0000950149-01-501526.txt : 20011019
0000950149-01-501526.hdr.sgml : 20011019
ACCESSION NUMBER: 0000950149-01-501526
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 20
CONFORMED PERIOD OF REPORT: 20010630
FILED AS OF DATE: 20011015
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: INTERNATIONAL MICROCOMPUTER SOFTWARE INC /CA/
CENTRAL INDEX KEY: 0000814929
STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372]
IRS NUMBER: 942862863
STATE OF INCORPORATION: CA
FISCAL YEAR END: 0630
FILING VALUES:
FORM TYPE: 10-K
SEC ACT: 1934 Act
SEC FILE NUMBER: 000-15949
FILM NUMBER: 1759374
BUSINESS ADDRESS:
STREET 1: 75 ROWLAND WAY
CITY: NOVATO
STATE: CA
ZIP: 94945
BUSINESS PHONE: 4158784000
MAIL ADDRESS:
STREET 1: 1895 EAST FRANCISCO BLVD
CITY: SAN RAFAEL
STATE: CA
ZIP: 94901
10-K
1
f76300e10-k.txt
INTERNATIONAL MICROCOMPUTER SOFTWARE, INC.
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(X) Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended June 30, 2001
or
( ) Transition report pursuant to Section 13 or 15(d) of the Exchange Act of
1934 for the Transition Period from _____ to _____
Commission File No. 0-15949
INTERNATIONAL MICROCOMPUTER SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
CALIFORNIA 94-2862863
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
75 ROWLAND WAY, NOVATO, CALIFORNIA 94945
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (415) 878-4000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: common stock,
no par value
Indicate by check mark whether registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in the definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock of the registrant by
non-affiliates of the registrant as of October 9, 2001 was approximately
$2,532,021
As of October 9, 2001, 9,738,542 Shares of Registrant's common stock, no par
value, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
INTERNATIONAL MICROCOMPUTER SOFTWARE, INC.
FORM 10-K ANNUAL REPORT
FOR THE YEAR ENDED JUNE 30, 2001
TABLE OF CONTENTS
PART I
Item 1. Business 3
Item 2. Properties and Facilities 13
Item 3. Legal Proceedings 13
Item 4. Submission of Matters to a Vote of Security Holders 14
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters 14
Item 6. Selected Financial Data 15
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 16
Item 7a. Quantitative and Qualitative Disclosures about Market Risk 42
Item 8. Financial Statements and Supplementary Data 42
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 42
PART III
Item 10. Directors and Executive Officers of the Registrant 42
Item 11. Executive Compensation 46
Item 12. Security Ownership of Certain Beneficial Owners and Management 48
Item 13. Certain Relationships and Related Transactions 49
PART IV
Item 14. Exhibits, Financial Statements, Schedules, and Reports on Form 8-K 50
Signatures 79
Exhibit
Index 82
2
PART I
FORWARD-LOOKING INFORMATION
This Annual Report of International Microcomputer Software, Inc ("IMSI") on Form
10-K contains forward-looking statements, particularly those identified with the
words, "anticipates," "believes," "expects," "plans," and similar expressions.
These statements reflect management's best judgment based on factors known to
them at the time of such statements. The reader may find discussions containing
such forward-looking statements in the material set forth under "Legal
Proceedings" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations," generally, and specifically therein under the
captions "Liquidity and Capital Resources" and "Future Performance and
Additional Risk Factors" as well as elsewhere in this Annual Report on Form
10-K. Actual events or results may differ materially from those discussed
herein. The reader should carefully consider the risk factors discussed under
"Future Performance and Additional Risk Factors," among others, in evaluating
the Company's prospects and future financial performance.
ITEM 1. BUSINESS
GENERAL
IMSI was incorporated in California in November 1982. IMSI's objective was to
develop and publish PC software such as graphics and precision drawing. Over the
next 16 years, IMSI became a leading developer and publisher of productivity
software in the precision design, graphic design, and other related business
applications. By the end of 1998, IMSI marketed and distributed its products
worldwide primarily through the retail channel. The Company's corporate
headquarters were in San Rafael, California, and the Company also maintained
subsidiary and branch offices in the United Kingdom, Germany, Australia, South
Africa, France, Sweden, and Canada.
In 1998 IMSI formulated a new strategy to transition from sales of boxed product
through the retail channel to Internet sales and to migrate the Company's core
products and content in the design and graphics categories to the Internet.
Since 1998, IMSI has accomplished a major restructuring and refined the
Company's strategy to focus on the Company's core capabilities in the design and
graphics and content software categories. The Company signed an agreement and
plan of merger dated August 31, 2001 with Digital Creative Development
Corporation, a Utah corporation publicly traded on the Nasdaq OTC Bulletin Board
(Nasdaq OTC/BB: DCDC) (hereinafter "DCDC"). The merger with DCDC will not
significantly affect the Company's fundamental strategy, other than to add
management and financial resources to those of IMSI to help implement that
strategy.
Today, IMSI's corporate headquarters are in Novato, California and the Company
maintains a branch office in Australia. The offices of the Company's wholly
owned subsidiary, ArtToday.com, are in Tucson, Arizona.
BACKGROUND
From its inception, IMSI has pursued the objective of developing and publishing
PC graphics and design software. In the early years IMSI used primarily direct
marketing programs to sell the Company's products. This was consistent with the
nature of the industry and appropriate to the Company's customers, which were
primarily professionals and small to medium-sized businesses in categories
under-served by major software vendors.
In July 1987 IMSI completed an initial public offering, raising net proceeds of
approximately $2,600,000. The Company utilized the proceeds in part to expand
its efforts to create product franchises by developing, licensing or acquiring
products in categories where it believed it could capture market share with
better technology, lower prices, or a more extensive distribution network. In
August 1988 the Company acquired Milan Systems America, Inc. and the rights to
the TurboCAD computer-aided-design software. In September 1995 IMSI acquired the
rights to the FloorPlan 3D home design software from Forte/ComputerEasy
International, Inc. On September 30, 1997, the Company acquired from Corel the
rights to the established graphics software products, Corel Flow, Corel
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Family Tree, Lumiere, and four in-process technologies, CorelCAD, Click and
Create, VisualCADD and Corel Personal Architect in the CAD, diagramming and
consumer categories.
During this period of expansion, IMSI began to diversify its marketing and
selling activities. In 1992, IMSI began to pursue sales in the retail channel.
The Company continued to employ direct marketing techniques to sell the
Company's products to direct consumers. In addition, IMSI began to utilize sales
representative firms to expand the retail distribution of its products.
In 1995 IMSI established the objective of becoming a leader in the rapidly
consolidating software market by building an extensive network of domestic and
international distribution. Over the next three years, IMSI achieved significant
success. IMSI's best-known product families included TurboCAD and FloorPlan in
the precision design category, MasterClips, in the graphic design category, and
Org Plus and FormTool in the business applications category. IMSI was selling
its products in 10 languages in more than 40 countries, primarily through large
distributors in the retail channel. In addition, the Company sold directly to
the corporate, education and government markets as well as to other consumers
through strategic partners, direct mail and email.
In 1998 IMSI formulated a strategy that focused on two objectives, both related
to the Internet:
- Transition from sales of boxed product through the retail
channel, to Internet sales
- Migrate the Company's core products and content in the design
and graphics categories to the Internet
This strategy was in response to the rapidly changing environment in the
software development and publishing business and the very significant perceived
potential in the Internet business. Increased competition, the growing dominance
of companies much larger than IMSI, and the need to grant large rebates,
allowances and return privileges to retain major customers' business caused very
significant reductions in IMSI's net sales and in gross profit margins. By
moving to an Internet sales strategy, IMSI believed it could reduce costs,
eliminate the problems associated with selling through large resellers and offer
customers lower prices. In October 1998 IMSI acquired all of the outstanding
stock of Zedcor, Inc., an Internet provider of art and visual content and owner
of the website, ArtToday.com. In November 1999 Zedcor Inc. changed its name to
ArtToday.com.
On June 24, 1999, IMSI announced a plan of restructuring to stem large and
growing losses and to generate cash to meet the Company's operating needs. The
restructuring plan included four major components:
- Outsource manufacturing and warehouse operations
- Consolidate facilities
- Reduce personnel
- Divest non-core products and focus on high margin product lines
In addition, IMSI launched efforts to sell ArtToday.com to generate cash to fund
operations. While selling ArtToday.com was not consistent with the 1998
strategic plan, the need to generate cash was paramount.
During the next six months, the Company's operating results and financial
condition deteriorated. The traditional network of domestic and international
retail relationships, which continued to be IMSI's primary source of revenues,
was generating poor results compared to prior years. In addition, the costs of
selling to large distributors, which included product returns, price protection,
rebates and coop advertising, were increasing. Then, in January 2000, an
arbitrator awarded Imageline, Inc. $2.6 million against IMSI for intellectual
property violations and attorneys' fees. This award caused the cancellation of a
substantial offer to purchase ArtToday.com. These events forced IMSI to take
even more drastic measures to reduce costs and conserve cash. On January 28,
2000, IMSI announced that it was exiting the retail software business, closing
its European, Canadian and South African offices, and liquidating those
subsidiaries and branch operations.
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In February 2000 the Board of Directors and the President and CEO resigned. A
new Board of Directors and management team came in and initiated efforts to
stabilize operations, re-establish profitability and positive cash flow.
Within two months of the new management taking the helm, IMSI stabilized
operations, reduced the rate of operating losses and improved the Company's cash
position. To re-establish sales, IMSI focused on building relationships with
online resellers and distributors. Also, IMSI executed a number of licensing and
re-publishing agreements to re-establish a presence in the traditional retail
sales channel, but without the product return, price rebate and coop-advertising
problems of selling directly to major resellers. In addition, IMSI initiated
programs to build an Internet based revenue stream from the Company's visual
content website, ArtToday.com, and the new precision design websites,
FloorPlan.com and Turbocad.com. IMSI generated an operating profit of $1.4
million for the quarter ended June 30, 2000, which compares to an operating loss
for the previous quarter of $1.5 million. Of greater importance, during the
quarter ending June 30, 2000, IMSI's cash balance increased by $0.6 million to
$1.5 million.
Since February 2000 when new management stepped in, the Company has been
attempting to restructure its debt in combination with new investment into the
Company.
The new management immediately entered into discussions with creditors. On
February 18, 2000, under the guidance of CMA Business Credit Services, IMSI held
a formally noticed general meeting of the Company's unsecured creditors. At this
meeting, the creditors elected a committee to represent their interests. The
committee agreed to grant IMSI a standstill period to prepare and present a plan
to the creditors for paying off its debts. In December 2000 the creditor's
committee and substantially all creditors agreed to accept payment of $0.10 on
the dollar to resolve outstanding debts prior to February 2000. The Company's
secured lenders agreed to forbear from taking action against the Company to
enforce the collection of secured notes as long as IMSI continued to demonstrate
progress in resolving the Company's liquidity and capital structure problems.
Despite considerable efforts in this regard, the Company was unsuccessful in
raising any investment capital for 18 months.
Finally, on August 31, 2001, IMSI entered into a merger agreement with DCDC
pursuant to which IMSI is to issue shares of IMSI common stock totaling 51% of
its outstanding shares to DCDC shareholders, in exchange for their DCDC common
stock and cancellation of the note purchased from Union Bank of California by
DCDC. The agreement calls for DCDC and IMSI to file a joint proxy
statement/prospectus and registration statement to obtain shareholder approval
of the merger and to register the IMSI shares to be issued in the merger.
DCDC's strategy is to acquire and invest in software, Internet and technology
related companies. DCDC also operates Keynomics, Inc., an ergonomics related
software technology entity; Tuneinmovies.com, Inc., a subsidiary that
distributes digitally enhanced movie content; and the Arthur Treacher's and
Pudgie's Famous Chicken restaurant chains. DCDC's goal is to sell off or
otherwise dispose of its restaurant business within 90 days of completion of the
merger.
This merger was approved by the directors of DCDC and is subject to DCDC
shareholder approval. It was also approved by the directors of IMSI and 52% of
the outstanding shareholders of IMSI have agreed to vote in favor of the merger.
Upon signing of the merger agreement, Martin Wade, a director and CEO of DCDC,
became CEO of IMSI, four of the five directors of IMSI resigned and the entire
board of directors of DCDC was appointed to the IMSI board of directors.
Along with the execution of the merger agreement, the Company is in the process
of restructuring its outstanding debt as follows:
- On August 31, 2001 DCDC purchased the Union Bank note for $2.5
million (with a book value of $3.6 million at the date of
purchase) and agreed to not enforce collection of the note
pending the merger. On September 27, 2001, IMSI and DCDC entered
into an addendum to the merger agreement which provided that in
the event the merger agreement is terminated for any reason, the
parties agree that IMSI shall pay
5
DCDC the Union Bank note principal in 72 equal monthly payments
of $49,722 plus interest at LIBOR plus 3%.
- On October 9, 2001 the Company signed an agreement with Silicon
Valley Bank for a settlement of its existing secured note, which
had a balance (including penalties and interest) of
approximately $3.2 million; the settlement provides for a new
secured promissory note for $1.2 million with 12 monthly
payments of $100,000 plus interest at 12% interest per annum.
- On July 27, 2001, and as subsequently amended on September 24,
2001 and October 5, 2001, IMSI and Imageline agreed on the
settlement of the arbitration award issued in January 2000 in
favor of Imageline. The settlement, effective September 30,
2001, calls for IMSI to provide a variety of considerations
including the following:
- The dismissal of any further appeals of the award.
- Cash installments over a 12-year period, starting
October 2001. These payments will be made as follows:
four equal quarterly payments of $78,750 beginning on
September 30, 2002; twelve monthly payments of $11,500
beginning on October 5, 2001; and, 132 monthly payments
of $6,500 thereafter. These payments have a net present
value of approximately $833,000 assuming a 12% discount
rate.
- Rights to royalties, licenses, and inventories
pertaining to the IMSI MasterClips line of products.
- A percentage of any net recovery IMSI obtains from
indemnification claims IMSI has against third parties
associated with the original circumstances leading to
the arbitration award.
The reduction in liabilities of $2 million arising from this settlement was
recognized in the fiscal 2001 financial statements.
- On July 30, 2001 Baystar Capital and IMSI entered into an
agreement wherein Baystar agreed to accept payment equal to 10%
of the balance of the note plus reduced interest, penalty
interest and penalties that accrue through the closing of the
DCDC merger. Payments would be made in four quarterly payments
beginning September 30, 2002. Interest will accrue at 8% per
annum from the closing date of the merger until the September
2002 payment, and at 12% per annum thereafter until the claim is
paid in full on or before June 30, 2003. Assuming the merger had
closed as of August 31, 2001, the amount payable to Baystar
would have been $710,000.
- IMSI is in the process of negotiating with its remaining
unsecured creditors the possibility of discounting down to 10%
all outstanding amounts owed to them (including interest from
February 1, 2000 at the rate of 8% per annum). These payments
will be made in quarterly installments beginning no later than
September 30, 2002.
Once these settlements and restructurings are complete, IMSI will have reduced
its outstanding debts, which amounted to $21.2 million at June 30, 2001 to
approximately $8.3 million.
STRATEGY
IMSI's objective is to successfully grow its sales, particularly in the design
and graphics software market segments, both for the desktop and online markets.
The Company's strategy to achieve this objective includes the following key
elements:
Operating Profits and Positive Operating Cash Flow - Sales of IMSI's design and
graphics software have been sufficient to fund the Company's cash operating
costs over the last twelve months. The Company has re-established sales through
the retail channel in the United States, Europe, Australia, the Middle East and
Africa by entering into republishing arrangements. In addition, the Company has
initiated direct sales to end-users through the Internet and
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through email, direct mail and other direct marketing programs. The strategy
going forward is to leverage and grow sales through these channels by expanding
distribution channels and the Company's own sales force.
Graphic Design - Grow ArtToday.com by adding new subscription customers,
increasing advertising and e-direct revenues and expanding the website to offer
pay-per-download sales of high quality, professional images. ArtToday.com has
over 2 million members, over 125,000 paid subscribers and 1.5 million unique
visitors per month. It offers users access to more than 1.4 million graphic
images, web art, photos, fonts, and animations. The Company plans to invest in
equipment, content and people to add over 2 million images and substantially
increase its customer base. ArtToday.com has developed the technology to act as
a content broker for design professionals who are interested in selling their
work on a pay-per-image basis, and the Company launched this service in 2001.
Precision Design - Continue to develop new versions of the Company's leading
software to expand sales of these core products and acquire complimentary
software products. New versions of TurboCAD and FloorPlan 3D are planned to be
released in the next half-year, as well as new products like TurboCAD/CAM. Until
September 2001 the Company was also developing an online design and
visualization tool, Design.NET, that was planned to allow users to design homes
and offices on the Internet, lay out floor plans using 3D images of furniture,
fixtures and finishes, and perform photo-realistic walkthroughs using their web
browser. IMSI's strategy had been to license the Design.NET technology to
industry leaders in major market segments. In the wake of its agreement to merge
with DCDC, the Company undertook an intensive reassessment of the current costs
and future potential financial benefits of the Design.NET project. Management
concluded that in view of a) its need to focus its resources on those activities
which are generating cash for the Company in the near term, and b) the amount of
investment the project would require before it would begin to generate revenues
of any significant amount, it would be in the best interest of the Company to
spin off the Design.NET project. Consequently, the Company has signed a letter
of intent to discontinue any further direct investment in Design.NET and to
transfer a majority of the ownership of the project to employees who are key to
its continued development. Pursuant to this letter of intent, these employees
have resigned from IMSI and are establishing an independent company to pursue
the development of this technology. IMSI will retain a 19.99% ownership interest
in this new company, but otherwise will have no further obligation to expend
capital on its activities or any outstanding obligations, if any. This
transition began as of October 1, 2001.
PRODUCTS
PRECISION DESIGN
IMSI's precision design products accounted for 37%, 26%, and 35% of the
Company's net revenues in fiscal 2001, 2000, and 1999 respectively. IMSI's
precision design products include the following:
- TURBOCAD is a CAD software product that allows a user to create
precision drawings. Over 1 million units of TurboCAD have been
sold by the Company over the last 15 years. TurboCAD offers
comprehensive functionality for the technical professional
combined with ease-of-use for the novice user. TurboCAD is used
by architects, engineers, and contractors in small and
medium-sized businesses, as well as by workgroups within many
large corporations such as Pennzoil, Dow Chemical, Bechtel,
Babcock & Wilcox, Houston Power & Lighting, and Motorola.
TurboCAD includes integrated 3D construction capabilities, file
compatibility with other CAD software (including AutoCAD by
AutoDesk), and integrated raster-to-vector conversion. TurboCAD
v6 Professional includes a software development kit that permits
end-user and third-party developer customization of the
software.
- FLOORPLAN 3D is a software tool for residential and commercial
space layout that allows a user to create, view and walk through
plans in three dimensions. This product provides photo-realistic
rendering of designs. FloorPlan 3D has received numerous
industry awards like PC Magazine's Editors Choice Award, and
over 1 million units have been sold over the last 15 years.
7
GRAPHIC DESIGN
IMSI's visual content products include art images, photographs, video clips,
animations and fonts stored in electronic form that enhance communication by
making online, onscreen and printed output more visually appealing. Graphic
design products accounted for 36%, 31%, and 34% of IMSI's net revenues in fiscal
2001, 2000, and 1999 respectively. The Company's visual content products include
the following:
- ARTTODAY ONLINE offers a collection of approximately 1.4 million
downloadable images on line at www.arttoday.com.
- MASTERCLIPS PREMIUM IMAGE COLLECTION has in the past-included
collections of up to 1,250,000 unique art and photographic
images. MasterClips Premium Image Collection products include a
browser, clip art editor and design guide. This line of product
is currently licensed to Sierra Online (Vivendi Universal
Interactive).
BUSINESS APPLICATIONS
IMSI's business applications products include business graphics and general
office products. These products accounted for 17%, 26%, and 21% of IMSI's net
revenues in fiscal 2001, 2000, and 1999 respectively. The Company's business
applications products include the following:
- ORGPLUS is an application designed for creating professional
organization charts. OrgPlus completely automates chart creation
so that no drawing or manual positioning of boxes is required.
Org Plus features automated sorting and drag and drop
capabilities.
- FLOW! enables general business users to create a wide variety of
diagrams, including flowcharts, organization charts, timelines,
block diagrams, geographic maps, and marketing charts. Flow!
also includes features that allow the user to enhance the
information content of diagrams. Flow! users can link diagrams
to databases and associate non-graphical data with shapes within
a diagram.
- HIJAAK is a professional 32-bit graphics toolkit that allows
users to convert, manage and view over 115 graphics file formats
including 3D and full Postscript files.
- TURBOPROJECT is a sophisticated project management tool that
allows users to create and manage a project schedule, allocate
resources and establish and track project budgets. TurboProject
Professional allows users to divide large projects into
sub-projects and distribute the sub-projects to individual
managers over company networks. The sub-projects can then be
reintegrated to update a master project schedule.
- FORMTOOL is a forms automation product that allows users to
design and print personal forms quickly, or choose from over 400
pre-built templates. The user can then complete and
electronically sign and route the form over a company Intranet
to other users in the organization. Data is automatically stored
in an integrated relational database. FormTool Scan & OCR
includes optical character recognition and scanning features for
easier form design.
SALES AND DISTRIBUTION
Through the middle of 1999, IMSI sold its products worldwide primarily through
retail sales channels to small and medium-sized businesses, professionals and
consumers. In the middle of 1999, the Company began implementing a strategy to
sell its products directly over the Internet. On January 28, 2000, IMSI
announced that it was exiting the retail software business, and the Company
terminated all distribution agreements.
In February 2000, the Company's new management began to re-establish sales
through the retail channel by using republishers, wherein the republishers
handled all packaging and distribution of the products and paid the Company
8
guaranteed royalties. The Company also utilized direct mail and email in the
consumer, corporate, education and government markets, and the Company sold
product via the Internet.
In March 2000 IMSI executed an agreement with ValuSoft to republish and sell the
Company's software products to major retailers in North America. Under this
agreement, ValuSoft performs all the manufacturing, assembly, packaging, sales
and distribution of IMSI's products to retailers. In return IMSI received
guaranteed royalty payments, which totaled $1,181,000 through June 30, 2001.
IMSI executed similar exclusive republishing agreements internationally during
the second half of fiscal 2000. The Company granted the exclusive rights to
manufacture and distribute its products to AB Soft in France and French speaking
countries; MicroBasic and subsequently MediaGold in Germany, Austria and
Switzerland; and MediaGold in all other European countries, the Middle East and
Africa. All of these international republishing agreements call for minimum
guaranteed royalty payments, which totaled $207,000 through June 30, 2001.
IMSI earns royalties based on the net sales made by the republishers. Net sales
are defined as gross sales less returns, rebates, price protection and other
deductions the republisher might provide to retailers. These costs associated
with sales in the retail channel will affect net sales realized by republishers,
and consequently any royalties payable to IMSI in excess of the guaranteed
minimum royalty payments.
DIRECT MAIL. IMSI conducts direct mail campaigns for new products and upgrades
of existing products. These mailings generally offer a specially priced specific
product, as well as complementary or enhanced products for a further charge.
IMSI's database of registered users includes 900,000 customers worldwide.
CORPORATE. IMSI believes that certain of its products, particularly TurboCAD,
TurboProject, Org Plus and HiJaak, are well suited for use within large
corporations. Over the past year, IMSI has sold site licenses to some large
companies, including Fortune 100 companies. IMSI markets to these corporations
through a combination of telemarketing, mailings and emailing.
INTERNET. A key emphasis of IMSI's sales strategy is to significantly increase
the marketing of its products via the Internet. The Company sells from its own
websites, as well as through strategic partnerships with online resellers or
service bureaus such as America Online, Buy.com, Outpost.com, Beyond.com and
Digital River.
MARKETING
IMSI's marketing efforts include online retail marketing and merchandising.
These efforts are directed at strengthening IMSI's product and corporate brands,
building customer loyalty, maximizing upgrade and repeat purchases and
developing incremental revenue opportunities. IMSI also seeks to increase market
share and brand recognition through public relations activities and
participation in popular trade and computer shows.
CUSTOMER SUPPORT
IMSI provides customer support to its end-users by telephone, email and through
numerous online options. Telephone technical assistance is available for key
products at no charge for the first 5 minutes and then $5 for each additional
five-minute increment or portion thereof. IMSI also offers customer support on
its website by offering answers to frequently asked questions, providing product
discussion forums and making intelligent help and search engines available. In
addition, several newer products released by IMSI contain an online link to
web-based support that automatically updates or patches the user's software via
the web.
PRODUCT DEVELOPMENT
The Company's product development program is focused on a few key software
products. In November 2000 IMSI released version 7.0 of the Company's popular
TurboCAD program and in February 2001 FloorPlan 3D was upgraded to version 5.
HiJaak Image Manager was released in July 2001.
9
IMSI generally creates product specifications and manages the product
development and quality assurance process from its offices in Novato,
California. Most program coding and quality testing is performed using contract
programmers in development centers in Russia. Contract programmers located
outside the United States are generally dedicated on a full-time basis to IMSI's
products. The cost of programmers in foreign countries is generally lower than
programmers available in the United States. In addition, programming talent is
generally more available outside the United States than in the United States
where the market for programmers is highly competitive. IMSI makes extensive use
of the Internet and Internet-based development tools to facilitate programming
in remote locations.
IMSI's general policy is to own, either through internal development or
acquisition, the core technology of the Company's principal products. Where
appropriate, IMSI augments its core technology with licensed technology. IMSI
possesses and is continually enhancing its core technology in vector graphics,
precision design, and project and time management processes.
As of June 30, 2001, IMSI had 21 employees in the Company's product development
organization, and IMSI contracted with approximately 25 independent contractors,
substantially all of whom were located overseas. IMSI's research and development
expenses totaled $2.6 million, $4.0 million, and $8.1 million for fiscal 2001,
2000 and 1999 respectively.
ACQUISITION AND LICENSING
The Company acquired the technology for TurboCAD in 1985, FloorPlan Design Suite
in 1990, and HiJaak in 1995. Over the last several years, IMSI licensed and
acquired millions of images and visual content from third parties, including
artists, photographic agencies and visual content aggregators for use by
ArtToday.com and in MasterClips. Where feasible, IMSI endeavors to acquire
images on a perpetual, worldwide basis and with electronic download rights. The
licenses have terms ranging from one year to perpetual and are generally not
exclusive. Licensing fees associated with licensed technology are generally paid
for by way of sales-based royalties, which are included in product costs.
As part of IMSI's restructuring plan announced on June 24, 1999, the Company
reduced the number of its product SKUs significantly in order to concentrate
more fully on the strongest core products in the design and graphics market
segments. IMSI plans to continue to divest non-core products when opportunities
to do so warrant.
OPERATIONS
IMSI controls the purchasing, inventory and marketing associated with its
products from its headquarters in Novato, California. The Company's product
development organization produces master diskettes or CD-ROMs and the
documentation for each product. Until April 2000 IMSI warehoused and shipped the
final products from its warehouse facility, as well as from various
international locations. IMSI contracted with third parties to handle the
duplication, printing and packaging of its products. Presently, the Company
leases space from MicroWeb, a fulfillment and storage company that also provides
assembly services for the Company. IMSI has multiple sources of supply for
substantially all product components. To date, IMSI has not experienced any
material difficulties or delays in the printing, packaging or assembly of its
products.
Licensees and republishers are responsible for their own duplication of CD-ROMs,
printing the documentation, packaging the products and fulfilling and shipping
the sales orders for pre-packaged software. Under the Company's agreement with
ValuSoft, IMSI can purchase ValuSoft manufactured IMSI products for sales to
IMSI's direct customers.
10
COMPETITION
The PC productivity software industry and the Internet are both highly
competitive and characterized by rapid changes in technology and customer
requirements. The rapid pace of technological change constantly creates new
opportunities for existing and new competitors and can quickly render existing
technologies less valuable. These competitive factors require that IMSI enhance
its core productivity software products, successfully execute the Company's
Internet strategies and implement effective marketing and sales programs all on
a timely basis. Many of IMSI's current and potential competitors in both
industries have larger technical staffs, more established and larger marketing
and sales organizations, significantly greater financial resources, greater name
recognition and better access to consumers than does IMSI. The Company's
relatively small size and very limited resources adversely affect IMSI's ability
to compete with these larger companies.
There has been a consolidation among competitors in the market for software
productivity products. Each of IMSI's major software productivity products
competes with one or more products from one or more major independent software
vendors. IMSI products and their primary competition are illustrated in the
following table:
IMSI PRODUCT COMPETING PRODUCTS COMPETITOR
------------ ------------------ ----------
TurboCAD AutoCAD AutoDesk Inc.
FloorPlan 3D Architect Broderbund
Home Architect Sierra Online
Home Design Suite Punch Software
TurboProject Project Microsoft
The software industry and the Internet have relatively small barriers to entry.
IMSI believes that competition will continue to intensify as a number of
software companies extend their product lines into additional product categories
and as additional competitors enter both markets. In addition, widespread use of
the Internet has reduced barriers to entry in the software market by allowing
software developers to distribute their products online without relying on
access to traditional distribution networks. As a result of the proliferation of
competing software developers, more products are competing for both retail shelf
space and online. Therefore, IMSI cannot assure investors that the Company's
products will achieve and/or sustain market acceptance and generate significant
levels of revenues in future periods or that IMSI will have the resources
required to compete successfully in the future.
The markets for IMSI's productivity software products are characterized by
significant price competition, and IMSI expects it will continue to face
increasing pricing pressures. In response to such competitive pressures, IMSI
has reduced the price of some of its products. Product prices may continue to
decline and the Company may not be able to respond to such declines with
additional product price reductions. If IMSI significantly reduces the prices of
one or more of the Company's products, there can be no assurance that such price
reductions will result in an increase in unit sales volume. Prolonged price
competition would have a material adverse effect on IMSI's operating results,
including reduced profit margins and potential loss of market share.
Approximately 42% of IMSI's revenues were derived from sales of the TurboCAD,
FloorPlan and MasterClips product lines in fiscal year 2001 as compared to 47%
in fiscal year 2000. Further decline in TurboCAD, MasterClips or FloorPlan
sales, or a decline in the gross margin on one or more of these products could
worsen IMSI's results of operations. Thus, IMSI may be more vulnerable to market
declines and competition in the markets for such products than companies with
more diversified sources of revenues.
Competition for ArtToday comes from several hundred graphic sites on the
Internet. Approximately 90% of those sites are vanity sites that do not generate
significant revenues. The remaining 10% can be segmented into those that sell
content, those that sell software and those that leverage traffic for banner
advertising revenues. Content sellers include Corel, Corbis, Getty PhoToGo,
PhotoSpin, WebSpice and NOVA. Software sellers include: Adobe, Corel, ACDSee and
Jasc.
11
While none of the above named competitors can match ArtToday.com in terms of
numbers of visitor/member traffic and page impressions, they are often
significantly better funded, have superior technology or higher quality images.
There is, therefore, the risk that these better-funded competitors could
duplicate ArtToday.com's strategy and reduce its market share. Possible
competition for ArtToday.com could also come from the large "horizontal" sites,
such as Yahoo, AOL and About. While these companies are now limited by a lack of
the content depth that is demanded by graphics professionals, they have the
financial resources, technical capabilities and market penetration to quickly
diminish ArtToday.com's current market advantage.
PROPRIETARY RIGHTS AND LICENSES
IMSI's ability to compete effectively depends in part on the Company's ability
to develop and maintain proprietary aspects of IMSI's technology. To protect the
Company's technology, IMSI relies on a combination of copyrights, trademarks,
trade secret laws, restrictions on disclosure and transferring title and other
methods. IMSI holds no patents, and existing copyright and trade secret laws
afford only limited protection. IMSI also generally enters into confidentiality
or license agreements with the Company's employees and consultants, and controls
access to and distribution of IMSI's documentation and other proprietary
information.
Despite the foregoing precautions, it may be possible for a third-party to copy
or otherwise obtain and use IMSI's products or technologies without
authorization, or to develop similar technologies independently. IMSI does not
include in its products any mechanism to prevent or inhibit unauthorized
copying. There can be no assurance that the steps taken by IMSI will prevent
misappropriation or infringement of its technology. In addition, litigation may
be necessary to protect IMSI's trade secrets or to determine the validity and
scope of the proprietary rights of others. Such litigation could result in
substantial costs and diversion of resources that could have a material adverse
effect on IMSI's business, operating results and financial condition.
IMSI provides its products to end users under non-exclusive licenses, which
generally are non-transferable and have a perpetual term. IMSI makes source code
available for some products. The provision of source code may increase the
likelihood of misappropriation or other misuse of IMSI's intellectual property.
IMSI licenses all of its products pursuant to shrink-wrap licenses, or Internet
click-wrap licenses, that are not signed by licensees and therefore may be
unenforceable under the laws of certain jurisdictions.
As the number of software products in the industry increases and the
functionality of these products further overlaps, software developers and
publishers may increasingly become subject to infringement claims. From time to
time, IMSI has received, and may receive in the future, notice of claims of
infringement of other parties' proprietary rights. Although IMSI investigates
claims and responds as it deems appropriate, there can be no assurance that
infringement or invalidity claims (or claims for indemnification resulting from
infringement claims) will not be asserted or prosecuted against IMSI. Regardless
of the validity or the successful assertion of such claims, IMSI would incur
significant costs and diversion of resources with respect to the defense
thereof, which could have a material adverse effect on IMSI's business,
operating results and financial condition (see Item 3, "Legal Proceedings"). If
any valid claims or actions were asserted against IMSI, the Company might seek
to obtain a license under a third party's intellectual property rights. There
can be no assurance, however, that under such circumstances a license would be
available on commercially reasonable terms, or at all.
EMPLOYEES
As of June 30, 2001, IMSI had 56 employees, including 18 in sales and marketing,
21 in product development, 3 in operations and 14 in administration and finance.
All of the employees are located in the United States with the exception of 4
employees in Australia. In addition, IMSI has approximately 25 software
developers working as contractors in Russia under a software development
contract. None of IMSI's employees are represented by a labor union and IMSI has
experienced no work stoppages. IMSI's success depends to a significant extent
upon the performance of the Company's executive officers, key technical
personnel, and other employees.
12
ITEM 2. PROPERTIES AND FACILITIES
IMSI's principal facilities are located in Novato, California, now occupying
approximately 5,000 square feet of office space. ArtToday.com's offices are
located in Tucson, Arizona where it occupies approximately 5,000 square feet of
office space. IMSI also occupies approximately 350 square feet of leased office
space in Alexandria, Australia from which it conducts its Australian sales
operations.
ITEM 3. LEGAL PROCEEDINGS
On April 23, 1998, IMSI began arbitration proceedings against Imageline, Inc. of
Virginia before the American Arbitration Association in San Francisco,
California. IMSI requested that all matters within the scope of the agreements
between Imageline and IMSI, which were in dispute between the parties, be
resolved by arbitration. 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 the
opportunity to cure. Imageline requested liquidated damages, alleged to be more
than $200,000, compensatory damages of at least $500,000, punitive damages,
legal fees, interest and costs. On January 14, 2000, Imageline, Inc. received a
$2.6 million arbitration award against IMSI for intellectual property violations
and attorney's fees. The award consisted of $1.2 million in actual damages, $1.2
in punitive damages and $0.2 million in attorneys' fees. IMSI appealed the award
in the federal district courts in both Virginia and California.
In April 2000 IMSI and Imageline initiated negotiations to settle the award
through a variety of considerations, including cash, a consulting agreement, and
warrants to purchase common stock. That settlement expired by its own terms,
however, due to the refusal of a key creditor of IMSI to approve the settlement.
Since that original agreement the matter has followed the dual tracks of legal
appeals in the federal courts and continued negotiations between the companies.
After carefully a) assessing the likelihood of success in pursuing its appeals
through the courts, b) evaluating the financial burden to IMSI of losing its
appeal and having to pay the full amount of the award, after having achieved a
workout arrangement with its other creditors; and c) weighing in the balance the
benefit to IMSI of reaching a comprehensive workout arrangement with all of its
creditors, both secured and unsecured, IMSI decided to settle its dispute with
Imageline as of July 27, 2001. As subsequently amended on September 24, 2001 and
October 5, 2001 the settlement, effective September 30, 2001 calls for IMSI to
provide a variety of considerations including the following:
a) Dismissal of any further appeals of the award
b) Cash installments over a 12 year period, starting October 2001
and having a net present value of approximately $833,000 as
follows:
i. 12 monthly payments of $11,500 from October 5, 2001 to
September 5, 2002
ii. Four equal quarterly payments of $78,500 beginning on
September 30, 2002
iii. 132 monthly payments of $6,500 from October 5, 2002
thereafter
c) Rights to royalties, licenses, and inventories pertaining to
IMSI's MasterClips line of products
d) A percentage of any net recovery IMSI obtains from any
indemnification claims IMSI has against third parties associated
with the original circumstances leading to the arbitration
award.
The reduction in liabilities of $2 million arising from this settlement
was recognized in the fiscal 2001 financial statements.
13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the fiscal
year ended June 30, 2001.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The following table sets forth the quarterly high bid and low asked prices of
the common stock for fiscal 2000 and fiscal 2001, as quoted on the OTCBB. Such
prices represent prices between dealers and do not include retail mark-ups,
markdowns or commissions and may not represent actual transactions.
CLOSING SALES PRICES
----------------------------
HIGH BID LOW ASKED
-------- --------
FISCAL YEAR 2000
First Quarter $ 4.82 $ 3.96
Second Quarter 2.40 2.08
Third Quarter 1.47 1.17
Fourth Quarter 0.81 0.67
FISCAL YEAR 2001
First Quarter $ 1.02 $ 0.13
Second Quarter 0.70 0.13
Third Quarter 0.50 0.14
Fourth Quarter 0.30 0.15
FISCAL YEAR 2002
First Quarter $ 0.42 $ 0.15
Second Quarter, through October 9, 2001 0.35 0.26
On September 20, 2001, there were 1,033 registered holders of record of the
common stock. IMSI believes that additional beneficial owners of its common
stock hold shares in street names.
IMSI has not paid any cash dividends on its common stock and does not plan to
pay any such dividends in the foreseeable future. Its Board of Directors will
determine IMSI's future dividend policy on the basis of many factors, including
results of operations, capital requirements and general business conditions.
14
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with the
Consolidated Financial Statements, including the related notes, and Item 7 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
Selected financial data for fiscal years ended June 30, 1997 to 2001:
STATEMENT OF OPERATIONS DATA:
YEAR ENDED JUNE 30, 2001 2000 1999 1998 1997
------------------- -------- -------- -------- -------- --------
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Net Revenues $ 12,245 $ 19,162 $ 37,679 $ 62,065 $ 41,839
Operating income (loss) (770) (8,019) (23,890) 86 4,367
Income (loss) from continuing
operations before income taxes (908) (16,339) (25,770) (673) 4,237
Extraordinary item (1) -- -- (959) -- --
Cumulative effect of change in
accounting principle (2) (285) -- -- -- --
Net income (loss) (1,174) (16,871) (26,966) (370) 2,597
Net income (loss) per share:
Basic $ (0.12) $ (2.22) $ (4.30) $ (0.07) $ 0.53
Diluted $ (0.12) $ (2.22) $ (4.30) $ (0.07) $ 0.46
Weighted average common shares
Basic 9,687 7,590 6,275 5,513 4,946
Diluted 9,687 7,590 6,275 5,513 5,682
(1) Extraordinary item related to debt extinguishments.
