the quarter ended
September 30, 1998. As of July 1, 1998, IMSI changed the amortization period for
visual content from 36 months to 60 months. In the fourth quarter of fiscal year
1999, reevaluating the amortization periods, the Company's management revised
the amortization period for visual content back to 36 months, effective for the
entire fiscal year. As a result, additional amortization charges of $99,000 are
attributable to the quarterly period ended September 30, 1998.
The following table shows the effect of these restatements on the quarter ended
September 30, 1998.
<TABLE>
<CAPTION>
As Reported Restated
----------- --------
<S> <C> <C>
Net revenues $ 13,360 $ 13,695
Product costs 5,370 5,469
-------- --------
Gross margin 7,990 8,226
-------- --------
Operating loss (1,719) (1,483)
-------- --------
Net Income before Taxes (1,896) (1,660)
Provision for Income Taxes (682) (554)
-------- --------
Net Income $ (1,214) $ (1,106)
======== ========
-------- --------
Basic and diluted loss per share ($ 0.21) ($ 0.20)
======== ========
</TABLE>
4. REVENUE RECOGNITION
Revenue is recognized when earned. IMSI has adopted American Institute of
Certified Public Accountants Statement of Position ("SOP") 97-2, Software
Revenue Recognition, and SOP 98-9, Modification of SOP 97-2, With Respect to
Certain Transactions in fiscal 1999. Revenue from packaged product sales to
distributors, resellers and end users is recorded when related products are
shipped. For software delivered via the Internet, revenue is recorded when the
customer downloads the software. Subscription revenue is recognized ratably over
the contract period, generally 12 to 15 months. Non-refundable advanced payments
received under license agreements are recognized as revenue when the customer
accepts the delivered software. Revenue from software licensed to
7
<PAGE> 8
developers, including royalties earned in excess of non-refundable advanced
payments, is recorded as the developers ship products containing the licensed
software. Costs related to post-contract customer support, which are minimal and
include limited telephone support, are accrued. Sales to distributors permit
limited rights of return. Return reserves are provided based on historical
experience considering factors such as inventory held by distributors and
resellers and sales trends. Provisions are also recorded for price protection
and rebates based on historical experience.
5. INVENTORIES
Inventories, consisting primarily of diskettes, manuals, hardware, freight in,
production costs and packing supplies, are valued at the lower of cost or market
and are accounted for on the first-in, first-out basis. Management performs
periodic assessments to determine the existence of obsolete, slow moving and
non-salable inventories, and records necessary provisions to reduce such
inventories to net realizable value. Inventories consist of:
<TABLE>
<CAPTION>
September 30, 1999 June 30, 1999
------------------ -------------
<S> <C> <C>
Raw materials $ 2,673 $ 2,343
Finished goods 2,436 3,897
------- -------
5,109 6,240
Reserves for obsolescence (2,854) (3,345)
------- -------
$ 2,255 $ 2,895
======= =======
</TABLE>
6. CAPITALIZED SOFTWARE DEVELOPMENT COSTS
Total capitalized software development costs were $8,289,000 at both September
30, 1999 and June 30, 1999 less accumulated amortization of $5,745,000 and
$5,433,000, respectively.
7. DEBT
IMSI's short-term borrowings and long term debt and other obligations consist of
the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1999 1999
------------- ------------
<S> <C> <C>
Short term borrowings
Non-revolving, reducing loan with interest at bank's
reference rate plus 3%, 11.25% at September 30, 1999 $ 4,780 $ 5,400
Term loan with interest at bank's reference rate plus 3% -- 750
Capital lease obligations 955 960
------------ ------------
Total short term borrowings $ 5,735 $ 7,110
============ ============
Long term debt and other obligations
Subordinated loan facility due November 2001 with
interest at 12% net of unamortized warrant cost
of $539 and $604, respectively $ 1,961 $ 1,896
Senior subordinated convertible note due May 2002
with interest at 9% net of unamortized warrant cost
of $1,003 and 1,100 3,997 3,900
Capital lease obligations 187 803
------------ ------------
Total long term debt and other obligations $ 6,145 $ 6,599
============ ============
</TABLE>
IMSI is in default of many of the covenants under its agreements relating to the
non-revolving, reducing loan with Union Bank of California ("Union"). The loan
was due September 30, 1999 and is unpaid. Under the terms of the loan agreement,
Union can declare the loan to be
8
<PAGE> 9
immediately due and payable and can commence immediate enforcement and
collection actions. Although there can be no assurances, IMSI anticipates it
will be able to repay the remaining amount owed to Union with proceeds to be
received from the planned sale or license of non-core product lines. IMSI is
negotiating with Union to attempt to obtain a forbearance to provide time to
allow IMSI to cure its default.
8. SEGMENT INFORMATION
IMSI has five reportable operating segments. Four of the segments are
geographic: North America, the United Kingdom, Germany and Australia. Each of
these segments generates revenues and incurs expenses related to the sale of our
PC productivity software. The last segment comprises the revenues and expenses
related to ArtToday.com (formerly Zedcor, Inc.) our graphic design Internet
subsidiary that was purchased in October of 1998 and previously was included in
the results of the North America geographic segment. Revenue from our precision
design Internet efforts are not yet material. The following table details
segment information as follows (in thousands):
<TABLE>
<CAPTION>
Other
Quarter Ended North Rest of Elimina-
September 30, 1999 ArtToday.com America UK Germany Australia World tions Total
- --------------------------- ------------ -------- -------- -------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Revenues-external $ 585 $ 2,620 $ 348 $ 989 $ 527 $ 565 $ -- $ 5,634
-internal 347 -- -- -- -- (347) --
Income (loss) before taxes (115) (2,090) 10 169 86 104 -- (1,836)
Income tax expense (credit) 15 -- -- 7 (5) -- 17
Net Income (loss) (115) (2,105) 10 169 79 109 (1,853)
Identifiable assets $ 59 $ 20,723 $ 547 $ 675 $ 290 $ 319 -- $ 22,613
Quarter Ended Other
September North Rest of Elimina-
30, 1998 (restated) America UK Germany Australia World tions Total
-------- -------- -------- --------- -------- -------- --------
Net Revenues-external $ 9,958 $ 749 $ 1,835 $ 640 $ 513 $ -- $ 13,695
-internal 542 -- -- -- -- (542) --
Income (loss) before taxes (1,652) (93) 167 157 (62) -- (1,483)
Income tax expense (credit) (563) -- -- 9 -- -- (554)
Net Income (loss) (1,266) (93) 167 148 (62) -- (1,106)
Identifiable assets $ 21,085 $ 1,100 $ 3,257 $ 839 $ 863 -- $ 27,144
</TABLE>
Pro forma results of operations for the quarter ending September 30, 1998 (as
restated) assuming that the ArtToday.com acquisition occurred at the beginning
of the quarter would be as follows (in thousands except per share amounts):
<TABLE>
<S> <C>
Revenues $ 14,315
Loss before taxes 1,587
Net loss 1,059
Diluted earnings (loss) per share ($ 0.19)
</TABLE>
9
<PAGE> 10
9. BASIC AND DILUTED EARNINGS PER SHARE
Net loss and the weighted average numbers of shares outstanding (denominator)
used to calculate basic earnings per share are reconciled to the numbers of
shares used in calculating diluted earnings per share as follows:
<TABLE>
<CAPTION>
Three Months Ended September 30,
--------------------------------
1999 1998
----------- -----------
<S> <C> <C>
Net Loss $(1,853,000) $(1,106,000)
=========== ===========
Shares used to compute basic EPS 7,019,000 5,667,000
Add effect of dilutive securities:
Convertible Note 658,000 --
Warrants 263,000 --
Stock options 674,000 589,000
----------- -----------
Shares used to compute diluted EPS 8,614,000(1) 6,256,000(1)
=========== ===========
</TABLE>
(1) Not presented as results were anti-dilutive
10. COMPREHENSIVE INCOME (LOSS)
Comprehensive income includes changes in the balance of items that are reported
directly in a separate component of stockholders' equity on the condensed
consolidated balance sheets. The reconciliation of net loss to comprehensive
loss is as follows.
<TABLE>
<CAPTION>
Three Months Ended September 30,
--------------------------------
1999 1998
----------- -----------
<S> <C> <C>
Net Loss $(1,853,000) $(1,106,000)
Other comprehensive (loss) gain
Foreign currency translation
adjustments (38,000) 153,000
----------- -----------
Total comprehensive loss $(1,891,000) $ (953,000)
=========== ===========
</TABLE>
11. SUBSEQUENT EVENTS
POTENTIAL DE-LISTING FROM THE NASDAQ NATIONAL MARKET
By letter of November 2, 1999, the Nasdaq National Market notified us that we
did not meet the $4 million net tangible assets requirement for continued
listing on the Nasdaq National Market. Our Fiscal 1999 Form 10-K reported net
assets of $1.4 million. The Nasdaq National Market deducts goodwill from net
assets to arrive at net tangible assets. As of June 30, 1999, IMSI had
$1,156,000 of unamortized goodwill and net tangible assets of $286,000. A
hearing before the Nasdaq Listings Qualifications Panel is scheduled for
November 18, 1999, at which time we will present our plan for compliance with
the net tangible assets requirement. There can be no assurance that IMSI will
continue to be listed on the Nasdaq National Market. Any de-listing instituted
by the Nasdaq would likely have an adverse and material effect on the price of
IMSI's stock and on the ability of IMSI's shareholders to sell their shares. The
securities laws of several states could impose limitations on the liquidity of
the common stock. Such de-listing could also adversely affect IMSI's ability to
obtain additional debt and/or equity financing and may result in the reduction
in the amount and quality of securities analyst and news media coverage of IMSI.