(2) Cumulative effect of change in accounting principle for beneficial
conversion feature in debt agreements.
BALANCE SHEET DATA:
AS OF JUNE 30, 2001 2000 1999 1998 1997
-------------- -------- -------- -------- -------- --------
Working capital $(17,480) $(18,999) $ (1,227) $ 6,572 $ 7,334
Total assets 5,988 8,634 27,144 35,655 17,573
Long-term liabilities 881 302 6,599 1,682 2,042
Stockholders' equity (deficit) $(15,247) $(14,853) $ 1,442 $ 13,411 $ 7,495
15
Selected quarterly financial data for fiscal year ended June 30, 2001:
STATEMENT OF OPERATIONS DATA:
JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30,
QUARTER ENDED 2001 2001 2000 2000
------------- ------------- -------------- ---------------- ------------------
(Amounts in thousands except per share amounts)
Net Revenues $ 2,846 $ 3,107 $ 3,234 $ 3,058
Operating income (loss) (625) (126) 21 (40)
Income (loss) from continuing
operations before income taxes 810 (704) (514) (500)
Cumulative effect of change in
accounting principle -- -- (285) --
Net income (loss) 807 (690) (799) (492)
Net income (loss) per share:
Basic and diluted $ 0.08 $ (0.07) $ (0.08) $ (0.05)
Weighted average common shares
Basic and diluted 9,695 9,694 9,694 9,669
BALANCE SHEET DATA:
JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30,
QUARTER ENDED 2001 2001 2000 2000
------------- ------------- -------------- ---------------- ------------------
(Amounts in thousands except per share amounts)
Working capital $(17,480) $(19,643) $(19,311) $(18,971)
Total assets 5,988 7,395 7,794 8,030
Long-term liabilities 881 203 298 353
Stockholders' equity (deficit) $(15,247) $(16,300) $(15,633) $(15,132)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RECENT EVENTS
On August 31, 2001, IMSI entered into a merger agreement with DCDC wherein, IMSI
is to issue shares of IMSI common stock totaling 51% of its outstanding shares
to DCDC shareholders, in exchange for their DCDC common stock. Along with the
execution of the merger agreement, the Company is in the process of
restructuring its outstanding debt as follows:
- On August 31, 2001 DCDC purchased the Union Bank note for $2.5
million (with a book value of $3.6 million at the date of
purchase) and agreed to not enforce collection of the note
pending the merger. On September 27, 2001, IMSI and DCDC entered
into an addendum to the merger agreement which provided that in
the event the merger agreement is terminated for any reason, the
parties agree that IMSI shall pay DCDC the Union Bank note
principal in 72 equal monthly payments of $49,722 plus interest
at LIBOR plus 3%.
16
- On October 9, 2001 the Company signed an agreement with Silicon
Valley Bank for a settlement of its existing secured note, which
had a balance (including penalties and interest) of
approximately $3.2 million; the settlement provides for a new
secured promissory note for $1.2 million with 12 monthly
payments of $100,000 plus interest at 12% interest per annum.
- On July 27, 2001, and as subsequently amended on September 24,
2001 and October 5, 2001, IMSI and Imageline agreed on the
settlement of the arbitration award issued in January 2000 in
favor of Imageline. The settlement, effective September 30,
2001, calls for IMSI to provide a variety of considerations
including the following:
- The dismissal of any further appeals of the award.
- Cash installments over a 12-year period, starting
October 2001. These payments will be made as follows:
four equal quarterly payments of $78,750 beginning on
September 30, 2002; twelve monthly payments of $11,500
beginning on October 5, 2001; and, 132 monthly payments
of $6,500 thereafter. These payments have a net present
value of approximately $833,000 assuming a 12% discount
rate.
- Rights to royalties, licenses, and inventories
pertaining to the IMSI MasterClips line of products.
- A percentage of any net recovery IMSI obtains from
indemnification claims IMSI has against third parties
associated with the original circumstances leading to
the arbitration award.
The reduction in liabilities of $2 million arising from this settlement was
recognized in the fiscal 2001 financial statements.
- On July 30, 2001 Baystar Capital and IMSI entered into an agreement
wherein Baystar agreed to accept payment equal to 10% of the balance of
the note plus reduced interest, penalty interest and penalties that
accrue through the closing of the DCDC merger. Payments would be made in
four quarterly payments beginning September 30, 2002. Interest will
accrue at 8% per annum from the closing date of the merger until the
September 2002 payment, and at 12% per annum thereafter until the claim
is paid in full on or before June 30, 2003. Assuming the merger had
closed as of August 31, 2001, the amount payable to Baystar would have
been $710,000.
- IMSI is in the process of negotiating with its remaining unsecured
creditors the possibility of discounting down to 10% all outstanding
amounts owed to them (including interest from February 1, 2000 at the
rate of 8% per annum). These payments will be made in quarterly
installments beginning no later than September 30, 2002.
The following table summarizes the effect of the debt restructuring, both
completed and in-process, on the liabilities at June 30, 2001 that were subject
to restructuring:
LIABILITIES PROPOSED LIABILITIES
SUBJECT TO REDUCTION IN AFTER PROPOSED
LIABILITIES RESTRUCTURE LIABILITIES RESTRUCTURE
----------- ------------ ------------ --------------
(AMOUNTS IN THOUSANDS)
Secured Creditors:
Union Bank of California $ 3,930 $ 3,601 $ 329
Silicon Valley Bank 3,148 1,948 1,200
------- ------- -------
Total 7,078 5,549 1,529
------- ------- -------
Unsecured Creditors
Baystar Capital 6,102 5,492 610
Other unsecured 3,807 1,867 1,940
------- ------- -------
Total 9,909 7,359 2,550
------- ------- -------
17
Total 16,987 12,908 4,079
Imageline debt restructured in FY 2001 2,874 2,041 833
------- ------- -------
Total Liabilities Subject to
Restructuring $19,861 $14,949 $ 4,912
======= ======= =======
18
RESULTS OF OPERATIONS
The following table sets forth IMSI's results of operations for the fiscal years
ended June 30, 2001, 2000 and 1999 in absolute dollars and as a percentage of
net revenues. It also details the changes from the prior fiscal year in absolute
dollars and in percentages
2001 2000
------------------------------------------- -------------------------------------------
$ change % change $ change % change
from from from from
as % of previous previous as % of previous previous
$ sales year year $ sales year year
------ ------- -------- -------- ------ ------- --------- ---------
Net Revenues 12,245 100% (6,917) -36% 19,162 100% (18,517) -49%
Product Costs 3,406 28% (6,784) -67% 10,190 53% (15,234) -60%
GROSS MARGIN 8,839 72% (133) -1% 8,972 47% (3,283) -27%
Costs and expenses
Sales and marketing 2,732 22% (2,688) -50% 5,420 28% (12,967) -71%
General and administrative 4,243 35% (3,605) -46% 7,848 41% (333) -4%
Research and development 2,634 22% (1,369) -34% 4,003 21% (4,066) -50%
Restructuring charge -- -- 280 -100% (280) -1% (1,788) -119%
TOTAL OPERATING EXPENSES 9,609 78% (7,382) -43% 16,991 89% (19,154) -53%
OPERATING LOSS (770) -6% 7,249 -90% (8,019) -42% 15,871 -66%
Other income (expense)
Gain on product line sales 285 2% (1,205) -81% 1,490 8% 1,490 --
Interest and other expense, net (2,164) -18% 1,561 -42% (3,725) -19% (1,845) 98%
Loss on disposition of fixed assets (13) 0% 1,594 -99% (1,607) -8% (1,607) --
Loss on liquidation of foreign
subsidiaries -- -- 2,043 -100% (2,043) -11% (2,043) --
Settlement agreements (287) -2% (287) -- -- -- -- --
Arbitration award 2,041 17% 4,476 -184% (2,435) -13% (2,435) --
TOTAL OTHER EXPENSE (138) -1% 8,182 -98% (8,320) -43% (6,440) 343%
LOSS FROM CONTINUING OPERATIONS
BEFORE INCOME (908) -7% 15,431 -94% (16,339) -85% 9,431 -37%
Income tax expense (benefit) (19) 0% (551) -104% 532 3% 295 124%
LOSS FROM CONTINUING OPERATIONS (889) -7% 15,982 -95% (16,871) -88% 9,136 -35%
Cumulative effect of change in
accounting principle (285) -2% (285) -- -- -- -- --
Extraordinary loss on extinguishment
of debt -- -- -- -- -- -- 959 -100%
NET LOSS (1,174) -10% 15,697 -93% (16,871) -88% 10,095 -37%
1999
--------------------------------
$ change
from
as % of previous
$ sales year
------ ------- ---------
Net Revenues 37,679 100% (24,386)
Product Costs 25,424 67% 2,042
GROSS MARGIN 12,255 33% (26,428)
Costs and expenses
Sales and marketing 18,387 49% (224)
General and administrative 8,181 22% 3,176
Research and development 8,069 21% (545)
Restructuring charge 1,508 4% 1,508
TOTAL OPERATING EXPENSES 36,145 96% (2,452)
OPERATING LOSS (23,890) -63% (23,976)
Other income (expense)
Gain on product line sales -- -- --
Interest and other expense, net (1,880) -5% (1,121)
Loss on disposition of fixed assets -- -- --
Loss on liquidation of foreign
subsidiaries -- -- --
Settlement agreements -- -- --
Arbitration award -- -- --
TOTAL OTHER EXPENSE (1,880) -5% (1,121)
LOSS FROM CONTINUING OPERATIONS
BEFORE INCOME (25,770) -68% (25,097)
Income tax expense (benefit) 237 1% 540
LOSS FROM CONTINUING OPERATIONS (26,007) -69% (25,637)
Cumulative effect of change in
accounting principle -- -- --
Extraordinary loss on extinguishment
of debt (959) -3% (959)
NET LOSS (26,966) -72% (26,596)
19
NET REVENUES
Net revenues of each of IMSI's principal product categories in dollars and as a
percentage of total net revenues for the three fiscal years are summarized in
the following table (in thousands except for percentage amounts):
YEAR ENDED JUNE 30,
-----------------------------------------------------------------------------------------------------
2001 2000 1999
----------------------------------- -------------------------------------- -----------------
CHANGES FROM CHANGES FROM
PREVIOUS YEAR PREVIOUS YEAR
---------------- ----------------
$ % $ % $ % $ % $ %
-------- --- -------- --- -------- --- -------- --- -------- ----
PRECISION DESIGN 4,537 37% (407) -8% 4,944 26% (8,224) -62% 13,168 35%
GRAPHIC DESIGN 4,457 36% (1,565) -26% 6,022 31% (6,906) -53% 12,928 34%
BUSINESS APPLICATION 2,098 17% (2,895) -58% 4,993 26% (3,020) -38% 8,013 21%
UTILITIES 876 7% (2,133) -71% 3,009 16% (912) -23% 3,921 10%
OTHER PRODUCTS 292 2% (591) -67% 883 5% (1,628) -65% 2,511 7%
PROVISION FOR RETURNS
NOT YET RECEIVED (15) 0% 674 -98% (689) -4% 2,173 75% (2,862) -8%
-------- --- -------- -- -------- --- -------- -- -------- ---
TOTAL NET REVENUES $ 12,245 100% $ (6,917) -36% $ 19,162 100% $(18,517) -49% $ 37,679 100%
======== === ======== == ======== === ======== == ======== ===
While a number of competitive factors influenced the substantial decline in net
revenues in all product categories during the last two fiscal years, IMSI's
serious financial problems were primary causes of the falling revenues.
The serious cash flow problems and large debt burden placed great constraints on
IMSI's ability to develop new and improved versions of its key software
products, and to adequately market and promote them. Also IMSI was attempting to
sell its non-core product lines, during the previous two fiscal years, to
generate cash flow. While IMSI did achieve some success, most notably the sale
of Easy Language for $1.7 million during fiscal 2000, the Company's weak
financial condition constrained its negotiating position and limited its
success.
During fiscal 2000, IMSI's new management team launched efforts to restore sales
through the retail channel by establishing republishing agreements for the
Company's core products. This followed IMSI's January 2000 major announcement to
exit the retail software business, liquidate the Company's European and South
African subsidiaries, and consolidate domestic operations in order to reduce
operating losses and focus on its Internet strategy. By the end of fiscal year
2000, IMSI had executed republishing agreements with ValuSoft, for sales in
North America, and AB Soft, French Corporation, MediaGold Ltd., a British
Corporation, and MicroBasic GmbH, a German Corporation, for sales in Europe,
Africa, and the Middle East.
Major declines in sales of FloorPlan and IMSI's flagship product, TurboCAD,
accounted for the decrease in the sales of precision design products. Sales of
these two popular products dropped by approximately 70% and 13% respectively in
fiscal year 2001. The inability to timely fund development of FloorPlan and
localization delays of TurboCAD in different languages negatively impacted both
of these products. CAD customers often use these products in their business or
profession and require that the software remain current and keep pace with the
rapidly changing technology. IMSI's limited funds prevented it from meeting this
requirement. The Company's primary competitors for these products (Punch and
AutoDesk) did release new versions of their software in fiscal year 2001.
Sales of the most significant revenue producing product line within the graphic
design category, MasterClips, decreased by approximately 64% in fiscal year
2001. On January 14, 2000, an arbitration ruling against IMSI pertaining to the
dispute with Imageline required IMSI to discontinue manufacturing and
distributing all MasterClips products containing Imageline images. This
arbitration ruling, combined with a continuing increase in competitive product
offerings and discount pricing in the visual content market, contributed to the
decline in MasterClips sales. Revenues from IMSI's wholly owned subsidiary,
ArtToday.com are included in this category and accounted for almost $3 million,
a slight decline from the $3.1 million of revenues in the previous fiscal year.
Because ArtToday.com's revenues are based on subscriptions, these amounts are
initially deferred and then
20
amortized over the subscription period, generally over 12 months. As of June 30,
2001, approximately $1,173,000 of revenue related to ArtToday.com and IMSI's
other visual content websites remained deferred.
During 1998 and 1999 market conditions deteriorated for IMSI's products in the
visual content and utilities categories as a result of mergers and strategic
alliances. In June 1998, The Learning Company purchased Broderbund, the
publisher of Click Art, a product competitive to IMSI's MasterClips product. In
subsequent months, Broderbund and Corel aggressively reduced prices and offered
rebates to increase their sales and market share. IMSI responded in some
instances with matching discounts and rebates, but nevertheless experienced a
significant decline in sales due to these competitive pressures. Those
continuous consolidations among the Company's competitors along with the adverse
arbitration award against IMSI pertaining to the Imageline matter and
MasterClips resulted in a significant loss of market share in the graphic design
category.
Sales of almost all products in the business applications category except those
of OrgPlus declined during fiscal 2001. Net revenues from the sale of Flow!,
FormTool, Maplinx, MasterPublisher, TurboProject People Scheduler and Web
Business Builder all declined in fiscal year 2001. Within this category, sales
of OrgPlus slightly increased by 4% during fiscal year 2001. Both net revenues
in absolute dollars and as a percentage of total sales from this category
decreased over the past three fiscal years reflecting the general decline in the
overall unit sales.
IMSI licensed the Org Plus software from The Learning Company ("TLC") in 1998.
The Company has net capitalized software and related goodwill totaling $840,000
at June 30, 2001, which is being amortized over 5 years at $30,000 per month.
The companies currently have a dispute as to what amounts are currently due TLC
pursuant to this license agreement. IMSI has accrued $400,000 representing
management's best estimate of the probable settlement amount and believes this
is sufficient to meet any future obligations to TLC. In May 2000, IMSI licensed
rights for OrgPlus on a non-exclusive basis to Human Concepts, Inc. who took
over development of the product and pays IMSI royalties on sales of the product.
Net revenues from sales of OrgPlus were approximately $1.5 million during fiscal
year 2001.
The decrease in net revenues in the utilities category during fiscal 2001 was
due to lower unit sales of products within this category (CD Copier, Net
Accelerator, and WinDelete), and because sales of Ram Shield, Voice Direct and
Year 2000 Now were absent during fiscal 2001. Increased competition, heavy price
discounting, and higher rebates in the utility market were the primary causes of
the declining sales of utilities products and many of IMSI's utility products
were unable to compete against popular utility suite products offered by larger
and better-known companies such as Network Associates (McAfee) and Symantec.
In September 1998, Network Associates purchased Cybermedia, developer of
Uninstaller, a competitor to IMSI's WinDelete product. In October 1998, Symantec
purchased Quarterdeck, the developer of Cleansweep, a product that is also a
competitor to IMSI's WinDelete product. Symantec and Network Associates are two
the largest competitors in the PC productivity software market. In both
instances Symantec and Network Associates re-launched these products with
aggressive marketing campaigns, and in product bundles with their other
products. The affect of these actions was increased competition and a reduction
in the market share of WinDelete.
Revenues in the other product categories decreased in fiscal year 2001 due to
fading sales of already discontinued non-core products in this category.
The continuing trend of intense price competition also adversely affected sales
in most product categories. This trend had particular impact in
consumer-oriented software products such as FloorPlan and the utilities
products.
Low barriers to entry, intense price competition, and continuing business
consolidations characterize the consumer software industry. Any one of these
factors may adversely affect revenues in the future. IMSI management believes
that its decision to reduce its reliance on the retail market has provided
insulation from unfavorable retail conditions, including erosion of margins from
competitive marketing and high rates of product returns. IMSI currently serves
the domestic retail and international markets using direct sales methods and
republishing agreements. These agreements include such features as advance and
minimum guaranteed monthly payments
21
against which royalties are recouped, exclusive sales territories, and an
agreement by IMSI to continue development and localization for each product into
the future.
To that extent, the Company granted to ValuSoft the exclusive rights to
reproduce and distribute its products in North America in exchange for royalty
payments based on net sales of these products. The agreement also provides for
minimum guaranteed royalty payments. Internationally, IMSI executed similar
exclusive republishing agreements. The Company granted the exclusive rights to
manufacture and distribute its products to ABSoft in France and French speaking
countries; MicroBasic in Germany, Austria and Switzerland; MediaGold in all
other European countries, the Middle East and Africa; Rock International and
Sumitomo in Japan; and Softchina in China. All of these international
republishing agreements call for royalty payments based on net sales with
minimum guaranteed payments.
For the fiscal year ended June 30, 2001, net revenues from domestic sales were
$11.1 million. This represented a decrease of $3.4 million or 23% from net
domestic sales revenues of $14.5 million in fiscal year 2000. During fiscal year
2001 net revenues from domestic sales accounted for 91% of total net revenues as
compared to 76% of total net revenues for the previous fiscal year. This
increase reflects the Company's decision in January 2000 to liquidate its
European and South African subsidiaries. The liquidation of these subsidiaries
resulted in fiscal 2000 in a loss of $2,043,000 from the write off of the
inter-company receivables and investment in subsidiaries that the Company
believes are not recoverable.
Net revenues from international sales decreased 77% to $1.1 million in fiscal
2001 from $4.7 million in fiscal 2000. As a result, net revenues from
international sales decreased as a percentage of IMSI's net revenues to 9% in
fiscal 2001 from 24% in fiscal 2000. The Company did not consolidate the
European and South African operations during fiscal 2001. During fiscal 2000,
these subsidiaries contributed $3.5 million to IMSI's consolidated net revenue.
Without the contribution of the European and South African subsidiaries during
fiscal 2000, net revenues from international operations for fiscal year 2001
would have only declined by $100,000 as compared to the previous fiscal year.
Australia accounted for almost $400,000 of IMSI's international net revenues in
the fiscal year 2001. The remaining $700,000 that comprised fiscal 2001
international sales was generated through international republishers.
With the liquidation of the Company's European and South African subsidiaries,
the risks associated with transactions in foreign currencies have been
substantially reduced. Nonetheless, IMSI's operating results may be affected by
the risks customarily associated with international operations, including a
devaluation of the U.S. dollar, increases in duty rates, exchange or price
controls, longer collection cycles, government regulations, political
instability and changes in international tax laws.
RESERVE FOR RETURNS, PRICE DISCOUNTS AND REBATES
The following table details IMSI's allowances for rebates, sales returns and
price discounts for the periods presented (in thousands):
PRICE
REBATES RETURNS DISCOUNTS TOTAL
-------- -------- --------- --------
RESERVE BALANCE 6/30/98 $ -- $ 2,998 $ 283 $ 3,281
Additions to reserve 2,474 17,714 6,146 26,334
Charges (2,376) (15,463) (5,610) (23,449)
-------- -------- -------- --------
RESERVE BALANCE 6/30/99 98 5,249 819 6,166
Additions to reserve 831 2,548 86 3,465
Charges (929) (7,349) (664) (8,942)
-------- -------- -------- --------
RESERVE BALANCE 6/30/00 $ -- $ 448 $ 241 $ 689
22
Additions to reserve -- 216 35 251
Charges -- (649) (276) (925)
-------- -------- -------- --------
RESERVE BALANCE 6/30/01 $ -- $ 15 $ -- $ 15
======== ======== ======== ========
The following table illustrates the percentage impact of returns, rebates, and
price discounts on gross revenues and the resulting net revenues as reflected in
the consolidated statement of operations.
2001 2000 1999
-------------------- -------------------- --------------------
AMOUNT % AMOUNT % AMOUNT %
------- ------- ------- ------- ------- -------
(IN THOUSANDS)
GROSS REVENUES $12,496 100.0% $22,627 100.0% $64,013 100.0%
ADDITIONS TO RESERVES FOR:
RETURNS 216 1.7% 2,548 11.2% 17,714 27.7%
PRICE DISCOUNTS 35 0.3% 86 0.4% 6,146 9.6%
REBATES -- --% 831 3.7% 2,474 3.9%
------- ------- ------- ------- ------- -------
251 2.0% 3,465 15.3% 26,334 41.2%
------- ------- ------- ------- ------- -------
NET REVENUES $12,245 98.0% $19,162 84.7% $37,679 58.8%
======= ======= ======= ======= ======= =======
IMSI's allowances for returns, price protection and rebates are based upon
management's best judgment and estimates at the time of preparing the financial
statements. Reserves are subjective estimates of future activity that are
subject to risks and uncertainties, which could cause actual results to differ
materially from estimates. During fiscal year 2001 IMSI provided an additional
$216,000 for returns and received actual returns for approximately $649,000. The
return reserve balance as of June 30, 2001 is consistent with the reduced level
of inventory in the channel from declining shipment of products, and the effects
of the republishing agreements. Historically, the Company estimated reserves for
returns, price discounts and rebates using, among other things, historical
averages, open return requests, channel inventories in the U.S., recent product
sell-through activity, planned product upgrades, sales trends, competition from
other products, product inventory on hand, and market conditions. This
complementary process is no longer used by IMSI to estimate reserves for
returns, discounts and rebates because of the new revenue model shifts those
risks to republishers.
For traditional boxed product sales, IMSI recognizes revenue net of estimated
returns and allowances for returns, price discounts and rebates, upon shipment
of product and only when no significant obligations remain and collection is
probable. IMSI's return policy generally allows its distributors to return
purchased products primarily in exchange for new products or for credit towards
future purchases as part of stock balancing programs. These returns are subject
to certain limitations that may exist in the contract with an individual
distributor, governing, for example, aggregate return amounts, and the age,
condition and packaging of returned product. Under certain circumstances, such
as terminations or when a product is defective, distributors could receive a
cash refund if returns exceed amounts owed.
In fiscal 2000, and because of a disagreement over payment terms, Tech Data
notified IMSI that it would terminate its distribution agreement with the
Company and requested to return $575,000 of IMSI's inventory. The Company
included an allowance of $566,000 return reserve representing Tech Data's entire
reported inventory at that time. During fiscal 2000 the Company received
inventory of approximately $522,000 and concluded that most of the product
inventory returned did not meet conditions specified in the contract. Therefore,
IMSI credited Tech Data for only $25,000 of the product. As of June 30, 2000 the
balance owed to IMSI by Tech Data was approximately $262,000 and IMSI fully
reserved this amount.
As of late Fall 2000 IMSI entered into intensive negotiations with Tech Data in
order to resolve the dispute between the companies. After careful reassessment
of all aspects of its relationship with Tech Data, the status of the disputed
inventory, and the costs to IMSI of any protracted legal proceedings to resolve
the issues, which would
23
have been required to take place in Florida, IMSI agreed to pay Tech Data
$50,000 as a universal settlement of all claims. This amount will be paid to
Tech Data in four quarterly installments beginning in September 2002.
In December 1998, IMSI's primary distributor in Germany exited the software
distribution business. On May 27, 1999, as a result of the termination, the
German distributor returned $248,000 of previously paid resalable product and
IMSI refunded the full $248,000. In March 1999, IMSI decided to terminate its
relationship with its primary distributor in Australia and sell directly to
retail outlets. The previously paid resalable product returned by the Australian
distributor upon termination was valued at $304,000. IMSI paid $189,000 in June
1999 to the Australian distributor and relieved $115,000 in receivables as a
result of that termination. As of June 30, 2001, IMSI had no current liability
to any foreign or domestic distributor for resalable product returned on
termination except for the $50,000 settlement with Tech Data as previously
disclosed.
In previous fiscal years IMSI provided price protection to its distributors when
it reduced the prices of its products. End users could return products through
dealers and distributors within 60 days from the date of purchase for a full
refund, and retailers may return older versions of products for a full refund.
Generally, distributors and retailers had no time limit to return merchandise,
except that distributors had 60-90 days to return merchandise upon termination
of the distributorship agreement. Starting in fiscal 2001, the Company is no
longer providing such price protection to distributors and does not intend to do
so in the future. However, should IMSI decide to resume effort to aggressively
pursue the retail market, then it might revise its current strategy with regard
to the price protection issue.
PRODUCT COSTS
IMSI's product costs include the costs of diskette and CD-ROM duplication,
printing of manuals, packaging and fulfillment, freight-in, freight out, license
fees, royalties that IMSI pays to third parties based on sales of published
software and amortization of capitalized software acquisition and development
costs. Costs associated with the return of products, such as refurbishment and
the write down in value of returned goods are also included in Product Costs.
The decrease in product costs as a percentage of net revenues in fiscal year
2001 was primarily attributable to a lower manufacturing burden and overhead
costs, lower costs associated with product returns, decreased purchase discounts
offered to customers and decreasing royalty expenses and amortization of
non-advanced fees.
IMSI reviews its product inventories for obsolescence at the end of each
reporting period. IMSI reserves a portion of its recorded inventory book value
to account for its anticipated inability to sell products or the anticipated
inability to sell products at a net realizable value that is greater than their
recorded cost. Products that are in IMSI's inventory but are not currently being
sold are fully reserved. During fiscal 2001, the Company reserved $160,000 for
obsolete inventory and had net inventories of $113,000 after these reserves as
of June 30, 2001.
As part of its restructuring plan in fiscal year 1999, IMSI identified a limited
number of core products that it planned to continue to sell on a long-term
basis. Reserves for non-core products were increased as part of the Company's
restructuring. During fiscal year 2000, the Company reversed $287,000 of these
inventory reserves due to better than anticipated sell-down of discontinued
products.
IMSI amortizes capitalized software development costs on a product-by-product
basis. The amortization recorded for each product is the greater of the amount
computed using (a) the ratio of current gross revenues to the total of current
and anticipated future gross revenues for the product or (b) the economic life
of such product. During fiscal 2001, the Company did not capitalize any new
software development costs. Amortization of such costs was $614,000, $979,000,
and $2,429,000 in fiscal 2001, 2000 and 1999, respectively.
SALES AND MARKETING EXPENSES
IMSI's sales and marketing expenses consist primarily of salaries and benefits
of sales and marketing personnel, commissions, advertising, printing, and direct
mail expenses. Sales and marketing expenses in fiscal year 2001 also
24
included $70,000 representing the write-off of a note receivable from the
Executive Vice President of direct sales and marketing of the Company deemed non
collectible at the end of fiscal 2001.
Very limited marketing, promotion and advertising activities were the primarily
cause of the decline in IMSI's sales and marketing expenses during fiscal 2001.
As a percentage of net revenues, the Company managed to keep these expenses at a
slightly lower rate than the previous fiscal year in order to support its
current level of sales. Cost reduction efforts associated with IMSI's fiscal
year 1999 restructuring plan significantly reduced sales and marketing expenses
in fiscal year 2000. In addition, the significant decrease in sales and
marketing expenses during fiscal year 2000 was due to lower headcount resulting
from the layoffs of employees in this department in January 2000 and to the
substantial reduction of marketing and advertising activities. IMSI had 18, 19
and 69 sales and marketing personnel at June 30, 2001, 2000 and 1999,
respectively.
GENERAL AND ADMINISTRATIVE EXPENSES
IMSI's general and administrative expenses consist primarily of salaries and
benefits for employees in the legal, finance, accounting, human resources,
information systems and operations departments and fees to IMSI's legal and
professional advisors. Also during fiscal 2001 IMSI wrote off a note receivable
from a former CEO and Chairman of the Board of the Company. This note was deemed
non collectible and the entire amount of $160,000 representing the note balance
was charged against general and administrative expenses.
At the beginning of fiscal 1999, IMSI was in a growth pattern, increasing
general and administrative expenses. When market conditions deteriorated for its
products, IMSI was not able to effectively reduce these expenses due to their
fixed nature. During fiscal years 2000 and 1999, IMSI had significant increases
in accounting, legal and consulting fees paid to outside third parties,
particularly in connection with litigation and in responding to SEC comments.
The Company was able to significantly save on these expenses during fiscal 2001.
IMSI had 16, 18, and 35 administrative personnel at June 30, 2001, 2000 and 1999
respectively.
RESEARCH AND DEVELOPMENT EXPENSES
IMSI's research and development expenses consist primarily of salaries and
benefits for research and development employees and payments to independent
contractors. IMSI had 21, 20 and 76 research and development employees at June
30, 2001, 2000 and 1999, respectively. The fiscal year 2001 decrease in absolute
dollars in research and development expenses was due to IMSI reducing the
services of the software development contractors outside the United States and
to the substantial reduction in the development costs relating to the expansion
of IMSI's product offering. IMSI did not capitalize any software acquisitions or
development costs during fiscal 2001. Software acquisition and development costs
in the amount of $159,000 relating to acquisitions by ArtToday were capitalized
during fiscal year 2000. During fiscal 1999, the Company capitalized $3.2
million of software acquisitions and development costs.
RESTRUCTURING CHARGE
IMSI began restructuring its operations in June 1999 in response to large
losses. The four major components of the restructuring plan were manufacturing
and warehouse outsourcing, facilities consolidation, personnel reductions, and
divestiture of non-core products to focus on high margin product lines. As of
June 30, 2000, a balance of $129,000 related to restructuring charges was still
accrued on the Company's books. During fiscal 2001, IMSI incurred all remaining
costs bringing the accrued balance to zero.
25
The following table summarizes the restructuring costs in fiscal 1999 by
segment:
COST OF OPERATING
GOODS SOLD EXPENSE
------------------ ------------------
North North
America UK America UK TOTAL
------- ------ ------- ------ ------
(in thousands)
Write down of inventory of non-core products $2,096 $88 $2,184
Write down of intangibles associated with
non-core products
License Fees 217 217
Goodwill $ 5 5
Prepaid Royalties 143 143
Capitalized Software 159 159
Write down of furniture, fixtures, equipment and
leasehold improvements:
Novato -
Computers and peripherals 150 150
Tenant improvements 139 139
Furniture and fixtures 109 109
Vacaville & Albuquerque -
Furniture and fixtures 25 25
U.K. -
Furniture and fixtures 41 41
Abandoned leases and associated costs:
Novato -
Rent 180 180
Broker's fee 65 65
Excess furniture lease 14 14
Additional walls and doors 29 29
Miscellaneous charges 3 3
Vacaville warehouse --
Rent 249 249
Broker's fee 103 103
Albuquerque tech support facility 110 110
U.K. --
Rent 6 6
Labor cost for shutdown of office 19 19
Warehouse transition costs 284 284
Personnel reduction and severance costs:
U.S. 35 470 505
U.K. 41 41
------ --- ------ ------ ------
$3,183 $88 $1,402 $ 107 $4,780
====== === ====== ====== ======
Costs recognized related to the restructuring that were not from write-offs of
existing assets or were not paid by June 30, 1999, $1,440,000 in total, were
accrued and recognized as a liability at June 30, 1999.
Subsequently, the Company reversed $280,000 of the restructuring accrual during
fiscal 2000: $177,000 in accrued severance costs as estimated costs were greater
than actual costs due to employee attrition, and $103,000 in broker's fees for
the Vacaville facility as the lease was terminated, not subleased.
26
The following table details the classification of cash and non-cash amounts
related to the restructuring:
CASH NON-CASH TOTAL
---------- ---------- ----------
RESTRUCTURING CHARGE $ 956,000 $ 553,000 $1,509,000
PRODUCT COSTS 657,000 2,614,000 3,271,000
---------- ---------- ----------
$1,613,000 $3,167,000 $4,780,000
========== ========== ==========
Write down of inventory of non-core products. In the restructuring, IMSI
identified products in the Company's precision design and graphic design
categories, or those in the business application category sold in combination
with the design products, such as TurboProject, as "core products" that IMSI
would continue to sell and support. "Non-core products" consist of those
products in the Company's inventory that, due to the restructuring plan, the
Company would continue to sell, but no longer support with upgrades,
improvements, or marketing programs. "Other products" refers to products that
IMSI would no longer sell.
In addition to older versions of FloorPlan, MasterClips, and TurboCAD, non-core
products included current and previous versions of:
3D Artist Graphics Converter Org Plus
CD Copier HiJaak People Scheduler
Conversational Skills Lumiere Solid Modeler
Cookbook Maplinx TurboSketch
Email animator MasterPhotos UpdateNow
EASY Language MasterPublisher VoiceDirect
Family Home Collection MultiMedia Fusion WebArt
Flow! Mouse Web Business Builder
FormTool Net Accelerator Year 2000
IMSI determined impairment of the inventory using a subjective estimate, product
by product, of how much the inventory exceeded customer demand, looking at
factors such as inventory levels at IMSI facilities and as reported by
distributors, sales data from internal sources and PC Data, and marketing and
sales department estimates based on historical and current market trends.
Write down of intangible assets associated with non-core products. At June 30,
1999, IMSI reviewed the intangible assets associated with non-core product lines
for impairment in accordance with SFAS No. 121 and adjusted the carrying value
of these assets as necessary. The Company believed these assets were impaired
because it no longer manufactured or actively marketed the non-core products
with which they were associated. The Company determined that the net realizable
value of the intangible assets with carrying value of $525,000 was $0. The fair
value of the intangible assets associated with the non-core product lines held
for sale, including Easy Language and business utility product lines, was
determined from then pending discussions with potential purchasers of these
product lines.
The following table provides a summary of the carrying value of all assets
associated with the Company's non-core products as of June 30, 1999:
WRITE-DOWN IN ADJUSTED COST
COST BASIS AT CONNECTION WITH BASIS AT
JUNE 30, 1999 RESTRUCTURING JUNE 30, 1999
------------- ------------- -------------
INVENTORY $3,263 $2,184 $1,079
LICENSE FEES 217 217 --
GOODWILL 5 5 --
PREPAID ROYALTIES 224 143 81
CAPITALIZED SOFTWARE 336 159 177
------ ------ ------
$4,045 $2,708 $1,337
====== ====== ======
Write down of furniture, fixtures, equipment and leasehold improvements. Because
the restructuring plan called for the reduction of employees and the
consolidation of facilities, IMSI wrote-down $464,000 of furniture, fixtures,
27
equipment and leasehold improvements at the Company's Novato headquarters,
Vacaville, California and Albuquerque, New Mexico facilities, and the U.K.
office. These assets were abandoned and are no longer being used in the
operation of the business. The fair value of furniture, fixtures, equipment and
leasehold improvements not associated with specific product lines was based on
current market prices for used equipment and furniture, less disposal costs.
Abandoned leases and associated costs. IMSI expensed a total of $778,000 for
abandoned leases and associated costs in the U.S. and U.K. segments. As part of
the restructuring, IMSI vacated a major portion of the office space leased at
the Company's Novato headquarters and succeeded in subleasing this space and
reducing monthly rental expense by $60,000. The charge for the Novato facility
consisted of four months rent for the space to be subleased, the broker's fee to
sublease the space, an excess furniture lease, and the cost of additional walls
and doors to partition the space.
The Company estimated that about 50% of the future rental costs for the
Vacaville warehouse should be accrued at June 30, 1999, along with a broker's
fee to sublet the unoccupied space. Because of the reduction in product lines
and corresponding reduction in the need for technical support, IMSI accrued 50%
of the future rent for the Albuquerque technical support facility. Because the
restructuring included the consolidation of the foreign offices, IMSI also
accrued $25,000 in expenses associated with vacating the U.K. office.
Warehouse transition costs. As IMSI made the transition to outsourcing of the
warehouse, fulfillment, and shipping functions, the Company provided for
warehouse transition costs of $284,000 in the restructuring. This accrual
assumed that the warehouse would remain open for four months during the
transition and that 50% of the operating expenses were associated with shutting
down the facility. IMSI accrued 50% estimated cost of operating the warehouse
for this four-month period as an operating expense and recognized the remaining
costs as cost of sales as incurred. In April 2000, IMSI vacated the Vacaville
warehouse.
Personnel reduction and severance costs. As part of the restructuring plan, IMSI
planned to terminate 90 employees in the following departments: sales and
marketing (22); general and administrative (8); manufacturing (23); and research
and development (37), all of whom were terminated as of June 30, 2000.
As a result of the restructuring, IMSI anticipated reduced future costs and
reduced future revenues. IMSI expected to reduce payroll costs by approximately
$266,000 per month and to reduce rent costs by approximately $71,000 per month.
Due to the write off of approximately $464,000 in furniture and equipment
assets, depreciable over 3 to 5 years, future periods will not include the
related depreciation charge. As anticipated, revenues declined substantially in
fiscal years 2000 and 2001 because IMSI is marketing and selling fewer products
and the demand for current products is declining.
GAIN ON PRODUCT LINE SALE
In August 1999, IMSI sold the rights to the Easy Language product line to
Learnout & Hauspie for $1.7 million, of which $1.5 million was recognized in
fiscal year 2000. During the first quarter of fiscal 2001 IMSI collected the
remaining $200,000 pertaining to the sale and recognized that amount as a
one-time gain on product line sale. During the same quarter, ArtToday (IMSI's
wholly owned subsidiary) sold the domain name "Caboodles" for $85,000 and
recorded a one-time gain for the same amount.
The Company also sold the rights to People Scheduler to Adaptive Software
Corporation for $55,000 in fiscal 2000.