10
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POTENTIAL PENALTIES FOR AGREEMENTS RELATING TO REGISTRATION OF SHARES
We agreed to file one or more registration statements covering the resale of the
shares described in Notes 6 and 7 to the consolidated financial statements in
our Fiscal 1999 Form 10-K including shares issued or issuable under agreements
with The Learning Company (now Mattel, Inc., "TLC"), Capital Ventures
International ("CVI"), BayStar Capital, Americ Disc and Homestyles. We have
filed registration statements pursuant to these agreements. The SEC Division of
Corporate Finance has had, and may continue to have, comments related to our
recent filings. We are working with the SEC to resolve these comments as soon
as possible. However, as a result of delays in the effectiveness of the
registration statements, we may be liable for financial penalties or other
payments under the terms of the agreements. The aggregate amount of one or more
of these penalties or other payments could have a material effect on our
financial statements, business, liquidity and results of operations.
Under the agreement with CVI, where CVI invested $5 million, if the registration
statement was not effective by July 3, 1999, then we may be obligated to pay CVI
one percent of the amount invested by CVI for the first month after July 3, 1999
and two percent for each month thereafter until the registration statement is
declared effective. Management believes that it has reached an agreement in
principle with CVI whereby CVI will waive the penalties. However, we have not
executed a written agreement with CVI.
On November 15, 1999, IMSI received a letter from BayStar Capital relating to
the 9% Convertible Note due 2002, the Warrant, the Registration Rights
Agreement and the Securities Purchase Agreement all dated May 24, 1999 (the
"BayStar Agreements"). In the letter, BayStar stated that IMSI owes BayStar
penalties relating to the failure of the registration statement relating to the
securities underlying the Note and the Warrant to be declared effective by
September 21, 1999. BayStar asserts in the letter that, after a 15-day notice
period, it intends to exercise rights that it claims to have under the BayStar
Agreements to modify the conversion terms of the Note so that the conversion
price would be reset to the closing bid price for the common stock on the day
before conversion of the Note. IMSI believes it is unclear from the letter and
the language of the Note what rights BayStar believes it has under the BayStar
Agreements that it purports to be asserting. There can be no assurances
concerning the outcome of any subsequent discussions between BayStar and IMSI
or any litigation that BayStar may subsequently initiate. If BayStar was
entitled to convert, and did convert the Note at a conversion price based on
the closing bid price of the common stock on the day before conversion rather
than at the conversion price originally fixed in the Note (subject to
adjustment), and if, as is true on the date of this Form 10-Q, the market price
of the common stock was significantly below the conversion price originally
fixed in the Note, such conversion could result in a materially larger number
of shares of common stock being issued, with resulting dilution to existing
shareholders.
Under the agreement with TLC, we agreed that if TLC sells any shares within 30
days following the effectiveness of a registration statement covering the
200,000 shares issued to TLC, we will pay TLC the difference between the sales
price and $8.50 per share in cash, or at IMSI's option, by issuing shares based
on the average share price during the thirty day protection period. On August
27, 1999 TLC served an arbitration demand on IMSI, alleging that IMSI failed to
timely file a registration statement for the shares issued, and asserting that
the original obligation was revived. Management believes that it has reached an
agreement in principle with TLC to issue 300,000 shares of common stock in
satisfaction of any alleged claim; however, no written agreement has been
executed by the parties.
IMSI is attempting to reach a negotiated outcome with these entities, including
negotiations for the issuance of additional shares of common stock. There can be
no assurance that such negotiations will be successful. See Notes 6 and 7 to the
consolidated financial statements in our Fiscal 1999 Form 10-K.
No liabilities have been recorded, and no accruals or reserves have been
established, in the financial statements with respect to the potential penalties
or payments described above.
11
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following information should be read in conjunction with the consolidated
financial statements and the notes thereto and in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations in
IMSI's Fiscal 1999 Form 10-K. This quarterly report on Form 10-Q, and in
particular this "Management's Discussion and Analysis of Financial Condition and
Results of Operations", may contain forward-looking statements regarding future
events or the future performance of IMSI that involve certain risks and
uncertainties including those discussed in the "Other Factors That May Affect
Future Operating Results" section of this Form 10-Q, as well as in IMSI's Fiscal
1999 Form 10-K, as filed with the Securities and Exchange Commission ("SEC").
Actual events or the actual future results of IMSI may differ materially from
any forward-looking statements due to such risks and uncertainties. IMSI assumes
no obligation to update these forward-looking statements to reflect actual
results or changes in factors or assumptions affecting such forward-looking
statements. This analysis is not intended to serve as a basis for projection of
future events.
RESULTS OF OPERATIONS
IMSI reported a net loss of $1,853,000 or ($0.26) per share for the quarter
ended September 30, 1999, as compared to a net loss of $1,106,000 or ($0.20) per
share for the comparable quarter of fiscal 1998, representing an increase in net
loss of $747,000. We reported an operating loss of $2,814,000 for the quarter
ending September 30, 1999 as compared to an operating loss of $1,483,000 for the
quarter ending September 30, 1998. In the quarter ended September 30, 1999, we
sold the Easy Language product for $1.7 million in cash and realized a gain of
$1,440,000 on the sale. This gain offsets a portion of the current period's
higher net loss.
NET REVENUES
Net revenues for the three month period ended September 30, 1999 were $5,634,000
compared to $13,695,000 in the comparable quarter of the previous fiscal year,
representing a decrease in net revenues of 58.9%. Product revenues in absolute
dollars and as a percentage of total net revenues for each of IMSI's principal
product categories were as follows for the periods indicated (in thousands):
<TABLE>
<CAPTION>
Three Months Ended September 30,
----------------------------------------------------------
1999 1998
------------------------ ------------------------
<S> <C> <C> <C> <C>
Precision Design $ 1,795 32% $ 3,777 28%
Graphic Design 2,520 44% 4,268 31%
Business Applications 2,006 36% 3,135 23%
Utilities 1,039 18% 3,580 26%
Other Products 498 9% 3,842 28%
Sales Reserves (2,224) -39% (4,907) -36%
------- ------- ------- -------
Net Revenues $ 5,634 100% $13,695 100%
======= ======= ======= =======
</TABLE>
Product category revenues are shown gross of sales reserves recorded in the
respective quarters for returns, price discounts and rebates. Accrued sales
reserves totaled $5,344,000 at September 30, 1999 as compared to $6,719,000 at
June 30, 1999. Except for a portion of rebates that are payable to a
non-customer processing agent, reserves for returns, price discounts and rebates
are classified along with allowances for doubtful accounts as contra receivables
on IMSI's balance sheet. A total of $452,000 and $553,000 of rebate reserves
were classified as accrued liabilities at September 30, 1999 and June 30, 1999,
respectively. Sales reserves are based on estimates of future activity and by
their nature are subject to certain risks and uncertainties, which could cause
actual results to differ materially from estimates.
Revenues in the precision design category decreased for the three-month period
ended September 30, 1999 by $1,982,000 or 52% from the comparable period in
fiscal 1998.
12
<PAGE> 13
TurboCAD and Floorplan revenue both declined significantly, as
intense competition characterized the computer-aided design software market.
Unit volume and average selling price both declined.
Revenue in the graphic design category decreased by $1,748,000 or 41% for the
three-month period ended September 30, 1999 from the comparable period of fiscal
1998. Within the category, MasterClips revenue declined by 51% in comparison to
the prior year period. MasterClips, which historically is updated every 6 to 9
months, has not been updated recently, and this is a significant factor in the
decline in sales. IMSI's Internet subsidiary, ArtToday.com, Inc., contributed to
sales with $585,000 in net revenue during the quarter.
Revenues in the business applications category for the three-month period ended
September 30, 1999 decreased by $1,129,000 or 36% from the comparable period of
fiscal 1998. TurboProject sales improved were comparable to the prior year and
HiJaak sales increased 103%. But a number of other products in this category are
not core products. Under IMSI's restructuring plan, IMSI is not spending as much
on marketing non-core products as during the comparable period last year, and
such reduced spending contributed to the decline in revenues during the first
quarter of fiscal 2000.
Revenues in the utilities category for the three month period ended September
30, 1999 decreased by $2,541,000 or 71%, from the comparable period of fiscal
1998. In the United States particularly, intense price competition and rebates
impacted consumer-oriented software products, including the utilities category.
The utilities products have also not been updated recently, which contributed to
the decline in sales, in both unit volume and average selling price.
Revenues in the other products category for the three month period ended
September 30, 1999 decreased by $3,343,000, or 87.0%, from the comparable period
of fiscal 1998. The decrease was primarily due to a discontinuation of products
in this category.
Sales decreased in all categories due to the continuing trends of intense price
competition and rebates. These trends had particular impact in consumer-oriented
software products such as MasterClips, FloorPlan and the Utilities products.
Intense price competition continued in both the United States and Europe,
although there were no rebates in Europe. These trends decrease revenue as a
result of decreased average selling price. The volume of units sold also
decreased. The decline in sales was due to both reduced unit volume and lower
average selling prices. In addition, net revenues declined because many of
IMSI's consumer software products have not been updated recently. Product
updates are an important competitive factor in maintaining unit sales volume,
share of the market, and shelf space in distribution. Our reduction in
advertising expenses also is a factor in causing reduced sales in all product
lines.
Net revenues from domestic sales decreased by $6,753,000 or 67.8%, to
$3,205,000, or 56.9% of net revenues, for the three month period ended September
30, 1999, from $9,958,000 or 72.7% of net revenues, for the comparable period in
the previous fiscal year.
Net revenues from international sales declined by $1,308,000 or 35%, and were
$2,429,000 or 43.1% of net revenues for the three month period ended September
30, 1999, compared to $3,737,000 or 27.3% of net revenues for the three months
ended September 30, 1998. Net revenues from international sales increased as a
percentage of total sales because of the much steeper decline in domestic sales
as a part of the total.
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<PAGE> 14
IMSI's international net revenues in the three-month period ended September 30,
1999 were generated primarily from Germany, Australia, South Africa, the United
Kingdom and France. As compared to the three-month period in the prior year,
sales declined 17.7% in Australia, declined 53.5 % in the United Kingdom, and
declined 46.1% in Germany.
Although IMSI believes that the risks associated with transactions in foreign
currencies are mitigated by diversified exposure to multiple currencies, our
operating results may be affected by the risks customarily associated with
international operations, including changes in the value of the dollar versus
other currencies, increases in duty rates, exchange or price controls, longer
collection cycles, government regulations, political instability and changes in
international tax laws.
During the quarter ended September 30, 1999, the Company's significant new
product releases and upgrades included:
- Stanley(R) Home Design Software, released August 31, 1999,
developed and marketed in alliance with The Stanley Works. Stanley Home
Design is a software tool that allows residential home remodelers to
draw and preview a prospective home in 3D. The product is a combination
of the capabilities found in IMSI's Floor Plan and TurboProject
products.
- FloorPlan 3D Design Suite v5, released August 31, 1999, is an
easy to use tool for Home and Garden design projects. Floor Plan allows
the customer to transform designs into 3D walkthroughs.
- Form Tool v4, and Form Tool Express 4.0, released September 30,
1999, are fast and easy tools for effective forms management. Form Tool
has built-in relational data base support, incorporates drag-and-drop
design, powerful data storage, and integrated scanning and OCR
technology. Customers may design and print business forms quickly, or
choose from over 400 pre-built templates. The customer can then complete
and electronically sign and route the form over a company Intranet to
other people in the organization. Data is automatically stored in an
integrated relational database.
Product returns often increase when IMSI introduces upgrades and new versions of
products. New version releases may result in an increase in return reserves of
previous versions. Therefore, new product introductions by competitors also
increase returns. As of September 30, 1999, management considered likely product
upgrades and factored in an appropriate return reserve for such products
accordingly.
PRODUCT COSTS
Product costs decreased from $5,469,000 to $3,182,000 representing an increase
as a percentage of net revenues from 39.9% to 56.5% for the three-month periods
ended September 30, 1998 and September 30, 1999, respectively. Major factors
were decreased selling prices for our products due to price protection and end
user rebate and costs associated with the refurbishment of returned products in
the United States. Product costs also increased as a percentage of net revenues
because of the amortization of capitalized software and license fees over a
lower sales base.
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<PAGE> 15
IMSI amortizes capitalized software development costs and license fees on a
product-by-product basis. The amortization for each product is the greater of
the amount computed using (a) the ratio of current gross revenues to the total
of current and anticipated future gross revenues for the product or (b) the
economic life of such product. Generally, capitalized software development costs
are amortized at minimum over 18 to 36 months, and license fees are amortized
over 36 months.
Aggregate amortization of such costs was $623,000 and $656,000 in the
three-month periods ended September 30, 1999 and September 30, 1998,
respectively.
SALES AND MARKETING
Sales and marketing expenses decreased from $5,684,000 to $2,041,000 for the
three month periods ended September 30, 1998 and September 30, 1999,
respectively, a decrease of 64.1%. Sales and marketing expenses as a percentage
of net revenues decreased from 41.5% to 36.2% of net revenues for the
three-month periods ended September 30, 1998 and September 30, 1999,
respectively. The decrease is primarily due to reduced advertising, marketing
staff, merchandisers and corporate sales representatives, and lower overhead
expense. Staff reductions and reduced expenses have occurred as part of IMSI's
restructuring plan. These reductions had a significant effect in the first
quarter of fiscal year 2000.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased from $1,744,000 to $1,914,000 for
the three-month periods ended September 30, 1998 and September 30, 1999,
respectively. General and administrative expenses as a percentage of net
revenues increased from 12.7% to 34.0% of net revenues for the three month
period ended September 30, 1998 and September 30, 1999, respectively. The
increase as a percentage of revenues reflected reduced sales volume for the
first quarter of fiscal 2000 and the addition of the general and administrative
expenses of ArtToday.com, Inc., our Internet subsidiary. ArtToday.com was
acquired in October 1998. ArtToday.com's general and administrative expenses
were not included in the expenses reported for the three months ending September
30, 1998. ArtToday.com had net revenue of $585,000, operating expenses of
$611,000 including general and administrative expense of $326,000 and an
operating loss of $112,000 during the three months ended September 30, 1999.
Increased amortization and depreciation were also factors in increased general
and administrative expense. IMSI's total employees in the United States declined
from 258 as of September 30, 1998, to 140 as of September 30, 1999.
RESEARCH AND DEVELOPMENT
Research and development expenses decreased in amount from $2,281,000 to
$1,311,000 for the three-month periods ended September 30, 1998 and September
30, 1999. This decrease was primarily attributable to a decrease in domestic
employees as part of the restructuring, and reduction in the number of products
under development as part of the streamlining of IMSI's product offerings.
ArtToday.com had research and development
15
<PAGE> 16
expense of $145,000 during the three-month period ended September 30, 1999.
ArtToday.com's research and development expense was not included in the
comparable period of last year. Research and development costs as a percentage
of net revenues increased from 16.7% to 23.3% of net revenues for the three
month periods ended September 30, 1998 and September 30, 1999, respectively. The
percentage increase reflected IMSI's commitment to invest in research and
development for its core products, and for our Internet subsidiary,
ArtToday.com, and reflected the decline in sales for the first quarter of fiscal
2000.
OTHER EXPENSE, NET
Other expense, net, which consists of interest expense on short- and long-term
borrowings as well as net gains or losses on foreign currency transactions,
increased from an expense of $177,000 for the three-month period ended September
30, 1998, to $462,000 for the three-month period ended September 30, 1999. For
the three-month period ended September 30, 1999, other expense, net included
$92,000 in foreign exchange gain, $162,000 in warrant amortization, and $392,000
of interest expense, compared to $105,000 in foreign exchange gain and $282,000
of interest expense for the comparable period in the previous fiscal year. We
are paying higher interest rates, and this category of expense includes the
amortization of warrants issued in connection with debt, an expense that IMSI
did not incur in the comparable period last year.
PROVISION FOR INCOME TAXES
IMSI did not record a tax benefit in the quarter ending September 30, 1999 for
our domestic tax losses because of the uncertainty of realization. Our effective
tax rate was 33.4% for the three-month period ended September 30, 1998. We
adhere 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.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1999, we had $3,113,000 in cash and cash equivalents.
Although our cash and cash equivalents declined by only $568,000 from $3,681,000
at June 30, 1999, working capital declined by $1,537,000 from a negative
$1,227,000 at June 30, 1999 to a negative $2,764,000 at September 30, 1999. The
decline in working capital was partially due to the accumulation of an
additional $388,000 in deferred revenue as of September 30, 1999 as compared to
June 30, 1999.
Despite our net loss of $1,853,000, operating activities used net cash of
$93,000 in the three months ending September 30, 1999 primarily due to the
collection of trade receivables and income tax refunds. IMSI has received $1.3
million in tax refunds in the first quarter of fiscal year 2000 and about $2.1
million to date in the second quarter of fiscal year 2000. We anticipate that we
will receive approximately an additional $300,000 in income tax refunds in
fiscal year 2000.
Our investing activities during the three months ended September 30, 1999,
provided $1,457,000 in cash, primarily from the sale of a non-core product line.
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Our financing activities used net cash of $1,970,000 for the three-month period
ended September 30, 1999. During the quarter ended September 30, 1999 we repaid
$621,000 of capital lease obligations. We also repaid Union Bank's $750,000 term
loan and paid down the bank's non-revolving reducing loan to us (our former
credit line) by $620,000.
The loans with Union Bank were due on September 30, 1999. The $4,780,000 balance
on the non-revolving reducing loan is unpaid. Under the terms of the loan
agreement, Union Bank can declare the loan to be immediately due and payable and
can commence immediate enforcement and collection actions. We anticipate that we
will be able to repay the remaining amount owed with proceeds we expect to
generate from the sale or license of non-core product lines. IMSI is in the
process of negotiating with Union to attempt to obtain a forbearance to provide
time to allow IMSI to cure its defaults. Enforcement and collection actions by
Union Bank could have a material adverse effect on IMSI's business, operating
results and financial condition.
IMSI will require additional working capital to meet its ongoing operating
expenses, to execute its continued transition to the Internet, to develop new
products, and to conduct other activities. IMSI believes that its existing cash
and cash equivalents will be insufficient to satisfy IMSI's working capital and
capital expenditure requirements over the next 12 months. The large accumulated
losses of IMSI and the relative small amount of shareholder's equity remaining
as of September 30, 1999 will make it difficult for IMSI to obtain new debt or
equity financing. See Note 2 to the condensed consolidated financial statements
concerning realization of assets and basis of presentation.