INTEREST AND OTHER EXPENSE, NET
Interest and other expenses, net include interest and penalties on debt
instruments, foreign currency transaction gains and losses, and other
non-recurring items.
During fiscal 2001, the Company reduced the balance on the line of credit owed
to Union Bank of California by $670,000 from $4,600,000 to $3,930,000. During
fiscal 2000, IMSI repaid the $750,000 balance of a term note payable to the same
bank and reduced its line of credit balance by $0.8 million from $5.4 million to
$4.6 million.
28
Although IMSI reduced its total bank obligations during fiscal 2001, and despite
the overall decreasing interest rates, the penalties accrued in connection with
defaults were the primary cause for the increase in interest expense.
The Company recorded interest in the amount of $410,000 related to Baystar
subordinated note, $536,000 related to the Union Bank line of credit, $157,000
related to the Imageline arbitration award and $41,000 related to leases.
The Baystar agreement calls for a 1% penalty per month for each month subsequent
to September 21, 1999 until the shares to be issued to Baystar are included in
an effective registration statement. During fiscal 2001 the Company recorded
$540,000 related to this penalty.
In accordance with the agreement with Silicon Valley Bank, the bank charged,
during fiscal 2000, 5% of penalty interest above the normal nominal rate of 12%
applicable on the balance of the loan upon default, which occurred on December
29, 1999. Total interest expense related to the Silicon Valley Bank obligation
was $441,000 during fiscal 2001.
The decrease in interest and other expense, net, in fiscal year 2001 as compared
to fiscal year 2000 was mainly attributable to the fact that, during fiscal
2000, the Company expensed the unamortized value of warrants issued in
connection with debt. Because IMSI defaulted its obligations to Silicon Valley
Bank and Baystar in fiscal 2000, the Company expensed the unamortized value of
the warrants issued to these creditors. This amortization accounted for $1.7
million or almost 46% of interest expenses in fiscal 2000.
Imageline
Foreign currency transaction losses were $48,000, $7,000 and $235,000 in fiscal
years 2001, 2000 and 1999 respectively. In the past, IMSI did not attempt to
hedge its foreign currency positions. In view of the very substantial reduction
in international business and denominating foreign contracts in U.S. dollars,
foreign currency translation losses have been minimized.
LOSS ON DISPOSITION OF FIXED ASSETS
During fiscal 2001, and pursuant to its upgrade policy, ArtToday replaced old
servers with new computer equipment costing approximately $210,000. The old
servers were sold for less than their carrying book value and the Company
recognized a $13,000 loss on disposition of fixed assets.
During fiscal year 2000, The Company wrote off $1,607,000 of leasehold
improvements, warehouse equipment, tradeshow equipment, computer equipment, and
office furniture, which were disposed of or abandoned during the Company's
extensive downsizing.
LOSS ON DISPOSITION OF FOREIGN SUBSIDIARIES
On January 28, 2000, IMSI announced that it was exiting the retail software
business, closing its German office and liquidating its European subsidiaries.
During the first quarter of fiscal year 2000, the Company closed its United
Kingdom and French offices. Liquidators assumed control of IMSI's European
subsidiaries and since January 2000, the Company no longer consolidates these
subsidiaries within its financial statements.
During fiscal 2000 the Company incurred a loss on liquidation of its European
subsidiaries of $2,043,000. This loss included the $1,562,000 write-off of
inter-company accounts receivable, the $68,000 write-off of the investment in
the foreign subsidiaries and the $393,000 write-off of the foreign subsidiaries
net assets. The liquidation process is proceeding according to the legal
requirements of the respective countries and may still require additional time
to complete. The Company does not anticipate any additional costs pertaining to
the closure of the European subsidiaries and does not expect to realize any
material residual value from the liquidation of their assets. Sales of the
Company's products in Europe are currently generated and will continue to be
generated in the foreseeable future primarily through third party licenses on
which IMSI receives royalties.
29
ADVERSE AWARD IN IMAGELINE ARBITRATION
On January 14, 2000, Imageline, Inc. received a $2.6 million arbitration award
against IMSI for intellectual property violations and attorneys' fees. The award
was comprised of $1.2 million in actual damages, $1.2 in punitive damages and
$0.2 million in attorneys' fees. IMSI and Imageline have entered into a
Settlement agreement whereby Imageline agreed to settle the award and any and
all claims against the Company. (See Management's Discussion and Analysis of
Financial Condition and Results of Operations - Recent Events).
PROVISION (BENEFIT) FOR INCOME TAXES
IMSI's effective tax rate was (2.1%), 3.2% and 0.1% in fiscal 2001, fiscal 2000
and fiscal 1999, respectively. The Company has a valuation allowance of
$17,358,000as of June 30, 2001 due to the uncertainty of realizing deferred tax
assets, consisting primarily of loss carry forwards. The income tax expense
recognized in fiscal year 2000 represents the increase in the valuation
allowance in fiscal year 2000 provided against net deferred tax assets recorded
as of June 30, 1999.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
In the second quarter of fiscal 2001, the Company adopted the provisions of
Emerging Issues Task Force Issue 00-27 ("EITF 00-27") "Application of EITF Issue
98-5, `Convertible Securities with Beneficial Conversion Features or
Contingently Adjustable Conversion Ratios,' to Certain Convertible Instruments."
EITF 00-27 is effective for transactions with a commitment date after November
16, 2000, except for the provisions relative to embedded conversion features
that are effective for instruments issued since May 20, 1999. EITF 00-27
requires companies to measure a convertible instrument's beneficial conversion
feature using an effective conversion price. Consequently, the conversion option
embedded in a convertible instrument issued with a detachable instrument, such
as a warrant, may have intrinsic value even if the conversion option is
at-the-money or out-of-money at the commitment date. In May 1999, IMSI issued a
convertible debt instrument to Baystar Capital that included an embedded
beneficial conversion feature as calculated under EITF 00-27. The result in
applying EITF 00-27 to this instrument resulted in the reporting of a cumulative
effect of change in accounting principle in the amount of $285,000 in the
quarter ended December 31, 2000, which caused an increase in the loss per share
of $0.03 during fiscal 2001.
NEW ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board adopted SFAS No. 141
Business Combinations and SFAS No. 142 Goodwill And Intangible Assets. SFAS No.
141 addresses the methods used to account for business combinations and requires
the use of the purchase method of accounting for all combinations after June 30,
2001. SFAS No. 142 addresses the methods used to amortize intangible assets and
to assess impairment of those assets, including goodwill resulting from business
combinations accounted for under the purchase method. SFAS No. 142 is effective
for fiscal years beginning after December 15, 2001; however, IMSI may elect to
early adopt the statement beginning July 1, 2001. Included in IMSI's assets at
June 30, 2001, is goodwill related to the acquisition of ArtToday.com and
OrgPlus with a net carrying value of $596,000. Upon adoption of SFAS No. 142,
IMSI will no longer amortize this goodwill, decreasing amortization expense by
approximately $270,000 per year. IMSI is required to assess this goodwill for
impairment in the year of adoption. The full effect of these new pronouncements
on IMSI's financial position or on the results of operations is not yet
determinable, and IMSI will not be able to make a decision about whether to
early adopt this pronouncement until an analysis of the impairment provisions of
the new standards has been completed. Under existing accounting standards, IMSI
determined that no impairment of goodwill existed as of June 30, 2001. In the
event that IMSI's analysis under the new guidance indicates that this goodwill
is impaired, a charge to earnings in the year of adoption will be required.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operating activities provided net cash of $697,000 and used net
cash of $253,000 and $2.7 million, respectively in fiscal 2001, 2000, and 1999.
30
During fiscal 2001 IMSI generated cash of almost $700,000 from its operating
activities despite a net loss of $1.2 million. Non-cash depreciation and
amortization expenses were $2.6 million and represented a significant element in
reconciling the net loss to the positive cash provided by operating activities.
During fiscal 2001 net accounts receivable decreased by $103,000 as IMSI
improved its collection and net inventories decreased by $76,000 as the Company
freed cash usually tied to inventories. Accrued interest and penalties increased
by $1.4 million during fiscal 2001 to $2.3 million from $859,000 in the previous
year. This increase was due to the fact that the Company did not pay interest
during fiscal 2001 except for interest related to the Union Bank debt and to the
current leases. The Company's accounts payable and accrued liabilities increased
as IMSI slowed its payments during fiscal 2001. Additional items that
contributed to minimizing the effect of the Company's net loss on its cash
provided by operating activities included, during fiscal 2001, non-cash charges
of $250,000 related to forgiveness of notes receivable from affiliate parties to
the Company and non-cash charges of $285,000 related to changes in accounting
principle.
In fiscal 2000, despite the Company's large net loss, net cash used by operating
activities was minimized because of the significant decrease in net accounts
receivable, net inventories and the collection of $3.8 million of income tax
refunds. During fiscal year 2000, accounts payable increased by $522,000 as IMSI
slowed its payments pursuant to the standstill agreement with its creditors.
Accrued liabilities also increased during the same reporting period as a result
of the adverse arbitration award pertaining to the Imageline ruling. These
increases in accounts payable and accrued liabilities were offset by the
decrease in accrued restructuring charges and deferred revenues. In addition,
non cash expenses relating to the depreciation and amortization of fixed assets
and capitalized software, the write off of fixed assets and the loss on
liquidation of foreign subsidiaries contributed in minimizing the cash effects
of the $16.9 million net loss in fiscal year 2000.
During fiscal year 1999 large reductions in accounts receivable and inventories
and an increase in accrued and other liabilities minimized the use of cash
caused by IMSI's large net loss. IMSI slowed its payments as a result of
declining cash receipts. Accrued liabilities, and especially, accrued rebates
payable increased significantly because of the intense price competition and
increase in rebates offered during the past fiscal year.
IMSI's investing activities used net cash of $94,000 in fiscal 2001, provided
net cash of $130,000 in fiscal year 2000 and consumed net cash of $5.7 million
in fiscal 1999.
During fiscal 2001, the Company collected the remaining $200,000 from the fiscal
2000 sale of the Easy Language program to Learnout & Hauspie. These funds were
previously held in an escrow account. Also during fiscal 2001, ArtToday sold the
domain name "Caboodles" for $85,000 and collected the entire amount. Those
proceeds from the product line and the domain name sale were not enough to
finance the purchase of new equipment needed to support the Company's
activities. The Company purchased $378,000 worth of equipment for cash during
fiscal 2001. The Company's financial situation prevented it from using
alternative financing methods to acquire those assets.
In fiscal 2000 the sale of the Easy Language product line for $1.7 million
dollars contributed $1.5 million dollars to net cash provided by investing
activities. The Company also sold the People Scheduler program during fiscal
year 2000 for $55,000 in cash. The cash collected in connection with the Easy
Language and People Scheduler sales was in part offset by the purchase of
$314,000 of equipment and the acquisition of $159,000 of goodwill, trademark and
brand. During fiscal 2000, the Company also collected approximately $40,000
relating to the sale of part of its fixed assets.
In fiscal 1999, net cash used by investing activities resulted primarily from
the purchase of $1.2 million of equipment, the acquisition of $2.2 million of
software development costs and $2.4 million of goodwill, trademark and brand.
These amounts are primarily associated with the ArtToday (formally Zedcor, Inc.)
acquisition and the Org Plus acquisition.
Net cash consumed by financing activities in fiscal 2001 and 2000 was $860,000
and $2.1 million respectively. Financing activities provided net cash of $10.1
million in fiscal 1999.
31
During fiscal 2001, IMSI reduced its total obligation to Union Bank of
California by $670,000 to $3,930,000 from $4,600,000 as of June 30, 2000 and
during the months of July and August 2001 IMSI further repaid Union Bank an
additional $329,000 bringing the balance of all amounts due to the bank to
$3,601,000. Pursuant to its merger agreement with IMSI, signed on August 31,
2001, DCDC acquired the Union Bank's note at a $1.1 million discount. Also
during fiscal 2001 the Company made payments relating to capital lease
obligations of $201,000 and collected $11,000 from the issuance of common stock.
In fiscal 2000, net cash used by financing activities was primarily the result
of payments to Union Bank of California. IMSI reduced the balance on the credit
line owed to Union Bank by $804,000 to $4.6 million. The Company also paid off
the $750,000 remaining balance of a term loan owed to Union Bank during fiscal
2000. IMSI issued stock for $3,000 and made payments relating to capital lease
obligations of $530,000 in fiscal 2000.
In fiscal 1999, net cash provided by financing activities resulted primarily
from term loan borrowings of $7.5 million (on November 3, 1998, IMSI borrowed
$2.5 million under a three-year subordinated loan facility with Silicon Valley
Bank and on May 26, 1999, IMSI issued to Baystar Capital, LP a three-year $5
million principal amount 9% subordinated convertible note.) and the issuance of
$6.2 million of common stock. This inflow of cash was partially offset by a net
repayment of $2.5 million on IMSI's credit line from Union Bank of California.
On March 3, 1999, IMSI entered into a stock purchase agreement and related
agreements with Capital Ventures International ("CVI"). Under the terms of the
agreement, CVI paid IMSI $5 million for 437,637 shares of common stock. The
agreement provided price protection to CVI depending on the market price of the
common stock at certain future dates. Accordingly, IMSI issued an additional
2,023,363 shares to CVI in March 2000. This new issuance brought CVI's ownership
of IMSI's stock to a total of 2,500,000 shares for its $5 million investment.
IMSI has no further obligation to issue any additional adjustment shares or to
pay other consideration to CVI and is relieved of making any further payments to
CVI in connection with not yet registering the shares of stock issued to CVI.
CVI also received a warrant to purchase 131,291 shares of common stock expiring
March 5, 2003. The warrant is currently exercisable at $14.8525 per share.
On May 4, 1998 IMSI entered into a line of credit agreement with Union Bank
under which it could borrow the lesser of $13,500,000 or 80% of eligible
accounts receivable, at Union Bank's reference rate plus 1/2% or LIBOR plus 2%,
at IMSI's option. IMSI borrowed approximately $10.0 million under the line of
credit agreement. Union Bank also provided a $1.5 million term loan at the same
interest rate. Due to IMSI's defaults under the agreements, the line of credit
was changed to a non-revolving, reducing loan with no further borrowings
available. The interest rate was adjusted to Union Bank's reference rate plus
3%. Under the terms of the agreements, all assets not subject to liens of other
financial institutions were pledged as collateral against the loans.
During fiscal 1999 and 2000 IMSI made payments to Union Bank that decreased the
total amount owed to $4,600,000; however, the loan agreements provided that all
loan amounts were due as of September 30, 1999. Because of the failure to pay
off the loan and because IMSI was not in compliance with financial covenants,
Union Bank could have declared all loans and the obligations under the
agreements to be immediately due and payable and could have commenced immediate
enforcement and collection actions but it did not do so. During fiscal 2001 the
Company reduced its total liabilities to Union Bank of California to $3,930,000
as of June 30, 2001 and during the months of July and August 2001 IMSI further
repaid Union Bank an additional $329,000 bringing the balance of all amounts due
to the bank to $3,601,000. Subsequently and pursuant to the Company's merger
agreement signed on August 31, 2001 with DCDC, DCDC purchased the Union Bank
debt for $2.5 million releasing IMSI from any further obligations to Union Bank
of California. However, in the event the merger agreement is terminated for any
reason, IMSI shall pay DCDC the Union Bank note principal in 72 equal monthly
payments of $49,722 plus interest at LIBOR plus 3%.
On May 26, 1999 IMSI announced a private placement transaction with Baystar
Capital, L.P. ("Baystar"). The Company issued a three year $5 million principal
amount 9% Senior Subordinated Convertible Note, and a warrant to acquire 250,000
shares of IMSI's common stock, to Baystar. The note is convertible into shares
of common stock. See Note 4 to the consolidated financial statements,
"Convertible Subordinated Debt."
32
IMSI is in default on its senior subordinated convertible note with Baystar
because of failure to pay a penalty for failing to have a registration statement
effective no later than September 21, 1999 covering the resale of shares
issuable to Baystar. The penalty is 1% per month of the principal balance
outstanding. IMSI has accrued a liability of $996,000 for this penalty through
June 30, 2001. Baystar has the right under the note to declare all sums due and
payable but has not done so. Accordingly, the full amount of the note is
recorded as a current liability. Because of the default, Baystar received the
right to convert its convertible note at the price of $2 per share. Baystar
converted $500,000 of the note on December 2, 1999 into common stock of IMSI at
a price of $2 per share. On July 30, 2001, Baystar Capital and IMSI entered into
a settlement agreement (see Management's Discussion and Analysis of Financial
Condition and Results of Operations - Recent Events).
The Company's cash and cash equivalents decreased by $247,000 to $1,230,000 at
June 30, 2001 from $1,477,000 at June 30, 2000. Working capital improved to a
negative $17.5 million at June 30, 2001 from a negative $19 million at June 30,
2000. Current assets declined by $1.3 million during fiscal year 2001. This
sharp decline was mainly the result of the decrease in cash and cash
equivalents, prepaid royalties and licenses and other current assets.
Current liabilities decreased by $2.8 million in fiscal year 2001 to $20.4
million from $23.2 million at June 30, 2000. This decrease in current
liabilities is attributable to the following factors:
- IMSI paying down its obligation to Union Bank by $670,000
- The substantial decline in deferred revenues by $1.2 million
- The reduction of $2 million in the accrued arbitration award:
During fiscal 2001, and upon the settlement of the Imageline
matter, the Company adjusted the total liability of $2.9 million
arising from the arbitration award to Imageline to $833,000
representing the net present value of the settlement agreement.
Furthermore, the Company reclassified $702,000 to long-term
liabilities, as these payments are not due within the next
twelve months.
These decreases were in part offset by increases in accrued interest and
penalties on debt instruments as well as increases in accounts payable and
accrued and other liabilities.
During fiscal year 2000 IMSI recorded $2.7 million relating to the Imageline
arbitration award. Also, and because of the default with respect to various
covenants with Baystar Capital and Silicon Valley Bank, IMSI re-classified the
remaining balances of these loans to current. This contributed to the increase
of the current liabilities during fiscal 2000.
IMSI defers revenues from ArtToday.com's subscriptions. ArtToday.com recognizes
these revenues over twelve months from the date of purchase. Deferred revenues
also include revenues related to licenses or prepaid contracts and revenues
related to ArtToday.com subscriptions IMSI sold in combination with
subscriptions to utility programs. Total deferred revenue decreased from
$2,385,000 in fiscal 2000 to $1,173,000 in fiscal 2001. Deferred revenues from
ArtToday.com's subscriptions increased to $1,161,000 from $1,108,000 as compared
to fiscal year 2000. The substantial decrease in the consolidated deferred
revenue balance during fiscal 2001 was attributable to the Company recognizing
almost all of the previously deferred revenues relating to the sales of software
containing bundled subscriptions.
If IMSI fails to raise additional capital, the negative working capital position
could have a material adverse effect on its liquidity over the next year. The
financial statements have been prepared on a basis that contemplates IMSI's
continuation as a going concern and the realization of the Company's assets and
liquidation of IMSI's liabilities in the ordinary course of business. The
Company has an accumulated deficit of $44.0 million at June 30, 2001. At June
30, 2001, IMSI was also in default of various loan covenants. These matters,
among others, raise substantial doubt about IMSI's ability to remain a going
concern for a reasonable period of time and the auditors' report on our
financial statements reflects such doubt. 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
33
sufficient to allow it to meet its obligations as they become due and to achieve
profitable operations. See Note 1 to the consolidated financial statements,
"Basis of Presentation and Realization of Assets."
Historically, IMSI has financed its working capital and capital expenditure
requirements primarily from retained earnings; short-term and long-term bank
borrowings, capitalized leases and sales of common stock. During fiscal year
2001 IMSI relied primarily on the collection of receivables, sales of some
assets and delaying its payments to vendors and lenders to fund operations.
During fiscal 2001 short-term borrowings decreased by $670,000. During Fiscal
2000, long-term debt of $6.3 million was reclassified to current liabilities due
to IMSI's defaults with Baystar Capital and Silicon Valley Bank.
IMSI will require additional working capital to meet its ongoing operating
expenses, to develop new products, and to properly conduct business activities.
The Company believes that its merger with DCDC, along with the reduction in its
liabilities under planned and completed settlements, will allow IMSI to continue
as a going concern, become profitable in the future and provide a remedy to its
working capital needs. In addition, the Company will continue to engage in
discussions with third parties concerning the sale or license of its remaining
non-core product lines; the sale or license of part of its assets; and raising
additional capital investment through the issuance of stock and short or long
term debt financing.
The large accumulated losses of IMSI and the negative amount of shareholder's
equity as of June 30, 2001 will make it difficult for IMSI to obtain new debt
financing or to obtain equity financing at attractive prices. In addition, it is
likely that the continuing company after the merger will require additional
capital, through equity or financing arrangements.
As of June 30, 2001 IMSI had $1.2 million of cash and cash equivalents. During
fiscal 2001, IMSI's operating activities generated net cash of approximately
$700,000, which was more than offset by the net cash used in the Company's
investing and financing activities. All these activities combined resulted in a
net decrease of $247,000 in IMSI's cash balance at June 30, 2001 when compared
to last year's ending cash balance. If IMSI continues to succeed in improving
its financial performance, management believes it will be able to obtain the
additional financing to meet the working capital needs of the Company. There can
be no assurance that IMSI will be successful in its efforts.
The forecast period of time through which the Company's financial resources will
be adequate to support working capital and capital expenditure requirements is a
forward-looking statement that involves risks and uncertainties, and actual
results could vary. The factors described in "Risk Factors" will affect future
capital requirements and the adequacy of available funds. IMSI can provide no
assurance that needed financing will be available. Furthermore, any additional
equity financing, if available, may be dilutive to shareholders, and debt
financing, if available, may involve restrictive covenants. If IMSI fails to
raise capital when needed, then lack of capital will have a material adverse
effect on IMSI's business, operating results, financial condition and ability to
continue as a going concern.
IMSI has no material commitments for capital expenditures. As of June 30, 2001
the Company has no material long-term debt. Over the next five years, IMSI has
obligations totaling $0.5 million under capital leases, and $0.7 million under
operating leases.
FUTURE PERFORMANCE AND ADDITIONAL RISK FACTORS
PERFORMANCE AND OPERATING RESULTS CONTINUE TO DECLINE DURING FISCAL 2001. IMSI
has experienced, and may continue to experience, operating losses 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):
34
FISCAL 2001 FISCAL 2000
------------------------------------- ------------------------------------
OPERATING NET INCOME OPERATING
QUARTER ENDING INCOME (LOSS) (LOSS) INCOME (LOSS) NET LOSS
-------------- ------------- ---------- ------------- --------
SEPTEMBER 30 $ (40) $ (492) $ (2,814) $ (1,853)
DECEMBER 31 21 (799) (5,069) (9,229)
MARCH 31 (126) (690) (1,490) (5,594)
JUNE 30 (625) 807 1,354 (195)
-------- -------- -------- --------
$ (770) $ (1,174) $ (8,019) $(16,871)
======== ======== ======== ========
While IMSI is attempting to increase revenues and return to profitability, there
is no assurance that the Company will achieve this objective. The cumulative
operating losses of the last two years and IMSI's large debt raise the question
of the Company's ability to continue as a going concern.
Factors that may affect operating results in the future include, but are not
limited to:
- Market acceptance of IMSI's products or those of its
competitors;
- Timing of introductions of new products and new versions of
existing products;
- Expenses relating to the development and promotion of such new
products and new version introductions;
- Intense price competition and numerous end-user rebates;
- Projected and actual changes in platforms and technologies;
- Accuracy of forecasts of, and fluctuations in, consumer demand;
- Extent of third party royalty payments;
- Rate of growth of the consumer software and Internet markets;
- Timing of orders or order cancellation from major customers;
- Changes or disruptions in the consumer software distribution
channels;
- Economic conditions, both generally and within the software or
Internet industries.
Historically the Company's business has been affected somewhat by seasonal
trends. These trends include higher net revenues in the fiscal quarter ended
December 31 as a result of strong calendar year-end holiday purchases by end
users of the Company's products. As a result, IMSI may experience lower net
revenues in the fiscal quarters ended March 31, June 30 and September 30. IMSI
normally ships products as the Company receives orders. Therefore, IMSI has
historically operated with little order backlog. Sales and operating results for
any quarter have depended on the volume and timing of orders received during
that quarter, which IMSI cannot predict with any degree of certainty.
Significant portions of IMSI's operating expenses are relatively fixed. Planned
expenditures are based on sales forecasts. If revenue levels are below
expectations, operating results are likely to be materially adversely affected.
Without growth in revenues in any particular quarter, IMSI's fixed operating
expenses could cause net income to decline when compared to the same period in
the previous year or the immediately preceding quarter. In such event, the
market price of the Company's common stock might be materially adversely
affected. Due to all of the foregoing factors, IMSI believes that
quarter-to-quarter comparisons of its operating results are not necessarily
meaningful and should not be relied upon as indications of future performance.
IMSI's relatively small size in an intensely competitive, rapidly changing
marketplace and its less recognized brand compared to larger and better
recognized competitors, creates the risk that IMSI may not be able to compete
successfully in the future. IMSI faces competition from a large number of
sources, and from larger competitors. Many of IMSI's current and potential
competitors have larger technical staffs, more established and larger marketing
and sales organizations, significantly greater financial resources, greater name
recognition, and better access to consumers than IMSI. IMSI's relatively small
size could adversely affect the Company's ability to compete with larger
companies, for sales to dealers, distributors, and retail outlets, and to
acquire products from third parties, who may desire to have their products sold
or published by larger entities. Larger companies may be more successful in
obtaining shelf space in retail outlets, and in competing for sales to dealers
and distributors. Technological change constantly creates new opportunities, and
can quickly render existing technologies less valuable. Change requires IMSI to
enhance the Company's existing products and to offer new products on a timely
basis. IMSI has limited resources and therefore must restrict its product
development efforts to a relatively small number of projects.
35
The PC software market is highly competitive. Important factors in the market
include product features and functionality, quality and performance,
reliability, brand recognition, ease of understanding and operation, rapid
changes in technology, advertising and dealer merchandising, access to
distribution channels and retail shelf space, marketing, pricing and
availability and quality of support services.
Each of IMSI's major products competes with products from major independent
software vendors:
- TurboCAD competes with AutoCAD from AutoDesk Inc.
- FloorPlan competes with 3D Architect from Broderbund Software,
Inc., Home Architect from Sierra On-Line, Home Design 3D from
Expert Software, Inc. and Super Home Suite from Punch! Software.
- MasterClips competes with Click Art from Broderbund Software
Inc. and Art Explosion from Nova Development.
- TurboProject competes with Microsoft Project.
IMSI's strategy has been to develop graphics and design software that does not
compete directly with applications or features included in operating systems and
applications suites, offered by major software vendors such as Microsoft.
However, such software vendors may in the future choose to expand the scope and
functionality of their products to support some or all of the features currently
offered by certain of IMSI's products, which could adversely affect demand for
the Company's products.
The software industry has limited barriers to entry. The availability of
personal computers with continuously expanding capabilities, at progressively
lower prices, contributes to the ease of market entry. IMSI believes that
competition in the industry will continue to intensify as a number of software
companies extend their product lines into additional product categories and as
additional competitors enter the market.
Use of the Internet reduces barriers to entry in the software market. Software
developers distribute their products online without relying on access to
traditional distribution networks. Because of the proliferation of competing
software developers, more products are competing for both retail shelf space and
online.
There can be no assurance that IMSI's products will achieve or sustain market
acceptance, and generate significant levels of revenues in subsequent years, or
that the Company will have the resources required to compete successfully in the
future.
IMSI HAS REDUCED AVAILABILITY OF BANK FINANCING, CREATING A RISK OF LACK OF
LIQUIDITY. The Company's reduced availability of bank financing could have a
material adverse effect on management's ability to execute its operating plans.
IMSI currently has no borrowing availability under any credit facilities. No
assurance can be given that IMSI will be successful in obtaining new sources of
credit in the future. The merger with DCDC and the restructuring of the
Company's debt as previously discussed do not provide the Company with any
borrowing capacity.
IMSI MAY RAISE ADDITIONAL FUNDS. ADDITIONAL DILUTION, OR SENIOR RIGHTS,
PREFERENCES OR PRIVILEGES MAY RESULT FROM ADDITIONAL EQUITY OR CONVERTIBLE DEBT
ISSUES. Unless the merger with DCDC is completed and all of the Company's
existing debts are restructured as anticipated, available funds and cash flows
generated from operations will not be sufficient to meet the Company's needs for
working capital and capital expenditures for the next twelve months. The Company
may need to raise significant new working capital in the near future, to support
operations and fund its plans. Possible plans to generate new capital include
the issuance of equity, sale or licensing of product lines and the sale of
assets, including IMSI's wholly owned subsidiary, ArtToday.com.
To raise funds, IMSI may issue equity or convertible debt. Also, the Company
intends to continue to sell or license product lines to generate funds. If IMSI
issues equity or convertible debt, the percentage of ownership of current
stockholders will be reduced. Stockholders will experience additional dilution,
and such securities may have rights, preferences or privileges senior to those
of the holders of IMSI's common stock. The Company may also raise funds by
selling assets.
36
IMSI does not know whether additional financing will be available on favorable
terms, or at all. If adequate funds are not available, or are not available on
acceptable terms, or if the Company is not able to sell assets, IMSI may not be
able to meet existing obligations, fund its Internet plans, develop or enhance
services or products, or respond to competitive pressures. Lack of funds could
have a material adverse effect on IMSI's business, operating results and
financial condition. See "Liquidity and Capital Resources."
POTENTIAL PENALTIES FOR AGREEMENTS RELATING TO REGISTRATION OF SHARES. IMSI
agreed to register for resale shares issued in 1999, including shares issued or
issuable under agreements with TLC, CVI, Baystar and others. IMSI has not been
able to obtain the effectiveness of these registration statements. The Company
has negotiated settlements with each of these companies except TLC at this time.
As of June 30, 2001, IMSI has accrued $400,000 related to the dispute with TLC.
There is no guarantee that this amount will be sufficient to settle this
dispute.
IMSI BEARS RISKS ASSOCIATED WITH SOFTWARE DEVELOPMENT THAT CAN ADVERSELY AFFECT
FINANCIAL PERFORMANCE. IMSI's small size and limited resources, in a market with
rapidly changing technology, creates the risk of lack of customer acceptance of
the Company's products, because of potential failure to upgrade existing
products, or potential failure to develop new products. New products are
introduced frequently. New and emerging technologies create uncertainty.
Customer requirements and preferences change frequently. Product obsolescence
and advances in computer software and hardware require that the Company develops
new products and enhances existing products to remain competitive. The pace of
change is accelerating in both hardware and software. PC hardware steadily
advances in power and function. Software is increasingly complex and flexible.
Software development costs increase, and development takes longer.
Despite testing, errors or "bugs" may still exist in new software releases.
Delays in shipping new products or upgrades, as well as the discovery of errors
or "bugs" after release may result in adverse publicity, customer
dissatisfaction and delay or loss of product revenues. Errors or "bugs" could
require significant design modification or corrective releases, and could result
in an increase in product returns. IMSI cannot provide assurance that future
products and upgrades will be released in a timely manner or that they will
receive market acceptance, if and when released.
New products, capabilities or technologies may replace or shorten the life
cycles of IMSI's existing products. The announcement of new products by IMSI or
by the Company's competitors may cause customers to defer the purchase of
existing products. Rapid changes in the market, and availability of new products
increase the degree of consumer acceptance risk for IMSI's products.
There is a risk of failure in the Company's product development efforts. IMSI
may not have the resources required to respond to technological changes or to
compete successfully in the future. Delays or difficulties associated with new
product introductions or upgrades could have a material adverse effect on IMSI's
business, operating results and financial condition.
Because software development costs increase, and software market introduction
costs increase, the financial risks for new product development will increase.
The risks of delays in the introduction of such new products will also increase.
If IMSI fails to develop or acquire new products in a timely manner, as revenues
decrease from products reaching the end of their natural life cycles, the
Company's operating results will be adversely affected.
Because of IMSI's small size and capital resources relative to some of the
Company's competitors, IMSI's ability to avoid technological obsolescence
through acquisition or development of new products or upgrades of existing
products may be more limited than companies with more funds.
The Company's distribution channels carry competing product lines. Consolidation
among the companies within IMSI's distribution channels has reduced the number
of available distributors, which has increased the competition for shelf-space.
The Company cannot provide any assurance that these pressures will not continue
or increase.
Intense competition and continuing uncertainties characterize the distribution
channels through which consumer software products are sold. New resellers have
emerged, such as general mass merchandisers and superstores. New
37
channels have developed, such as the Internet. Large customers, such as retail
chains and corporate users, seek to purchase directly from software developers,
instead of purchasing from distributors or resellers. Although IMSI is
attempting to take advantage of these new distribution channels, no assurance
can be given that these efforts will be successful. Consolidations, and
financial difficulties of some distributors and resellers, are additional
uncertainties.
In the past, IMSI allowed distributors to return products in exchange for new
products, or for credit towards future purchases, as part of stock balancing
programs. Also, IMSI provided price protection to distributors when the Company
reduced the price of products. End users could return products through dealers
and distributors within a reasonable period from the date of purchase for a full
refund. Retailers could return older versions of products. These practices are
standard in the software industry. IMSI made these allowances to remain
competitive with other software manufacturers. Also, there are shipping,
handling and refurbishment costs associated with receiving returns and
processing them for resale. While IMSI will not be directly involved with these
risks and costs because of the Company's new distribution strategies, the
Company's licensees and republishers will face these risks, and they could
significantly reduce the profitability of these agreements.
BECAUSE A SUBSTANTIAL AMOUNT OF THE COMPANY'S REVENUE DEPENDS ON A FEW LICENSEES
AND REPUBLISHERS, AN ADVERSE CHANGE IN THESE RELATIONSHIPS COULD MATERIALLY
AFFECT THE COMPANY. Sales through a limited number of licensees and republishers
are, and are expected to continue to be, a substantial amount of IMSI's
revenues. At fiscal year end the Company's top two customers were comprised of a
service bureau, Digital River, and a software republisher, ValuSoft. For the
fiscal year ended June 30, 2001, these top two customers accounted for
approximately 21% of net revenues.
If IMSI is unable to collect receivables from any of the Company's largest
customers, then IMSI's operating results and financial condition could be
materially adversely affected. The loss of, or reduction in sales to, or any
other adverse change in IMSI's relationship with any of the Company's principal
customers, or principal accounts sold through such customers, could materially
adversely affect IMSI's operating results and financial condition.
A portion of IMSI's sales to end-users, Digital River, and several other large
customers are made on credit, with varying credit terms. IMSI's customers
compete in a volatile industry and are subject to the risk of bankruptcy or
other business failure. Some of IMSI's customers have experienced difficulties.
Although IMSI maintains a reserve for uncollectible receivables, the Company
cannot provide any assurance that the reserve will prove to be sufficient or
that the difficulties for these larger customers will not continue or will not
have an adverse effect on IMSI's business, operating results and financial
condition.
IMSI'S INTELLECTUAL PROPERTY MAY BE VULNERABLE TO UNAUTHORIZED USE, AND THE
RISKS OF INFRINGEMENT OR LAWSUITS. IMSI's ability to compete effectively depends
in part on the Company's ability to develop and maintain proprietary aspects of
IMSI's technology. To protect IMSI's technology, the Company relies on a
combination of copyrights, trademarks, trade secret laws, restrictions on
disclosure and transferring title, and other methods. IMSI holds no patents.
Copyright and trade secret laws afford limited protection. IMSI also generally
enters into confidentiality or license agreements with employees and
consultants. The Company generally controls access to and distribution of
documentation and other proprietary information.
Despite precautions, it may be possible for a third party to copy or otherwise
obtain and use IMSI's products or technologies without authorization, or to
develop similar technologies independently. IMSI does not include in its
products any mechanism to prevent or inhibit unauthorized copying. Policing
unauthorized use of the Company's technology is difficult. IMSI is unable to
determine the extent to which piracy of the Company's products exists. Software
piracy is a persistent problem. If a significant amount of unauthorized copying
of IMSI's products were to occur, the Company's business, operating results and
financial condition could be adversely affected.
In addition, effective copyright, trademark and trade secret protection may be
unavailable or limited in foreign countries. The global nature of the Internet
makes it virtually impossible to control the ultimate destination of IMSI's
products. There can be no assurance that the steps IMSI takes will prevent
misappropriation or infringement of IMSI's technology. Litigation may be
necessary to protect IMSI's trade secrets or to determine the
38
validity and scope of the proprietary rights of others. Such litigation could
result in substantial costs and diversion of resources that could have a
material adverse effect on IMSI's business, operating results and financial
condition. Software developers and publishers are increasingly subject to
infringement claims. From time to time, IMSI has received, and may receive in
the future, notice of claims of infringement of other parties' proprietary
rights. IMSI investigates claims and responds, as the Company deems appropriate.
IMSI cannot provide any assurance that infringement or invalidity claims, or
claims for indemnification resulting from infringement claims, will not be
asserted or prosecuted against the Company.
Defending such claims is expensive and diverts resources. If any valid claims or
actions were asserted against the Company, IMSI might seek to obtain a license
under a third party's intellectual property rights. IMSI cannot provide any
assurance, however, that under such circumstances a license would be available
on commercially reasonable terms, or at all.
IMSI provides its products to end users under non-exclusive licenses, which
generally are non-transferable and have a perpetual term. IMSI makes source code
available for certain of the Company's products. Providing source code increases
the likelihood of misappropriation or other misuse of IMSI's intellectual
property. IMSI licenses all of its products pursuant to shrink-wrap licenses, or
click-wrap licenses on the Internet, that are not signed by licensees and
therefore may be unenforceable under the laws of certain jurisdictions.
IMSI'S DEPENDENCE ON THIRD PARTY DEVELOPERS COULD HAVE A MATERIAL ADVERSE EFFECT
ON THE COMPANY'S BUSINESS, BECAUSE OF THE RISK OF LOSS OF LICENSES TO SOFTWARE
DEVELOPED BY THIRD PARTIES, OR LOSS OF SUPPORT FOR THOSE LICENSES. IMSI's
business strategy has historically depended in part on the Company's
relationships with third-party developers, who provide products that expand the
functionality of IMSI's software. Many of these licenses require payment of
royalties based on revenues received by IMSI.
In other cases, IMSI may be required to pay substantial up-front royalties and
development fees to software developers.
Licenses from third parties for several of IMSI's products have limited terms
and are non-exclusive. IMSI cannot provide any assurance that these third-party
software licenses for current products or for new products will continue to be
available on commercially reasonable terms, or that the software will be
appropriately supported, maintained or enhanced by the licensors.
If IMSI were to lose licenses for software developed by third parties, then the
Company would have increased costs and lost sales. Product shipments would be
delayed or reduced until equivalent software could be developed, which would
have a material adverse effect on IMSI's business, operating results and
financial condition.
Talented development personnel are in high demand. IMSI cannot provide any
assurance that independent developers will be able to provide development
support to the Company in the future. If sales of software utilizing third-party
technology increase disproportionately, operating income as a percent of revenue
may be below historical levels due to third-party royalty obligations.