To a large extent, IMSI plans to meet its working capital needs in the coming
twelve months through sale or license of the rights to its non-core products. As
part of its restructuring strategy, IMSI plans to reduce the number of its
product SKU's by approximately 75% through sales of its non-core product lines.
To this end, IMSI sold the rights to the Easy Language product for $1.7 million
in August 1999. IMSI has engaged in, and expects to engage in, discussions with
third parties concerning sale or license of a material part of its remaining
non-core product lines. The sale or license of the rights to these products is
consistent with our strategy of focusing on our core products while
transitioning to the Internet. This strategy also includes reducing our costs
through manufacturing and warehouse outsourcing, facilities consolidation, and
personnel reductions.
IMSI believes that the cash derived from the anticipated sale or license of
non-core product lines and its tax refunds will improve its balance sheet and
working capital position. If our restructuring efforts succeed in improving our
financial performance, management believes it will be able to obtain the
additional financing our working capital needs require. There can be no
assurance that we will be successful in our efforts. If these efforts are
unsuccessful, IMSI will consider selling one or more of its core product lines.
Our forecast period of time through which our financial resources will be
adequate to support our working capital and capital expenditure requirements is
a forward-looking statement that involves risks and uncertainties, and actual
results could vary. The factors described in "Risk Factors", here and in our
Fiscal 1999 Form 10-K, will affect our future capital requirements and the
adequacy of our available funds. No assurance can be given that needed financing
will be available on terms attractive to us, or at all. Furthermore, any
additional equity financing, if available, may be dilutive to shareholders, and
debt financing, if available, may involve restrictive covenants. If IMSI fails
to raise capital when needed, then lack of capital will hamper our ability to
continue as a going concern.
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<PAGE> 18
IMSI had no material commitments for capital expenditures as of September 30,
1999.
IMSI's international revenues are generally denominated in foreign currencies of
IMSI's subsidiaries. Consequently, a decrease in the value of a relevant foreign
currency in relation to the U.S. dollar can adversely affect IMSI's net
revenues. Further, a decrease in the value of a relevant foreign currency in
relation to the U.S. dollar occurring after sale and before receipt of payment
by IMSI would have an adverse effect on IMSI's results of operations and cash
flows. IMSI had a $92,000 foreign exchange gain and a $105,000 foreign exchange
loss, in the three-month periods ending September 30, 1999 and September 30,
1998, respectively.
OTHER FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
For further discussion please refer to the subheading "Future Performance and
Additional Risk Factors" in the Fiscal 1999 Form 10-K.
OPERATING RESULTS REFLECT REDUCED LOSSES IN THE FIRST QUARTER OF FISCAL 2000.
IMSI has experienced, and may continue to experience, deteriorating operating
results due to a variety of factors. The following table shows IMSI's operating
income (loss) and net income (loss) for the periods presented (in thousands), as
restated.
<TABLE>
<CAPTION>
OPERATING NET INCOME
QUARTER ENDING INCOME (LOSS) (LOSS)
- ----------------------- ------------- ----------
<S> <C> <C>
Fiscal 1998 (Restated)
September 30 $ (4,668) $ (3,114)
December 31 2,140 1,220
March 31 1,894 1,000
June 30 720 524
-------- --------
$ 86 $ (370)
Fiscal 1999
September 30 $ (1,483) $ (1,106)
December 31 (6,103) (4,274)
March 31 (6,319) (9,780)
June 30 (9,985) (12,245)
-------- --------
$(23,890) $(27,405)
======== ========
Fiscal 2000
September 30 $ (2,814) $ (1,853)
</TABLE>
We experienced growth during fiscal 1997 and earlier years. However, starting in
fiscal year 1998, our operating results began to steadily worsen. IMSI continues
to lose money in fiscal year 2000. While the quarterly net loss in the three
months ended September 30, 1999 is $747,000 greater than the quarterly net loss
during the comparable period last year, the current quarterly results reverse
seven quarters of declining operating income (loss).
Factors that may cause fluctuations of, or a continuing decline in, operating
results in the future include the market factors and competitive factors
described at page 23 in our Fiscal 1999 Form 10-K, under "Future Performance and
Additional Risk Factors."
YEAR 2000 ISSUES COULD AFFECT OUR BUSINESS IF OUR PRODUCTS, OR THE SYSTEMS WE
USE, OR THE SYSTEMS OUR SUPPLIERS USE FAIL BECAUSE THEY ARE NOT YEAR 2000
COMPLIANT. Software, embedded processors,
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<PAGE> 19
or computer systems may fail if they do not accurately recognize the Year 2000.
We recognize the need to ensure that our operations will not be adversely
impacted by Year 2000 software failures. Software failures due to processing
errors potentially arising from calculations using the Year 2000 date are a
known risk. We established procedures for evaluating and managing the risks and
costs associated with this problem. As part of the general upgrade of our
information systems, we are putting in place systems that will be Year 2000
compliant.
We have initiated a Year 2000 Compliance Plan that addresses three types of
systems that must be Year 2000 compliant.
Products: Our software products have been undergoing Year 2000 Compliance
testing since January 1998. We believe that all current versions of our products
are Year 2000 compliant. Our products that are no longer current and products
developed years ago may not be Year 2000 compliant. We advise our customers to
upgrade to current versions of our products.
INFORMATION TECHNOLOGY SYSTEMS: We identified all internal data processing and
networking systems that we believe were at risk from the Year 2000 problem, and,
where available, reviewed the manufacturer's Year 2000 Compliance statement for
each system. Internal testing was done for any mission critical system for which
the manufacturer's Year 2000 Compliance statement was not adequate to ensure the
reliability of the system. All information technology systems will be verified
as Year 2000 Compliant by the end of November 1999. In addition, no new
information technology systems will be implemented without first ensuring that
they are Year 2000 Compliant.
NON-INFORMATION TECHNOLOGY SYSTEMS: We have identified a wide range of general
computing and facilities systems that must be verified as Year 2000 Compliant.
The majority of these systems will be upgraded or replaced as necessary during
normal maintenance if they are not compliant. The manufacturer's Year 2000
Compliance statements are currently under review for the remaining systems and
will be upgraded or replaced if necessary. Because new systems are continually
being integrated, the effort to ensure Year 2000 Compliance for these systems is
an ongoing effort.
We have communicated with our customers and suppliers to determine their Year
2000 compliance readiness, and the extent to which we are vulnerable to any
third party Year 2000 issues. However, there can be no guarantee that the
systems of other companies on which our systems rely will be timely converted.
Failure to convert by another company, or a conversion that is incompatible with
our systems, would have a material adverse effect on us, our results of
operations and our financial condition.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
IMSI is exposed to the impact of interest rate and foreign currency
fluctuations. IMSI's objective in managing its exposure to interest rate changes
and foreign currency fluctuations is to limit the impact of interest rate
changes on earnings and cash flow and to lower its overall borrowing costs.
IMSI's major market risk exposure is changing interest rates in the United
States, which would change interest expense on the our non-revolving, reducing
loan.
Most of our international revenues are denominated in foreign currencies.
Consequently a decrease in the value of a relevant foreign currency in relation
to the U.S. dollar could adversely affect our net revenues. IMSI does not hedge
foreign currency risk.
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PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
On April 23, 1998 IMSI began arbitration proceedings against Imageline, Inc.
before the American Arbitration Association in San Francisco, California. IMSI
requested that all matters within the scope of the agreements between Imageline
and IMSI be resolved by arbitration, including a dispute in which Imageline sued
Mindscape, Inc. for alleged copyright infringement, for which IMSI may be
required to indemnify Mindscape, in whole or in part. IMSI further requested
that the arbitration decide the rights and liabilities of the parties, and the
validity of the copyrights under which Imageline asserted its claims against
IMSI. IMSI also requested compensatory damages and attorney's fees.
On August 12, 1999 Imageline filed a counterclaim in the arbitration, alleging
breach by IMSI of an agreement between the parties, including unauthorized
sublicensing, and instituting arbitration proceedings without notice and
opportunity to cure. Imageline requested liquidated damages, alleged to be more
than $200,000, compensatory damages of at least $500,000, punitive damages,
legal fees, interest and costs. IMSI cannot provide any assurance as to the
outcome of the arbitration. An adverse outcome on this matter could require IMSI
to pay a large amount of damages to Imageline.
ITEM 2. Changes in Securities and Use of Proceeds
Not Applicable
ITEM 3. Defaults upon Senior Securities
We are in default of our non-revolving reducing loan to Union Bank of
California. See Note 7 to the condensed consolidated financial statements, at
page 8 above.
ITEM 4. Submission of Matters to a Vote of Security Holders
Not Applicable
ITEM 5. Other Information
The Nasdaq National Market has informed us that as of November 2, 1999 IMSI is
no longer in compliance with the net tangible assets requirement of $4 million
for continued listing on the Nasdaq National Market. See Note 10 to the
condensed consolidated financial statements, at page 9 above.
ITEM 6. Exhibits and Reports on Form 8-K
Exhibits
<TABLE>
<S> <C>
10.1 August 10, 1999 Asset Purchase Agreement with L&H Applications USA, Inc.
27.1 Financial Data Schedule
</TABLE>
No report on Form 8-K was filed during the quarter ended September 30, 1999.
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<PAGE> 21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATE: November 12, 1998 INTERNATIONAL MICROCOMPUTER SOFTWARE, INC.