THE COMPANY'S USE OF DEVELOPMENT TEAMS OUTSIDE THE UNITED STATES INVOLVES RISK,
INCLUDING CONTROL AND COORDINATION RISKS. IMSI programs code and quality tests
most of the Company's products outside the United States. IMSI uses contract
programmers in development centers in Russia, and has also used programmers in
Ukraine, India, and other countries. The cost of programmers outside of the
United States is lower than the cost of programmers in the United States.
Relying on foreign contractors presents a number of risks. Managing, overseeing
and controlling the programming process are more difficult because of the
distance between IMSI management and the contractors. IMSI's contractors have
different cultures and languages from the Company's managers, making
coordination more difficult.
IMSI's agreements provide that the Company owns the source code developed by the
programmers. But the location of the source code outside the United States makes
it more difficult for IMSI to ensure that access to the Company's source code is
protected. If IMSI loses the services of these programmers, then IMSI's
business,
39
operating results and financial condition would be materially adversely
affected. The Company probably could find other programmers in the United States
or in other countries, but the costs could significantly increase IMSI's
expenses.
IMSI'S INTERNET STRATEGY CREATES ADDITIONAL COSTS AND INTRODUCES NEW
UNCERTAINTIES WITH NO ASSURANCE OF RESULTS. IMSI's marketplace now has a higher
emphasis on the Internet, on Internet-related services, and on content tailored
for the Internet. The Company plans to take advantage of opportunities created
by the Internet and online networks. During fiscal year 2000 and 2001, IMSI
incurred, and expects in the future to incur, significant costs for the
Company's Internet infrastructure. These costs include additions to hardware,
increases in Internet personnel, acquisitions and cross licenses to drive
traffic to IMSI's websites, and a transition to an Internet sales and marketing
strategy.
IMSI cannot provide any assurance that the Company's Internet strategy will be
successful, or that the costs and investments in this area will provide
adequate, or any, results. Delivery of software using the Internet will
necessitate some changes in IMSI's business. These changes include addressing
operational challenges such as improving download time for pictures, images, and
programs, ensuring proper regulation of content quality and developing
sophisticated security for transmitting payments. If IMSI fails to adapt to and
utilize such technologies and media successfully and in a timely manner, then
the Company's competitive position and financial results could be materially and
adversely affected.
IMSI MAY NOT BE ABLE TO ATTRACT AND RETAIN KEY PERSONNEL. IMSI's success depends
to a significant extent on the performance and continued service of the
Company's senior management and key employees. IMSI maintains no key person
insurance. The Company does not have employment agreements or non-competition
agreements with any of its key employees. Competition for highly skilled
employees with technical, Internet, management, marketing, sales, product
development and other specialized training is intense, and the supply is
limited. The strong demand for these skills in the United States continued
during fiscal 2001. IMSI cannot provide any assurance that the Company will be
successful in attracting, motivating and retaining such personnel.
IMSI's board of directors and management experienced significant changes in
fiscal 2000 and again upon the signing of the merger agreement with DCDC on
August 31, 2001. On August 31, 2001 all of the members of the DCDC Board of
Directors were appointed to the IMSI Board and all pre-existing members of the
IMSI Board except for Robert Mayer resigned from the Board. Martin Wade, current
CEO of DCDC was appointed CEO of IMSI.
IMSI has historically experienced difficulty in attracting highly qualified
programmers and software engineers in the U.S. The Company cannot provide any
assurance that it will be successful in attracting, motivating and retaining
such personnel. IMSI cannot provide any assurance that one or more key employees
will not leave the Company or compete against IMSI. If the Company fails to
attract qualified employees or to retain the services of key personnel, then
IMSI's business, operating results and financial condition could be materially
adversely affected.
IMSI'S RELIANCE ON OUTSOURCING COULD MATERIALLY ADVERSELY AFFECT OPERATING
RESULTS BECAUSE OF LACK OF SUPPLY. IMSI outsources most of the production of the
Company's products. Production primarily involves duplication of media and
printing user manuals and packaging materials. IMSI intends to continue
outsourcing in the future, as long as it is economically sound to do so. IMSI
believes that the Company has adequate alternative suppliers of outsourcing
services. But the loss of a supplier, or the inability to obtain contract
services, could materially adversely affect IMSI's operating results.
Systems integration risks and inventory and fulfillment risks may affect the
ability to ship products effectively and cause costly delays or cancellation of
customer orders. IMSI's divestiture of non-core products may reduce unit sales
to the point that outsourced costs of production may increase.
40
IMSI'S COMMON STOCK PRICE IS HIGHLY VOLATILE AND IS SUBJECT TO WIDE FLUCTUATIONS
AND MARKET RISK. The market price of the Company's common stock is highly
volatile. IMSI's stock is subject to wide fluctuations in response to factors
such as:
- Actual or anticipated variations in operating results,
- Announcements of technological innovations,
- New products or services introduced by the Company or its
competitors,
- Changes in financial estimates by securities analysts,
- Conditions and trends in the software market,
- General market conditions, and
- Other factors, such as recessions, interest rates or
international currency fluctuations.
Historically, the trading volume of IMSI's common stock has been very small. The
market for the Company's common stock has been materially less liquid than that
of most other publicly traded companies. Small trading volume and a less liquid
market may amplify price changes in IMSI's stock. If a significant amount of
IMSI's common stock is sold, then the Company's stock price could decline
significantly.
The stock market experiences extreme price and volume fluctuations that have
particularly affected the market prices for stock in technology companies. Price
fluctuations in technology stock prices are often unrelated or disproportionate
to the operating performance of technology companies. Although the trading
prices of many technology companies' stocks have retreated from their historical
highs, they continue to reflect price to earnings ratios substantially above
historical levels. IMSI cannot provide any assurance that these trading prices
and price to earnings ratios will be sustained. The market price of the
Company's common stock may be adversely affected by these broad market factors.
IMSI stock trades on the OTC Bulletin Board. As a result, investors could find
it more difficult to dispose of, or to obtain accurate quotations of the market
value of, the stock as compared to securities that are traded on the NASDAQ
trading market or on an exchange. In addition, trading in IMSI's common stock is
covered by what is are commonly known as the "Penny Stock Rules." These rules
require brokers to provide additional disclosure in connection with any trades
involving a stock defined as a "penny stock," including the delivery, prior to
any penny stock transaction, of a disclosure schedule explaining the penny stock
market and the risks related to trading in these stocks.
IMSI'S REGISTRATION OF A SIGNIFICANT NUMBER OF SHARES FOR POSSIBLE PUBLIC RESALE
COULD ADVERSELY AFFECT THE MARKET PRICE OF THE COMPANY'S COMMON STOCK. On
October 9, 2001, IMSI had 9,738,542 shares outstanding, of which 9,694,352 were
registered for resale or otherwise freely tradable under Rule 144. An additional
24,148 are available for limited resale under Rule 144. Pursuant to the merger
agreement between DCDC and IMSI signed August 31, 2001, IMSI will be issuing
approximately 10 million new shares of common stock to DCDC shareholders for
which the Company intends to file a registration statement. The resale of large
blocks of shares could adversely affect the market price of the Company's common
stock.
IMSI'S BOARD OF DIRECTORS MAY ISSUE PREFERRED STOCK TO PREVENT A TAKEOVER. The
Board of Directors is authorized to issue up to 20,000,000 shares of Preferred
Stock and to determine the price, rights, preferences, privileges and
restrictions, including voting rights, of those shares without any further vote
or action by the shareholders. The rights of the holders of common stock will be
subject to, and may be adversely affected by, the rights of the holders of any
Preferred Stock that may be issued in the future. The issuance of Preferred
Stock, while providing desirable flexibility in connection with possible
acquisitions and other corporate purposes, could have the effect of delaying,
deferring or preventing a change in control of IMSI. IMSI has no current plans
to issue shares of Preferred Stock, and until the completion of the merger, the
issuance of any preferred shares would violate the merger agreement with DCDC.
41
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Historically, IMSI was exposed to interest rate and foreign currency
fluctuations. IMSI's objective in managing its exposure to interest rate changes
and foreign currency fluctuations was to limit the impact of interest rate
changes on earnings and cash flow and to lower its overall borrowing costs.
The Company's exposure to market risk with respect to financial instruments is
primarily related to changes in interest rates with respect to borrowing
activities, which may adversely affect the Company's financial position, results
of operations and cash flows. All IMSI's debt is denominated in US Dollars. The
Company does not use financial instruments for trading or other speculative
purposes and is not party to any derivative financial instruments.
To a lesser degree, IMSI is still exposed to market risk from foreign currency
fluctuations associated with its Australian operations. Most of IMSI's
international revenues are now denominated in U.S. Dollars. Consequently the
exposure to foreign currency fluctuations is minimal. IMSI does not hedge
interest rate or foreign currency exposure.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements and the financial statement schedule are attached as an
exhibit at Item 14(a).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
On August 31, 2001, Martin Wade III was named chief executive officer and Gordon
Landies was named president of IMSI, following the resignation of Geoffrey
Koblick as president and chief executive officer. Also on August 31, 2001, Paul
Jakab was named chief operating officer of IMSI and Vincent DeLorenzo replaced
Jeffrey Morgan, who stepped down, as chief financial officer. Simultaneous to
this event, the entire IMSI board of directors, with the exception of Robert
Mayer, stepped down and was replaced by the board of directors of DCDC, pursuant
to the plan of merger signed by the two companies on August 31, 2001.
DIRECTORS
The names of all members of the Board of Directors of IMSI, and information
about them as of September 25, 2001 are set forth below:
NAME AGE OCCUPATION SINCE
---- --- ---------- -----
Bruce Galloway(1)(3)(4) 43 Managing Director, Burnham Securities Inc 2001
Martin Wade, III(3) 52 President and Chief Executive Officer of the Company 2001
Skuli Thorvaldsson 60 Individual Investor 2001
Gary Herman(3) 37 Associate Managing Director, Burnham Securities Inc 2001
Donald Perlyn(1) 58 Executive Vice President, Nathan's Famous, Inc 2001
42
Maurice Sonnenberg(1)(2) 65 Senior International Advisor, Bear Stearns & Co and 2001
Manatt, Phelps and Philips, LLP
Evan Binn(2) 62 Director 2001
Sigurdur Jon Bjornsson 35 Vice President and Financial director, EFA Venture Inc 2001
Robert Mayer 47 Executive Vice President of the Company 2000
----------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
(3) Member of the Executive Committee.
(4) Chairman of Board of Directors
BRUCE R. GALLOWAY. Mr. Galloway became a director of IMSI in August 2001,
pursuant to the merger agreement between IMSI and DCDC signed on August 31,
2001. Mr. Galloway has been Chairman of the Board of Directors of DCDC since May
1996. Mr. Galloway is currently a managing director of Burnham Securities Inc.,
an NASD Broker/Dealer and investment bank based in New York. He is currently the
Chairman of Arthur Treacher's, Inc., Datametrics Corporation and Digital Systems
Group, Inc., as well as a director of Waiters.com, Inc. Prior to joining Burnham
in 1993, Mr. Galloway was a senior vice president at Oppenheimer & Company, an
investment bank and NASD Broker/Dealer based in New York, from 1991 through
1993. Mr. Galloway holds a B.A. degree in Economics from Hobart College and an
M.B.A. in Finance from New York University's Stern Graduate School of Business.
MARTIN WADE III. Mr. Wade became a director and CEO of IMSI pursuant to the
merger agreement between IMSI and DCDC. Mr. Wade also serves as CEO of DCDC. He
brings to the Company a proven track record in mergers and acquisitions and
investment banking. Prior to joining DCDC in 2000, Mr. Wade served from 1998 to
2000 as an M&A banker at Prudential Securities and from 1996 to 1998 as a
managing director in M&A at Salomon Brothers. From 1991 to 1996, Mr. Wade was
National Head of Investment at C.J. Lawrence, Morgan Grenfell, where he was
appointed to the Board of Directors. Martin Wade also spent six years in the M&A
at Bankers Trust and eight years at Lehman Brothers Kuhn Loeb. Mr. Wade is
credited with participating in over 200 M&A transactions involving various
clients such as, Nike, Cornerstone National Gas Company, Handmark Graphics and
Redken Laboratories, Inc. Mr. Wade was previously National Head of Investment
Banking for Price Waterhouse in the mid 1990's. He is also a member of the Board
of Directors for DiMon (NYSE: DMN) and Energy Transfer Group of Dallas, Texas.
SKULI THORVALDSSON. Mr. Thorvaldsson became a director of IMSI in August 2001,
pursuant to the merger agreement between IMSI and DCDC. Mr. Thorvaldsson has
been Vice Chairman of the Board of Directors of DCDC since May 1996. Mr.
Thorvaldsson has various diversified interests in food court services, travel
agency and pork processing. He is also a master franchisee of Domino's Pizza in
Scandinavia. Mr. Thorvaldsson is a director of Allied Resources Corp. Mr.
Thorvaldsson graduated from the Commercial College of Iceland and the University
of Barcelona. Mr. Thorvaldsson received his Degree in Law from the University of
Iceland.
GARY HERMAN. Mr. Herman became a director of IMSI in August 2001, pursuant to
the merger agreement between IMSI and DCDC. Mr. Herman joined Burnham Securities
in 1997 and is currently an Associate Managing Director in the Galloway
Division. Prior to joining Burnham, he was the managing partner of Kingshill
Group, Inc., a merchant banking and financial firm with offices in New York and
Tokyo. Mr. Herman is currently a director of Digital Creative Development Corp.,
Datametrics Corp., Arthur Treacher's, Inc., Comstar Interactive Inc., Heavy.com,
Inc. and the NYC Industrial Development Agency. Mr. Herman has a B.S. from the
State University of New York at Albany.
43
DONALD PERLYN. Mr. Perlyn became a director of IMSI in August 2001, pursuant to
the merger agreement between IMSI and DCDC. He was elected to the Board of
Directors of DCDC in November 1998. Mr. Perlyn joined Miami Subs Corporation in
May 1989. He was promoted to the position of President of Miami Subs Corporation
in July of 1998. In October of 1999 and as a result of the acquisition of Miami
Subs Corp. by Nathan's Famous Inc. (a DCDC subsidiary) Mr. Perlyn assumed the
position of Executive Vice President of Nathan's Famous, Inc. in addition to his
responsibilities at Miami Subs. Mr. Perlyn is also a member of the Board of
Directors of Nathan's Famous, Inc. Mr. Perlyn is an attorney and a 32 year
veteran of the of the restaurant industry with extensive experience in
restaurant development, operations and franchising.
MAURICE SONNENBERG. Mr. Sonnenberg became a director of IMSI in August 2001,
pursuant to the merger agreement between IMSI and DCDC. He was elected to the
Board of Directors of DCDC in November 1998. Mr. Sonnenberg has served as an
advisor to five United States Presidential Administrations on matters of
finance, international trade, foreign policy and intelligence matters. Among his
vocational activities he presently serves as the Senior International Advisor to
the investment-banking firm of Bear Stearns & Co. Inc. and as the Senior
International Advisor to the law firm of Manatt, Phelps and Philips, LLP (with
offices in Washington DC and Los Angeles).
EVAN BINN. Mr. Binn became a director of IMSI in August 2001, pursuant to the
merger agreement between IMSI and DCDC. Mr. Binn was elected to the Board of
Directors of DCDC in November 1998. Mr. Binn received his bachelor's degree from
University of California at Los Angeles and is a certified public accountant in
California. He is a member of the California Society of Certified Public
Accountants and has maintained a practice in Los Angeles, California for
thirty-seven years.
SIGURDUR JON BJORNSSON. Mr. Bjornsson became a director of IMSI in August 2001,
pursuant to the merger agreement between IMSI and DCDC. In March 2000, Mr.
Bjornsson was elected to the Board of Directors of DCDC. Mr. Bjornsson currently
serves as Vice President and Financial director of EFA Venture Inc., a venture
capital firm that he joined in July 1997. Before joining EFA Venture, Inc., Mr.
Bjornsson served as a sales manager at Icelandic American Trading Company (the
sole distributor and marketer of Protector and Gamble products in Iceland). Mr.
Bjornsson also serves on a number of corporate boards in Iceland, including
Icebird Airline, Scandinavian Pizza Company, New Industries, and Betware.com
Ltd. Mr. Bjornsson graduated from the University of Iceland with a BS major in
Business Finance in 1993.
ROBERT MAYER became a director in February 2000. Mr. Mayer served as the
Company's Vice President of Sales from 1990 until 1995 and then as Executive
Vice President of Worldwide Sales until March 2000 when he left the Company to
serve as a Vice President at Adventa.com, Inc. Mr. Mayer rejoined the IMSI team
in November 2000 as Executive Vice President. Mr. Mayer also served as a
director from 1985 until May 1999. Mr. Mayer received a Bachelors of Arts degree
from the University of California at Berkeley, and Masters of Science degree
from the University of Washington.
EXECUTIVE OFFICERS
GORDON LANDIES. Mr. Landies joined IMSI on September 1, 2001 as President
subsequent to the merger agreement between IMSI and DCDC. He brings to the
Company 17 years of experience in management of software companies. Before
joining IMSI Mr. Landies was a consultant and managing partner in GL Ventures,
LLC providing services to software publishing and media companies. In 1999, Mr.
Landies was the General Manager of the Home and Game division of Mattel
Interactive. From 1994 to 1998 Mr. Landies held positions of Senior Vice
President of sales and Executive Vice President for Mindscape, a $100+ million
consumer software company. From 1990 to 1994 he was Vice President of sales for
The Software Toolworks. Mr. Landies previously served on the Board of Directors
of IMSI from 1995 to 1998 as well as on the Boards of Directors of Mindscape,
Inc, Entertainment Universe, Inc. and several other private organizations. Mr.
Landies graduated in 1981 from Northern Illinois University with a Masters of
Business Administration and holds a B.S. in economics from Elmhurt College.
44
PAUL JAKAB. Mr. Jakab rejoined IMSI on September 1, 2001 as Chief Operating
Officer subsequent to the signing of the merger agreement between IMSI and DCDC.
Until May 2001 Mr. Jakab had been Executive Vice President, International Sales
and Business development for IMSI. He brings to the Company more than twenty
years of management experience with a variety of technology companies. Before
joining IMSI, Mr. Jakab worked with a variety of Internet companies in a
consulting capacity, and until 1998 Mr. Jakab was responsible for the
international software business of Mindscape, Inc. From 1991 until 1994 Mr.
Jakab was the general counsel of Mindscape and advised the company on a full
range of legal issues. In the 1980's Mr. Jakab served as general counsel or
corporate counsel to Silicon Valley companies Atari, Inc., Apple Computer, and
Worlds of Wonder, Inc. Mr. Jakab holds an M.B.A. from Stanford University, a
J.D. from Columbia University and a B.A. from Harvard College. He is also a
member of both the California and Washington, D.C. bar associations.
VINCENT DELORENZO. Mr. DeLorenzo joined IMSI on September 1, 2001 as Chief
Financial Officer subsequent to the signing of the merger agreement between IMSI
and DCDC. Mr. DeLorenzo is also the CFO of DCDC. Prior to joining DCDC, Mr.
DeLorenzo successfully owned and operated three retail automotive franchises
with annual sales of over $45 million. From 1989 to 1993 he served as Chief
Financial Officer and Deputy CEO of a privately held $400 million vertically
integrated retail automotive company. Beginning in 1971, Mr. DeLorenzo was with
Kidde, Inc., a $3 billion conglomerate, where he served as Vice President of
Finance. He was responsible for acquisitions and divestitures, all public and
regulatory reporting, and financial planning and forecasting for domestic and
international subsidiaries. He began his career with Price Waterhouse & Co.
KATHLEEN MOUNTANOS has been with IMSI for the last 7 of her 12 years in the
software industry. During her tenure, Kathleen expanded the IMSI sales
department to include corporate, government, and educational sales divisions.
She is currently Vice President of North American Sales. Ms. Mountanos received
her BA in Liberal Arts from St. Mary's College, and her Master's Degree from the
University of San Francisco.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's directors and executive
officers, and persons who own more than ten percent of a registered class of the
Company's equity securities, to file with the Commission initial reports of
ownership and reports of changes in ownership of the Company's Common Stock and
other equity securities of the Company. Officers, directors and greater than ten
percent shareholders are required by the Commission's regulations to furnish the
Company with copies of all Section 16(a) forms they filed.
The Company has not been provided with copies of any forms filed by officers,
directors, or ten percent shareholders. The Company has informed the officers,
directors, and ten percent shareholders of the filing requirements. Each
delinquent filer has represented that they will file the required forms and
provide the copies to the Company within three days of such filings.
45
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth all compensation awarded, earned or paid for
services rendered in all capacities to the Company and its subsidiaries during
each of the fiscal years ended June 30, 2001, 2000 and 1999 to (i) the Company's
chief executive officer during fiscal 2001; and (ii) the Company's four most
highly compensated executive officers other than the CEO who were serving as
executive officers at the end of fiscal 2001.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM
------------------------------------------------------------------- COMPENSATION
OTHER AWARDS
NAME AND FISCAL ANNUAL SECURITIES
PRINCIPAL POSITIONS YEAR SALARY($)(1) BONUS($)(1) COMPENSATION($)(2) UNDERLYING OPTIONS
------------------- ------ ------------ ----------- ------------------ ------------------
Geoffrey B. Koblick(3) 2001 211,875 20,450 9,314 --
President and Chief 2000 222,099 -- 7,661 280,750
Executive Officer 1999 200,000 9,706 7,252 --
Michael Gariepy(4) 2001 169,125 -- -- --
Vice President and General 2000 77,682 -- -- --
Manager of Design.net Project 1999 127,421 -- 2,990 206,672
Peter Gariepy(5) 2001 142,581 5,000 -- --
President of ArtToday.com 2000 133,000 5,000 -- 10,672
1999 177,816 -- 2,990 --
Jeffrey Morgan(6) 2001 132,604
2000 43,901 -- -- 125,000
Kathleen Mountanos(7) 2001 141,188 50,239 --
Vice President North 2000 130,516 56,987 -- 132,625
American Sales 1999 68,282 68,554 -- --
Robert Mayer(8)(9) 2001 107,638 26,887 69,675 --
Executive Vice President, 2000 162,763 -- 5,032 132,500
Worldwide Sales 1999 180,009 4,162 7,367 --
---------------------
(1) Amounts stated above are the actual amounts received. Amounts paid in
fiscal 2001 are based upon the following annual salaries: Koblick
$220,000, M. Gariepy $180,000, P. Gariepy $149,000, Mountanos $150,000,
Morgan $150,000 and Mayer $180,000. On May 15, 2001 all the executives
accepted a reduction in their annual salaries to $120,000 Mr. Koblick's
salary for 2000 includes $108,333 of severance.
(2) Includes payments of medical and dental insurance premiums by the
Company.
(3) Mr. Koblick was the previous Chief Operating Officer, Chairman of the
Board of Directors and General Counsel until May 1999. From July 1999
until January 2000, Mr. Koblick was paid severance, and he served as a
Consultant to the Company. Mr. Koblick rejoined the Company as President
and Chief Executive Officer on February 15, 2000. He resigned from his
position with IMSI on August 31, 2001.
(4) Mr. Michael Gariepy served as Vice President of Sales for ArtToday.com
until August 2, 1999. Mr. Gariepy rejoined the Company in his current
role on February 28, 2000.
(5) Mr. Peter Gariepy has been with ArtToday.com since the company's
founding in 1987 and was named President in July 1999.
46
(6) Mr. Morgan joined IMSI in February 2000 as Chief Financial Officer. He
resigned from his position with IMSI on August 31, 2001.
(7) Ms. Mountanos has been employed by IMSI for 7 years, and was named Vice
President of North American sales on July 1, 1999.
(8) Mr. Mayer worked for IMSI on a full-time basis through March 31, 2000,
at which time he became a consultant to the Company. Mr. Mayer rejoined
the Company in his current capacity in November 2000.
(9) Includes the forgiveness in June 2001 of a note receivable owed by Mr.
Mayer to IMSI in the amount of $69,675.
OPTION GRANTS
During fiscal 2001 there were no individual grants of options to acquire the
Company's Common Stock to any Named Person.
OPTIONS EXERCISED
The following table sets forth information with respect to the options exercised
during fiscal 2001 by the Named Persons, including the aggregate value of gains
on the date of exercise. In addition, this table includes the number of shares
covered by both exercisable and non-exercisable stock options as of June 30,
2001. Also reported are the values for "in-the-money" options, which represent
the positive spread between the exercise price of any such existing stock
options and the fiscal year-end price of the Common Stock.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
FY-END OPTION/SAR VALUES
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS/SARS IN-THE-MONEY OPTIONS
AT JUNE 30, 2001 (1)(2) AT JUNE 30, 2001 ($)(3)
VALUE ------------------------- -------------------------
NAME EXERCISE # REALIZED($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- ---------- ----------- ------------------------- -------------------------
Geoffrey B. Koblick -- -- 136,665/273,335 0/0
Michael Gariepy -- -- 66,666/133,334 0/0
Peter Gariepy -- -- 6,000/9,000 0/0
Robert Mayer -- -- 133,195/21,805 0/0
Kathleen Mountanos -- -- 60,663/73,987 0/0
Jeffrey Morgan -- -- 41,666/83,334 0/0
(1) These options, which have a four-year vesting period, become exercisable
over time based on continuous employment with the Company and in certain
cases are subject to various performance criteria or vest in full upon
acquisition of the Company. As of August 31, 2001 all of the options
became fully exercisable when the Company signed the plan of merger with
DCDC and underwent a change in control.
(2) Does not include options held by Geoffrey B. Koblick and Michael Gariepy
in the Company's subsidiary, ArtToday.com, exercisable at $15.43 per
share.
47
(3) Based on the difference between the market price of the Common Stock at
June 30, 2001 ($.28 per share), and the aggregate exercise prices of
options shown in the table.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of October 9, 2001, the beneficial ownership
of the Company's Common Stock by (i) each person who is known by the Company to
own of record or beneficially more than five percent (5%) of the Company's
Common Stock, (ii) each director or nominee, (iii) each other executive officer
named in the Summary Compensation Table, above in Item 11, and (iv) all
directors and executive officers as a group. Except as otherwise indicated, the
shareholders listed in the table have sole voting and dispositive power with
respect to the shares indicated, subject to community property laws where
applicable. The business address of Capital Ventures International is in care of
Heights Capital Management, 425 California Street, Suite 1100, San Francisco,
California 94104. The business address of Baystar Capital L.P. is 505 Montgomery
Street, 20th Floor, San Francisco, California 94111. The business address of ROI
Capital Management is 17 East Sir Francis Drake Boulevard, Suite 225, Larkspur,
California 94939. The business address of Messrs. Mayer, Koblick, Michael
Gariepy, Landies, Jakab, and Ms. Mountanos is 75 Rowland Way, Novato, California
94945. The business address of Mr. Morgan is 3208 Roger Avenue, Walnut Creek,
California 94596. The business address of Mr. Peter Gariepy is 3720 North Dodge,
Suite Z, Tucson, Arizona, 85716. The business address of Mr. Boyer is 17 East
Sir Francis Drake Boulevard, Suite 225, Larkspur, California 94939. The business
address of Mr. Hall is 2600 Campus Drive, Suite 205, San Mateo, California,
94413. The business address of Mr. Sonnenberg is 245 Park Avenue, 19TH floor,
New York, New York 10167. The business address of Mr. Perlyn is 6300 Northwest
31st Avenue, Ft. Lauderdale, Florida 33309. The business address of Mr. Binn is
7240 Hayvenhurst Avenue, Suite 230, Van Nuys, California 91406. The business
address of Mr. Bjornsson is Sidumuli 28, 108 Reykjavik, Iceland. The business
address of Messrs Galloway and Herman is 1325 6th Avenue, New York, New York
10019. The business address of Mr. Wade and Mr. DeLorenzo is 67 Irving Place
North 4th floor, New York, New York 10003. The business address of Mr.
Thorvaldsson is Bergstadastraeti 77, 101 Reykjavik, Iceland.
NAME AND ADDRESS
OF BENEFICIAL OWNER SHARES BENEFICIALLY OWNED (1) PERCENTAGE OF CLASS(1)
------------------- ----------------------------- ----------------------
Capital Ventures, Inc (2) 2,631,291 26.71%
Geoffrey Koblick 807,600 7.95%
Baystar Capital, L.P. (3) 745,894 7.31%
Mark Boyer 662,265 6.75%
Michael Gariepy 587,306 5.91%
Robert Mayer 584,586 5.90%
ROI Capital Management 521,765 5.37%
Gordon Landies 364,560 3.62%
Kathleen Mountanos 163,250 1.65%
Jeffrey Morgan 125,000 1.27%
Richard Hall 107,663 1.10%
Paul Jakab 104,999 1.07%
Peter Gariepy 80,951 *
Martin Wade -- --
Vincent DeLorenzo -- --
Bruce Galloway -- --
Skuli Thorvaldsson -- --
Gary Herman -- --
Donald Perlyn -- --
Maurice Sonnenberg -- --
Evan Binn -- --
Sigurdur Jon Bjornsson -- --
All directors and executive
officers as a group (19 persons) 3,588,180 31.21%
----------
* Less than one percent of the Company's outstanding common stock.
48
(1) Assumes that the person has exercised, to the extent exercisable on or
before 60 days from the date of the table, all options, convertible
securities, and warrants to purchase Common Stock held by such person
and that no other person has exercised any outstanding options,
convertible securities or warrants.
(2) Includes 131,291 shares issuable to Capital Ventures, Inc. on the
exercise of a warrant.
(3) Includes 242,010 shares issuable to Baystar on the conversion of a note
and 250,000 shares issuable to Baystar on the exercise of a warrant.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During fiscal 2001, the Company forgave a note receivable from Martin Sacks,
former President and Chief Executive Officer of IMSI. The note, deemed non
recoverable, amounted to $160,598.
In May 2000, IMSI licensed certain rights related to Org Plus to Human Concepts,
Inc; a company controlled by Mr. Martin Sacks the former President and CEO of
IMSI. Human Concepts, Inc. took over development of the product and pays IMSI
royalties on sales of the product. IMSI also retained rights to sell to certain
customers. Net revenues from sales of OrgPlus were approximately $1.5 million
during fiscal year 2001.
The Company also forgave during fiscal 2001 a note owed by Robert Mayer who
currently serves as Executive Vice President of direct sales and marketing. The
note amounted to $69,675.
There was a severance agreement between IMSI and Geoffrey Koblick. Between May
1999 and January 2000, Mr. Koblick acted as a consultant to the Company and
received $150,000 as separation payments. IMSI also forgave a promissory note in
the amount of $35,000 owed by Mr. Koblick. During the severance period, Mr.
Koblick was entitled to exercise his stock options and vesting continued. Mr.
Koblick returned as President and CEO on February 15, 2000.
Also, Jeffrey B. Morgan, former Chief Financial Officer of the Company, received
a $75,000 severance package when he resigned his position with the Company on
August 31, 2001. The agreement calls for payments of $60,000 (representing 50%
of Mr. Morgan's annual base salary) payable in 12 equal installments starting in
September 2001 and a $15,000 payment made in September 2001.
As of September 2001 the Company entered into individual management agreements
with Gordon Landies and Paul Jakab pursuant to which Mr. Landies was named
President of the Company and Mr. Jakab was named Chief Operating Officer of the
Company. As compensation for their services, each executive is to receive a
monthly base salary of $13,000; options or warrants totaling 350,000; a
quarterly bonus of up to 25% of their base pay, depending upon the extent to
which profit and cash goals (to be agreed to by the Company's Executive
Committee) are met; and the right to participate in the Company's benefit plans.
Also in September 2000, the Company entered into a six-month management
agreement with DCDC to formalize the arrangement whereby DCDC is to provide
management services to the Company in connection with the Company's day-to-day
business in exchange for a fee of $50,000 per month. Specifically, DCDC (through
Martin Wade acting as the Company's CEO, Vincent De Lorenzo acting as CFO, and
from time to time various assistants to the CFO) will provide the Company
advisory services in the areas of financial management, insurance, investment
banking, and business planning, among others.
49
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a) DOCUMENTS FILED AS PART OF THIS ANNUAL REPORT ON FORM 10-K:
1. Financial Statements
Independent Auditors' Report for the years ended June 30, 2001, 2000 and 1999 51
Consolidated Balance Sheets at June 30, 2001 and 2000 52
Consolidated Statements of Operations for the years ended June 30, 2001, 2000, and 1999 53
Consolidated Statements of Shareholders' Equity for the years ended June 30, 2001, 2000, and 1999 54
Consolidated Statements of Cash Flows for the years ended June 30, 2001, 2000, and 1999 55-56
Notes to Consolidated Financial Statements 57
2. Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts for the years ended June 30, 2001, 2000, and 1999 77
(b) REPORTS ON FORM 8-K: 78
(c) EXHIBITS: SEE EXHIBIT INDEX 82
50
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
International Microcomputer Software, Inc.
We have audited the accompanying consolidated balance sheets of International
Microcomputer Software, Inc. and subsidiaries (the "Company") as of June 30,
2001 and 2000, and the related consolidated statements of operations,
shareholders' equity, and cash flows for each of the three years in the period
ended June 30, 2001. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
International Microcomputer Software, Inc. and subsidiaries as of June 30, 2001
and 2000, and the consolidated results of their operations and their
consolidated cash flows for each of the three years in the period ended June 30,
2001, in conformity with accounting principles generally accepted in the United
States of America.
We have also audited Schedule II as listed in the Index at Item 14(a) 2 for each
of the years ended June 30, 2001, 2000 and 1999. In our opinion, this schedule
presents fairly, in all material respects, the information required to be set
forth therein.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As shown in the financial statements,
the Company incurred a net loss of $1,174,000 during the year ended June 30,
2001, and, as of that date, the Company's current liabilities exceeded its
current assets by $17,480,000 and it was in default under its lending
agreements. These factors, among others, as discussed in Note 1 to the financial
statements, raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note 1. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ GRANT THORNTON LLP
----------------------------
San Francisco, California
September 28, 2001, except for Note 13 and the last sentence of Note 4 as to
which the date is October 9, 2001
51
INTERNATIONAL MICROCOMPUTER SOFTWARE, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
2001 2000
-------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 1,230 $ 1,477
Receivables, less allowances for doubtful accounts,
discounts and returns of $182 and $995 940 1,043
Inventories 113 189
Prepaid royalties and licenses 229 1,087
Other current assets 362 390
-------- --------
Total current assets 2,874 4,186
Fixed assets, net 580 770
Capitalized software development costs, net 1,305 1,918
Capitalized brand and goodwill, net 1,229 1,760
-------- --------
Total assets $ 5,988 $ 8,634
======== ========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Current portion of long-term debt $ 11,682 $ 12,430
Trade accounts payable 2,358 2,514
Accrued interest and penalties payable 2,293 859
Accrued and other liabilities 2,717 2,151
Accrued restructuring charges -- 129
Accrued arbitration award 131 2,717
Deferred revenue 1,173 2,385
-------- --------
Total current liabilities 20,354 23,185
Accrued arbitration award 702 --
Long-term debt and other obligations 179 302
-------- --------
Total liabilities 21,235 23,487
Shareholders' Deficit:
Common stock, no par value; 300,000,000 authorized;
Issued and outstanding 9,695,740 in 2001 and 9,469,366 in 2000 28,754 28,271
Accumulated deficit (44,008) (42,834)
Accumulated other comprehensive income (loss) 7 (3)
Notes receivable from shareholders -- (250)
Deferred compensation -- (37)
-------- --------
Total shareholders' deficit (15,247) (14,853)
-------- --------
Total liabilities and shareholders' deficit $ 5,988 $ 8,634
======== ========
See Notes to Consolidated Financial Statements
52
INTERNATIONAL MICROCOMPUTER SOFTWARE, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2001 2000 1999
-------- -------- --------
Net revenues $ 12,245 $ 19,162 $ 37,679
Product costs 3,406 10,190 25,424
-------- -------- --------
Gross margin 8,839 8,972 12,255
Costs and expenses:
Sales and marketing 2,732 5,420 18,387
General and administrative 4,243 7,848 8,181
Research and development 2,634 4,003 8,069
Restructuring charge -- (280) 1,508
-------- -------- --------
Total operating expenses 9,609 16,991 36,145
Operating loss (770) (8,019) (23,890)
Other income (expense):
Gain on product line sales 285 1,490 --
Interest and other expense, net (2,164) (3,725) (1,880)
Loss on disposition of fixed assets (13) (1,607) --
Loss on liquidation of foreign
subsidiaries -- (2,043) --
Settlement agreements (287) -- --
Arbitration award 2,041 (2,435) --
-------- -------- --------
Total other expense (138) (8,320) (1,880)
-------- -------- --------
Loss from continuing operations
before income taxes (908) (16,339) (25,770)
Income tax expense (benefit) (19) 532 237
-------- -------- --------
Loss from continuing operations (889) (16,871) (26,007)
Cumulative effect of change in
accounting principle (285) -- --
Extraordinary loss on
extinguishment of debt -- -- (959)
-------- -------- --------
Net loss $ (1,174) $(16,871) $(26,966)
======== ======== ========
Basic and diluted loss per share $ (0.12) $ (2.22) $ (4.30)
======== ======== ========
Shares used in calculating basic and
diluted per share information: 9,687 7,590 6,275
See Notes to Consolidated Financial Statements
53
INTERNATIONAL MICROCOMPUTER SOFTWARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED JUNE 30, 2001, 2000, AND 1999
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Accumulated
Retained Other Notes
Common Stock Earnings Comprehensive Comprehensive Receivable
--------------------- (Accumulated Income Income from Deferred
Shares Amount Deficit) (Loss) (Loss) Shareholders Compensation Total
--------- --------- ------------- ------------- ------------- ------------ ------------ ---------
BALANCE AT
JUNE 30, 1998 5,684,179 $ 12,718 $ 1,003 $ (25) $ (285) $ -- $ 13,411
Issuance of common
stock under
stock bonus and
option plans 163,365 960 960
Issuance of
common stock
related to:
Acquisitions 194,508 1,107 1,107
Settlement of
debt 503,913 5,696 5,696
ArtToday.com
agreement 50,476 311 311
Capital Ventures
agreement 437,637 5,000 5,000
Value attributed
to warrants:
Silicon Valley Bank 776 776
Baystar Capital, L.P. 1,162 1,162
Common stock
received in
satisfaction of
receivable (20,000) (320) (320)
Forgiveness of
note receivable
from shareholder 35 35
Deferred
compensation 116 116
Net loss (26,966) $ (26,966) (26,966)
Foreign currency
translation
adjustment 154 154 154
=========
Comprehensive Loss $ (26,812)
========= ========= ========= ========= --------- ========= ========= =========
BALANCE AT JUNE 30, 1999 7,014,078 27,526 (25,963) 129 (250) -- 1,442
--------- --------- ------------- ------------- ---------- --------- --------- ---------
Issuance of common
stock under
stock bonus and
option plans 7,000 3 3
Issuance of
common stock
related to:
Price
Protection
agreement with
Capital
Ventures 2,062,363 --
Settlement of debt 385,925 628 (37) 591
Liquidation of
subsidiaries (139) $ (139) (139)
Issuance of
warrants 114 114
Net loss (16,871) (16,871) (16,871)
Foreign currency
translation
adjustment 7 7 7
=========
Comprehensive Loss $ (17,003)
========= ========= ========= ========= ========= ========= ========= =========
BALANCE AT
JUNE 30, 2000 9,469,366 $ 28,271 $ (42,834) $ (3) $ (250) $ (37) $ (14,853)
========= ========= ========= ========= ========= ========= =========
Issuance of common
stock under
stock bonus and
option plans 41,369 11 11
Deferred
compensation 37 37
Issuance of
common stock
related to:
Settlement
(ArtToday.com) 185,005 187 187
Forgiveness of
shareholder
receivable 250 250
Net loss
(before
cumulative effect
of change in
accounting
principle) (889) $ (889) (889)
Cumulative effect
of change in
accounting
principle 285 (285) (285) --
Foreign currency
translation
adjustment 10 10 10
=========
Comprehensive Loss $ (1,164)
========= ========= ========= ========= ========= ========= ========= =========
BALANCE AT
JUNE 30, 2001 9,695,740 $ 28,754 $ (44,008) $ 7 $ -- $ -- $ (15,247)
========= ========== ========= ========= ========= ========= =========
See Notes to Consolidated Financial Statements
54
INTERNATIONAL MICROCOMPUTER SOFTWARE, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30
(IN THOUSANDS)
2001 2000 1999
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,174) $(16,871) $(26,966)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET
CASH PROVIDED (USED) BY OPERATING ACTIVITIES:
Depreciation and amortization 2,561 3,848 4,504
Liquidation of subsidiaries, net of cash -- 2,043 --
Net provision for bad debt (139) 306 479
Net provision for returns (433) 448 2,251
Net provision for rebates -- -- 98
Net provision for price discounts (241) 241 536
Provision for inventory obsolescence (151) 311 238
Deferred taxes -- 465 4,128
Forgiveness of notes receivable from shareholders 250 -- 35
Loss on disposal of fixed assets, net of cash 9 1,607 232
Cumulative effect of change in accounting principle 285 -- --
Restructuring charges -- (280) 3,167
Foreign currency translation 1 7 235
Charges related to stock issuance and warrant amortization 224 1,887 1,271
Gain on product line and domain name sale (285) (1,490) --
CHANGES IN ASSETS AND LIABILITIES:
Receivables 916 1,791 4,568
Inventories 227 1,511 1,232
Income taxes receivable -- 3,751 (3,751)
Other current assets 28 7 51
Trade accounts payable 194 522 (422)
Accrued and other liabilities 216 (2,031) 1,084
Accrued interest and penalties 1,434 781 78
Accrued arbitration award (1,884) 2,717 --
Accrued restructuring charges (129) (1,031) 1,440
Deferred revenue (1,212) (793) 2,771
-------- -------- --------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 697 (253) (2,741)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Liquidation of subsidiaries -- (992) --
Proceeds from product line sales 285 1,555 --
Purchase of equipment (378) (314) (1,190)
Proceeds from sale of fixed assets 5 40 --
Software development costs and in-process technologies -- (159) (2,171)
Purchase of goodwill, trademark and brand -- -- (2,404)
Other (6) -- 36
-------- -------- --------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES (94) 130 (5,729)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Credit line borrowings -- -- 2,025
Credit line repayments (670) (804) (4,573)
Borrowings (repayments) under term loans -- (750) 7,496
Capital lease and other obligations repayment (201) (530) (992)
Proceeds from issuance of common stock 11 3 6,183
-------- -------- --------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (860) (2,081) 10,139
-------- -------- --------
Effect of exchange rate change on cash and cash equivalents 10 -- (81)
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (247) (2,204) 1,588
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,477 3,681 2,093
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF THE YEAR $ 1,230 $ 1,477 $ 3,681
======== ======== ========
See Notes to Consolidated Financial Statements
55
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 562 $ 1,100 $ 1,584
Income taxes paid $ -- $ 11 $ 308
SUPPLEMENTAL DISCLOSURES OF NON-CASH FINANCING AND
INVESTING ACTIVITIES
Equipment acquired through capital lease obligations $ 25 $ -- $ 984
Common stock received in satisfaction of receivable -- -- 320
Repayment of payables and accrued and other liabilities with
IMSI common stock -- 128 3,090
Equipment disposals subject to capital lease obligations -- 187 --
Repayment of term loans with IMSI common stock -- 500 2,606
Acquisition of technology and assets in exchange for:
Notes payable -- -- 4,030
Common stock -- -- 1,107
See Notes to Consolidated Financial Statements
56
INTERNATIONAL MICROCOMPUTER SOFTWARE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
International Microcomputer Software, Inc. ("IMSI" or the "Company") was
incorporated in California in November 1982. IMSI has wholly-owned subsidiaries
located in Tucson, Arizona and Australia. IMSI develops and publishes software
in the precision design (computer assisted drawing), graphic design (visual
content), business applications, and utilities categories targeted to small to
medium-size businesses, professionals, and consumers.