By: /s/ COSTA JOHN
------------------------------------
Costa John
President,
Chief Executive Officer
and Chief Financial Officer
(Principal Executive Officer
and Principal Financial Officer)
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<PAGE> 22
Exhibit Index
<TABLE>
Exhibits Description
- -------- -----------
<S> <C>
10.1 August 10, 1999 Asset Purchase Agreement with L&H Applications USA, Inc.
27.1 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 10.1
ASSET PURCHASE AGREEMENT
------------------------
AGREEMENT entered into as of the 10th day of August 1999 (the "Effective
Date"), between L&H Applications USA Inc. with its principal place of business
in Waltham, Massachusetts ("Buyer"), and International Microcomputer Software,
Inc., a California corporation with its principal headquarters in Novato,
California ("Seller or Company").
RECITALS:
WHEREAS, Seller is in the business, among others, of the development and
sale of speech recognition software with regard to language learning software;
WHEREAS, the Buyer wishes to acquire (directly or indirectly through
subsidiaries) from Seller all of the assets and properties necessary for or
material to the business and operations of the Seller's language learning
product lines listed on Exhibit 4 attached hereto (the "Business"), and Seller
wishes to convey such assets to Buyer, subject to the terms and conditions set
forth in this Agreement;
NOW, THEREFORE, in consideration for the mutual agreements contained
herein and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, in order to consummate said sale,
the parties hereto agree as follows:
1. PURCHASE AND SALE OF ASSETS.
1.1. Sale of Assets.
1.1.1. Subject to the provisions of this Agreement, Seller agrees to sell and
Buyer agrees to purchase, at the Closing (as defined in Section 1.4
hereof), all of the assets necessary for or material to the Business of
every kind and description, tangible and intangible, whether or not
currently used in the Business, and wherever located, without limitation
including the following:
(i) All copies of the source code to the software for the Business
and copies of the object code of the software for the Business, (whether
licensed, owned or under development) and all trade secrets, formulae,
algorithms, technical documentation, patents, shrink wrap/end user
license agreements, copyrights, trademarks, data and other proprietary
information relating to the Business;
(ii) All dictionaries for all languages.
(iii) All development tools created to build the source and object
code and the dictionaries.
(iv) All master CD-ROMs of all final versions of object code being
purchased pursuant to this Agreement.
(v) All of the following materials pertaining to the Business: (A)
pre-existing database customer lists and end-user registration
databases, (B) training manuals and materials, (C) advertising
and promotional materials, (D) plans, designs, procedures,
research data, drawings, models, blue prints, specifications,
flow sheets, equipment and parts list and descriptions and
related instructions (the "Business Records") and (E) product
packaging, marketing collateral, product strategy documentation,
press quotes and awards;
Page 1
<PAGE> 2
(vi) All of the Seller's rights, title and interest in its
intellectual property and to its patent applications and
patents, including any patents issuing therefrom, and any
reissues, reexaminations, divisions, continuations in whole or
in part, extensions and foreign counterparts thereof;
(vii) To the extent transferable, any and all permits, licenses,
orders, ratings and approvals of federal, state or local
governmental or regulatory authorities held in connection with,
necessary for, or material to the Business; and
(viii) All of the assets set forth in Exhibit 5 attached hereto.
1.1.2. In addition, Seller agrees to provide Buyer a CD-ROM that contains clip
art images from its MasterClips collection and to license such clip art
to L&H in order to make them available for use in Buyer's technologies
and products. Seller agrees that Buyer may select up to 20,000 clip art
images royalty free from the aforementioned CD-ROM.
1.1.3. Seller will also deliver to Buyer a list of its Voice Direct registered
usernames and Buyer will have unlimited access to reasonably use those
names in its course of business. Seller agrees that it will not make
those names available for any usage or purpose whatsoever to any other
company competing with the business of Buyer or to its resellers such
as, but not limited to, mail catalogs etc. Buyer agrees that it will
honor the "opt out" field that indicates whether the registered user
will accept unsolicited electronic mail to any Voice Direct registered
user.
The assets, property and business of the Seller to be sold to and purchased by
Buyer under this Agreement are hereinafter sometimes referred to as the "Subject
Assets."
1.2. Purchase Price and Payment
1.2.1. The total consideration for the sale by the Seller to Buyer of the
Subject Assets shall be 1,800,000 USD ("Purchase Price"). The
Purchase Price shall be paid as follows:
- Upon Buyer receiving a mutually acceptable executed copy of this
Agreement, by facsimile, from Seller, Buyer will pay 50,000 USD
to Seller within 3 business days as "good faith" pursuant to
wire instructions provided by Seller to Buyer in writing.
- On the Closing Date, Buyer will initiate a wire transfer in the
amount of 1,500,000 USD (subject to adjustment pursuant to
article 1.2.2. below) from Belgium to the bank account indicated
by Seller in writing prior to the initiation of the wire
transfer. Buyer shall provide Seller with evidence of the
initiation of such wire transfer.
- In addition to the 1,500,000 USD (subject to adjustment) payment
made by Buyer to Seller pursuant to the previous paragraph, on
the Closing Date, Buyer will initiate a second wire transfer in
the amount of 50,000 USD from Belgium to a bank account
indicated by Seller in writing prior to the initiation of the
wire transfer. Within one (1) business day of Seller's receipt
of said 50,000 USD, Seller agrees to: (i) pay VDO Systems 50,000
USD; and (ii) effect, in writing, the satisfaction of all
royalty payments under the contract dated February 10, 1999
between Seller and VDO Systems.
- On the Closing Date Buyer will initiate a wire transfer from
Belgium in the amount of 200,000 USD to the escrow agent
according to article 1.2.3 of this Agreement.
1.2.2. Notwithstanding what is mentioned in 1.2.1, should the "Closing"
occur on or before August 13, 1999, Buyer shall receive a discount
of 50,000 USD, which will bring the total
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Purchase Price to 1,750,000 USD, which shall be applied to reduce the
$1,500,00 USD payment due on the Closing Date to $1,450,000. Both
Parties will use their best efforts to "close" the contemplated
transaction on or before August 13, 1999.
1.2.3 Buyer and Seller agree to execute, upon approval by an agreed upon
escrow agent (but no later than the Closing Date), an Escrow
Agreement in substantially the form attached hereto as Exhibit 6.
1.3. Assumption of liabilities
(a) Buyer shall not assume or agree to perform and discharge in the
ordinary course of business (i) any of the liabilities and
obligations of Seller arising under the unfilled portions of those
sales orders from customers of Seller and (ii) any accounts payables
existing or arising before the Closing.
(b) Buyer shall not assume or be bound by any obligations or liabilities
of Seller of any kind or nature, known, unknown, accrued, absolute,
contingent, whether or not disclosed on and Exhibit hereto or
otherwise, whatsoever, all of which shall be retained by Seller (the
"Retained Liabilities"). Seller shall be responsible for and pay any
and all losses, damages, obligations, liens, assessments, judgments,
fines, disposal and other costs and expenses, liabilities and
claims, including, without limitation, interest, penalties and fees
of counsel, as the same are incurred, of every kind or nature
whatsoever made by or owed to any person to the extent any of the
foregoing relates to (a) the Seller's operations and assets, (b) the
inventory existing at the moment of the Closing, (c) the Retained
Liabilities, (d) any contracts or other agreements or understandings
relating to the Business to which Seller is a party which are not
expressly listed and assumed hereunder, or (e) operations or assets
acquired under this Agreement to the extent arising in connection
with or on the basis of events, acts, omissions, conditions or any
other state of facts occurring or existing prior to or on the
Closing Date, including without limitation, any liabilities for any
express or implied warranties under any of the shrink wrap/end user
license agreements.
1.4. Closing Date.
The closing of the purchase and sale provided for in this Agreement
(herein called the "Closing") shall be held at the offices of Lernout &
Hauspie Speech Products USA, Inc. in Burlington, Massachusetts at 10:00
a.m. (Eastern Time Zone) on August 12, 1999 (the "Closing Date"), or at
such other place, date or time as may be fixed by mutual agreement of
the parties.
1.5. Transfer of Subject Assets.
At the Closing, Seller shall deliver or cause to be delivered to Buyer
good and sufficient instruments of transfer transferring to Buyer title,
free and clear of all liens, restrictions and encumbrances, to all the
Subject Assets in form and substance satisfactory to counsel for Buyer.
Seller shall, at Buyer's expense, crate, remove and transport the
Subject Assets from the Seller's facility to such destinations as Buyer
shall request.
1.6. Further Assurances.
Seller from time to time after the Closing at the request of Buyer and
without further consideration shall execute and deliver further
instruments of transfer and assignment (in
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addition to those delivered under Section 1.5) and take such other
action as Buyer may reasonably require to more effectively transfer and
assign to, and vest in, Buyer each of the Subject Assets.
1.7. Collection of Receivables.
Seller shall have the right and authority to collect the accounts
receivable of Seller (including, without limitation, those relating to
the Business) existing as of the Closing Date, provided such collection
shall be conducted in a manner which will not be reasonably expected to
impact Buyer negatively, the business being acquired hereunder or
Buyer's relationship with any customer. Buyer shall cooperate with
Seller in connection with Seller's efforts to collect such accounts
receivable, and shall promptly pay over to Seller amounts paid to Buyer
in respect of such receivables.
2. REPRESENTATIONS AND WARRANTIES OF SELLER.
Seller hereby represents and warrants to Buyer as follows:
2.1. Organization and Qualification of Seller.
The Seller is a corporation duly organized, validly existing and in good
standing under the laws of the State of California and has all requisite
corporate power and authority to carry on its business as now conducted
and as proposed to be conducted and is validly existing in accordance
with its Articles of Incorporation and Bylaws.
2.2. Authority and Binding Effect.
The Seller has full power and authority to enter into this Agreement and
to carry out the transactions contemplated hereby, and this Agreement
has been duly authorized, executed and delivered by the Seller and
constitutes the legal, valid and binding obligation of the Seller,
enforceable in accordance with its terms.
2.3. Present Compliance with Obligations and Laws.
Neither the ownership nor use of the Subject Assets by Seller violates
or, with or without the passage of time or the giving of notice, or
both, would reasonably be expected to violate, conflict with or result
in a default or right to accelerate under, any term of any material
lien, encumbrance, mortgage, deed of trust, lease, license, agreement or
condition of any material debt instrument or any law, regulation,
administrative order or judicial order applicable to the Seller that
could materially and adversely affect the Subject Assets.
2.4. No Conflict of Transaction with Obligations and Laws.
(a) Neither the execution, delivery nor the performance of this
Agreement by Seller, or the performance by Seller of the
transactions contemplated hereby, will: (i) constitute a breach or
violation of the bylaws of Seller; (ii) result in the creation of
any lien, charge or
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encumbrance on the Subject Assets; (iii) constitute (with or without
the passage of time or giving of notice) a default under or breach
of any material agreement, instrument or obligation to which the
Seller is a party or by which it or any of the Subject Assets are
bound; or (iv) result in a violation of any law, regulation,
administrative order or judicial order applicable to the Seller that
could materially and adversely affect the Subject Assets.
(b) The execution, delivery and performance of this Agreement and the
transactions contemplated hereby by the Seller do not require the
Seller to obtain any material consent, waiver, approval,
authorization, exemption of or giving of notice to any governmental
authority or other third party.
2.5. Absence of Undisclosed Liabilities.
To the knowledge of Seller, there is no fact which materially adversely
affects, or may in the future (so far as can now be reasonably foreseen)
materially adversely affect, the Subject Assets provided that no
representation is made as to general economic conditions or the general
fluctuations of the speech recognition industry.
2.6. Absence of Certain Changes.
Since June 1, 1999, there has not been:
(i) any encumbrance or lien placed on any of the Subject Assets
which remains in existence on the date hereof or at the time
of Closing;
(ii) any obligation or liability incurred by the Sellers with
respect to the Business other than obligations and
liabilities incurred in the ordinary course of business,
consistent with past practice;
(iii) other than in the ordinary course of business, any adverse
change, or event or circumstances which would reasonably be
expected to result in any material adverse change in the
assets used in, or in the business relationships or the
operation of, the Business.
2.7. Title to Properties; Liens; Condition of Properties
(a) The Subject Assets do not include any real property or leasehold
interests in real property. Seller owns all of the Subject Assets,
and Seller has and is conveying to Buyer hereunder good and valid
title to all the Subject Assets. None of the Subject Assets,
tangible or intangible, is subject to any mortgage, pledge, lien,
tax lien, conditional sale agreement, security interest,
encumbrance, claim or other charge or restraint on transfer of any
nature whatsoever. All financing statements under the Uniform
Commercial Code previously filed with respect to any of the Subject
Assets in any jurisdiction have been or will be terminated, together
with the security interests and rights created thereby, and Seller
has not signed any other such financing statement or any security
agreement authorizing any secured party thereunder to file any such
financing statement. The Subject Assets comprise of all assets
necessary for or material to the continued conduct of the Business
by the Buyer as currently conducted by Seller.
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(b) To the knowledge of Seller, there does not exist any material defect
in any of the software for the Business that is of a nature of a
latent defect which would render such software unfit for its
continued use in its current mode.
2.8. Intellectual Property Rights.
To the Seller's knowledge, the Company owns or possesses sufficient
legal rights to all, patents, copyrights, trade secrets, licenses and
all other intellectual property rights necessary for the Business as now
conducted without any conflict with, or infringement of, the rights of
others. The Company has not received any communications alleging that
the Company has violated or, by conducting the Business as proposed,
would violate any of the patents, trademarks, service marks, trade
names, copyrights, trade secrets or other proprietary rights or
processes of any other person or entity. All intellectual property
rights related to the Business are listed in Exhibit 2 attached hereto.
2.9. Litigation.
There is no litigation pending (or, to the knowledge of the Seller,
threatened) against the Seller related to the Business and there are no
outstanding court orders, court decrees, or court stipulations to which
the Seller is a party and by which any of the Subject Assets is bound,
that (a) conflict with or seek to enjoin or prevent this Agreement or
affect the transactions contemplated hereby, or (b) materially restrict
the present business, properties, operations, prospects, assets or
condition, financial or otherwise, of the Business, or (c) will result
in any materially adverse change in the Subject Assets or the Business.
2.10. Product Warranty Claims.
As of the date of this Agreement: (i) there have been no product or
service warranty claims made by customers of Seller relating to the
Business for an amount in excess of $5,000 with respect to any single
claim or for amounts in excess of $50,000 with respect to all claims
made in any fiscal year; (ii) there have been no product recalls having
a customary standard unit cost in excess of $5,000 with respect to any
single recall or of products having a customary standard unit cost in
excess of $50,000 in the aggregate with respect to all product recalls
in any fiscal year; and (iii) except as stated in the end user license
agreement there are no product or service warranties outstanding or
currently being offered to customers of Seller relating to the Business.
2.11 Product Liability Claims.
No product liability or other tort claims have been made or, to the
knowledge of Seller, threatened against the Seller, relating to products
sold or services performed by the Business in the past three (3) years.
To the knowledge of the Seller, there are no defects in the design or
manufacture of the products manufactured, distributed or sold by Seller
as related to the Business on or before the date hereof.
2.12 Year 2000
All operating codes, programs, utilities of the Subject Assets are
designed to record, store, process, and present calendar dates falling
on or after January 1, 2000 in the same manner, and with the same
functionality, as provided on or before December 31, 1999. Such software
and hardware is designed to not lose functionality or degrade in
performance as a consequence of such software operating at a date later
than December 31, 1999.
2.13. Disclosure of Material Information.
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No representation or warranty of Seller contained in this Agreement, or
any other document, certificate or other instrument referenced in this
Agreement or any Schedule or Exhibit hereto, contains or will contain
any untrue statement of a material fact or omits, or will omit to state
any material fact necessary, in light of the circumstances under which
it was or will be made, in order to make the statements herein or
therein not misleading.
3. PRECLOSING COVENANTS AND CONDITIONS PRECEDENT TO CLOSING
3.1 Seller will conduct the Business from the Effective Date to the Closing
only in the ordinary course of business on a basis consistent with past
practice. Seller will not pursue, sign, or enter into any OEM or
distribution agreements material to the Business from the Effective Date
to the Closing.
3.2 Prior to the Closing, Seller shall; (i) have delivered to Buyer the
source code for Easy Language 25 for Windows and (ii) Seller shall
demonstrate to Buyer that the final executable code to this product can
in fact be derived from this source code. Seller shall provide its best
technical efforts to assist Buyer in realizing this condition.
4. REPRESENTATIONS AND WARRANTIES OF BUYER.
Buyer hereby represents and warrants to Seller as follows:
4.1. Authority and Binding Effect.
The Buyer has full power and authority to enter into this Agreement and
to carry out the transactions contemplated hereby, and this Agreement
has been duly authorized, executed and delivered by the Buyer and
constitutes the legal, valid and binding obligation of the Buyer,
enforceable in accordance with its terms.
4.2. No Conflicts.
Neither the execution and delivery of this Agreement by the Buyer nor
the consummation of the transactions contemplated hereby in accordance
with the terms hereof (i) will materially conflict with, result in a
material breach of or constitute a material default under any indenture,
mortgage, lease or other agreement to which the Buyer is a party or to
which it or any of its properties may be subject or (ii) will result in
a material violation of any order, writ, injunction, decree or award of
any court or governmental authority to which the Buyer or any of its
properties may be subject.
4.3. Authorization.
No approval, consent, withholding of objection or other authorization is
required from any court, administrative agency or governmental authority
in connection with the execution, delivery or performance by the Buyer
of this Agreement and the related agreements referred to herein. The
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execution, delivery or performance by the Buyer under this Agreement do
not conflict with or constitute a breach or default of any law or
regulation to which the Buyer is submitted, of the Articles of
Association and/or Bylaws and of any agreement entered into or binding
upon the Buyer.
4.4 Disclosure of Material Information.
No representation or warranty of Buyer contained in this Agreement, or
any other document, certificate or other instrument referenced in this
Agreement or any Schedule or Exhibit hereto, contains or will contain
any untrue statement of a material fact or omits, or will omit to state
any material fact necessary, in light of the circumstances under which
it was or will be made, in order to make the statements herein or
therein not misleading.
5. COVENANTS OF SELLER.
The Seller hereby covenants and agrees with the Buyer as follows:
5.1 After the Effective Date, Seller will not sell or ship any products
related to the Business to any OEM anywhere in the World. Subject to the
provisions of the previous sentence: (a) after the Effective Date and
until August 31, 1999, Seller will only sell or ship products related to
the Business to those accounts listed on Exhibit A attached hereto and
Exhibit A to the Letter of Intent signed between the Parties dated July
15, 1999 (the "Letter of Intent"); and (b) after August 31, 1999 and
until November 30, 1999, Seller will only sell or ship products related
to the Business to those accounts listed on Exhibit A attached to the
Letter of Intent. After November 30, 1999, Seller will not ship or sell
any products related to Business to any person or entity anywhere in the
World. Notwithstanding the foregoing, Seller will never ship or sell the
Easy Language 35 for Windows product (a product currently under
development), or any product with similar functions to the Easy Language
35 for Windows product, to any person or entity anywhere in the World.