BASIS OF PRESENTATION AND REALIZATION OF ASSETS
The financial statements have been prepared on a basis that contemplates IMSI's
continuation as a going concern and the realization of assets and liquidation of
liabilities in the ordinary course of business. The Company has an accumulated
deficit of $44,008,000 and negative working capital of $17,480,000 at June 30,
2001. In January 2000, IMSI ceased interest and principal payments on all
borrowings, debt or other interest bearing obligations, with the exception of
monthly interest payments to Union Bank of California. Accordingly, the Company
is in default of various covenants of these agreements. Since February 18, 2000
IMSI has operated under a standstill agreement with its creditors that continues
on a month-to-month basis so long as IMSI demonstrates progress in achieving a
debt settlement acceptable to the creditors. Since the arrival of a new
management team in February 2000, the Company has been simultaneously seeking a
restructure of its debt in combination with an investment into the Company.
On August 31, 2001, IMSI entered into a merger agreement with Digital Creative
Development Corporation ("DCDC") a publicly traded company on the Nasdaq OTC
Bulletin Board (Nasdaq OTC/BB:DCDC) wherein IMSI is to issue shares of IMSI
common stock totaling 51% of its outstanding shares to DCDC shareholders, in
exchange for all the common stock of DCDC and cancellation of the note purchased
from Union Bank of California by DCDC. The merger agreement was approved by all
of the directors of DCDC and IMSI. Also, 52% of the outstanding shareholders of
IMSI have agreed to vote in favor of the merger. The merger is still subject to
DCDC shareholder approval. Along with the execution of the merger agreement, the
Company is in the process of restructuring its outstanding debt as follows:
- On August 31, 2001 DCDC purchased the Union Bank note for $2.5
million (with a book value of $3.6 million at the date of
purchase) and agreed to not enforce collection of the note pending
the merger. On September 27, 2001, IMSI and DCDC entered into an
addendum to the merger agreement which provided that in the event
the merger agreement is terminated for any reason, the parties
agree that IMSI shall pay DCDC the Union Bank note principal in 72
equal monthly payments of $49,722 plus interest at LIBOR plus 3%.
- On October 9, 2001 the Company signed an agreement with Silicon
Valley Bank for a settlement of its existing secured note, which
had a balance (including penalties and interest) of approximately
$3.2 million; the settlement provides for a new secured promissory
note for $1.2 million with 12 monthly payments of $100,000 plus
interest at 12% interest per annum.
57
- On July 27, 2001, and as subsequently amended on September 24,
2001 and October 5, 2001, IMSI and Imageline agreed on the
settlement of the arbitration award issued in January 2000 in
favor of Imageline. The settlement, effective September 30, 2001,
calls for IMSI to provide a variety of considerations including
the following:
- The dismissal of any further appeals of the award.
- Cash installments over a 12-year period, starting October
2001. These payments will be made as follows: four equal
quarterly payments of $78,750 beginning on September 30,
2002; twelve monthly payments of $11,500 beginning on
October 5, 2001; and, 132 monthly payments of $6,500
thereafter. These payments have a net present value of
approximately $833,000 assuming a 12% discount rate.
- Rights to royalties, licenses, and inventories pertaining
to the IMSI MasterClips line of products.
- A percentage of any net recovery IMSI obtains from
indemnification claims IMSI has against third parties
associated with the original circumstances leading to the
arbitration award.
- On July 30, 2001 Baystar Capital and IMSI entered into an
agreement wherein Baystar agreed to accept payment equal to 10% of
the balance of the note plus reduced interest, penalty interest
and penalties that accrue through the closing of the DCDC merger.
Payments would be made in four quarterly payments beginning
September 30, 2002. Interest will accrue at 8% per annum from the
closing date of the merger until the September 2002 payment, and
at 12% per annum thereafter until the claim is paid in full on or
before June 30, 2003. Assuming the merger had closed as of August
31, 2001, the amount payable to Baystar would have been $710,000.
- IMSI is in the process of negotiating with its remaining unsecured
creditors the possibility of discounting down to 10% all
outstanding amounts owed to them (including interest from February
1, 2000 at the rate of 8% per annum). These payments will be made
in quarterly installments beginning no later than September 30,
2002.
The Company believes that its merger with DCDC, along with the reduction in its
liabilities under planned and completed settlements, will allow IMSI to continue
as a going concern, become profitable in the future and provide a remedy to its
working capital needs. In addition, the Company will continue to engage in
discussions with third parties concerning the sale or license of its remaining
non-core product lines; the sale or license of part of its assets; and raising
additional capital investment through the issuance of stock and short or long
term debt financing.
The large accumulated losses of IMSI and the negative amount of shareholder's
equity as of June 30, 2001 will make it difficult for IMSI to obtain new debt
financing or to obtain equity financing at attractive prices. In addition, it is
likely that the continuing company after the merger will require additional
capital, through equity or financing arrangements.
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.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of IMSI and its
wholly owned subsidiaries. All significant inter-company balances and
transactions have been eliminated in consolidation. During the third quarter of
fiscal year 2000, the Company began the liquidation of its European and South
African subsidiaries. Upon
58
appointment of a liquidator over the assets of the subsidiaries, the Company no
longer had control, and therefore ceased consolidating these subsidiaries in its
financial statements.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and the accompanying notes. The amounts IMSI will ultimately incur or
recover could differ materially from IMSI's current estimates.
REVENUE RECOGNITION
Revenue is recognized when earned, in accordance with American Institute of
Certified Public Accountants Statement of Position ("SOP") 97-2, Software
Revenue Recognition, and SOP 98-9, Modification of SOP 97-2, With Respect to
Certain Transactions. Revenue from packaged product sales to distributors,
resellers and end users is recorded when persuasive evidence of an arrangement
exists (generally a purchase order), product has been delivered, the fee is
fixed and determinable, and a collection of the resulting account is probable.
For software delivered via the Internet, revenue is recorded when the customer
downloads the software. Subscription revenue is recognized ratably over the
contract period, generally 12 to 15 months. Revenue from hybrid products is
allocated to the underlying components based on the ratio of the value of each
component to the total price and each portion is recognized accordingly.
Non-refundable advanced payments received under license agreements with no
defined terms are recognized as revenue when the customer accepts the delivered
software. Revenue from software licensed to developers, including amounts earned
in excess of non-refundable advanced payments, is recorded as the developers
ship products containing the licensed software. Revenue from minimum guaranteed
royalties in republishing agreements is recognized ratably over the term of the
agreement. Royalties in excess of the guaranteed minimums are recognized when
collected. Costs related to post-contract customer support, which are minimal
and include limited telephone support and online maintenance, are accrued. Sales
to distributors permit limited rights of return upon termination or when a
product is defective. Reserves for returns, price discounts and rebates are
estimated using historical averages, open return requests, channel inventories,
recent product sell-through activity and market conditions.
CONCENTRATIONS
Financial instruments that potentially subject IMSI to concentrations of credit
risk consist of cash and cash equivalents and accounts receivable. IMSI places
its cash and cash equivalents at well-known, quality financial institutions. At
times, cash balances held at financial institutions are in excess of federally
insured limits. IMSI sells a majority of its products to end-users through
republishers and telemarketing efforts. Although IMSI attempts to prudently
manage and control accounts receivable and performs ongoing credit evaluations
in the normal course of business, the Company generally requires no collateral
on its product sales.
Digital River represented 13.7% of IMSI's gross revenues during fiscal year
2001. No single customer accounted for more than 10% of IMSI's revenue for
fiscal year 2000. Ingram Micro represented 18.3% and Tech Data represented 9.0%
of IMSI's net revenues for fiscal 1999. Sales to these customers are reflected
in the Company's North American segment.
ROYALTY AGREEMENTS
IMSI has entered into agreements whereby it is obligated to pay royalties on
software published. IMSI generally pays royalties based on a percentage of sales
on respective products or on a fee per unit sold basis. The Company expenses
software royalties as product costs during the period in which the related
revenues are recorded.
59
CASH AND CASH EQUIVALENTS
IMSI considers all highly liquid investments purchased with an original maturity
of three months or less to be cash equivalents.
CAPITALIZED SOFTWARE DEVELOPMENT COSTS AND LICENSE FEES
Costs incurred in the initial design phase of software development are expensed
as incurred in research and development. Once the point of technological
feasibility is reached, direct production costs are capitalized in compliance
with Statement of Financial Accounting Standards ("SFAS") No. 86, "Accounting
for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed."
IMSI ceases capitalizing computer software costs when the product is available
for general release to customers. Costs associated with acquired completed
software are capitalized. Total capitalized software development costs at June
30, 2001 and 2000 were $3,841,000, less accumulated amortization of $2,536,000
and $1,923,000 respectively.
IMSI amortizes capitalized software development costs and visual content 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) 18, 36, or 60 months, depending on the product. IMSI evaluates the net
realizable value of each software product at each balance sheet date and records
write-downs to net realizable value for any products for which the carrying
value is in excess of the estimated net realizable value. Total amortization
expense of capitalized software and license fees, all of which was charged to
product costs, was $613,000, $731,000, and $3,000,000 in fiscal years 2001,
2000, and 1999, respectively.
INVENTORIES
Inventories, consisting primarily of CD-ROMs, manuals, packaging, 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. IMSI recognizes all inventory reserves as a
component of product costs.
FIXED ASSETS
Furniture and equipment are stated at cost. Depreciation of furniture and
equipment is computed using the straight-line method over the estimated useful
lives of the respective assets of 3 to 5 years. Depreciation of software and
computer equipment is computed using the straight-line method over an estimated
useful life of 3 years.
INCOME TAXES
Income taxes are accounted for using an asset and liability approach for
financial reporting. IMSI recognizes deferred tax liabilities and assets for the
expected future tax consequences of temporary differences between the financial
statement carrying amount and the tax basis of assets and liabilities and net
operating loss and tax credit carry forwards. Valuation allowances are
established when necessary to reduce deferred tax assets to the amounts expected
to be realized.
FOREIGN CURRENCY TRANSLATION
The asset and liability accounts of foreign subsidiaries are translated from
their respective functional currencies at the rates in effect at the balance
sheet date, and revenue and expense accounts are translated at weighted average
60
rates during the periods. Foreign currency translation adjustments are included
in other comprehensive income. Foreign currency transaction gains and losses are
included in the Statement of Operations.
LONG LIVED ASSETS
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets To Be Disposed Of requires that long-lived assets be written
down to fair value whenever events or changes indicate that the carrying amount
of an asset may not be recoverable. IMSI's policy is to review the
recoverability of all long-lived assets at a minimum of once per year and record
an impairment loss when the undiscounted cash flows do not exceed the carrying
amount of the asset.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of cash and cash equivalents and accounts receivable approximates
carrying value due to the short-term nature of such instruments. The fair value
of accounts payable and debt obligations is not determinable due to the overdue
nature of the covenant defaults of the agreements. The accrued arbitration award
is recorded at fair value at June 30, 2001.
NEW ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board adopted SFAS No. 141
Business Combinations and SFAS No. 142 Goodwill And Intangible Assets. SFAS No.
141 addresses the methods used to account for business combinations and requires
the use of the purchase method of accounting for all combinations after June 30,
2001. SFAS No. 142 addresses the methods used to amortize intangible assets and
to assess impairment of those assets, including goodwill resulting from business
combinations accounted for under the purchase method. SFAS No. 142 is effective
for fiscal years beginning after December 15, 2001; however, IMSI may elect to
early adopt the statement beginning July 1, 2001. Included in IMSI's assets at
June 30, 2001, is goodwill related to the acquisition of ArtToday.com and
OrgPlus with a net carrying value of $596,000. Upon adoption of SFAS No. 142,
IMSI will no longer amortize this goodwill, decreasing amortization expense by
approximately $270,000 per year. IMSI is required to assess this goodwill for
impairment in the year of adoption. The full effect of these new pronouncements
on IMSI's financial position or on the results of operations is not yet
determinable, and IMSI will not be able to make a decision about whether to
early adopt this pronouncement until an analysis of the impairment provisions of
the new standards has been completed. Under existing accounting standards, IMSI
determined that no impairment of goodwill existed as of June 30, 2001. In the
event that IMSI's analysis under the new guidance indicates that this goodwill
is impaired, a charge to earnings in the year of adoption will be required.
CERTAIN RECLASSIFICATIONS
Certain reclassifications have been made to conform to the 2001 presentation.
2. RESTRUCTURING CHARGE
IMSI implemented a plan of restructuring in June 1999 and at the end of the
fiscal year 2000, the restructuring was substantially complete. The following
table details the restructuring charge by segment and the components that
comprised the operating expense and cost of goods sold.
61
COST OF GOODS SOLD OPERATING EXPENSE
------------------ ------------------
North North
America UK America UK Total
------- ------ ------- ------ ------
(in thousands)
Write down of assets $2,864 $ 88 $ 428 $ 41 $3,421
Abandoned leases and associated costs -- -- 504 25 529
Warehouse transition costs 284 -- -- -- 284
Personnel reduction and severance costs 35 -- 470 41 546
------ ------ ------ ------ ------
$3,183 $ 88 $1,402 $ 107 $4,780
====== ====== ====== ====== ======
In accordance with EITF 94-3, the restructuring charges recognized as of June
30, 1999 were not associated with or did not benefit activities that were
continued, and were not associated with or were not incurred to generate
revenues after the restructuring plan's commitment date. These costs were either
incremental to other costs incurred by IMSI in the conduct of its activities
prior to the commitment date and were incurred as a direct result of the
restructuring plan or represented amounts under a contractual obligation that
existed prior to the commitment date and either continued after the
restructuring plan was completed, with no economic benefit to the enterprise, or
IMSI would incur a penalty to cancel the contractual obligation.
As part of the restructuring plan, IMSI planned to terminate 90 employees by the
end of fiscal year 2000 in the following departments: sales and marketing (22);
general and administrative (8); manufacturing (23); and research and development
(37). As of June 30, 2000, all planned terminations were completed.
The fair value of furniture, fixtures, equipment and leasehold improvements not
associated with specific product lines was determined based on current market
prices for used equipment and furniture, less disposal costs. The fair value of
the intangible assets associated with the non-core product lines held for sale,
including EASY Language and other business utility product lines, was determined
from pending discussions with potential purchasers of these product lines.
The following chart summarizes the cash and non-cash portions of the
restructuring charge (in thousands):
CASH NON-CASH TOTAL
------ -------- ------
Write down of inventory for non-core products $ -- $2,096 $2,096
Write down of furniture, fixtures, equipment and leasehold improvements -- 423 423
Write down of intangibles associated with non-core products -- 525 525
Abandoned leases and associated costs 753 -- 753
Warehouse transition costs 284 -- 284
Personnel reduction and severance costs 469 35 504
------ ------ ------
U.S. Segment Subtotal 1,506 3,079 4,585
------ ------ ------
Foreign 107 88 195
------ ------ ------
Total restructuring charge: $1,613 $3,167 $4,780
====== ====== ======
The following table details the activity in the accrued restructuring liability
account (in thousands):
BALANCE BALANCE BALANCE
JUNE 30, 1999 REVERSALS PAID JUNE 30, 2000 PAID JUNE 30, 2001
------------- --------- ------- ------------- ------ -------------
Warehouse closure and transition $ 636 $ (103) $ (471) $ 62 $ (62) $ --
Facilities consolidation 401 (342) 59 (59) --
Consolidation of Foreign Offices 6 (6) -- --
Personnel reductions (1) 397 (177) (212) 8 (8) --
------- ------ ------- ------- ------ -----
Total accrued restructuring liability $ 1,440 $ (280) $(1,031) $ 129 $ (129) $ --
======= ====== ======= ======= ====== =====
62
(1) During the quarter ended December 31, 1999, the Company decreased the
restructuring accrual for personnel reductions by $139,000 primarily due
to the re-hire of and cessation of termination benefits payable to
formerly terminated executive Geoffrey Koblick. During the quarter ended
March 31, 2000, the Company decreased this accrual by an additional
$38,000 due to actual severance costs being lower than estimated as a
result of employee attrition.
3. ACQUISITIONS
ART TODAY.COM
In October 1998, IMSI acquired all the outstanding common stock of ArtToday.com,
an Internet provider of art and animations. The total purchase price of $3.5
million consisted of $970,000 in IMSI stock (176,455 shares at $5.50 per share),
$300,000 in cash (paid by IMSI in November 1998), and $2,230,000 payable
pursuant to an 8% secured promissory note. As of June 30, 1999, the note balance
was satisfied by IMSI (See Note 5, "ArtToday.com Fee Agreement"). The operating
results of ArtToday.com are included in the statement of operations from the
date of acquisition. The purchase price for ArtToday.com was allocated as
follows:
Net working capital $ 93,000
Capitalized software development costs (visual content products) 3,000,000
Goodwill 407,000
----------
$3,500,000
==========
4. DEBT
IMSI's short-term borrowings and long-term debt and other obligations consist of
the following (in thousands):
SHORT-TERM BORROWINGS JUNE 30, 2001 JUNE 30, 2000
------------- -------------
Non-revolving, reducing loan with interest at bank's reference rate plus 3%, 9.75% at June 30, 2001 $ 3,930 $ 4,600
Subordinated loan facility due November 2001 with interest at 12% 2,500 2,500
Senior subordinated convertible note due May 2002 with interest at 9% 4,500 4,500
Other 95 95
Lease in default - Heller Financial Incorporated 317 325
Capital lease obligations 340 410
------- -------
TOTAL SHORT-TERM BORROWINGS $11,682 $12,430
======= =======
LONG-TERM DEBT AND OTHER OBLIGATIONS
Capital lease obligations $ 179 $ 302
------- -------
TOTAL LONG-TERM DEBT AND OTHER OBLIGATIONS $ 179 $ 302
======= =======
63
NON-REVOLVING, REDUCING LOAN
On May 4, 1998 IMSI entered into a line of credit agreement with Union Bank of
California ("Union") under which it could borrow the lesser of $13.5 million or
80% of eligible accounts receivable, at Union's reference rate plus 1/2% or
LIBOR plus 2%, at IMSI's option. The Company borrowed up to approximately $10.0
million under the line of credit agreement. Union also provided IMSI a $1.5
million term loan at the same interest rate. The line of credit was to expire on
October 31, 1999 and the repayment of the term loan was due on the same date.
Due to IMSI's defaults under the agreements, the line of credit was revised as
of September 24, 1998 to a non-revolving, reducing loan with no further
borrowings available. The interest rate was set at Union's reference rate plus
3%. The amended loan agreements required IMSI to comply with financial covenants
including maintenance of net worth and working capital requirements. The revised
loans were due on September 30, 1999. Under the terms of the agreements, all
assets not subject to liens of other financial institutions were pledged as
collateral against the loans. As of June 30, 2001, IMSI was still in default but
had paid in full the $1.5 million term loan, and had paid down the non-revolving
reducing loan to $3.93 million.
SENIOR CONVERTIBLE NOTE
On May 24, 1999, IMSI entered into a securities purchase agreement and related
agreements with Baystar Capital, L.P. ("Baystar"). The Company issued Baystar a
three-year $5 million principal amount 9% Senior Subordinated Convertible Note,
due May 24, 2002 with interest payable quarterly. Baystar also received a
warrant to purchase 250,000 shares of common stock at an initial exercise price
of $7.5946. Management estimated that the fair value of the warrants, using the
Black-Scholes option-pricing model, was $1,162,000. The valuation assumed the
exercise of the warrants at expiration, 105% volatility and a risk-free interest
rate of 5.5%.
During fiscal year 2000, IMSI defaulted under several provisions of the
agreement. Due to the default, IMSI recorded the full amount of the subordinated
loan as a current liability and expensed the remaining warrant value of
$1,100,000 in fiscal year 2000.
The note is convertible, at Baystar's option, into shares of common stock at any
time at an initial conversion price of $7.5946 per share, which is 115% of the
market price of the common stock on the closing date of the transaction. Under
the Baystar agreement, IMSI may be required to issue additional shares depending
on the occurrence of specified events, including the failure to make timely
interest payments on the convertible note. For failure to pay interest on time,
Baystar may demand that IMSI issue shares of common stock to Baystar equal to
200% of the amount of the late interest payment divided by the closing price of
the common stock on the day prior to the payment. In addition the agreement
provides for the payment of a penalty if IMSI failed to obtain, by September 21,
1999, an effective registration statement, which included the shares to be
issued to Baystar. The penalty is defined as 1% of the principal amount per
month for each month subsequent to September 21, 1999 until the shares are
included in an effective registration statement. As of June 30, 2001 the shares
issuable to Baystar had not been included on an effective registration
statement. In November 1999, Baystar notified IMSI that the Company had breached
its obligation to pay the cash penalty fees. On December 2, 1999, to settle the
breach, Baystar converted $500,000 of principal plus accrued interest of $7,767
into common stock of IMSI at a price of $2.00 per share, which was the closing
bid price of IMSI stock on December 1, 1999. IMSI has accrued a liability of
$996,000 for this penalty through June 30, 2001 in the financial statements.
Subsequent to year-end, the Company settled its liability to Baystar (See Note
1).
In the second quarter of fiscal 2001, the Company adopted the provisions of
Emerging Issues Task Force Issue 00-27 ("EITF 00-27") "Application of EITF Issue
98-5, `Convertible Securities with Beneficial Conversion Features or
Contingently Adjustable Conversion Ratios,' to Certain Convertible Instruments."
EITF 00-27 is effective for transactions with a commitment date of after
November 16, 2000, except for the provisions relative to embedded conversion
features that are effective for instruments issued since May 20, 1999. EITF
00-27 requires companies to measure a convertible instruments beneficial
conversion feature using an effective conversion price. Consequently,
64
the conversion option embedded in a convertible instrument issued with a
detachable instrument, such as a warrant, may have intrinsic value even if the
conversion option is at-the-money or out-of-money at the commitment date. The
Baystar note included an embedded beneficial conversion feature as calculated
under EITF 00-27. The result if applying EITF 00-27 to this instrument resulted
in the reporting of a cumulative effect of change in accounting principle in the
amount of $285,000, which caused an increase in the loss per share of $0.03
during fiscal 2001.
SUBORDINATED LOAN FACILITY
On November 3, 1998, IMSI borrowed $2.5 million under a three-year subordinated
loan facility with Silicon Valley Bank. The interest rate is 12%. As part of the
loan facility, detachable warrants, which have a five-year term, are issuable to
purchase shares of IMSI's common stock as follows:
If loan not paid in full prior to: Warrants to be issued Exercise price per share
----------------------------------------------------------------------------------------------
November 3, 1998 30,000 $7.00
October 31, 1999 5,000 7.00
January 31, 2000 25,000 7.00
April 30, 2001 65,000 6.00
October 31, 2001 125,000 5.00
When IMSI first recorded the loan, management estimated that the fair value of
the warrants, using the Black-Scholes option-pricing model, was $776,000. The
valuation assumed that the loan would not be repaid until November 3, 2001 (the
due date) and that all warrants would be issued. The valuation also assumed the
exercise of the warrants at expiration, 57% volatility and a risk-free interest
rate of 5.5%. It was originally intended that this value would be amortized as
additional interest expense over the life of the loan.
IMSI is in default under the subordinated loan facility with Silicon Valley Bank
for failure to make interest payments and the entry of the Imageline arbitration
award. Therefore, in fiscal 2000 IMSI recorded the full amount of the
subordinated loan as a current liability and expensed the remaining warrant
value of $604,000 as interest expense. Also, under the subordinated loan
agreement, IMSI must accrue additional penalty interest at the rate of 5%, which
resulted in an additional $51,000 of interest expense in fiscal 2000 and
$125,000 in fiscal 2001. On October 9, 2001, an agreement was executed between
IMSI and Silicon Valley Bank restructuring the subordinated loan facility (See
Note 1).
5. COMMON STOCK
COREL CORPORATION
During fiscal year 1999, IMSI received 20,000 shares of its common stock from
Corel Corporation in consideration for the sale of visual content images to
Corel. The value attributed to the 20,000 shares ($320,000), and the images
sold, was the trading price of the shares on the date of the agreement.
ARTTODAY.COM FEE AGREEMENT
On February 25, 1999, IMSI entered into a fee agreement with the former
shareholders of ArtToday.com. Under the terms of the fee agreement, IMSI issued
150,321 shares of common stock, with a market value of $11.44 per share, in
satisfaction of $1,503,000 owed to the former shareholders of ArtToday.com under
the terms of the acquisition described in Note 3. In May 1999, IMSI agreed with
the former ArtToday.com shareholders to issue an additional 40,476 shares of
common stock, pursuant to a renegotiation of the fee agreement and 10,000 shares
in consideration of the release of a security interest held by the former
ArtToday.com shareholders. IMSI recognized a charge of $311,000 upon the
issuance of the 50,476 shares.
65
The May 1999 amendment to the ArtToday.com fee agreement provided for the
issuance of additional shares if the average market price of IMSI stock was less
than $8 for the three days before the effective date of the registration of the
shares. IMSI and the former ArtToday.com shareholders executed a Settlement
Agreement and Mutual Release, stipulating that IMSI would issue to the former
ArtToday.com shareholders an additional 185,005 shares in settlement and release
of all claims between the parties. Under this agreement, the former ArtToday.com
shareholders have no right or option to require any payment in cash or to
receive additional shares. The Company issued these shares and recorded a charge
in fiscal year 2001 amounting to $187,490 for the value of the shares issued.
ASSET PURCHASE AGREEMENT
On December 24, 1998, IMSI purchased certain assets of Clipartconnection.com, an
Internet provider of art and animation, for a purchase price of 18,053 shares of
common stock valued at $150,000.
GARAY FEE AGREEMENT
On January 11, 1999, IMSI entered into a fee agreement with the Law Offices of
Mark Garay, Inc. ("Garay"). Under the terms of the Garay fee agreement, IMSI
issued 11,112 shares of common stock, valued at $10.25 per share, in
satisfaction of a $100,000 debt owed for legal services performed.
TLC FEE AGREEMENT
On October 2, 1998, The Learning Company ("TLC") and IMSI entered into a
software license agreement whereby TLC sold Org Plus to IMSI in exchange for
current and future cash payments. In January 1999, IMSI and TLC agreed to amend
the terms of the Org Plus agreement to allow IMSI to settle the $1.8 million
portion of the unpaid purchase price by the issuance of 200,000 shares of common
stock, valued at $12.00 per share. IMSI has accrued $400,000 as of June 30, 2001
in relation to the dispute between the Company and TLC over the OrgPlus
agreement.
GREENTREE FEE AGREEMENT
On February 18, 1999, IMSI entered into a fee agreement with Greentree to
satisfy a $150,000 debt owed to Greentree under the terms of a software license
agreement between IMSI and Greentree. In settlement of this debt, IMSI issued to
Greentree 18,053 shares, valued at $11.00 per share.
CAPITAL VENTURES INTERNATIONAL AGREEMENT
On March 3, 1999, IMSI entered into a stock purchase agreement with Capital
Ventures International ("CVI"). CVI paid the Company $5 million, and IMSI issued
437,637 shares of the Company's common stock, valued at $11.42 per share. CVI
also received a warrant to purchase 131,291 shares of common stock expiring
March 5, 2003. The warrant is currently exercisable at $14.8525 per share. The
exercise price and number of shares issued is subject to adjustment for
anti-dilution provisions.
The agreement required IMSI to issue additional shares to CVI if the market
price of the Company's common stock fell below $11.42 prior to March 4, 2000 or
if IMSI completed a capital transaction as defined in the agreement. As a result
of the partial conversion of the Baystar note in December 1999, CVI was entitled
to an adjustment of the purchase price under its stock purchase agreement. In
March 2000, CVI and IMSI agreed to an adjusted price of $2.00 per share,
equivalent to the value at which Bay Star converted a portion of its convertible
debt to common shares. As a result of this agreement, CVI received 2,500,000
shares for its $5 million investment. Because the lowest trading price of IMSI's
common stock from March 1999 to March 2000 was $0.625 per share, CVI could have
been entitled to a total of 8,000,000 shares pursuant to the price adjustment
provisions of the original
66
agreement, not the 2,500,000 ultimately received. Since this resolution provided
CVI with fewer shares than it was entitled to under the original agreement, IMSI
did not record a charge for the issuance of the shares. IMSI has no further
obligation to issue any additional adjustment shares or to pay other
consideration to CVI and is relieved of making any further payments to CVI in
connection with not yet registering for resale the shares issued to CVI.
HOMESTYLES AGREEMENT
On January 11, 1999, IMSI entered into a fee agreement with Homestyles to
satisfy a $90,000 debt IMSI owed under the terms of various software license
agreements. IMSI issued 10,000 shares of common stock, valued at $10.25 per
share to extinguish the debt. In the fourth quarter of 2000, Homestyles claimed
that the debt was still outstanding due to the decline in IMSI's stock price.
IMSI agreed to pay $90,000 to Homestyles as settlement during fiscal year 2001.
Homestyles retained all shares previously issued.
MINNEVICH AGREEMENT
On January 11, 1999, IMSI entered into a fee agreement with Joseph Minnevich to
satisfy a $45,000 debt owed under the terms of various software license
agreements. In settlement of this debt, IMSI issued 5,000 shares of common
stock, valued at $10.25 per share. IMSI issued an additional 10,000 shares of
common stock on April 18, 2000, valued at $0.66 per share to settle a claim
brought by Minnevich related to the January 11, 1999 fee agreement.
GATEWAY AGREEMENT
On March 1, 1999, IMSI entered into a fee agreement with Gateway to satisfy a
$72,000 debt owed under the terms of various manufacturing agreements. In
settlement of this debt, IMSI issued 8,000 shares of common stock, valued at
$11.438 per share.
SPATIAL AGREEMENT
On March 25, 1999, IMSI entered into a fee agreement with Spatial to satisfy a
$45,000 debt owed under the terms of various software license agreements. In
settlement of this debt, IMSI issued 5,000 shares of common stock, valued at
$11.25 per share.
STARBASE AGREEMENT
On March 26, 1999, IMSI entered into a fee agreement with StarBase to satisfy a
$121,000 debt owed under the terms of various software license agreements. In
settlement of this debt, IMSI issued 10,750 shares of common stock, valued at
$10.25 per share. StarBase is seeking $121,000 as additional compensation for
the debt, due to the decline in the value of the stock after issuance.
AMERICDISC AGREEMENT
On April 5, 1999, IMSI entered into a stock transfer agreement with AmericDisc
to satisfy a $700,000 debt owed for an outstanding balance relating to
duplication services. In settlement of this debt, IMSI issued 63,987 shares of
common stock, valued at $10.94 per share, and warrants to purchase 13,000 shares
at $14.23 exercisable for a period of four years. AmericDisc was issued the
shares without recourse, per the agreement. AmericDisc has subsequently claimed
that additional shares are due. On August 30, 2001 IMSI agreed to issue
AmericDisc an additional 23,513 shares of common stock, and 50,000 warrants to
purchase IMSI common stock within three years at $0.50 per share.
67
SOFTWARE SYNDICATE FEE AGREEMENT
On June 7, 1999, IMSI entered in a fee agreement with Software Syndicate to
satisfy a $152,000 debt owed under terms of various license agreements. In
settlement, IMSI issued 21,690 shares of common stock, valued at $7.00 per
share. An additional 20,000 shares of common stock were issued to Software
Syndicate by IMSI on April 18, 2000, valued at $0.66 per share to settle claims
brought by Software Syndicate related to the June 7, 1999 agreement.
EXTRAORDINARY CHARGE
Pursuant to the agreements described above, in fiscal year 1999 IMSI issued
503,913 shares of common stock, whose cumulative value based on the closing
price of the common stock on the date of settlement was $5,696,000, to retire
debt totaling $4,778,000. Because the value of the shares issued was $918,000
greater than the face value of the respective debt retired, IMSI recorded an
extraordinary charge for the extinguishment of debt of $959,000, or $0.15 per
share, after including $41,000 for the costs incurred to issue and register the
shares. The extraordinary charge recognized in fiscal year 1999 is summarized in
the following table:
Number of Face Difference
Shares Closing Closing Value of in
Issued Price Value Debt Values
--------- -------- ---------- ---------- ----------
ArtToday.com Fee Agreement 150,321 $ 11.44 $1,720,000 $1,503,000 $ 217,000
Garay Fee Agreement 11,112 10.25 114,000 100,000 14,000
TLC Fee Agreement 200,000 12.00 2,400,000 1,800,000 600,000
Greentree Fee Agreement 18,053 11.00 199,000 150,000 49,000
Homestyles Agreement 10,000 10.25 103,000 90,000 13,000
Minnevich Agreement 5,000 10.25 51,000 45,000 6,000
Gateway Agreement 8,000 11.44 91,000 72,000 19,000
Spatial Agreement 5,000 11.25 56,000 45,000 11,000
StarBase Agreement 10,750 10.25 110,000 121,000 (11,000)
AmericDisc Agreement 63,987 10.94 700,000 700,000 0
Software Syndicate 21,690 7.00 152,000 152,000 0
------- ---------- ---------- ----------
Total: 503,913 $5,696,000 $4,778,000 $ 918,000
======= ========== ========== ==========
Cost of registration/issuance 41,000
----------
Total extraordinary charge $959,000
==========
6. SEGMENT INFORMATION AND LIQUIDATION OF EUROPEAN SUBSIDIARIES
Until January 2000, IMSI had four reportable operating segments based on
geography: North America, the United Kingdom, Germany and Australia, and each of
these segments generated revenues and incurred expenses related to the sale of
the Company's PC productivity software. In January 2000, ArtToday.com met the
operating segment disclosure requirements of SFAS No. 131. Previously, the
Company included the results of this graphic design Internet subsidiary in the
North America geographic segment because ArtToday.com's separate results were
not material.
On January 28, 2000, IMSI announced that it was exiting the retail software
business, and liquidating its European and South African subsidiaries. In the
first quarter of fiscal year 2000, the Company closed its United Kingdom and
French offices. The loss on the disposition of the Company's foreign
subsidiaries was $2,043,000. This loss includes the $1,562,000 write-off of the
inter-company accounts receivable, the $68,000 write-off of the investment in
the foreign subsidiaries and the $393,000 write-off of the foreign subsidiaries
net assets.