5.2 On or before August 31, 1999, Seller and Buyer shall send a letter to
Seller's channel parties (distributors, resellers, retailers, etc...)
requesting they return any remaining inventory to Seller. Such letter
shall be sent by registered or certified mail, or overnight courier, as
Buyer shall designate.
5.3 Within 7 days following the Closing, a joint letter from top management
of Seller and Buyer will be sent by Buyer at its sole expense to all
VoiceDirect registered users making a special offer to upgrade to L&H
Voice Xpress.
5.4. Non-Competition by Seller.
Seller, in order to induce Buyer to enter into this Agreement, expressly
covenants and agrees that neither Seller, nor any entity wholly or
substantially controlled by or under common control with Seller will,
directly or indirectly, for a period of five (5) years following the
Closing Date, develop or distribute products relating to language
translation or language learning anywhere in the World.
5.5 Payment of Debts.
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Buyer and Seller will each pay their own debts and liabilities retained
or assumed according to this Agreement.
5.6. End User Support.
The Seller shall provide technical support for all of the software
products listed on Exhibit 5 attached hereto for ninety (90) days after
the Closing Date. Thereafter, the Seller shall refer all technical
support calls and customer service calls to the Buyer at www.lhsl.com
(for international and domestic customers) and 1-800-380-1234 (for
domestic customers) and the Buyer shall be solely responsible for all
technical support and customer service for all of the software products
listed on Exhibit 5 attached hereto.
5.7 Product Claims and Returns.
The Seller shall be responsible for customer claims relating to services
rendered by Seller, and customer claims relating to, or returns of,
products of the Seller which were sold and shipped by the Seller.
5.8. Support to Buyer.
Seller shall give free reasonable telephone and e-mail support and
consulting related to technical and engineering issues of the Business
during a period of two months following the Closing upon request of
Buyer.
6. CONDITIONS TO OBLIGATIONS OF THE BUYER.
The obligations of the Buyer to consummate the transactions contemplated
by this Agreement are subject to the fulfillment prior to or at the Closing of
the following conditions:
6.1 Representations; Warranties; Covenants.
Each of the representations and warranties of the Seller set forth in
this Agreement shall be accurate in all respects as if made on and as of
the date of Closing as well as on the date hereof, other than with
respect to representations and warranties that refer to or speak as of a
certain date, and except for changes occurring in the ordinary course of
business. The Seller shall have performed in all respects all those
obligations and shall have complied with those covenants required to be
observed under this Agreement prior to the Closing.
6.2. No Material Adverse Change.
During the period from the date hereof to the Closing, there shall not
have been any material adverse change in the condition, financial or
otherwise or the results of operation of the Business other than changes
in the ordinary course none of which has been materially adverse, and
the Seller shall not have sustained any damage by casualty to, or
destruction of the Subject Assets, whether or not insured, which
materially and adversely affects the operation of the Business.
7. INDEMNIFICATION.
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7.1. The Seller hereby agrees to indemnify, defend and hold the Buyer and the
Buyer's successors and assigns, harmless from, against and in respect of
any and all losses, judgments, settlements, claims, fines penalties,
liabilities, costs or expenses incurred or sustained by the Buyer or
such other persons or entities to the extent attributable to any breach
of any warranty by the Seller made in, or any non-performance of any
covenant, agreement or obligation to be performed on the part of the
Seller under this Agreement or arising out of any liabilities of Seller
not expressly assumed hereunder.
7.2. The Buyer hereby agrees to indemnify and hold the Seller and the
Seller's successors and assigns harmless from and against and in respect
of any and all losses, judgments, settlements, claims, fines penalties,
liabilities, costs or expenses incurred or sustained by the Seller or
such other persons or entities to the extent attributable to any breach
of any warranty by the Buyer made in, or any non-performance of any
covenant, agreement or obligation to be performed on the part of the
Buyer under this Agreement.
7.3 Claims for Indemnification.
Whenever any claim shall arise for indemnification hereunder, the
indemnified party (the "INDEMNIFIED PARTY") shall promptly notify the
indemnifying party (the "INDEMNIFYING PARTY") of the claim and, when
known, the facts constituting the basis for such claim. In the event of
any such claim for indemnification hereunder resulting from or in
connection with any claim or legal proceedings by a third party, the
notice to the Indemnifying Party shall specify, if known, the amount or
an estimate of the amount of the liability arising therefrom. The
Indemnified Party shall not settle or compromise any claim by a third
party for which it is entitled to indemnification hereunder without the
prior written consent of the Indemnifying Party, which shall not be
unreasonable withheld, unless suit shall have been instituted against it
and the Indemnifying Party shall not have taken control of such suit
after notification thereof as provided in this Agreement.
7.4 Defense by Indemnifying Party.
In connection with any claim giving rise to indemnity hereunder
resulting from or arising out of any claim or legal proceeding by a
person who is not a party to this Agreement, the Indemnifying Party at
its sole cost and expense may, upon written notice to the Indemnified
Party, assume and control the defense of any such claim or legal
proceeding if it acknowledges to the Indemnified Party in writing its
obligations to indemnify the Indemnified Party with respect to all
elements of such claim. The Indemnified Party shall be entitled to
participate in (but not control) the defense of any such action, with
its counsel and at its own expense. If the Indemnifying Party does not
assume the defense of any such claim or litigation resulting therefrom
within 30 days after the date such claim is made, (a) the Indemnified
Party may defend against such claim or litigation, in such manner as it
may deem appropriate, including, but not limited to, settling such claim
or litigation, after giving notice of the same to the Indemnifying
Party, on such terms as the Indemnified Party may deem appropriate, and
(b) the Indemnifying Party shall be entitled to participate in (but not
control) the defense of such action, with its counsel and at its own
expense. If the Indemnifying Party thereafter seeks to question the
manner in which the Indemnified Party defended such third party claim or
the amount or nature of any such settlement, the Indemnifying Party
shall have the burden to prove by preponderance of the evidence that the
Indemnified Party did not defend or settle such third party claim in a
reasonably prudent manner.
7.5 Payment of Indemnification Obligation.
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Seller agrees to consent, in writing, to any disbursement from the
escrow created by article 1.2 hereof requested by Buyer in connection
with an uncontested claim for indemnification by the Buyer pursuant to
this Article.
7.6 Survival of Representations; Claims for Indemnification.
All representations and warranties made by the parties herein or in any
instrument or document furnished in connection herewith shall survive
the Closing and any investigation at any time made by or on behalf of
the parties hereto. All such representations and warranties shall expire
on the second anniversary of the Closing Date, except for claims, if
any, asserted in writing prior to such second anniversary, which shall
survive until finally resolved and satisfied in full. All claims and
actions for indemnity pursuant to this section shall be asserted or
maintained in writing by a party hereto on or prior to the expiration of
such two-year period.
7.7 Ceiling.
Seller shall only be required to make payments with respect to such
damages for breaches of representations or warranties within the scope
of these indemnifications up to an amount equal to the total purchase
price paid by Buyer to Seller under article 1.2 of this Agreement. Buyer
shall only be required to make payments with respect to such damages or
matters within the scope of these indemnifications up to 1,000,000USD.
8. TERMINATION OF AGREEMENT.
8.1. Termination.
At any time prior to the Closing, this Agreement may be terminated (i)
by mutual consent of Buyer and Seller with the approval of their
respective Board of Directors, notwithstanding prior approval of this
Agreement by the Board of Directors of any party, (ii) by either Buyer
or Seller if there has been a material breach of a representation or
warranty or breach of covenant by the other party in its
representations, warranties and covenants set forth herein, (iii) by
Buyer if the conditions stated in Article 3 and 6 have not been
satisfied at or prior to the Closing, and (iv) by Buyer or Seller if the
Closing does not occur on or before August 31, 1999.
8.2. Effect of Termination.
If this Agreement shall be terminated as above provided, all obligations
of the parties hereunder shall terminate but any breaching party shall
remain liable to the non-breaching parties for their damages and
out-of-pocket expenses. In the event that this Agreement is so
terminated, each party will return all papers, documents, financial
statements and other data furnished to it by or with respect to each
other party to such other party (including any copies thereof made by
the first party). In the event this Agreement is terminated: (i) by
Buyer and Seller pursuant to article 8.1(i); (ii) by Buyer pursuant to
articles 8.1(ii) or 8.1(iii); or (iii) by operation of this Agreement
pursuant to Article 8.1(iv), Seller shall, on or before two (2) business
days after such termination return the 50,000 USD "good faith" payment
made by Buyer pursuant to article 1.2.1 to Buyer, assuming that Seller
has actually received such funds from Buyer.
8.3. Right to Proceed.
Anything in this Agreement to the contrary notwithstanding, if any of
the conditions specified in Article 6 hereof shall have not been
satisfied, Buyer shall have the right to waive the Buyers' right to
require fulfillment of any such condition and to proceed with the
transactions contemplated hereby.
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9. MISCELLANEOUS.
9.1. Notices.
Any notice or other communication in connection with this Agreement
shall be deemed to be delivered if in writing (or in the form of a
facsimile transmission, receipt telephonically confirmed) addressed as
provided below and if either (a) actually delivered electronically or
physically at said address, or (b) in the case of a letter, three (3)
business days shall have elapsed after the same shall have been sent by
internationally recognized overnight courier:
If to Seller to:
International Microcomputer Software, Inc.
ATTN: Legal Department
75 Rowland Way
Novato, CA 94945
T: 415/878-4000
F: 415/893-9860
If to Buyer, to:
Lernout & Hauspie Speech Products N.V.
Flanders Language Valley 50
B-8900 Ieper, Belgium
Attn: Legal Dept
Tel: 011-32 57 228888
Fax: 011 32 57 219661
And in any case at such other address as the addressee shall have
specified by written notice. All periods of notice shall be measured
from the date of delivery thereof.
9.2. Publicity and Disclosures.
No press releases or any public disclosure, either written or oral, of
the transactions contemplated by this Agreement, except as required by
this Agreement, shall be made by either party without the prior
knowledge and written consent of the other party, except as otherwise
required by applicable law, such consent not to be unreasonably
withheld. Buyer acknowledges that Seller is required to publicly
disclose this transaction within a reasonable time after Closing.
9.3. Confidentiality.
The parties agree that they will keep confidential and not disclose or
divulge any confidential, proprietary or secret information which they
may obtain from the other in connection with the transactions
contemplated herein, or pursuant to inspection rights granted hereunder
unless such information is or hereafter becomes public information.
Furthermore, after the Closing Date, Seller, nor any person controlling,
controlled by or under common control with Seller will, for any reason,
directly or indirectly, for itself or any other person, use or disclose
any trade secrets or confidential information, know-how or proprietary
information transferred pursuant to this Agreement, except to Buyer, its
officers, directors, employees or agents, in connection with the
operation of the Business by Seller before or by Buyer after the Closing
Date, except as may be required to be disclosed by law.
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9.4. Entire Agreement.
This Agreement (including all exhibits or schedules appended to this
Agreement and all documents delivered pursuant to this Agreement, all of
which are hereby incorporated herein by reference) constitutes the
entire agreement between the parties, and all promises, representations,
understandings, warranties and agreements with reference to the subject
matter hereof and inducements to the making of this Agreement relied
upon by any party hereto, have been expressed herein or in the documents
incorporated herein by reference.
9.5. Severability.
The invalidity or unenforceability of any provision of this Agreement
shall not affect the validity or enforceability of any other provision
hereof.
9.6. Assignability.
This Agreement may not be assigned otherwise than by operation of law
(a) by Buyer without the prior written consent of Seller, or (b) by
Seller without the prior written consent of Buyer. This Agreement shall
inure to the benefit of and be binding upon the parties hereto and their
respective successors and permitted assigns.
9.7. Amendment.
This Agreement may be amended only by a written agreement executed by
Buyer and Seller.
9.8. Governing Law.
This Agreement shall be governed by and construed in accordance with the
laws of the State of California (other than the choice of law principles
thereof). Any claim, action, suit or other proceeding initiated by any
of the Sellers' Indemnified Persons against Buyer, or by any of the
Buyer's Indemnified Persons against any Seller, under or in connection
with this Agreement may be asserted, brought, prosecuted and maintained
in any Federal or state courts in San Francisco, California, as the
party bringing such action, suit or proceeding shall elect, having
jurisdiction over the subject matter thereof, and Seller and Buyer
hereby waive any and all rights to object to the laying of venue in any
such court and to any right to claim that any such court may be an
inconvenient forum. Seller and Buyer hereby submit themselves to the
jurisdiction of each such court and agree that service of process on
them in any such action, suit or proceeding may be effected by the means
by which notices are to be given to it under this Agreement.
9.9 Brokers.
9.9.1 For the Seller. The Seller represents and warrants that it has not
engaged any broker or finder or incurred any liability for brokerage
fees, commissions or finder's fees in connection with the transactions
contemplated by this Agreement. The Seller agrees to indemnify and hold
harmless the Buyer against any claims or liabilities asserted against it
by any person acting or
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claiming to act as a broker or finder on behalf of the Seller.
9.9.2 For the Buyer. The Buyer agrees to pay all fees, expenses and
compensation owed to any person, firm or corporation who has acted in
the capacity of broker or finder on its behalf in connection with the
transactions contemplated by this Agreement. The Buyer agrees to
indemnify and hold harmless the Seller against any claims or liabilities
asserted against it by any person acting or claiming to act as a broker
or finder on behalf of the Buyer.
9.10. Counterparts.
This Agreement may be executed in multiple counterparts and by
facsimile, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
9.11. Effect of Table of Contents and Headings.
Any table of contents, title of an article or section heading herein
contained is for convenience of reference only and shall not affect the
meaning of construction of any of the provisions hereof.
9.12. Rules of Construction.
Neither this Agreement nor any other agreement, document or instrument
referred to herein or executed or delivered in connection herewith shall
be construed against either party as the principal draft person hereof
or thereof.
9.13 Fees and expenses.
Each Party will bear its own fees and expenses.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
under seal in multiple counterparts as of the date set forth above by their duly
authorized representatives.
Seller: Buyer:
IMSI L&H Applications USA Inc.
BY: /s/ COSTA JOHN BY: /s/ GASTON BASTIAENS
------------------------------ --------------------------
Name: Costa John Name: Gaston Bastiaens
------------------------------ --------------------------
Title: Chief Executive Officer Title: President and CEO
------------------------------ --------------------------
Date: August 10, 1999 Date: August 11, 1999
------------------------------ --------------------------
Page 14
<PAGE> 15
EXHIBITS
<TABLE>
<S> <C>
Exhibit 1: Customer/Distribution List
Exhibit 2: Patents and Trademarks
Exhibit 3: Non-Disclosure Agreement
Exhibit 4: Language Learning Product Lines
Exhibit 5: Summary of Assets
Exhibit 6: Escrow Agreement
</TABLE>
Page 15
<PAGE> 16
EXHIBIT 1: CUSTOMER/DISTRIBUTION LIST
UNITED STATES:
Merisel
Navarre
GT Interactive
Ingram
TechData
CANADA:
Ingram
Merisel
LATIN AMERICA:
MSD - Brazil
Funny Life - Mexico
CD ROM Show - Argentina
SOUTH AFRICA:
Siltek
EUROPE:
ARES - Spain
GTI - Spain
GEM - UK
IOPI - Italy
Buhl - Germany
Innelec - France
Sybex - France
Thali - Switzerland
PF1 - Israel
TeleDireckt - Holland
Unitech - Greece
ASIA:
Modern - India
Acer - Singapore
Softchina - Taiwan, P.R.C.
Winning Run - Japan
Jarrir - Saudi Arabia
Page 1
<PAGE> 17
EXHIBIT 2: PATENTS AND TRADEMARKS
Page 2
<PAGE> 18
EXHIBIT 3: NON-DISCLOSURE AGREEMENT
Page 3
<PAGE> 19
EXHIBIT 4: LANGUAGE LEARNING PRODUCT LINES
IMSI Easy Language 25 World in 1
IMSI Easy Language Deluxe Suite
IMSI Easy Language Conversational Skills
IMSI Easy Language 17 in 1
Easy Language 3.0
Easy Language Spanish
Easy Language 6 in 1
IMSI Easy Language 35 (this product is still under development)
Page 4
<PAGE> 20
EXHIBIT 5: SUMMARY OF ASSETS
EASY LANGUAGE 35 WORLD LANGUAGES - (PRODUCT UNDER DEVELOPMENT)
- Current development status of all and any Source and Object Code
- Any unique development tools created by of for IMSI
EASY LANGUAGE DELUXE SUITE -
- Source and Object Code
- Registered user database
- Press clippings
- Artwork
- Sell Sheet
- Box
- CD Label
EASY LANGUAGE 25 WORLD LANGUAGES -
- Source and Object Code
- Registered user database
- Press clippings
- Artwork
- Dictionary Cover
- Sell Sheet
- CD Label
- Jewel Case Cover
- Box
EASY LANGUAGE 17 IN 1 -
- Source and Object Code
- Registered user database
- Press clipping
- Artwork
- Box
- Dictionary Cover
- Jewel Case Cover
- Sell Sheet
- CD label
- Shelf Talker
EASY LANGUAGE CONVERSATIONAL -
- Source and Object Code
- Registered user database
- Press clipping
- Artwork
- Box
- CD Label
- Jewel Case Cover
- Manual Cover
- Sell Sheet
EASY LANGUAGE 6 IN 1 -
- Source and Object Code
EASY LANGUAGE SPANISH -
- Source and Object Code
- Artwork
- Box
- Jewel Case cover
- CD Label
NON-PRODUCT SPECIFIC ASSETS -
- Voice Direct registered user database
- 20,000 images from Masterclips
- "Easy Language" Trademark
- "Easy Language" Copyright
Page 5
<PAGE> 21
EXHIBIT 6: ESCROW AGREEMENT
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 4-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1
<CASH> 3,113
<SECURITIES> 0
<RECEIVABLES> 9,651
<ALLOWANCES> 6,296
<INVENTORY> 2,255
<CURRENT-ASSETS> 14,056
<PP&E> 6,487
<DEPRECIATION> 3,177
<TOTAL-ASSETS> 22,613
<CURRENT-LIABILITIES> 16,820
<BONDS> 0
0
0
<COMMON> 27,986
<OTHER-SE> (83)
<TOTAL-LIABILITY-AND-EQUITY> 22,613
<SALES> 5,634
<TOTAL-REVENUES> 5,634
<CGS> 3,182
<TOTAL-COSTS> 5,266
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 462
<INCOME-PRETAX> (1,836)
<INCOME-TAX> 17
<INCOME-CONTINUING> (1,853)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,853)
<EPS-BASIC> (.26)
<EPS-DILUTED> (.26)
</TABLE>