68
During fiscal year 2001, IMSI received $152,000 in cash related to the past
operations of the discontinued subsidiaries. This was partially offset by
payments made of $103,000, resulting in net cash received of $49,000. Any gain
represented by this amount is being deferred as an offset to possible future
expenses arising from the liquidation of the subsidiaries. The liquidation
process is proceeding according to the legal requirements of the respective
countries, and the Company is not certain when it will be complete.
The following table details segment information for the years ended June 30 as
follows (in thousands):
ARTTODAY.COM NORTH AMERICA OTHER FOREIGN ELIMINATIONS TOTAL
------------ ------------- ------------- ------------ --------
FISCAL YEAR 2001:
Net Revenues - external customers $ 2,991 $ 8,863 $ 391 $ -- $ 12,245
- inter-segment 85 -- -- (85) --
Operating loss (36) (632) (102) -- (770)
Interest and other expense, net 4 2,163 (3) -- 2,164
Identifiable assets 1,493 5,371 178 (1,054) 5,988
Depreciation and amortization expense 361 2,197 3 -- 2,561
FISCAL YEAR 2000:
Net Revenues - external customers $ 3,083 $ 11,410 $ 4,669 $ -- $ 19,162
- inter-segment -- 712 -- (712) --
Operating Income (loss) 355 (8,385) 11 -- (8,019)
Interest and other expense, net 19 8,309 (8) -- 8,320
Identifiable assets 794 8,014 (23) (151) 8,634
Depreciation and amortization expense 199 2,460 91 -- 2,750
FISCAL YEAR 1999:
Net Revenues - external customers $ 716 $ 24,533 $ 12,430 $ -- $ 37,679
- inter-segment -- 2,736 -- (2,736) --
Operating loss (1,072) (22,187) (631) -- (23,890)
Interest and other expense, net 1 (1,901) 20 -- (1,880)
Identifiable assets 639 21,807 4,698 -- 27,144
Depreciation and amortization expense 175 3,958 175 -- 4,308
Each segment generates revenues from all product categories. Revenues by
categories are as follows (in thousands):
YEAR ENDED JUNE 30 2001 2000 1999
-------- -------- --------
Precision Design $ 4,537 $ 4,944 $ 13,168
Graphic Design 4,457 6,022 12,928
Business Applications 2,098 4,993 8,013
Utilities 876 3,009 3,921
Other Products 292 883 2,511
Sales Reserves (15) (689) (2,862)
-------- -------- --------
Net Revenues $ 12,245 $ 19,162 $ 37,679
======== ======== ========
69
7. INVENTORIES
At June 30, inventories consist of (in thousands):
2001 2000
----- -----
Raw materials $ 74 $ 386
Finished goods 199 114
----- -----
273 500
Reserves for obsolescence (160) (311)
----- -----
$ 113 $ 189
===== =====
8. FIXED ASSETS
At June 30, furniture and equipment consist of (in thousands):
2001 2000
------- -------
Computer and office equipment $ 1,485 $ 1,439
Software 357 568
------- -------
1,842 2,007
Accumulated depreciation (1,262) (1,237)
------- -------
$ 580 $ 770
======= =======
9. INCOME TAXES
The provision (benefit) for taxes on income for the years ended June 30 was
comprised of the following (in thousands):
2001 2000 1999
------- ------- -------
Current:
Federal $ -- $ -- $(3,990)
State (10) 13 --
Foreign (9) 18 215
------- ------- -------
(19) 31 (3,775)
------- ------- -------
Deferred
Federal -- 395 3,565
State -- 70 447
Foreign -- 36 --
------- ------- -------
-- 501 4,012
------- ------- -------
Total tax provision (benefit) $ (19) $ 532 $ 237
======= ======= =======
70
Deferred tax balances consisted of the following (in thousands):
JUNE 30 JUNE 30
2001 2000
-------- --------
CURRENT TAX ASSETS
Accrued arbitration award $ 333 $ 1,083
Standstill accounts payable 947 918
Standstill royalties payable 246 256
Allowance for doubtful accounts and returns 75 394
Accrued employee liabilities 46 260
Inventory reserve 15 117
Accrued restructuring costs -- 51
-------- --------
Total current tax assets 1,662 3,079
-------- --------
NON-CURRENT ASSETS
Net operating loss carry forward 11,345 10,162
Fixed assets 321 321
Purchased intangibles 3,955 3,955
Loss on investment in subsidiaries in liquidation 75 75
-------- --------
Total non-current assets 15,696 14,513
-------- --------
VALUATION ALLOWANCE (17,358) (17,592)
-------- --------
TOTAL ASSETS -- --
-------- --------
NET DEFERRED TAX ASSETS $ -- $ --
======== ========
At June 30, 2001, IMSI had an operating loss carry forward of approximately
$30,254,000 for federal tax purposes, which expires in various amounts through
2021 and related carry forwards for state purposes. During the year, and during
prior years, there were transactions that may be considered to be an "ownership
change" within the meaning of Internal Revenue Code section 382 whereby the net
operating loss carry forward available to offset future taxable income could be
effectively limited.
The effective tax rate differs from the federal statutory rate for the years
ended June 30 as follows (in thousands):
2001 2000 1999
------- -------- --------
Federal tax at 34% statutory rate $ (399) $ (5,556) $ (8,762)
State tax provision, net of federal benefit (13) (954) (1,504)
Change in valuation allowance (234) 6,466 11,126
Other 627 576 (623)
------- -------- --------
Total income tax provision (benefit) $ (19) $ 532 $ 237
======= ======== ========
71
10. EARNINGS PER SHARE
Basic earnings per share is computed by dividing net loss by the weighted
average number of common shares outstanding for the period. Diluted earnings per
share reflects the potential dilution that could occur from common shares
issuable as a result of the exercise or conversion of stock options, warrants or
other convertible securities. A total of 2,997,465, 3,200,029, and 2,357,548
potentially dilutive securities for the years ending June 30 2001, 2000, and
1999, respectively, have been excluded from the computation of diluted earnings
per share, as their inclusion would be anti-dilutive.
11. STOCK OPTIONS AND EMPLOYEE STOCK INCENTIVE PLANS
IMSI
The 1993 Employee Incentive Plan, as amended, permits IMSI to grant options to
purchase up to 2,925,000 shares of common stock to employees, directors and
consultants at prices not less than the fair market value at date of grant for
incentive stock options and not less than 85% of fair market value for
non-statutory stock options. These options generally expire 10 years from the
date of grant and become exercisable ratably over a 4 to 5-year period. At June
30, 2001, 948,836 shares were available for future grants under the 1993 plan.
Option activity under the plans is as follows:
WEIGHTED
NUMBER OF AVERAGE
SHARES EXERCISE PRICE
---------- --------------
Outstanding, June 30, 1998 1,848,138 $ 8.1
Granted (weighted average fair value of $5.39) 1,049,825 7.6
Exercised (164,150) 4.9
Canceled (800,556) 10.8
---------- ------
Outstanding, June 30, 1999 1,933,257 $ 7.0
Granted (weighted average fair value of $1.56) 3,130,883 1.7
Exercised (7,000) 0.3
Cancelled (2,761,402) 5.9
---------- ------
Outstanding, June 30, 2000 2,295,738 $ 1.1
Granted (weighted average fair value of $0.67) 96,000 0.5
Exercised (39,521) 0.2
Cancelled (376,053) 2.1
---------- ------
Outstanding, June 30, 2001 1,976,164 $ 0.9
========== ======
72
Additional information regarding options outstanding as of June 30, 2001 is as
follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------------------------------------- ------------------------------------
RANGE OF NUMBER WEIGHTED AVG. REMAINING WEIGHTED AVG. NUMBER WEIGHTED AVG.
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE (YRS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
--------------- ----------- ----------------------- -------------- ----------- --------------
$0.11 to 0.74 205,374 7.7 $0.67 166,540 $0.63
$0.75 1,423,477 8.5 $0.75 528,568 $0.75
$0.76 to 1.63 235,625 8.6 $1.16 87,026 $1.17
$1.64 to 10.25 111,688 5.0 $4.06 87,699 $3.49
--------- -------
1,976,164 869,833
========= =======
IMSI continues to account for stock-based awards issued to employees in
accordance with Accounting Principles Board No. 25, Accounting for Stock Issued
to Employees and its related interpretations. Accordingly, no compensation
expense has been recognized in the financial statements for employee stock
arrangements as all grants have been made at fair market value. Financial
Accounting Interpretation No. 44 ("FIN 44") addresses the accounting for certain
provisions and transactions pertaining to employee stock options. The provisions
of FIN 44 are effective for fiscal periods ending after July 1, 2000. Certain
provisions of FIN 44 apply to transactions occurring after December 15, 1998,
primarily related to the definition of an employee and accounting for option
re-pricings. In February 2000, IMSI canceled approximately 870,000 options held
by existing employees and replaced those options with new options with a revised
expiration date. The canceled options had a weighted average exercise price of
$3.51 per share, and the reissued options are exercisable at $0.75 per share.
This cancellation and re-grant meets the definition of a re-pricing under FIN
44, and the reissued options are being accounted for as variable options. Under
variable plan accounting the Company recognizes a charge equal to the per share
change in the share value until the underlying option is exercised. During
fiscal years 2000 and 2001, no charge was required under variable plan
accounting.
SFAS No. 123, Accounting for Stock-Based Compensation, requires the disclosure
of pro forma net income and earnings per share had IMSI adopted the fair value
method in SFAS No. 123. Under this method, the fair value of stock-based awards
to employees is calculated through the use of option pricing models, even though
such models were developed to estimate the fair value of freely tradable, fully
transferable options without vesting restrictions, which significantly differ
from IMSI's stock option awards. These models also require subjective
assumptions, including future stock price volatility and expected time to
exercise, which greatly affect the calculated values. IMSI's calculations were
made using the Black-Scholes option pricing model with the following weighted
average assumptions: expected life of 5 years; stock volatility, 231% in fiscal
2001, 136% in fiscal 2000, and 105% in fiscal 1999; risk free interest rates of
6.0% in fiscal 2001 and 2000, and 5.5% in 1999; and no dividends during the
expected term. IMSI's calculations are based on a single option valuation
approach and forfeitures are recognized as they occur.
If the computed fair values of the awards had been amortized to expense over the
vesting period of the awards, pro forma amounts would have been:
2001 2000 1999
------------ ------------- -------------
Net loss
As reported $ (1,174,000) $ (16,872,000) $ (26,966,000)
Pro forma (1,665,000) (17,359,000) (27,306,000)
Diluted loss per share
As reported $ (0.12) $ (1.78) $ (4.30)
Pro forma (0.17) (1.83) (4.35)
73
At June 30, 2001 warrants were outstanding as part of consulting or fee
agreements as follows:
Name of Holder Date of Issue Number of warrants Exercise Price
----------------------------------------------------------------------------------------------------------------
AmericDisc April 5, 1999 13,000 $14.0522
Baystar Capital, LP May 24, 1999 250,000 0.2000
Capital Ventures International March 5, 1999 131,291 14.8525
Gordon Landies April 12, 2000 100,000 0.7500
Gordon Landies April 21, 2000 50,000 0.7500
Joe Abrams April 12, 2000 100,000 0.7500
Riggs & Company April 27, 2000 10,000 0.1500
Silicon Valley Bank May 1, 2001 65,000 6.0000
Silicon Valley Bank Feb. 1, 2000 25,000 7.0000
Silicon Valley Bank Oct. 31, 1999 35,000 7.0000
-------
Total 779,291
Subsequent to June 30, 2001, parties were issued warrants as part of consulting
or fee agreements. The following table summarizes these issuances:
Name of Holder Date of Issue Number of warrants Exercise Price
----------------------------------------------------------------------------------------------------------------
AmericDisc August 30, 2001 50,000 $0.50
Gordon Landies August 30, 2001 150,000 $0.20
Joe Abrams August 30, 2001 150,000 $0.20
-------
Total 350,000
ARTTODAY.COM
In February 2000, ArtToday adopted a stock option plan to attract, retain and
motivate eligible persons. If all outstanding options were exercised, it would
create a minority interest in ArtToday of 12.7%. The options vest and are
exercisable under certain conditions, which may vary depending on the options,
over periods not to exceed ten years from the date the option is granted,
provided the employee is still employed by the Company at the time of exercise.
Participants who are not officers, directors or consultants of ArtToday or of a
Parent or Subsidiary of ArtToday have the right to exercise an option at the
rate of not less than 20% per year over five years from the date the option is
granted. Upon termination of employment, the employee generally has 90 days to
exercise vested options otherwise the options are forfeited. The exercise price
of each option is determined by the Board of Directors when the option is
granted and may not be less than 85% of the fair market value of the shares on
the grant date; provided that the exercise price of an incentive stock option or
any option granted to a ten percent stockholder will not be less than 100% of
the fair market value of the shares on the date of the grant. All grants under
the plan have been at 100% of the fair market value of the shares.
74
A summary of the activity in the ArtToday stock option plan during fiscal years
2001 and 2000 is as follows:
Weighted
Weighted average
Average remaining life
Shares Exercise Price (years)
------ -------------- --------------
Outstanding at June 30, 1999 -- --
Net grants during the year 33,019 $15.43
------ ------ ------
Outstanding at June 30, 2000 33,019 $15.43 9.7
Net grants during the year 2,100 $15.43
------ ------ ------
Outstanding at June 30, 2001 35,119 $15.43 8.8
====== ====== ======
12. COMMITMENTS
IMSI leases its facilities and certain equipment under various non-cancelable
operating lease agreements expiring through 2006. IMSI also leases equipment
under capital leases, which expire at various dates through 2006. IMSI is
required to pay property taxes, insurance, and normal maintenance costs on most
property leases. Future minimum payments for capital leases and rental
commitments for non-cancelable operating leases with remaining terms of over one
year at June 30, 2001 are as follows (in thousands):
CAPITAL LEASE
FISCAL YEAR OBLIGATIONS OPERATING LEASES
----------- ------------- ----------------
2002 $ 371 $284
2003 167 227
2004 17 119
2005 4 82
2006 1 26
----- ----
Total minimum lease payments 560 $738
====
Less amount representing interest (41)
-----
Capital lease obligations 519
Less current portion (340)
-----
Long-term portion $ 179
=====
Capital lease obligations consist primarily of computer equipment, furniture and
fixtures and leasehold improvements. The average term is 3 years. Total rent
expense for all operating leases was $241,000, $701,000, and $1,294,000 for the
fiscal years ended June 30, 2001, 2000, and 1999 respectively.
13. ARBITRATION AWARD
Imageline, Inc. was awarded a $2.6 million arbitration judgment for intellectual
property violations and attorneys' fees, comprised of $1.2 million in actual
damages, $1.2 in punitive damages and $0.2 million in attorneys' fees. Interest
has been accrued on the award at an annual statutory rate of 6%.
75
On July 27, 2001, and as subsequently amended on September 24, 2001 and October
5, 2001, IMSI and Imageline agreed on the settlement of the arbitration award
issued in January 2000 in favor of Imageline. The settlement, effective
September 30, 2001, calls for IMSI to provide a variety of considerations
including the following:
- The dismissal of any further appeals of the award.
- Cash installments over a 12-year period, starting October 2001.
These payments will be made as follows: four equal quarterly
payments of $78,750 beginning on September 30, 2002; twelve
monthly payments of $11,500 beginning on October 5, 2001; and, 132
monthly payments of $6,500 thereafter. These payments have a net
present value of approximately $833,000 assuming a 12% discount
rate.
- Rights to royalties, licenses, and inventories pertaining to the
IMSI MasterClips line of products.
- A percentage of any net recovery IMSI obtains from indemnification
claims IMSI has against third parties associated with the original
circumstances leading to the arbitration award.
76
SCHEDULE II
INTERNATIONAL MICROCOMPUTER SOFTWARE, INC.
AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS):
ADDITIONS
BALANCE AT CHARGED TO
BEGINNING OF COSTS AND BALANCE AT
DESCRIPTION PERIOD EXPENSES DEDUCTIONS END OF PERIOD
----------- ------------ ----------- ---------- -------------
YEAR ENDED JUNE 30, 2001
Allowance for doubtful accounts $ 306 $ 189 $ (328) $ 167
Return reserve 448 216 (649) 15
Price discounts reserve 241 35 (276) --
Inventory reserve 311 28 (179) 160
YEAR ENDED JUNE 30, 2000
Allowance for doubtful accounts $1,279 $ 602 $ 1,575 $ 306
Return reserve 5,249 2,548 7,349 448
Price discounts reserve 819 86 664 241
Rebates reserve 98 831 929 --
Inventory reserve 3,345 -- 3,034 311
YEAR ENDED JUNE 30, 1999
Allowance for doubtful accounts $ 800 $ 623 $ 144 $1,279
Return reserve 2,998 17,714 15,463 5,249
Price discounts reserve 283 6,146 5,610 819
Rebates reserve 2,474 2,376 98
Inventory reserve 615 3,555 825 3,345
77
(b) Reports on Form 8-K
One report on Form 8-K was filed during the first quarter of fiscal year 2002,
on September 19, 2001, to discuss a change in control of registrant.
78
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Novato, State of
California on October 11, 2001.
INTERNATIONAL MICROCOMPUTER SOFTWARE, INC.
By: /s/ MARTIN WADE III
-------------------------------
Martin Wade III
Chief Executive Officer
By: /s/ VINCENT DELORENZO
-------------------------------
Vincent DeLorenzo
Chief Financial Officer
(Principal Accounting Officer)
POWER OF ATTORNEY
KNOW ALL BY THESE PRESENTS that each individual whose signature appears below
constitutes and appoints Martin Wade and Vincent DeLorenzo, and each of them,
his attorneys-in-fact, and agents, each with the power of substitution, for him
and in his name, place and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this Report, and to file the
same, with all exhibits thereto and all documents in connection therewith, with
the Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents or any of them, or his or their substitute or substitutes, may lawfully
do or cause to be done by virtue hereof.
Pursuant to the Requirement of the Securities Exchange Act of 1934, the
following persons in the capacities and on October 11, 2001 have signed this
report below.
By: /s/ BRUCE GALLOWAY
-------------------------------
Bruce Galloway
Director & Chairman of
the Board of Directors
By: /s/ MARTIN WADE III
-------------------------------
Martin Wade III
Director
By: /s/ SKULI THORVALDSSON
-------------------------------
Skuli Thorvaldsson
Director
By: /s/ GARY HERMAN
-------------------------------
Gary Herman
Director
By: /s/ DONALD PERLYN
-------------------------------
Donald Perlyn
Director
79
By: /s/ MAURICE SONNENBERG
-------------------------------
Maurice Sonnenberg
Director
By: /s/ EVAN BINN
-------------------------------
Evan Binn
Director
By: /s/ SIGURDUR JON BJORNSSON
-------------------------------
Sigurdur Jon Bjornsson
Director
By: /s/ ROBERT MAYER
-------------------------------
Robert Mayer
Director
80
81
INTERNATIONAL MICROCOMPUTER SOFTWARE, INC.
2001 FORM 10-K ANNUAL REPORT
EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBIT TITLE PAGE
------- ------------- ----
2.2 Merger Agreement between IMSI and DCDC(1)
3.01 Registrant's Amended and Restated Articles of Incorporation(2)
3.02 Registrant's Bylaws, as amended to date(2)
10.1 Union Bank of California and DCDC Loan Purchase Agreement - August 30, 2001 83
10.2 Silicon Valley Bank Restructure Agreement - October 9, 2001 95
10.3 Letter from IMSI to Silicon Valley Bank - October 12, 2001 111
10.4 Silicon Valley Bank Promissory Note - October 9, 2001 112
10.5 Silicon Valley Bank Pledge Agreement - October 9, 2001 117
10.6 Silicon Valley Bank Reaffirmation of Subordination Agreement and Pledge Agreement - October 9, 2001 129
10.7 Silicon Valley Bank Reaffirmation of Guaranty and Security Agreement - October 9, 2001 131
10.8 Silicon Valley Bank Subordination and Termination Agreement - October 9, 2001 135
10.9 Baystar Capital Settlement Terms - Senior Subordinated Convertible Note - July 30, 2001 141
10.10 Imageline Settlement Agreement - July 27, 2001 142
10.11 Imageline Amendment to Settlement Agreement - September 24, 2001 144
10.12 Imageline Addendum #2 to Settlement Agreement - October 5, 2001 145
10.13 Management Agreement - Gordon Landies - September 1, 2001 146
10.14 Management Agreement - Paul Jakab - September 1, 2001 150
10.15 Management Agreement - DCDC - September 21, 2001 154
10.16 Form of Workout Agreement for unsecured creditors of International Microcomputer Software,
Inc. - November 6, 2000 157
10.17 Addendum to Form of Workout Agreement for Unsecured Creditors of International Microcomputer
Software, Inc. 162
21.1 Subsidiaries of the Registrant 164
23.1 Independent Auditors' Consent 165
----------
(1) Incorporated by reference to exhibit of the same number to Registrant's
Form 8-K (File no. 000-15949) filed on September 19, 2001
(2) Incorporated by reference to exhibits of the same number to Registrant's
Registration Statement on Form S-3 (File no. 33-69206) filed on September
22, 1993.
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EX-10.1
3
f76300ex10-1.txt
EXHIBIT 10.1
EXHIBIT 10.1
LOAN PURCHASE AGREEMENT
THIS LOAN PURCHASE AGREEMENT (this "Agreement") is made and entered into as of
August 22, 2001, by and between DIGITAL CREATIVE DEVELOPMENT CORPORATION
("Buyer"), and UNION BANK OF CALIFORNIA, N. A. ("Seller"), with reference to the
following:
A. Seller has heretofore made that certain $3,601,000.00 loan (the
"Loan"), to International Microcomputer Software, Inc. ("Borrower")
and Arttoday.com ("Guarantor"), which Loan is evidenced by that
certain Second Amended and Restated Secured Non-Revolving Reducing
Promissory Note ("Note") dated April 23, 1999, made payable by
Borrower to the order of Seller in the original principal amount of
$7,200,000.00, and is secured by the following: (i) that certain
Security Agreement dated as of May 1, 1998 ("California Security
Agreement") pursuant to which Borrower granted to Bank a security
interest in the personal property described therein ("California
Collateral") and it was perfected by the filing of a UCC-1 Financing
Statement with the California Secretary of State on May 15, 1998, as
file no. 9813561043 ("California UCC-1"); (ii) that certain
Collateral Assignment, Patent Mortgage and Security Agreement dated
as of May 1, 1998 ("Patent Security Agreement") pursuant to which
Borrower granted to Bank a security interest in the intellectual
property described therein ("Patent Collateral") and it was
perfected by a filing with the United States- Department of Commerce
Patent and Trademark Office on July 24, 1998 as file no. 100773879
and on March 16, 1999 as file no. 100985547 (each a "Patent Filing"
collectively the "Patent Filings") and by the filing of a UCC-1
Financing Statement with the California Secretary of State on May
15, 1998, as file no. 9813561037 ("Patent UCC-1); and (iii) that
certain Pledge Agreement dated as of February 21, 2000 ("Pledge
Agreement") pursuant to which Borrower granted to Bank a security
interest in the common stock of Guarantor described therein ("Stock
Collateral"). The documents and instruments pertaining to the Loan
are further described in the Index of Loan Documents attached hereto
as Exhibit A. All of the documents and instruments evidencing,
securing or pertaining to the Loan, including without limitation
those referred to in this paragraph, are hereinafter referred to
collectively as the "Loan Documents." All types of collateral
referred to in this paragraph are hereinafter referred to
collectively as "Collateral".
B. The Loan matured September 30, 1999, and since then has been in
default.
C. Buyer desires to purchase the Loan and the Loan Documents from
Seller, and Seller desires to sell the Loan and the Loan Documents
to Buyer, upon the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and the mutual promises and
agreements hereinafter contained and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, Seller and Buyer
hereby agree as follows:
1. PURCHASE AND SALE.
Subject to the terms and conditions of this Agreement, Buyer shall
purchase from Seller, and Seller shall sell to Buyer, all of Seller's
right, title and interest in and to the Loan and the Loan Documents,
without recourse and without representation or warranty of any kind except
as expressly set forth in this Agreement.
2. PURCHASE PRICE
(a) The purchase price (the "Purchase Price") payable by Buyer to Seller
hereunder for the Loan and the Loan Documents shall be Two Million
Five Hundred Thousand Dollars ($2,500,000.00).
83
(b) The Purchase Price shall be paid by Buyer through a wire transfer to
Seller, in accordance with the following wire transfer instructions:
Union Bank of California, N.A. Monterey Park, California
ABA No.: 122-000-496
Wire Account No.: 070-196431
Wire Account Name: Wire Transfer Clearing Account
Attention: 192 Commercial Note Center
Fax No.: (213) 720-2555 or -2251
Telex No.: 188612, UNIONBK UT
Reference: International Microcomputer Software, Inc.
Obligor #381-443-705-2
Contact: Christiana Creekpaum, VP
Special Assets Department, 1-001-8
415-765-2252
(c) Upon Seller's receipt of the Purchase Price, Buyer shall become the
owner of and entitled to receive from and after the Closing all
payments and recoveries in respect of the Loan. In no event shall
Buyer have any right or claim in or to any loan fee, commitment fee,
payment or recovery received by Seller prior to the Closing in
respect of the Loan.
3. CLOSING
(a) The consummation of the purchase and sale of the Loan and the Loan
Documents contemplated hereby (the "Closing") shall occur on a date
mutually approved by Seller and Buyer, but no later than August 31,
2001. If the Closing has not occurred by the close of business on
such date, then this Agreement shall, at the written election of
either Seller or Buyer, be terminated and Seller and Buyer shall
have no liability whatsoever to each other relating to the
transactions contemplated hereby, whether arising under this
Agreement or otherwise; provided, however, that (i) in the case
where the Closing has not occurred by the close of business on such
date solely because of the failure of one party to use reasonable
efforts to close, the other party alone shall have the right, at its
option, to either terminate this Agreement or specify a reasonable
extension of the Closing; and (ii) in the event that this Agreement
is terminated for any reason, the terms and provisions of Sections
10 and 11 of this Agreement shall survive.
(b) Seller shall bear no expense in connection with this Agreement or
the transactions contemplated hereby.
4. SERVICING.
Upon the Closing of the sale of the Loan, Buyer shall assume complete
responsibility for the servicing and administration of the Loan,
including, but not limited to, the collection of all payments thereunder,
and Seller shall have no further servicing or administrative
responsibilities with respect to the Loan.
5. SELLER'S CLOSING DOCUMENTS.
Except as otherwise provided in this Section, at or promptly following the
Closing, Seller shall deliver the following documents and items
(collectively, the "Closing Documents"), and Buyer agrees to execute and
promptly deliver to Seller a receipt for such documents and items upon
Buyer's receipt thereof:
(a) The executed original of the Note.
84
(b) An Endorsement to Promissory Note in the form of Exhibit B attached
hereto, duly executed by Seller, with respect to the Note, which
shall be attached to the Note.
(c) An Assignment of Loan Documents in the form of Exhibit C attached
hereto, duly executed by Seller, assigning and transferring to Buyer
all of Seller's rights and interests in and to the Loan Documents.
(d) The executed originals of all of the Loan Documents (or, if
unavailable, copies of such Loan Documents certified by Seller to be
true, correct and complete copies of the originals).
(e) A Uniform Commercial Code Assignment Statement duly executed by
Seller, for each Uniform Commercial Code Financing Statement naming
Seller as secured party that was recorded or filed in connection
with the Loan (collectively, the "UCC Assignments").
(f) Written notice of the assignment of the Loan, in form and substance
of that attached hereto as Exhibit D duly executed by Seller,
instructing Borrower to remit all payments to Buyer or its
collection agent.
(g) The original stock certificate(s) evidencing the Stock Collateral
and accompanying stock power(s).
(h) Written assignment to Buyer of the Patent Filing, in form suitable
for filing in the United States-Department of Commerce Patent and
Trademark Office, duly executed by Seller.
6. REPRESENTATIONS AND WARRANTIES OF SELLER.
Seller hereby represents and warrants to Buyer, which representations and
warranties shall be deemed restated as of the Closing, that:
(a) Seller is a national banking association, duly organized, validly
existing and in good standing under the laws of the United States.
(b) Seller has, and at all relevant times has had, the full power and
authority to execute, deliver and perform, and to enter into and
consummate all transactions contemplated by this Agreement. Seller
has duly authorized the execution, delivery and performance of this
Agreement, has duly executed and delivered this Agreement and this
Agreement constitutes a legal, valid and binding obligation of
Seller, enforceable against it in accordance with its terms.
(c) The execution and delivery of this Agreement by Seller, and the
performance and compliance with the terms of this Agreement by
Seller, will not violate Seller's charter or bylaws or constitute a
default (or an event which, with notice or lapse of time, or both,
would constitute a default) under, or result in the breach of, any
material agreement or other instrument to which it is a party or
which is applicable to it or any of its assets.
(d) Seller is the current legal and beneficial owner and holder of the
Loan and the Loan Documents.
(e) As of August 21, 2001, the outstanding principal balance of the Note
was $3,601,000.00, the amount of accrued but unpaid interest on the
Note was $26,480.69 and interest has been paid through July 31,
2001.
85
(f) To the best of Seller's knowledge, there is no litigation pending
against Seller which, if determined adversely to Seller, would
materially adversely affect Seller's sale of the Loan or the
execution, delivery or enforceability of this Agreement.
(g) Seller shall not, during the term of this Agreement, enter into an
agreement with any third party with respect to its purchase of the
Loan.
It is understood and agreed that the representations and warranties set
forth above shall survive the assignment of the Loan to Buyer.
7. REPRESENTATIONS AND WARRANTIES OF BUYER.
Buyer hereby represents and warrants to Seller, which representations and
warranties shall be deemed restated as of the Closing, that:
(a) Buyer is a corporation duly organized, validly existing and in good
standing under the laws of the State of Utah.
(b) Buyer has, and at all relevant times has had, the full power and
authority to execute, deliver and perform, and to enter into and
consummate all transactions contemplated by this Agreement. Buyer
has duly authorized the execution, delivery and performance of this
Agreement, has duly executed and delivered this Agreement and this
Agreement constitutes a legal, valid and binding obligation of
Buyer, enforceable against it in accordance with its terms.
(c) The execution and delivery of this Agreement by Buyer, and the
performance and compliance with the terms of this Agreement by
Buyer, will not violate Buyer's charter or bylaws or constitute a
default (or an event which, with notice or lapse of time, or both,
would constitute a default) under, or result in the breach of, any
material agreement or other instrument to which it is a party or
which is applicable to it or any of its assets.
(d) Buyer is not in violation of, and its execution and delivery of this
Agreement and its performance and compliance with the terms of this
Agreement will not constitute a violation of, any law, any order or
decree of any court, or any order, regulation or demand of any
federal, state or local governmental or regulatory authority.
(e) To the best of Buyer's knowledge, there is no litigation pending or
threatened against Buyer, which if determined adversely to Buyer,
would materially adversely affect Buyer's purchase of the Loan or
the execution, delivery or enforceability of this Agreement.
(f) The purchase of the Loan is a legal investment for Buyer under
applicable laws.
(g) Buyer (i) is a sophisticated entity with respect to the purchase of
the Loan and the Loan Documents, (ii) is able to bear the economic
risk associated with the purchase of the Loan and the Loan
Documents, (iii) has adequate information concerning Borrower's and
Guarantor's business and financial condition to make an informed
decision regarding the purchase of the Loan and the Loan Documents,
(iv) has such knowledge and experience, and has made investments of
a similar nature, so as to be aware of the risks and uncertainties
inherent in purchases of the type contemplated in this Agreement,
and (v) has independently and without reliance upon Seller, and
based on such information as Buyer has deemed appropriate, made its
own analysis and decision to enter into this Agreement, except that
Buyer has relied upon Seller's express representations, warranties,
covenants, and indemnities in this Agreement. Buyer acknowledges
that Seller has not given Buyer
86
any investment advice, credit information, or opinion on whether the
purchase of the Loan or the Loan Documents is prudent.
The foregoing representations and warranties of Buyer shall survive the
execution of this Agreement and the Closing.
8. CONDITIONS PRECEDENT TO CLOSING; SELLER'S COVENANT.
The following shall be conditions precedent to Buyer's and Seller's
respective duties and obligations under this Agreement, unless Buyer or
Seller (whichever is the beneficiary of the condition in question) waives
the satisfaction thereof in writing:
(a) Seller and Buyer shall each have performed and discharged all of
their respective obligations under this Agreement, whether set forth
in this Section or elsewhere in this Agreement.
(b) Seller and Buyer shall each have delivered to the other party, all
payments, documents and instruments required of such party by the
terms of this Agreement at the times and in the manner provided
hereunder, including without limitation Buyer's payment to Seller of
the Purchase Price in accordance with Section 2 hereof.
(c) Seller and Buyer shall each have done, executed, acknowledged and
delivered all such further acts, instruments and assurances and
shall have taken all such further actions as shall be reasonably
necessary or desirable to consummate and effect the transactions
contemplated by this Agreement.
(d) The representations and warranties of Buyer and Seller contained in
Sections 6 and 7 hereof shall be true and correct as of the Closing.
(e) Borrower and Guarantor shall have executed and delivered to Seller a
general release of claims in the form of Exhibit E, whereunder
Borrower and Guarantor release any and all claims against Seller.
(f) Borrower shall have paid to Seller in immediately available funds
(i) Twenty One Thousand Dollars ($21,000.00) for application to the
outstanding principal of the Loan and (ii) all interest accrued on
the Loan through and including the Closing.
The conditions described above are exclusively conditions precedent to the
Closing. Buyer and Seller agree to use reasonable efforts to satisfy such
conditions, but neither Seller nor Buyer shall have any liability
hereunder whatsoever if the subject transaction is not consummated solely
because of the failure of any such condition to be satisfied
notwithstanding the use of such reasonable efforts.
During the period commencing on the date on which this Agreement is
executed by both Seller and Buyer and ending on the Closing or sooner
termination of this Agreement, Seller shall not enter into any
modification, amendment, supplement, consent, approval or waiver with
respect to the Loan or any of the Loan Documents (which shall be referred
to herein as a "Changed Circumstance") without Buyer's prior written
consent, except as required by law, by the terms of the Loan Documents or
pursuant to the terms of previously negotiated settlements or similar
contracts entered into or pending as of the date of this Agreement and
disclosed to Buyer prior to the date of this Agreement.
9. MISCELLANEOUS
(a) All written notices or demands of any kind that either party hereto
may be required or may desire to serve on the other party hereto in
connection with this Agreement shall be served (as an alternative
87
to personal service) by registered or certified mail. Any such
notice or demand so to be served by registered or certified mail
shall be deposited in the United States Mail with postage thereon
fully prepaid and, if the party so to be served be Seller, addressed
to Seller as follows:
Union Bank of California, N. A.
Special Assets Department
400 California Street, 8th Floor
San Francisco, California 94104
Attention: Christiana Creekpaum, VP
and if the party so to be served be Buyer, addressed to Buyer
as follows:
Digital Creative Development Corporation
67 Irving Place
New York, New York 10003
Attention: Martin R. Wade III
Service of any such notice or demand so made by mail shall be deemed
complete on the date of actual delivery as shown by the addressee's
registry or certification receipt or at the expiration of the third
(3rd) business day after the date of mailing, whichever is earlier
in time. Any party hereto may from time to time, by notice in
writing served upon the other party hereto as aforesaid, designate a
different mailing address to which or a different person to whose
attention all such notices or demands are thereafter to be
addressed.
(b) No delay or omission by either party hereto in exercising any right
or power arising from any default by the other party hereto shall be
construed as a waiver of such default or as an acquiescence therein,
nor shall any single or partial exercise thereof preclude any
further exercise thereof or the exercise of any other right or power
arising from any default by the other party hereto. No waiver of any
breach of any of the covenants or conditions contained in this
Agreement shall be construed to be a waiver of or an acquiescence in
or a consent to any previous or subsequent breach of the same or of
any other condition or covenant.
(c) This Agreement is made for the sole benefit of Seller and Buyer and
their respective successors and permitted assigns, and no other
person or persons shall have any rights or remedies under or by
reason of this Agreement or any right to the exercise of any right
or power of either party hereto or arising from any default by
either party hereto.
(d) Seller may accept deposits from, lend money to, act as trustee under
indentures or in general engage in any kind of business with
Borrower, any guarantor or their subsidiaries, owners, partners or
affiliates, if any (collectively, "Borrower's Affiliates"), or any
person who may do business with or own interests in any of them.
(e) After Closing, Buyer hereby agrees to allow Seller reasonable access
to the Loan Documents, upon reasonable prior notice to Buyer. Buyer
further agrees to allow Seller, at its expense, to inspect and make
abstracts from or copies of any of the Loan Documents, upon
reasonable terms and conditions and upon reasonable prior notice to
Buyer. Before destruction or disposition of any of the Loan
Documents, Buyer shall attempt to give reasonable notice to Seller
and allow Seller, at its expense, to recover the same from Buyer.
88
(f) In the event any legal action is undertaken in order to enforce or
interpret any provision of this Agreement, the prevailing party in
such legal action, as determined by the court, shall be entitled to
receive from the other party the prevailing party's reasonable
attorneys' fees and court costs.
(g) Time is hereby declared to be of the essence of this Agreement and
of every part hereof. When the context and construction so require,
all words used in the singular herein shall be deemed to have been
used in the plural and the masculine shall include the feminine and
the neuter and vice versa.
(h) Prior to Closing, this Agreement shall not be assigned by Buyer
without the written consent of Seller, which consent may be withheld
in Seller's sole discretion.
(i) This Agreement constitutes the entire understanding between the
parties hereto with respect to the subject matter hereof,
superseding all prior written or oral understandings, and may not be
terminated, modified or amended in any way except by a written
agreement signed by each of the parties hereto.
(j) This Agreement may be executed in two (2) or more counterparts,
which may be delivered by facsimile transmission, each of which
shall be deemed an original but all of which together shall
constitute but one and the same document.
(k) Except as otherwise expressly provided in this Agreement, whether or
not the transactions contemplated by this Agreement are consummated,
Buyer shall pay all of its Closing and due diligence expenses and
its expenses in negotiating and carrying out its obligations under
this Agreement, including the costs of its legal counsel and all of
the expenses of Buyer relating to this Agreement.
(l) Buyer and Seller hereby acknowledge, confirm and agree that Buyer
shall have no claims and Seller shall have no liability whatsoever
as a result of or otherwise in connection with any claim that may
arise by reason of the incapacity, lack of authority, death or
disability of Borrower or any other person or entity or the failure
of Seller to file or enforce any claim against Borrower or any other
person or entity, any claim based upon an election of remedies by
Seller, any claim based upon a duty, if any, on the part of Seller
to disclose to Buyer any facts that Seller may now or hereafter know
about Borrower or any other person or entity, or any notice of
default, notice of sale or bankruptcy of Borrower under the Loan.
(m) BUYER AND SELLER HEREBY ACKNOWLEDGE THAT THIS AGREEMENT HAS BEEN
NEGOTIATED AND EXECUTED IN THE STATE OF CALIFORNIA. BUYER AND SELLER
EXPRESSLY AGREE THAT THIS AGREEMENT SHALL BE GOVERNED BY,
INTERPRETED UNDER AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF CALIFORNIA (WITHOUT GIVING EFFECT TO
CALIFORNIA'S PRINCIPLES OF CONFLICTS OF LAWS). BUYER AND SELLER EACH
IRREVOCABLY SUBMIT TO THE EXCLUSIVE JURISDICTION OF ANY STATE OR
FEDERAL COURT SITTING IN THE COUNTY OF SAN FRANCISCO, STATE OF
CALIFORNIA, OVER ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF OR
RELATING TO THIS AGREEMENT. SELLER AND BUYER EACH EXPRESSLY AND
UNCONDITIONALLY WAIVE IN CONNECTION WITH ANY SUIT, ACTION OR
PROCEEDING BROUGHT UNDER OR ARISING OUT OF THIS AGREEMENT ANY AND
EVERY RIGHT EACH MAY HAVE TO A TRIAL BY JURY.
10. BROKERS.
89
Buyer and Seller each warrant to the other that no fees or commissions are
due or owing to any finders or brokers as a result of the respective
activities of each party in connection with this transaction. In the event
of any claim for brokers' or finders' fees or commissions in connection
with the negotiation, execution or consummation of this Agreement or the
purchase and sale of the Loan, then Buyer shall indemnify, save harmless
and defend Seller from and against any such claim based upon the alleged
statement, representation or agreement by Buyer, and Seller shall
indemnify, save harmless and defend Buyer from and against any such claim
based upon any alleged statement, representation or agreement by Seller.
The indemnity provided for herein shall survive the Closing or the
termination of this Agreement for any reason.
11. INDEMNIFICATION BY BUYER.
Buyer hereby indemnifies and agrees to defend and hold harmless Seller and
each of its affiliates, agents, employees, successors and assigns from and
against any and all losses, liabilities, obligations, judgments,
settlements, damages, costs and expenses, including, without limitation,
interest, penalties and reasonable attorneys' fees, court costs and other
reasonable expenses of litigation and arbitration, suffered by any of such
parties and arising out of or due to:
(a) following the Closing, any act or omission of Buyer in its capacity
as lender under the Loan Documents, provided that forgiveness of the
Loan in whole or part by Buyer following Closing in and of itself
shall not give rise to any liability of Buyer to Bank under this
Section; and
(b) any material breach by Buyer of its representations, warranties,
covenants or agreements set forth in this Agreement.
Any legal counsel hired by Buyer in connection with the indemnification of
Seller pursuant to this Section shall be subject to approval by Seller.
The foregoing indemnity shall survive Closing.
IN WITNESS WHEREOF, Buyer and Seller have executed this Agreement as of the day
and year first above written.
"SELLER" "BUYER"
UNION BANK OF CALIFORNIA, N. A. DIGITAL CREATIVE DEVELOPMENT CORPORATION
By: /s/ CHRISTIANA CREEKPAUM By: /s/ MARTIN WADE III
----------------------------- ---------------------------------
Title: Vice President Title: President and CEO
----------------------------- ---------------------------------
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SCHEDULE OF EXHIBITS
A. Index of Loan Documents
B. Endorsement to Promissory Note to be executed by Seller
C. Assignment of Loan Documents to be executed by Seller
D. Notice to Borrower of Assignment of Claims and Supporting Documentation
E. Borrower's Release
91
EXHIBIT A
EXHIBIT B
ENDORSEMENT TO PROMISSORY NOTE
This Endorsement applies to that certain Second Amended and Restated Secured
Non-Revolving Reducing Promissory Note executed by International Microcomputer
Software, Inc. to the order of UNION BANK OF CALIFORNIA, N. A. dated April 23,
1999 in the original amount of Seven Million Two Hundred Thousand and No/100
Dollars ($7,200,000.00), as amended.
PAY TO THE ORDER OF Digital Creative Development Corporation, without recourse
and without representation or warranty of any kind except as expressly set forth
in that certain Loan Purchase Agreement dated as of August 22, 2001, by and
between the undersigned and Digital Creative Development Corporation.
Dated as of August ___, 2001.
UNION BANK OF CALIFORNIA, N. A.
By: /s/ CHRISTIANA CREEKPAUM
-----------------------------
Christiana Creekpaum
Vice President
EXHIBIT C
ASSIGNMENT OF LOAN DOCUMENTS
FOR VALUE RECEIVED the undersigned, UNION BANK OF CALIFORNIA, N. A.
("Assignor"), hereby assigns and transfers to Digital Creative Development
Corporation ("Assignee"), all of Assignor's right, title and interest in, to and
under any and all document and instrument executed in connection with, or
related in any manner whatsoever to, the loan evidenced by (i) that certain
Second Amended and Restated Secured Non-Revolving Reducing Promissory Note dated
April 23, 1999; and (ii) all those certain loan documents and instruments
expressly described on Exhibit A attached hereto and hereby made a part hereof.
This Assignment shall be binding upon and shall inure to the benefit of Assignor
and Assignee and their respective successors and assigns.
This Assignment is made without representation or warranty by, or recourse to,
Assignor, except as specifically set forth in the Loan Purchase Agreement dated
as of August 22, 2001, between Assignor and Assignee.
Date: August _____, 2001
UNION BANK OF CALIFORNIA, N. A.
By: /s/ CHRISTIANA CREEKPAUM
-----------------------------
Christiana Creekpaum
Vice President
EXHIBIT D
August 31, 2001
Via Certified Mail
92
International Microcomputer Software, Inc.
75 Rowland Way
Novato, California 94945
Attention: Geoffrey Koblick
Re: Sale and Transfer of Loan evidenced by that certain Second Amended and
Restated Secured Non-Revolving Reducing Promissory Note dated April 23, 1999,
made by International Microcomputer Software, Inc., payable to the order of
Union Bank of California, N.A., in the original principal amount of $
7,200,000.00.
Ladies and Gentlemen:
Effective August 31, 2001, UNION BANK OF CALIFORNIA, N. A. has transferred the
above-referenced loan (the "Loan") to Digital Creative Development Corporation
("Purchaser").
Accordingly, you are hereby irrevocably and unconditionally authorized and
directed that each payment of interest, principal, escrows or any other charge
made by you under the Loan is to be made in the form of a check made payable to
the order of Purchaser, and delivered to the following address:
Fleet Bank
Hartford, CT
ABA # 001-900-571
Digital Creative Development Corporation
Account # 942-777-2502
Payments that are not made in accordance with this authorization and direction
will not be credited to payment of such interest, principal, escrows or other
charges until otherwise properly directed.
Yours truly,
UNION BANK OF CALIFORNIA, N. A.
By: /s/ CHRISTIANA CREEKPAUM
-----------------------------
Christiana Creekpaum
Vice President
cc: Arttoday.com, Guarantor (via certified mail)
EXHIBIT E
BORROWER'S AND GUARANTOR'S RELEASE
FOR VALUABLE CONSIDERATION, the receipt of which is hereby acknowledged,
International Microcomputer Software, Inc., a corporation, and Arttoday.com, on
their own behalf and on behalf of their past, present and future officers,
directors, shareholders, representatives, agents, attorneys, administrators,
predecessors, successors and assigns (collectively, the "Releasing Parties"),
hereby enter into this Borrower's and Guarantor's Release ("Release").
The Releasing Parties are entering into this Release in connection with that
certain loan (as heretofore amended, the "Loan"), heretofore made by UNION BANK
OF CALIFORNIA, N. A. ("Bank") to International Microcomputer
93
Software, Inc., a California corporation ("Borrower"), and Arttoday.com
("Guarantor"), which Loan is evidenced by that certain Second Amended and
Restated Secured Non-Revolving Reducing Promissory Note dated April 23, 1999
made payable by Borrower to the order of Bank in the original principal amount
of $7,200,000.00 (as previously amended, the "Note").
NOW, THEREFORE, the Releasing Parties hereby release and forever discharge Bank
from and against all claims, demands or causes of action arising out of or
relating to the Loan including, without limitation, all actions taken or not
taken by Bank with respect thereto prior to the date hereof.
The Releasing Parties represent, warrant and agree that in executing and
entering into this Release they are not relying and have not relied upon any
representations, promises or statements made by anyone that are not recited,
contained or embodied herein.
The Releasing Parties understand and expressly assume the risk that any fact not
recited, contained or embodied herein may turn out hereafter to be other than,
different from or contrary to the facts now known by the Releasing Parties or
believed by the Releasing Parties to be true. Nevertheless, the Releasing
Parties, with the advice of their own independently selected legal counsel,
intend by this Release to release fully, finally and forever all released
matters and agree that this Release shall be effective in all respects
notwithstanding any difference in facts, and shall not be subject to
termination, modification or rescission by reason of any such difference in
facts. In that regard, the Releasing Parties waive all rights that they may have
California Civil Code Section 1542 (and all similar ordinances and statutory,
regulatory, or judicially created laws or rules of any other jurisdiction),
which provides:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR
SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF
KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR.
The Releasing Parties hereby represent and warrant that they have not heretofore
assigned or transferred or purported to assign or transfer to any person or
entity all or any part of any interest in any claim, contention, demand or cause
of action relating to this Release.
This Release may be executed in two (2) or more counterparts, each of which
shall be an original but all of which together shall constitute but one and the
same instrument.
IN WITNESS WHEREOF, this Release has been executed as of August ____, 2001.
BORROWER
INTERNATIONAL MICROCOMPUTER SOFTWARE, INC.
By: /s/ GEOFFREY B. KOBLICK
---------------------------------
Title: CEO
---------------------------------
GUARANTOR
ARTTODAY.COM
By: /s/ GEOFFREY B. KOBLICK
---------------------------------
Title: CEO
---------------------------------
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EX-10.2
4
f76300ex10-2.txt
EXHIBIT 10.2
EXHIBIT 10.2
RESTRUCTURE AGREEMENT
This Restructure Agreement ("Agreement") is made as of October 9, 2001
by and among SILICON VALLEY BANK, a California banking corporation ("SVB"),
INTERNATIONAL MICROCOMPUTER SOFTWARE, INC., a California corporation ("IMSI" or
"Borrower"), ARTTODAY.COM, Inc. an Arizona Corporation ("ArtToday"), and DIGITAL
CREATIVE DEVELOPMENT CORPORATION ("DCDC") a Utah corporation.
RECITALS
A. IMSI is indebted to SVB pursuant to a Loan and Security Agreement
dated November 3, 1998 ("SVB Loan Agreement").
The obligations under the Loan Agreement ("SVB Obligations") are
secured by all assets of IMSI described in said agreement
("Collateral").
In addition, the SVB Obligations are secured by the terms of the
Intellectual Property Security Agreement ("IMSI IP Security
Agreement") executed by IMSI dated November 3, 1998 and by the assets
described therein ("IP Collateral").
In addition, the SVB Obligations and the UBOC Obligations are secured
by the terms of a Pledge Agreement ("Pledge Agreement") executed by
IMSI encumbering all shares of stock in ArtToday which are owned by
IMSI.
B. IMSI was obligated to Union Bank of California ("UBOC") pursuant to
the terms of the First Amended and Restated Loan Agreement dated as
of April 23, 1999, between IMSI and UBOC, including all promissory
notes issued thereto and all documents executed in connection
therewith, as amended and modified (collectively, "UBOC Loan
Agreement"). DCDC has purchased the UBOC Loan Agreement and all
rights and liabilities associated therewith.
The obligations under the UBOC Loan Agreement ("UBOC Obligations")
are secured by the assets described in said agreement ("Collateral").
In addition, the UBOC Obligations are secured by the terms of the
Intellectual Property Security Agreement executed by IMSI dated
November 3, 1999 and by the assets described therein ("IP
Collateral").
In addition, the UBOC Obligations are secured by the terms of the
Pledge Agreement encumbering all shares of stock in ArtToday which
are owned by Borrower.
The UBOC Obligations have been assigned to and assumed by DCDC.
C. UBOC and SVB have entered into an Intercreditor Agreement dated as of
November 3, 1998 ("Intercreditor Agreement") which among other things
provides that UBOC's lien on the assets of Borrower shall be senior
to SVB's lien.
D. The SVB Obligations and the UBOC Obligations are guarantied pursuant
to the terms of a Limited Guaranty executed by ArtToday. ("ArtToday
Guaranty").
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E. The obligations of ArtToday under the ArtToday Guaranty are secured
by all of the assets of ArtToday pursuant to the terms of:
(i) a Security Agreement (All Personal Property Assets) ("ArtToday
Security Agreement"); and
(ii) an the Intellectual Property Security Agreement executed by
ArtToday ("ArtToday IP Security Agreement").
F. IMSI is obligated to various unsecured creditors (collectively the
"Unsecured Creditors") as a result of which an Unofficial Committee
of Unsecured Creditors ("Committee") has been formed. (The claims
held by the Unsecured Creditors shall be collectively referred to as
the "Unsecured Claims".) A UCC-1 lien has been filed in the name of
Credit Manager's Association on behalf of the Unsecured Creditors.
G. IMSI may be obligated to Imageline, Inc. ("Imageline") pursuant to an
arbitration award in the amount of $2,600,000.
H. Baystar Capital L.P. ("Baystar Capital") is a creditor of IMSI
pursuant to a Senior Subordinated Convertible Note dated as of May
24, 1999 ("Baystar Note"). The obligations under the Baystar Note are
subordinated to the SVB Obligations and the UBOC Obligations.
I. Heller Financial, Inc. ("Heller Financial") has filed a judgment lien
against IMSI.
J. IMSI is in default under the UBOC Loan Agreement and the SVB Loan
Agreement.
K. DCDC intends to merge with and into a wholly-owned subsidiary of IMSI
("Merger Subsidiary") in such a manner that Merger Subsidiary
acquires all assets and obligations of DCDC ("Merger Transaction").
The UBOC Loan Agreement will become one of the assets of Merger
Subsidiary following the Merger Transaction.
L. Concurrent with or prior to the completion of the Merger Transaction
as provided or referred to herein, (i) SVB will reduce the amounts
owed by IMSI under the SVB Loan Agreement; (ii) the Intercreditor
Agreement will be terminated; (iii) SVB will retain a senior lien on
the assets of IMSI to secure the amounts owed to SVB by IMSI, (iv)
SVB will retain a senior lien on the assets of ArtToday to secure the
amounts owed to SVB by ArtToday; (v) the holder of the UBOC Loan
Agreement will subordinate the UBOC Obligations and the liens which
secure such obligations to the SVB Obligations and the liens which
secure such obligations and execute a Pledge Agreement in connection
therewith; (vi) the Unsecured Creditors will agree to accept 10% of
their claims in full satisfaction of their claims; and (vii)
Imageline will agree to accept an agreed upon sum to satisfy the
arbitration award in favor of Imageline.
M. Defined terms used but not defined in this Agreement shall have the
meaning provided in the Loan Agreement.
AGREEMENT
NOW THEREFORE, in consideration of the above recitals and the covenants
contained herein and for other good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the parties hereto agree as follows:
Acknowledgement of SVB Obligations. IMSI and DCDC and ArtToday hereby
acknowledge as follows:
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Borrower is obligated to SVB according to the terms of the SVB Loan Agreement.
As of September 28, 2001 the following amounts were outstanding: principal in
the sum of $3,248,291.88; interest in the sum of $749,125.21; and costs of SVB,
including reasonable attorneys' fees and costs in an amount to be specified.
Acknowledgment of Liens. IMSI, DCDC, and ArtToday hereby agree and acknowledge
that: Prior to this Agreement becoming effective, pursuant to the terms of the
SVB Loan Agreement and the IMSI IP Security Agreement, SVB Obligations have been
and are currently secured by a lien on all of IMSI's' personal property assets,
including, without limitation, its intellectual property assets. Said liens have
been fully perfected.
Upon this Agreement becoming effective and the subordination of the UBOC Loan
and Liens, the SVB Obligations shall be secured by a first priority lien on all
of IMSI's personal property assets. Said lien is and shall remain in full force
and effect and shall remain fully perfected.
Default. IMSI, DCDC, and ArtToday hereby agree and acknowledge that the SVB Loan
Agreement is in default (hereinafter the "Stated Defaults") by virtue of the
fact that the loan payments due have not been paid.
No Required Advances. As a result of the Stated Defaults, SVB is not
required to make any further advances under the Loan Agreement.
UBOC Loan and Lien.
Concurrent herewith or prior hereto, DCDC shall purchase the UBOC Loan Agreement
and shall acquire as assignee all liens securing the UBOC Loan Agreement and all
of UBOC's rights thereunder and thereto.
Concurrent herewith DCDC, as holder of the UBOC Loan Agreement shall execute a
Subordination Agreement in form and substance as set forth in Exhibit A hereto.
According to the terms thereof repayment of the UBOC Loan Agreement (and any
guaranty thereof) shall be subordinated to repayment of the SVB Obligations (and
any guaranty thereof), and the lien which secures the UBOC Loan Agreement shall
be subordinated to the lien held by SVB to secure the SVB Obligations.
All collateral held by UBOC and/or DCDC to secure the UBOC Loan Agreement shall
be delivered to SVB concurrent with the execution of this Agreement, including
without limitation the stock in ArtToday held by UBOC under to the ArtToday
Pledge Agreement.
Concurrent herewith (i) DCDC shall execute a Pledge Agreement ("DCDC Pledge
Agreement") in form and substance as set forth in Exhibit B granting a lien on
the UBOC Loan Agreement and related documents to secure DCDC's obligations under
the Subordination Agreement; (ii) DCDC shall deliver to SVB, the UBOC Loan
Agreement as collateral; (iii) SVB shall file such UCC-1 Financing Statements or
UCC-3 Assignments as it deems appropriate to protect or perfect its position as
assignee of DCDC's interests.
Upon completion of the Merger Transaction, DCDC or IMSI shall inform SVB of
completion of the Merger Transaction and Merger Subsidiary shall execute and
deliver to SVB a Reaffirmation of Subordination Agreement in form and substance
as set forth in Exhibit C, reaffirming the subordination of the UBOC
Obligations.
Neither DCDC nor Merger Subsidiary shall assign or transfer any interest in the
UBOC Loan Agreement unless the assignee or transferee agree in writing to be
bound by the terms of the Subordination Agreement and SVB consents to such
assignment or transfer in writing.
Intercreditor Agreement.
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The Intercreditor Agreement shall be deemed terminated effective immediately and
automatically upon effectiveness of the Revised Promissory Note referred to
below in Section 11.a.
Thereafter the Intercreditor Agreement shall not under any circumstances be
revived or reinstated without written agreement of both SVB and the then holder
of the UBOC Loan Agreement.
Unsecured Creditor Claims.
IMSI is in negotiation with the holders of the Unsecured Claims and IMSI intend
to have the Unsecured Creditor enter into one or more written agreements by
which each shall agree that: (A) each shall accept payment of ten percent (10%)
or less of their respective claims in full satisfaction of such claims, and (B)
such payment shall be made after payment in full of the Revised Promissory Note.
IMSI agrees that under no circumstance will it make any payment on any Unsecured
Claims until the Revised Promissory Note has been paid in full.
Imageline Claims.
IMSI represents and warrants that Imageline does not claim a lien on or
ownership interest in any asset in which SVB has a lien to secure the SVB
Obligations ("Collateral Asset").
To the extent that Imageline shall assert a claim or interest in any Collateral
Asset or shall seek to enforce the judgment lien, IMSI will take all necessary
steps to promptly satisfy or release such claims subject to the restrictions
specified below.
IMSI agrees that under no circumstance will it make any payment to Imageline
until the Revised Promissory Note has been paid in full.
Baystar Capital.
IMSI represents and warrants that Baystar Capital is an unsecured creditor of
IMSI and has no lien on any assets to secure the debt owed by IMSI.
To the extent that Baystar should assert a claim or interest in any Collateral
Assets, IMSI will take all necessary steps to promptly satisfy or release such
claim subject to the restrictions specified below.
IMSI agrees that under no circumstance will it make any payment to Baystar
Capital until the Revised Promissory Note has been paid in full.
Heller Financial.
To the extent Heller Financial shall seek to enforce its judgment lien, IMSI
will take all necessary steps to promptly satisfy or release such claims subject
to the restrictions below.
IMSI agrees that under no circumstance will it make any payment to Heller
Financial until the Revised Promissory Note has been paid in full.
Modification of SVB Obligations.
Concurrent herewith IMSI shall execute a Revised Promissory Note in form and
structure as set forth in Exhibit D.
Upon execution and delivery to SVB of the Restructure Documents specified below,
and (ii) completion of the Related Actions specified below, the monetary
obligation owed to SVB under the SVB Loan Agreement ("Original SVB Obligations")
shall be reduced to the monetary obligation as set forth in the Revised
Promissory Note ("Revised SVB Obligations").
SVB hereby agrees that it upon the effectiveness of the Revised Promissory Note,
SVB shall automatically and immediately be deemed to waive: (i) the Stated
Defaults; (ii) any defaults which may have arisen solely by virtue of
98
the consummation of the merger of DCDC into IMSI; and (iii) its claim to any
monetary amounts in excess of the Revised Promissory Note as of the effective
date thereof. However, the waiver referred to above shall not be deemed to waive
or modify any other of the provisions of the SVB Loan Agreement; nor shall it be
deemed to otherwise waive or affect any right of SVB under the SVB Loan
Agreement.
The term "Restructure Documents" shall mean:
this Agreement;
the Revised Promissory Note referred to in Section 9.a;
the DCDC Subordination Agreement referred to in Section 5.b. above;
the DCDC Pledge Agreement referred to in Section 5.d above;
the Subsidiary Reaffirmation Agreement referred to in Section 5.e;
the Reaffirmation of Guaranty and Security Agreement referred to below
in Section 13;
the legal opinions and the other documents referred to in Section 20.
The "Related Actions" shall mean all of the following:
Transfer by UBOC to DCDC of the UBOC Loan Agreement and all of UBOC's
rights thereunder as referred to in Section 5 above;
and Termination of the Intercreditor Agreement as referred to in Section
6 above;
Delivery to SVB of the UBOC Loan Agreement and all related instruments
and documents
Payment of the Restructure Expenses to SVB (as defined below);
Restructure Expenses. SVB shall be reimbursed all reasonable legal fees and
expenses incurred in the negotiation, preparation and documentation of this
Agreement and all related documents, which amounts are to be paid upon demand by
SVB at or following the execution or delivery of this Agreement and which amount
shall not exceed the sum of twenty thousand dollars.
Reaffirmation by Merger Subsidiary. The Subordination Security Agreement shall
be executed by Merger Subsidiary in form and substance as in Exhibit E which
shall become effective immediately upon the merger of DCDC and Merger
Subsidiary. Said agreement shall be executed either concurrent herewith or upon
the formation of the Merger Subsidiary whichever is later.
Personal Property Security Interests. IMSI shall execute such other documents
and take such action as may be requested by SVB to perfect, enforce or
memorialize SVB's security interest in any Collateral Agreement.
Reaffirmation of Guaranty. ArtToday hereby acknowledges, agrees, admits and
represents that: ArtToday has guaranteed all obligations of IMSI to SVB under
the SVB Loan Agreement, subject to the limitations as set forth in the Limited
Guaranty therein. The Limited Guaranty applies to the obligations of IMSI to SVB
following the merger of DCDC into Merger Subsidiary.
Subject to the limitations as provided therein, the Limited Guaranty remains in
full force and effect and there are no defenses to the liability of ArtToday
under the Guaranty and its liability thereunder has not been exonerated or
released in any way.
The Guaranty shall continue to guaranty payment of amounts owed under the SVB
Loan Agreement as modified herein, on the terms provided in the Guaranty.
ArtToday shall execute and deliver to SVB a Reaffirmation of Guaranty in the
form attached hereto as Exhibit F ("Reaffirmation of Guaranty").
ArtToday hereby consents to the modification of the SVB Loan Agreement as
provided herein. The ArtToday Security Agreement shall continue to secure the
ArtToday Guaranty. The ArtToday Security Agreement remains in full force and
effect and there are no defenses to the rights of SVB thereunder.
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Further Assurances. Each of the parties hereto shall take all actions and
execute such documents as are requested to implement the provisions of this
Agreement or any document executed in connection herewith, and to recognize,
perfect or enforce the rights of the parties hereunder or thereunder.
Representation and Warranties of SVB. SVB hereby makes the following
representations and warranties to IMSI, DCDC and ArtToday: (i) All corporate
action on the part of SVB, its officers and directors necessary for the
authorization, execution and delivery of this Agreement and the agreement
contemplated hereby and the performance of all obligations of SVB under such
agreements has been taken or will be taken prior to their execution, and this
Agreement; and (ii) the agreements contemplated to which SVB is a party herein
constitute valid and legally binding obligations of SVB, enforceable in
accordance with their terms, except as subject to laws of general application
relating to bankruptcy, insolvency and relief of debtors and rules of law
governing specific performance, injunctive relief or other equitable remedies.
Separation of Entities and Assets.
IMSI shall not at any time, transfer any assets of IMSI to Merger Subsidiary or
to DCDC. Following completion of the Merger Transaction, Merger Subsidiary shall
be an entity separate from and independent of IMSI and ArtToday. IMSI shall take
all action necessary to maintain the separateness of independence of Merger
Subsidiary and its assets from IMSI and ArtToday.
To the extent that there is any creditor of DCDC prior to the Merger Transaction
and who should claim a lien on any asset of either ArtToday or IMSI after the
Merger Transaction, IMSI will segregate all proceeds of such collateral from the
proceeds of collateral which was subject to SVB's liens prior to completion of
the Merger Transaction. Such funds will be deposited into an interest bearing
account, and SVB shall be given a lien on such account.
No Other Defaults. IMSI and DCDC represent and warrant that to the best of their
knowledge and belief no defaults exist under the SVB Loan Agreement other than
the Stated Defaults.
Additional Representations and Warranties To SVB. The following representations
and warranties are made to SVB:
DCDC hereby represents and warrants to SVB as follows:
DCDC is duly organized, validly existing and in good standing under the
laws of the state of Utah with its principal place of business at 67
Irving Place North, 4th Floor, New York, New York, and has all requisite
corporate power and authority to carry on its business as now conducted
or proposed to be conducted; and
DCDC is qualified or licensed to do business, and in good standing as a
foreign corporation in the State of California and, as the case may be,
in all other jurisdictions in which such qualification or licensing is
required.
IMSI represents and warrants to SVB as follows:
IMSI is duly organized, validly existing and in good standing under the
laws of the state of California with its principal place of business at
75 Rowland Way, Novato, California and has all requisite corporate power
and authority to carry on its business as now conducted or proposed to
be conducted;
IMSI is qualified or licensed to do business, and in good standing as a
foreign corporation or foreign limited liability company, as the case
may be, in all jurisdictions in which such qualification or licensing is
required;
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IMSI has no trademarks, copyrights or patents except those identified in
the IMSI IP Security Agreement. Any and all copyright rights, copyright
applications, copyright registrations and like protections in each work
or authorship and derivative work thereof, whether published or
unpublished and whether or not the same also constitutes a trade secret,
now or hereafter existing, created, acquired or held; all patents,
patent applications and like protections including without limitation
improvements, divisions, continuations, renewals, reissues, extensions
and continuations in part of the same, including without limitation the
patents and patent applications; all trademark and servicemark rights,
whether registered or not, applications to register and registrations of
the same and like protections, and the entire goodwill of the business
of IMSI connected with and symbolized by such trademarks are set forth
on Exhibit G hereto;
IMSI holds all of the shares of stock in ArtToday;
IMSI holds or will hold all of the shares of stock, or all of the
membership interest in Merger Subsidiary; and
Except for agreements contemplated hereby, IMSI has not sold, exchanged
or otherwise disposed of any of its assets or rights, other than in the
ordinary course of business.
ArtToday represents and warrants to SVB as follows:
ArtToday is a corporation duly organized, validly existing and in good
standing under the laws of the State of Arizona, or if not in good
standing, shall be in good standing in the State of Arizona within ten
(10) day as of the signing of this Agreement and remain in good standing
until the SVB Obligations are paid in full;
ArtToday has all requisite corporate power and authority to carry on its
business as now conducted and proposed to be conducted;
ArtToday's principal place of business is at 75 Rowland Way, Novato,
California;
ArtToday has no trademarks, copyrights or patents except those
identified in the ArtToday IP Security Agreement. Any and all copyright
rights, copyright applications, copyright registrations and like
protections in each work or authorship and derivative work thereof,
whether published or unpublished and whether or not the same also
constitutes a trade secret, now or hereafter existing, created, acquired
or held; all patents, patent applications and like protections including
without limitation improvements, divisions, continuations, renewals,
reissues, extensions and continuations in part of the same, including
without limitation the patents and patent applications; all trademark
and servicemark rights, whether registered or not, applications to
register and registrations of the same and like protections, and the
entire goodwill of the business of ArtToday connected with and
symbolized by such trademarks are set forth on Exhibit H hereto; and
ArtToday is qualified or licensed to do business, and in good standing
as a foreign corporation or foreign limited liability company, as the
case may be, in all jurisdictions in which such qualification or
licensing is required.
DCDC and IMSI each severally represents and warrants to SVB as follows:
The Merger Agreement attached hereto as Exhibit I, is the true, correct
and final form evidencing the Merger Transaction, and has not been and
will not be in any way amended, annulled, rescinded, repealed, revoked
or supplemented.
DCDC, IMSI, and ArtToday each severally represents and warrants to SVB as
follows:
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The execution, delivery and performance of this Agreement and of any
instrument or agreement required by this Agreement are within its
powers, have been duly authorized, are not in conflict with the terms of
any of its charters, bylaws or other organization papers and are not in
conflict with any law or any indenture, agreement or undertaking to
which it is a party or by which it is bound or affected. The execution,
delivery and performance of this Agreement and the agreements
contemplated herein and the consummation of the transactions
contemplated hereby and thereby will not be in conflict with or
constitute, with or without the passage of time and giving of notice,
either a default under any instrument, judgment, order, writ, decree or
contract or an event which results in the creation of, any lien, charge
or encumbrance upon any of its assets.
There is no litigation, claim, proceeding or dispute pending (or to its
knowledge threatened) against or affecting it or its financial condition
which either would impair its ability to perform the obligations
hereunder, questions the validity of this Agreement of the agreements
contemplated hereby, or which has not already been expressly disclosed
to SVB in writing.
This Agreement is a legal, valid and binding agreement of the each,
enforceable against each of them in accordance with its terms, and any
instrument or agreement required hereunder, when executed and delivered,
will be similarly legal, valid, binding and enforceable.
All financial information submitted by or on its behalf to SVB is true
and correct in all material respects and is complete insofar as may be
necessary to give SVB a true and accurate knowledge of the subject
matter thereof.
No event has occurred and is continuing which constitutes an Event of
Default of such party under this Agreement or which would become an
Event of Default (defined below) upon a lapse of time or with notice if
applicable.
It is not aware of any rights, any patents, trademarks, service marks,
trade names, copyrights, trade secrets or proprietary rights and
processes held by third parties that it will be required to obtain in
order to conduct its business as proposed to be conducted and that
cannot be obtained on commercially reasonable terms from such parties.
Except as disclosed in writing to SVB, it has not received any
communications alleging that it has violated any of the patents,
trademarks, service marks, trade names, copyrights or trade secrets or
other proprietary rights of any other person or entity, nor is it aware
of any reasonable basis for any such allegations.
IMSI and ArtToday each severally represent and warrant to SVB as follows:
There are no liens, claims or interests in the assets which are subject to SVB's
lien granted except for SVB's lien and the lien which secures the UBOC
Obligations referred to in the Recitals above;
SVB holds and shall retain a first priority lien on the assets of IMSI
and of ArtToday, following execution of the DCDC Subordination
Agreement; and
SVB holds and shall retain a first priority lien on all of the shares of
stock in ArtToday, following execution of the DCDC Subordination
Agreement
There are no other defaults under the Loan Agreement other than the Stated
Defaults.
Legal Opinions/Officer Certificates. Relating to the representations and
warranties provided above, SVB will be provided with: (i) one or more legal
opinions in the form attached hereto as Exhibit J, and (ii) officer certificates
in form as attached hereto as Exhibit K.
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Events of Default. At the option of SVB, the following shall constitute an
"Event of Default" under this Agreement:
Breach of any provision of this Agreement or any agreement, instrument
or certificate executed pursuant hereto.
Breach (whether presently existing or hereafter occurring) of any
provision of, or the occurrence of an Event of Default, excluding the
Stated Defaults, under the SVB Loan Agreement.
Discovery that: (i) any representation or warranty herein or in any
agreement, instrument or certificate executed pursuant hereto; or (ii)
any financial information provided to SVB in connection herewith, was
false or misleading in any material respect when made or provided to
SVB.
Any action by Imageline to foreclose on or enforce its judgment loan.
Any action by Heller Financial to foreclose on or enforce its judgment
lien.
Any action by the Unsecured Creditors to enforce the lien granted to the
Credit Manager's Association.
Remedies Upon Default. Upon the occurrence of an Event of Default, SVB may at
its option and without notice or demand:
Immediately make demand for all obligations owed under the SVB Loan
Agreement and/or the Revised Promissory Note and/or this Agreement.
Immediately enforce all rights under this Agreement and the SVB Loan
Agreement and under applicable law.
Exercise any or all of its remedies under the SVB Loan Agreement, the IP
Security Agreement, or the Pledge Agreement under applicable law.
Enforce the Limited Guaranty and all agreements securing the Limited
Guaranty.
Have the right to enforce one or more remedies partially, successively
or concurrently, and in any order it deems appropriate. SVB's
enforcement of any remedy or remedies shall not estop or prevent SVB
from pursuing any additional remedy or remedies that it may have
hereunder or by law.
Waiver and Release of SVB.
In further consideration of SVB entering into this IMSI and DCDC and ArtToday
and each of their past and present officers, shareholders, directors, employees,
agents, successors and assigns (collectively referred to as the "IMSI Releasing
Parties") hereby waive and release any and all claims, rights and defenses,
causes of action and offsets of any nature whatsoever (known or unknown) which
each of the IMSI Releasing Parties now has (or might have) against SVB, all of
SVB's past and present officers, directors, employees, agents, attorneys or
representatives arising from or in any way related to the SVB Loan Agreement and
all modifications, supplements and extensions thereto, all the advances
thereunder, all documents executed in connection therewith and SVB's actions in
connection therewith.
This waiver and release is not intended to release and waive, nor shall it be
interpreted as releasing and waiving, rights, defenses, claims, causes of
actions and offsets arising from or related to this Agreement and the breach of
any representation, warranty or covenant contained herein.
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Each of the IMSI Releasing Parties understands (a) that it is possible that
unknown losses or claims may exist, or (b) that past known losses have been
underestimated; nevertheless each of the IMSI Releasing Parties is taking this
risk into account in determining the consideration it is to receive for this
release through this Agreement. Consequently, each of the IMSI Releasing Parties
expressly waives all rights and benefits conferred by Section 1542 of the
California Civil Code which provides as follows:
"A general release does not extend to claims which the creditor does not
know or suspect to exist in his favor at the time of executing the
release, which if known by him must have materially affected his
settlement with the debtor."
The waiver and release specified above will become effective immediately
upon: (i) execution and delivery to SVB of the Transaction Documents and
(ii) completion of the Related Actions.
Preservation of Agreements. Except as expressly modified herein, the terms and
conditions of the SVB Loan Agreement, the IP Security Agreement, the Pledge
Agreement, the Limited Guaranty, the ArtToday Security Agreement, and the
ArtToday IP Security Agreement remain in full force and effect and unmodified.
Controlling Provisions. To the extent that there is any inconsistency or
conflict between the terms, conditions and provisions of the SVB Loan Agreement,
the IP Security Agreement, the Pledge Agreement, this Agreement, the Limited
Guaranty, the ArtToday Security Agreement, and the ArtToday IP Security
Agreement the terms, conditions and provisions of this Agreement will prevail.
Successors and Assigns. This Agreement shall bind and inure to the benefit of
the parties hereto and their respective successors and assigns; provided,
however, that the parties hereto other than SVB may not assign this Agreement or
any rights and duties or obligations of them hereunder without the prior written
consent of SVB. SVB may assign this Agreement with the assignment of the SVB
Loan Agreement.
No Waiver. No consent or waiver under this Agreement shall be effective unless
made in writing and signed by the party consenting or waiving. No waiver of any
breach or default shall be deemed a waiver of any breach or default thereafter
occurring.
Attorneys' Fees and Expenses. IMSI, DCDC and ArtToday shall severally pay SVB
for all reasonable attorneys' fees and costs incurred by SVB in connection with
or related to its respective default under this Agreement, whether or not a
legal proceeding is commenced. In the event of any action by SVB to enforce this
Agreement or any instrument or agreement required by this Agreement or to
enforce or interpret SVB's rights under such agreement or instrument (whether in
a state, federal or bankruptcy court or otherwise), each of IMSI, DCDC and
ArtToday agree to pay all expenses incurred by SVB including but not limited to
reasonable attorneys' fees and costs, to the extent that it is the party against
which enforcement is sought.
Severability. In the event that any provision, or portions thereof, of this
Agreement is held to be unenforceable or invalid by any court of competent
jurisdiction, the validity and enforceability of the remaining provisions, or
portions thereof, shall not be affected thereby.
Execution in Counterparts. This Agreement and each of the other documents
executed in connection with this Agreement may be executed simultaneously in one
or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
Captions. The captions contained in this Agreement are for the convenience of
the parties and shall not be deemed or construed as in any way limiting or
extending the language of the provisions to which said captions may refer.
104
Notices. All notices, demands, or requests from one party to another shall,
unless otherwise specified herein, be delivered personally or sent by mail,
certified or registered, return receipt requested or sent by facsimile, to the
persons and addresses identified below. Any such notice, demand or request shall
be deemed to have been received when personally delivered or five (5) days after
mailing or upon delivery by facsimile in the manner set forth below:
SVB: WITH NOTICE TO:
Silicon Valley Bank Peter S. Munoz
160 Spear Street, Suite 360 Crosby, Heafey, Roach & May
San Francisco, CA 94105 Two Embarcadero Center, 20th Floor
Attn: Susan Phillips McGee San Francisco, CA 94111
Facsimile: 415-369-0195 Facsimile: (415) 391-8269
IMSI: WITH NOTICE TO:
Geoffrey Koblick, President David M. Greenberg, Esq.
International Microcomputer Software, Inc. David M. Greenberg, P.C.
75 Rowland Way 60 East Sir Francis Drake Blvd.
Novato, California 94945 Larkspur, California 94939
Facsimile 415-897-2544 Facsimile: 415-925-8875
ARTTODAY: WITH NOTICE TO:
Geoffrey Koblick, CEO David M. Greenberg, Esq.
ARTTODAY.COM, Inc. David M. Greenberg, P.C.
75 Rowland Way 60 East Sir Francis Drake Blvd.
Novato, California 94945 Larkspur, California 94939
Facsimile 415-897-2544 Facsimile: 415-925-8875
DCDC: WITH NOTICE TO:
Martin Wade, President & CEO Hank Gracin, Esq.
Digital Creative Development Corporation Lehman & Eilen, LLP
67 Irving Place North, 4th Floor 50 Charles Lindbergh Blvd., Suite 505
New York, New York 10003 Uniondale, New York 11553
Facsimile: 212-388-9897 Facsimile: 516-222-0948
or at such other address as such party may designate by ten (10) days' advance
written notice to the other parties pursuant to this paragraph.
Advice of Attorney. Each of the parties hereto expressly declares that it knows
and understands the contents of this Agreement and has had an opportunity to
consult with an attorney regarding its form and content.
No Other Beneficiaries. Nothing contained in this Agreement is intended, nor
shall it be construed or deemed, to confer any rights, powers or privileges on
any person, firm, partnership, corporation or other entity who or which is not
an express party herein or a successor-in-interest to any party hereto.
Neutral Construction. Each of the parties hereto has been involved in the
negotiation, review and execution of this Agreement; and each has had the
opportunity to receive independent legal advice from an attorney or attorneys of
its choice with respect to the advisability of making and executing this
Agreement. In the event of any dispute or controversy regarding this Agreement,
the parties hereto shall be considered to be the joint authors of this Agreement
and no provision of this Agreement shall be interpreted against a party hereto
because of authorship.
105
WAIVER OF RIGHT TO JURY TRIAL. EACH OF THE PARTIES TO THIS AGREEMENT HEREBY
KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE ANY RIGHT (WHETHER ARISING UNDER
THE CONSTITUTION OF THE UNITED STATES, THE STATE OF CALIFORNIA OR OF ANY OTHER
STATE, OR ANY FOREIGN JURISDICTION, UNDER ANY STATUTES REGARDING OR RULES OF
CIVIL PROCEDURE APPLICABLE IN ANY STATE OR FEDERAL OR FOREIGN LEGAL PROCEEDING,
UNDER COMMON LAW, OR OTHERWISE) TO DEMAND OR HAVE A TRIAL BY JURY OF ANY CLAIM,
DEMAND, ACTION OR CAUSE OF ACTION ARISING UNDER THIS AGREEMENT, THE LOAN
AGREEMENT, OR IN ANY WAY CONNECTED WITH OR RELATED OR INCIDENTAL TO THE
DISCUSSIONS, DEALINGS OR ACTIONS OF SUCH PERSONS OR ANY OF THEM (WHETHER ORAL OR
WRITTEN) WITH RESPECT THERETO, OR TO THE TRANSACTIONS RELATED THERETO, IN EACH
CASE WHETHER NOW EXISTING OR HEREAFTER ARISING, AND WHETHER SOUNDING IN CONTRACT
OR TORT OR OTHERWISE; AND EACH SUCH PERSON HEREBY AGREES AND CONSENTS THAT ANY
SUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY TRIAL COURT
WITHOUT A JURY, AND THAT ANY OTHER PARTY TO THIS AGREEMENT MAY FILE AN ORIGINAL
COUNTERPART OR A COPY OF THIS AGREEMENT WITH ANY COURT AS WRITTEN EVIDENCE OF
THEIR WAIVER OF RIGHT TO TRIAL BY JURY. BORROWER AND EACH OF THEM, ACKNOWLEDGE
AND AGREE THAT THEY HAVE RECEIVED FULL AND SUFFICIENT CONSIDERATION FOR THIS
PROVISION (AND EACH OTHER PROVISION OF EACH OTHER RELATED DOCUMENT TO WHICH IT
IS A PARTY) AND THAT THIS PROVISION IS A MATERIAL INDUCEMENT FOR SVB ACCEPTING
THIS AGREEMENT. BY WAIVING A JURY TRIAL, THE PARTIES INTEND CLAIMS AND DISPUTES
TO BE RESOLVED BY A JUDGE ACTING WITHOUT A JURY IN ORDER TO AVOID THE DELAYS,
EXPENSE AND RISK OF MISTAKEN INTERPRETATIONS WHICH EACH PARTY ACKNOWLEDGES TO BE
GREATER WITH JURY TRIALS THAN WITH NON-JURY TRIALS. NOTHING IN THIS SECTION
DEALING WITH WAIVER OF JURY TRIAL SHALL BE DEEMED TO WAIVE ANY PROVISION OF THE
SUCCEEDING PARAGRAPH DEALING WITH ARBITRATION, BUT RATHER TO SUPPLEMENT THE
AGREEMENT OF THE PARTIES TO ARBITRATE TO THE EXTENT, IF ANY, THAT ANY OR ALL
DISPUTES AMONG THE PARTIES ARE LITIGATED IN A LEGAL ACTION DESPITE THE
ARBITRATION PROVISION.
INITIALS:
------------- ------------- ------------- ------------- -------------
Arbitration. In the event of any dispute, claim or controversy between the
parties arising out of or in any way relating to this Agreement or any term or
condition of this Agreement, whether in contract, tort, equity or otherwise, and
whether relating to the meaning, interpretation, effect, validity, performance
or enforcement thereof, including any controversy as to the arbitrability
thereof, such dispute, claim or controversy shall be resolved by and through an
arbitration proceeding before a single arbitrator in Santa Clara County,
California, pursuant to the commercial arbitration rules of the American
Arbitration Association. Both the foregoing agreement of the parties to
arbitrate any and all such claims, and the results, determination, finding,
judgment and/or award rendered through such arbitration, shall be final and
binding on the parties hereto and may be specifically enforced by legal
proceedings. The parties intend that they be permitted to conduct reasonable and
expedited discovery in advance of any arbitration proceeding.
Controlling Law. This Agreement and any instrument or agreement executed in
connection with this Agreement shall be governed by and construed under the laws
of the State of California without regard to conflict of law principles.
Venue and Jurisdiction. Any and all legal proceedings to enforce or interpret
this Agreement and any instrument or agreement executed in connection with this
Agreement and the rights thereunder (including any action to compel arbitration
hereunder or to enforce any award or judgment rendered thereby) shall be
governed in accordance with paragraph 34 of the Restructure Agreement.
Jurisdiction and venue on such matters shall be appropriate in any state
106
court within the City and County of San Francisco, State of California, or the
County of Santa Clara, State of California, or the federal courts located in the
Northern District of California, at SVB's election. The parties hereto each
waives any right it may have to assert the doctrine of forum non-conveniens or
to object to such venue. Each of the parties hereto hereby consents to and
submits to the jurisdiction of such courts and to any court-ordered relief
issued by such courts.
IN WITNESS WHEREOF, the parties hereto have executed this Restructure Agreement.
SILICON VALLEY BANK,
a California banking corporation
By: /s/ SUSAN PHILLIPS McGEE
----------------------------------------
DIGITAL CREATIVE DEVELOPMENT CORPORATION,
a Utah corporation
By: /s/ MARTIN WADE III
----------------------------------------
Its: President and CEO
----------------------------------------
INTERNATIONAL MICROCOMPUTER SOFTWARE, INC.,
a California corporation
By: /s/ MARTIN WADE III
----------------------------------------
Its: CEO
----------------------------------------
ARTTODAY.COM, INC.,
an Arizona corporation
By: /s/ MARTIN WADE III
----------------------------------------
Its: CEO
----------------------------------------
APPROVED AS TO FORM:
CROSBY, HEAFEY, ROACH & MAY,
PROFESSIONAL CORPORATION
By:
----------------------------------------
Peter S. Munoz
Attorneys for Silicon Valley Bank
107
EXHIBIT "A"
SUBORDINATION AGREEMENT
EXHIBIT "B"
DCDC PLEDGE AGREEMENT
EXHIBIT "C"
REAFFIRMATION OF SUBORDINATION AGREEMENT
EXHIBIT "D"
REVISED PROMISSORY NOTE
EXHIBIT "E"
SUBORDINATION OF SECURITY AGREEMENT BY MERGER SUBSIDIARY
EXHIBIT "F
REAFFIRMATION OF GUARANTEE BY ARTTODAY
EXHIBIT "G"
IMSI COPYRIGHTS
SCHEDULE A - ISSUED COPYRIGHTS
None
SCHEDULE B - PENDING COPYRIGHT APPLICATIONS
None
SCHEDULE C - UNREGISTERED COPYRIGHTS
(Where No Copyright Application Is Pending)
None
IMSI PATENTS
None
IMSI TRADEMARKS
TRADEMARK DESCRIPTION COUNTRY REG. NO STATUS
--------------------- ------- ------- ------
TurboCAD USA 1736115 Live
FormTool USA 1391469 Live
FloorPlan USA 1655925 Live
WinDelete USA 1939951 Live
EZ Language USA 1926749 Live
Living Media USA 1954650 Live
IMSI USA 1982398 Live
IMSI USA 2164950 Live
108
IMSI USA 1980954 Live
IMSI USA 2159821 Live
IMSI Publisher USA 1808946 Live
IMSI Mouse USA 1818785 Live
EZ Internet USA 2150003 Live
TurboPublisher USA 2038641 Live
TurboDraw USA 2038648 Live
TurboProject USA 2122203 Live
FloorPlan USA 2308531 Live
IMSI:
MasterPhotos Studio UpdateNow
MasterPhotos 75,000 MasterClips Email Animator
MasterPhotos 50,000 MasterClips 303,000
MasterPhotos 25,000 MasterClips 202,000
MicroCookbook MasterClips 150,000
Graphics Converter MasterClips 150,000 (Mac)
Graphics File Converter MasterClips 101,000 (Mac)
NetAccelerator Deluxe MasterClips 35,000 (Mac)
NetAccelerator v2 MasterClips 75,000
Net Accelerator v3 MasterClips 45,000
NetAccelerator TurboCAD Professional v4 - v7
MasterPublisher 97 TurboCAD v4 - v7
TotalCAD 2D/3D TurboCAD 3D Modeler
John Ash Wine Country Cuisine TurboSketch
PeopleScheduler TurboCAD 2D/3D for Windows
Web Business Builder TurboCAD 2D/3D for Mac
MultiMedia Fusion TurboCAD Designer v5 - v7
Lumiere Flow!
RAM Shield FormTool Express
UpdateNow FormTool Scan&OCR
John Ash Wine Country Cuisine Lumiere
MasterPhotos Studio FormTool v4
MasterPhotos 75,000 IMSI Publisher
MasterPhotos 50,000 Living Media
MasterPhotos 25,000 3D Design Plus
MicroCookbook Web Business Builder
Graphics Converter MultiMedia Fusion
Graphics File Converter PeopleScheduler
NetAccelerator Deluxe WinDelete 97
NetAccelerator v2 WinDelete Deluxe
Net Accelerator v3 MapLinx Professional
NetAccelerator HiJaak Pro v4.5, v5
MasterPublisher 97 Hijaak v5 Professional
TotalCAD 2D/3D RAM Shield
109
EXHIBIT "H"
ARTTODAY COPYRIGHTS
SCHEDULE A - ISSUED COPYRIGHTS
None
SCHEDULE B - PENDING COPYRIGHT APPLICATIONS
None
SCHEDULE C - UNREGISTERED COPYRIGHTS
(Where No Copyright Application Is Pending)
None
ARTTODAY PATENTS
PATENT DESCRIPTION DOCKET NO. COUNTRY SERIAL NO. FILING DATE STATUS
------------------ ---------- ------- ---------- ----------- ------
Computer-Implemented U.S.A. Application 2/29/96 Pending
Optimization of Publishing 60/012,697
Layouts
ARTTODAY TRADEMARKS
TRADEMARK DESCRIPTION COUNTRY SERIAL NO. REG. NO STATUS
--------------------- ------- ---------- ------- ------
1) Costodometer U.S.A. 74-669,432 1,972,787 Registered
2) The Newspaper Architect U.S.A. 74-669,399 1,973,744 Registered
3) The Magazine Architect U.S.A. 74-669,311 1,972,785 Registered
4) Poteus U.S.A. 74-669,310 1,968,407 Registered
5) Rebel Artist
6) ArtToday
7) DeskGallery
8) DeskPaint
EXHIBIT "I"
MERGER AGREEMENT
EXHIBIT "J"
LEGAL OPINION
EXHIBIT "K"
SECRETARY / INCUMBENCY CERTIFICATE
110
EX-10.3
5
f76300ex10-3.txt
EXHIBIT 10.3
EXHIBIT 10.3
October 12, 2001
FAX TO: SUSAN PHILLIPS MCGEE
FAX # 856-0813
From: Geoffrey Koblick
Susan,
In the "Restructure Agreement" by and among Silicon Valley Bank, IMSI, ArtToday,
and DCDC, Section 8 Imageline Claims, it is stated in subsection (c), "IMSI
agrees that under no circumstances will it make any payment to Imageline until
the revised promissory note has been paid in full".
Per our discussion today, we need to clarify that the above section was not
referring to, nor including monthly payments to Imageline of $11,500 which are
beginning this month which had been previously negotiated and consented to.
In addition, Section 1. Acknowledgement of SVB Obligations, paragraph (b)
erroneously references the outstanding principal balance of the SVB loan as
$3,248,291.88. The actual amount is $2,499,166.67.
Finally, it is hereby agreed that the due date for the principal and interest
payments under the Promissory Note signed by IMSI for the benefit of SVB shall
begin on October 20, 2001 and continue monthly on the 20th of each month, until
the Note is paid in full.
Please signify your agreement to this clarification by signing below and FAX
this signed letter back to me at 415-897-2544. If you have any further
questions, please call me at 415-878-4082 or Paul Jakab at 415-878-4073. Thank
you.
Regards,
Geoffrey Koblick
Agreed to this 12th day of October, 2001:
By: /s/ SUSAN PHILLIPS McGEE
------------------------------------------
Susan Phillips McGee, Silicon Valley Bank
111
EX-10.4
6
f76300ex10-4.txt
EXHIBIT 10.4
EXHIBIT 10.4
PROMISSORY NOTE
(Fixed Rate)
$1,200,000.00 October 9, 2001
Santa Clara, California
FOR VALUE RECEIVED, the undersigned, INTERNATIONAL MICROCOMPUTER SOFTWARE, INC.,
a California corporation ("Borrower"), promises to pay to SILICON VALLEY BANK, a
California banking corporation ("Lender"), or order, at its office at 3003
Tasman Avenue, Santa Clara, California, 95054 or at such other place as Lender
from time-to-time designates in writing, in lawful money of the United States of
America, the principal amount of ONE MILLION TWO HUNDRED THOUSAND AND NO/lOOTHS
DOLLARS ($1,200,000.00), together with interest on the unpaid principal amount
hereof from the date hereof, at the Applicable Rate provided below.
This Note is being delivered pursuant to the terms of a Restructure Agreement of
even date herewith executed by Lender, Borrower, and by other parties as
specified therein. The Restructure Agreement modifies the terms of that certain
Loan and Security Agreement ("Loan Agreement") dated November 3, 1999 executed
by Borrower and Lender.
Payment. Borrower will pay this loan in 12 principal payments of One Hundred
Thousand Dollars ($100,000) each. Borrower's first principal payment is due on
the last date of the month on which this Note is executed ("Initial Payment
Date"), and all subsequent principal payments are due on the same day of each
month after that. In addition, Borrower will pay regular monthly payments of all
accrued unpaid interest due as of each payment date, beginning on the Initial
Payment Date, with all subsequent interest payments to be due on the same day of
each month after that. Borrower's final payment will be due twelve months from
the date on which this Note is executed, and will be for all principal and all
accrued interest not yet paid. Unless otherwise agreed or required by applicable
law, payments will be applied first to any unpaid collection costs (including
without limitation attorneys fees) and any late charges, then to any unpaid
interest, and any remaining amount to principal. Borrower will pay Lender at
Lender's address shown above or at such other place as Lender may designate in
writing.
Interest.
Rate. The interest rate to be applied to the unpaid principal balance of this
Note will be at a rate of Twelve Percent (12%) per annum from the date hereof.
Computation. The annual interest rate for this Note is computed on a 365/360
basis; that is, by applying the ratio of the annual interest rate over a year of
360 days, multiplied by the outstanding principal balance, multiplied by the
actual number of days the principal balance is outstanding.
Prepayment. Borrower may pay without penalty all or a portion of the amount owed
earlier than it is due. Early payments of less than the full amount owing under
this Note will not, unless agreed to by Lender in writing, relieve Borrower of
Borrower's obligation to continue to make payments under the payment schedule.
Rather, early payments will reduce the principal balance due and may result in
Borrower's making fewer payments. Borrower agrees not to send Lender payments
marked "paid in full", "without recourse", or similar language. If Borrower
sends such a payment, Lender may accept it without losing any of Lender's rights
under this Note, and Borrower will remain obligated to pay any further amount
owed to Lender. All written communications concerning disputed amounts,
including any check or other payment instrument that indicates that the payment
constitutes "payment in full" of the amount owed or that is tendered with other
conditions or limitations or as full satisfaction of a disputed amount must be
mailed or delivered to Lender as specified below.
112
Late Charge. If a payment is 5 days or more late Borrower will be charged 5.000%
of the unpaid portion of the regularly scheduled payment.
Interest After Default. Upon default, including failure to pay upon final
maturity, at Lender's option, and if permitted by applicable law, Lender may
add any unpaid accrued interest to principal and such sum will bear interest
therefrom until paid at the rate provided in this Note (including any increased
rate). Upon Borrower's failure to pay all amounts declared due pursuant to this
section, Lender, at its option, may, if permitted under applicable law, increase
the variable interest rate on this Note to six percentage points over the Rate
specified above.
Default. Each of the following shall constitute an event of default ("Event of
Default") under this Note:
Payment Default. Borrower fails to make any payment when due under this Note.
Other Defaults. Borrower fails to comply with or to perform any other term,
obligation, covenant or condition contained in this Note, in the Restructure
Agreement in the Loan Agreement or in any of the related documents or to comply
with or to perform any term, obligation, covenant or condition contained in any
other agreement between Lender and Borrower; or if an event of default occurs
thereunder.
Guaranty. The revocation or termination of any guaranty of this Note or of the
Loan Agreement.
False Statements. Any warranty, representation or statement made or furnished to
Lender by Borrower or on Borrower's behalf under this Note or the related
documents is false or misleading in any material respect, either now or at the
time made or furnished or becomes false or misleading at any time thereafter.
Insolvency. The dissolution or termination of Borrower's existence as a going
business, the insolvency of borrower, the appointment of a receiver for any part
of Borrower's property, any assignment for the benefit of creditors, any type of
creditor workout, or the commencement of any proceeding under any bankruptcy or
insolvency laws by or against Borrower.
Creditor or Forfeiture Proceedings. Commencement of foreclosure or forfeiture
proceedings, whether by judicial proceeding, self-help, repossession or any
other method, by any creditor of Borrower or by any governmental agency against
any collateral securing the loan. This includes a garnishment of any of
Borrower's accounts, including deposit accounts, with Lender. However, this
Event of Default shall not apply if there is a good faith dispute by Borrower as
to the validity or reasonableness of the claim which is the basis of the
creditor or forfeiture proceeding and if Borrower gives Lender written notice of
the creditor or forfeiture proceeding and deposits with Lender monies or a
surety bond for the creditor or forfeiture proceeding, in an amount determined
by Lender, in its sole discretion, as being an adequate reserve or bond for the
dispute.
Events Affecting Guarantor. Any of the preceding events occurs with respect to
any Guarantor of any of the indebtedness or any Guarantor dies or becomes
incompetent, or revokes or disputes the validity of, or liability under, any
guaranty of the indebtedness.
Change in Ownership. Any change in ownership of twenty-five percent (25%) or
more of the common stock of Borrower except for the Merger Transaction referred
to in the Restructure Agreement.
Adverse Change. A material adverse change occurs in Borrower's financial
condition, or Lender believes the prospect of payment or performance of this
Note is impaired.
Lender's Rights. Upon default, Lender may declare the entire unpaid principal
balance on this Note and all accrued unpaid interest immediately due and
payable. In addition Lender may enforce its rights under the Loan Agreement and
under any guaranty thereof or hereof.
113
Attorneys' Fees; Expenses. Borrower agrees to pay all fees and costs including
without limitation attorneys' fees and costs which may be incurred by Lender in
connection with or related to the enforcement of this Note and Lender's rights
hereunder whether or not legal action is commenced. In the event of any action
to enforce this Note and Lender's rights hereunder (whether in state, federal or
Bankruptcy Court) Borrower agrees to pay all expenses incurred by Lender
including without limitation attorneys' fees and costs.
Collateral. Borrower acknowledges this Note is secured by (i) the terms of the
Loan Agreement, (ii) the terms of an Intellectual Property Security Agreement
executed by Borrower dated November 3, 1999, and (iii) the terms of a Pledge
Agreement executed by Borrower.
Guaranty. Borrower acknowledges that this Note is guaranteed by a Limited
Guaranty executed by ArtToday.com, Inc.
Notices. Any notice, demand or request required hereunder shall be given in
writing (at the addresses set forth below) by any of the following means: (a)
personal service; (b) electronic communication, whether by telex, telegram or
telecopying; (c) overnight courier; or (d) registered or certified, first class
U.S. mail, return receipt requested.
To Borrower: To Bank:
International Microcomputer Software, Inc. Silicon Valley Bank
75 Rowland Way 3003 Tasman Drive
Novato, California 94945 Santa Clara, California 95054
Attn: Geoffrey Koblick, President Attn:
Fax: (415) 897-2544 Fax: (408)
Such addresses may be changed by notice to the other parties given in the same
manner as above provided. Any notice, demand or request sent pursuant to either
subsection (a) or (b), above, shall be deemed received upon such personal
service or upon dispatch by electronic means. Any notice, demand or request sent
pursuant to subsection (c), above, shall be deemed received on the business day
immediately following deposit with the overnight courier, and, if sent pursuant
to subsection (d), above, shall be deemed received forty-eight (48) hours
following deposit into the U.S. mail.
No electronic record or electronic signature (other than a telex or telecopy)
shall be deemed to be a writing so as to satisfy any requirement under this Note
that any agreement, waiver, notice or other instrument under or pursuant hereto
be in writing.
Miscellaneous.
Headings; Gender. The headings of the paragraphs of this Note are inserted for
convenience only and shall not be deemed to constitute a part hereof. All words
and phrases shall be taken to include the singular or plural number, and the
masculine, feminine or neuter gender, as may fit the case.
Waiver.
Borrower for itself and for its successors, personal representatives, heirs and
assigns, all guarantors, endorsers and signers, and their respective successors,
personal representatives, heirs and assigns (collectively the "Obligated
Parties"), hereby waives all valuation and appraisement privileges, presentment
and demand for payment, protest, notice of protest and nonpayment, dishonor and
notice of
114
dishonor, bringing of suit, lack of diligence or delays in collection or
enforcement of this Note and notice of the intention to accelerate.
Borrower for itself and the other Obligated Parties agrees that it shall remain
obligated notwithstanding the release of any party liable, the release of any
security for debt, the taking of any additional security and any other
indulgence or forbearance.
Borrower for itself and the other Obligated Parties agrees (i) that this Note
and any or all payments coming due hereunder may be extended or renewed from
time-to-time without in any way affecting or diminishing its liability hereunder
and (ii) that the Note may be modified without the consent of or notice to
anyone other than the party with whom the modification is made.
Severability. If any provision of this Note or any payments pursuant to the
terms hereof shall be invalid or unenforceable to any extent, the remainder of
this Note and any other payments hereunder shall not be affected thereby and
shall be enforceable to the greatest extent permitted by law.
No Waiver. No failure or delay by Lender or its assigns in exercising any right,
power or privilege hereunder shall operate as a waiver thereof; nor shall any
single or partial exercise thereof preclude any other or further exercise
thereof or the exercise of any other right, power or privilege.
Assignability. This Note shall be binding upon Borrower and Borrower's
representatives, successors and assigns and shall inure to the benefit of
Lender, its successors and assigns, and their successors and assigns and
respective personal representatives, successors and assigns according to the
context hereof, except that Borrower shall not have the right to assign the
obligations contained in this Note. Notice is hereby waived with respect to any
such assignment.
Joint and Several Obligations. If this Note is executed by more than one person
or entity as Borrower, the obligations of each such person or entity shall be
joint and several. If Borrower is a partnership, all general partners of
Borrower, whether or not signatory hereto, shall be directly and personally
liable hereunder, jointly and severally. This Note is executed with full
recourse to all assets of each person or entity constituting Borrower or, if
Borrower is a partnership, each person or entity which is a general partner of
Borrower. No such person shall be a mere accommodation maker, and each such
person shall be primarily and directly liable hereunder.
Governing Law and Venue. This Note shall be governed by and construed under the
laws of the State of California. Jurisdiction and venue shall be appropriate in
any state court within the City and County of San Francisco, State of
California, or the County of Santa Clara, State of California, or the federal
courts located in the Northern District of California, at Lender's election.
Borrower waives any right Borrower may have to assert the doctrine of forum
non-conveniens or to object to such venue and hereby consents to the
jurisdiction of such courts and to any court-ordered relief.
115
Time. Time is of the essence of this Note and each provision hereof. Whenever in
this Note the term "day" is used, it means a calendar day, unless the term
"business day" is used, in which case the term "business day" shall mean a day
on which Lender is open for its usual banking business, other than a Saturday or
Sunday.
WAIVER OF JURY TRIAL. BORROWER HEREBY WAIVES, TO THE EXTENT PERMITTED BY
APPLICABLE LAW, TRIAL BY JURY IN ANY LITIGATION IN ANY COURT WITH RESPECT TO, IN
CONNECTION WITH, OR ARISING OUT OF THIS NOTE, OR THE VALIDITY, PROTECTION,
INTERPRETATION, COLLECTION OR ENFORCEMENT HEREOF, OR ANY OTHER CLAIM OR DISPUTE
HOWSOEVER ARISING (INCLUDING TORT AND CLAIMS FOR BREACH OF DUTY), BY BORROWER.
[The remainder of this page left intentionally blank.]
IN WITNESS WHEREOF, the undersigned has executed and delivered this Note as of
the date and year first above written.
BORROWER:
INTERNATIONAL MICROCOMPUTER SOFTWARE, INC.
a California corporation
By: /s/ MARTIN WADE III
-------------------------------------
Its: CEO
-------------------------------------
By:
-------------------------------------
Its:
-------------------------------------
116
EX-10.5
7
f76300ex10-5.txt
EXHIBIT 10.5
EXHIBIT 10.5
PLEDGE AGREEMENT
(Promissory Note and Contract Rights)
THIS PLEDGE AGREEMENT ("Agreement") is made as of October 9, 2001 by and between
DIGITAL CREATIVE DEVELOPMENT CORPORATION ("DCDC") a Utah corporation.
("Pledgor") and SILICON VALLEY BANK, a California banking corporation ("SVB").
Terms used without other definition herein that are defined in Division 8 or
Division 9 of the California Uniform Commercial Code shall have the respective
meanings assigned to such terms therein.
RECITALS
A. International Microcomputer Software, Inc. ("IMSI") is indebted to
SVB pursuant to a Loan and Security Agreement dated November 3, 1998
("SVB Loan Agreement").
The obligations under the SVB Loan Agreement ("SVB Obligations") are
secured by all assets of IMSI described in said agreement ("Loan
Collateral").
In addition the SVB Obligations are secured by the terms of the
Intellectual Property Security Agreement ("IMSI IP Security
Agreement") executed by IMSI dated November 3, 1999 and by the assets
described therein ("IP Collateral").
In addition the SVB Obligations are secured by the terms of a Pledge
Agreement ("Pledge Agreement") executed by IMSI encumbering all
shares of stock in ArtToday which are owned by IMSI.
B. IMSI is obligated to Union Bank of California ("UBOC") pursuant to
the terms of the First Amended and Restated Loan Agreement dated as
of April 23, 1999, between IMSI and UBOC, including any promissory
notes issued thereto and all documents executed in connection
therewith, as amended and modified (collectively, "UBOC Loan").
The obligations under the UBOC Loan ("UBOC Obligations") are secured
by the Loan Collateral. In addition the UBOC Obligations are secured
by the terms of the Intellectual Property Security Agreement executed
by IMSI dated November 3, 1999 and by the IP Collateral.
In addition the UBOC Obligations are secured by the terms of the
Pledge Agreement encumbering all shares of stock in ArtToday which
are owned by Borrower.
C. UBOC and SVB have entered into an Intercreditor Agreement dated as of
November 3, 1998 ("Intercreditor Agreement") which among other things
provides that UBOC's lien on the assets of Borrower shall be senior
to SVB's lien.
D. The SVB Obligations and the UBOC Obligations are guarantied pursuant
to the terms of a Limited Guaranty executed by ArtToday ("Limited
Guaranty").
E. The obligations of ArtToday under the ArtToday Guaranty are secured
by all of the assets of ArtToday pursuant to the terms of:
a Security Agreement (All Personal Property Assets) ("ArtToday
Security Agreement"); and
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an Intellectual Property Security Agreement executed by Art Today
("ArtToday IP Security Agreement").
F. Concurrent herewith IMSI and SVB and DCDC and other parties are
entering into a Restructure Agreement of even date which will
restructure and reduce the monetary obligations owed by IMSI under
the SVB Loan Agreement.
G. Concurrent herewith IMSI is executing as maker a promissory note of
even date ("Revised Promissory Note") in the original principal sum
of $1,200,000 which shall reflect the reduction of the monetary
obligations of IMSI under the SVB Loan Agreement.
H. Concurrent herewith or prior hereto DCDC has acquired or will acquire
from UBOC the UBOC Loan Agreement. DCDC intends to merge with a
wholly owned subsidiary of IMSI ("Merger Subsidiary") in such a
manner that Merger Subsidiary acquires all assets and obligations of
DCDC (the "Merger Transaction"). As a result of the Merger
Transaction Merger Subsidiary shall acquire the UBOC Loan Agreement
and all liens related thereto.
I. Concurrent herewith DCDC us executing a Subordination and Termination
Agreement ("DCDC Subordination Agreement") pursuant to which DCDC is
subordinating the UBOC Obligations and the liens related thereto.
AGREEMENT
NOW, THEREFORE, for good and valuable consideration, the receipt and adequacy of
which are hereby acknowledged, Pledgor and SVB hereby agree as follows:
Security Interest/Pledge.
Grant of Interest. Pledgor hereby grants SVB a first priority security interest
in all of its present and future interest in the Collateral to secure the DCDC
Obligations, as hereinafter defined.
Collateral. The term "Collateral" means, collectively:
All rights to payment and other rights and powers and benefit of
Pledgor as holder of, and under the following (collectively referred
to as the "UBOC Loan Documents"):
The Promissory Note dated April 23, 1999 executed by IMSI as maker in
favor of UBOC as holder ("UBOC Note").
The First Amended and Restated Loan Agreement dated as of April 23,
1999 between IMSI as borrower and UBOC as Lender ("UBOC Loan
Agreement").
An Intellectual Property Security Agreement executed by IMSI as
debtor in favor of UBOC as secured party dated November 3, 1999.
A Pledge Agreement executed by IMSI as debtor.
A Limited Guaranty executed by ArtToday.com Inc. in favor of SVB and
UBOC.
A Security Agreement (All Personal Property Assets) executed by
ArtToday as debtor in favor of SVB and UBOC as secured parties.
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All Supporting Obligations as defined in the Code supporting payment
on performance of the UBOC Loan Documents and all collateral securing
the performance of the UBOC Loan Documents.
All deposit accounts which contain proceeds from the UBOC Loan
Documents or which secure the performance of the UBOC Loan Documents.
All present and future products, proceeds, and revenues of and from
the UBOC Loan Documents together with all substitutions therefor and
additions thereto.
Obligations. "DCDC Obligations" means all debts, obligations, and liabilities of
Pledgor currently existing or hereafter arising under or in connection with the
DCDC Subordination Agreement however evidenced, whether due or not due, absolute
or contingent, liquidated or unliquidated, determined or undetermined, and
whether Pledgor may be liable individually or jointly, or whether recovery upon
such obligation may be or become barred by any statute of limitations or
otherwise unenforceable; and all renewals, extensions and modifications
therefor; and all attorneys' fees and costs incurred by SVB in connection with
the collection and enforcement thereof.
Collateral Delivery.
Concurrent with the execution and delivery of this Agreement or prior thereto,
each Pledgor is delivering to SVB the originals of all UBOC Loan Documents and
all collateral therefore.
If, at any time, any Pledgor obtains possession of any certificate or instrument
constituting or representing any item of the Collateral, such Pledgor shall
deliver or arrange for the immediate delivery of such certificate or instrument
to SVB.
If any Collateral is not securities and is not capable of being delivered, each
Pledgor shall deliver to SVB such financing statements or other instruments as
are deemed necessary by SVB to enable it to perfect its security interest in
such Collateral and obtain "control" under applicable law.
UCC Filings. SVB may file such UCC-1 Financing Statements or UCC-3 Amendments as
SVB deems appropriate to perfect or reflect its security interest as granted
herein.
Disposition of Collections and Proceeds.
All payments, collections and proceeds received on account of the Collateral
shall be delivered to SVB and held as additional collateral or disposed of as
provided in Section 4.3 below.
Covenants, Representations and Warranties.
Pledgor's Covenants. Pledgor hereby covenants and agrees that:
It will at all times keep the Collateral free of all liens, encumbrances
and claims of any kind or nature other than the security interest of
SVB.
It will not sell, transfer, lease or otherwise dispose of any of the
Collateral or any interest therein to any individual or entity
("Person") except for the lien granted to SVB by this Agreement.
It will pay when due and prior to delinquency all taxes, levies,
assessments or other claims which are or may become liens against any
items of Collateral.
It will deliver to SVB promptly or ensure that SVB promptly receives (i)
all Collateral and all proceeds thereof, (ii) such acknowledgments, or
other agreements or writings as SVB may
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request relating to the Collateral, and (iii) copies of records and
other reports relating to the Collateral in such form and detail and at
such times as SVB may from time to time reasonably require.
It will give prompt notice to SVB of any threatened or asserted dispute
or claim with respect to the Collateral of which it has actual knowledge
and the occurrence of any Event of Default hereunder.
It will from time to time as reasonably required by SVB: (i) execute and
deliver to SVB, and file or record at Pledgor's expense, all notices and
other documents SVB deems reasonably necessary in order for it to
maintain a first perfected security interest in the Collateral; and (ii)
perform such other acts, and execute and deliver to SVB such additional
assignments, agreements and instruments, as SVB may reasonably request
in connection with the administration and enforcement of this Agreement
and/or SVB's rights, powers and remedies hereunder.
Without prior written notice to SVB, it will not change its name,
mailing address, its legal structure or the state of its formation.
Pledgor's Representations. Pledgor hereby represents and warrants to SVB that:
It has full and complete marketable title to the Collateral free and
clear of all liens, encumbrances and security interests (except for
those in favor of SVB and those expressly permitted in writing by SVB).
It has duly authorized by all necessary action the execution, delivery
and performance of this Agreement and neither its execution and delivery
hereof nor its consummation of the transactions contemplated hereby nor
its compliance with any of the terms and provisions hereof does or will
require any approval not yet received of its stockholders or any
approval or consent of any trustee or holders of any of its obligations.
Default.
Events of Default. The occurrence of any of the following shall constitute an
"Event of Default" under this Agreement at the option of SVB.
Breach of or the occurrence of an event of default under the DCDC Subordination
Agreement. SVB fails to have a first priority security interest in any item of
Collateral or such lien shall be challenged by any person or entity.
Any party with a lien on or any interest in any item of Collateral takes action
to enforce such lien or interest.
Any representation or warranty made, or financial statement, certificate or
other document provided, by Pledgor to SVB shall prove to have been false or
misleading.
Pledgor fails to pay its debts generally as they become due or shall file any
petition or action for relief under any bankruptcy, insolvency, reorganization,
moratorium, creditor composition law, or any other law for the relief of or
relating to debtors; an involuntary petition shall be filed under any bankruptcy
law against Pledgor, or a custodian, receiver, trustee, assignee for the benefit
of creditors, or other similar official, shall be appointed to take possession,
custody or control of the properties of Pledgor; or the dissolution or
termination of the business of Pledgor.
Any voluntary or involuntary lien(s) of any kind or character attaches to any
item of Collateral.
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SVB reasonably determines, in good faith, that its security interest in the
Collateral is materially impaired. Pledgor fails to perform any of its duties or
obligations under this Agreement not specifically referred to in this Section
4.1.
Rights on Default. Upon the occurrence of an Event of Default:
SVB shall have all rights and remedies available under contract or
applicable law, which include those of a secured party under the
California Uniform Commercial Code, at law, or in equity. Under, or in
addition to, such remedies SVB shall have the following rights:
SVB shall have the right to take possession of the Collateral
(if not then in Bank's possession) with or without the
appointment of a receiver;
SVB may collect or enforce any or all of the UBOC Loan Documents
and any Supporting Obligations and any item of Collateral
whether or not SVB has foreclosed upon such assets;
SVB may lease or license any item of Collateral;
SVB may sell and dispose of any item of Collateral, or any part
thereof, at public or private sale or at any broker's board or
on any securities exchange, for cash, upon credit or for future
delivery, and at such price or prices as SVB may deem
satisfactory. SVB may be the purchaser of any or all of the
Collateral so sold at any public sale (or, if the Collateral is
of a type customarily sold in a recognized market or is of a
type which is the subject of widely distributed standard price
quotations, at any private sale) and thereafter hold the same,
absolutely, free from any right or claim of whatsoever kind.
Upon any such sale SVB shall have the right to deliver, assign,
and transfer to the purchaser thereof the Collateral so sold.
Each purchaser at any such sale shall hold the Collateral so
sold absolutely, and free from any claim or right of whatsoever
kind, including any equity or right of redemption of Pledgor,
who or which, to the extent permitted by law, hereby
specifically waives any now existing or hereafter acquired
rights of redemption, stay or appraisal.
SVB shall give Pledgor ten (10) days' written notice of its
intention to make any such public or private sale or two (2)
days written notice of a sale at a broker's board or on a
securities exchange. Such notice, in case of a public sale,
shall state the time and place fixed for such sale, and, in case
of sale at a broker's board or on a securities exchange, shall
state the board or exchange at which such sale is to be made and
the day on which the Collateral, or the portion thereof being so
sold, will first be offered for sale at such board or exchange.
Any such public sale shall be held at such time or times within
ordinary business hours and at such place or places as SVB may
fix in the notice of such sale. At any such sale the Collateral
may be sold in one lot as an entirety or in separate parcels, as
SVB may determine. SVB shall not be obligated to make any such
sale pursuant to any such notice. SVB may, without notice or
publication, adjourn any public or private sale or cause the
same to be adjourned from time to time by announcement at the
time and place fixed for the sale, and such sale may be made at
any time or place to which the same may be so adjourned. In case
of any sale of all or any part of the Collateral on credit or
for future delivery, the Collateral so sold may be retained by
SVB until the selling price is paid by the purchaser thereof,
but SVB shall not incur any liability in case of the failure of
such purchaser to take up and pay for the Collateral so sold
and, in case of any such failure, such Collateral may again be
sold upon like notice.
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SVB, instead of exercising the power of sale herein conferred
upon it, or in addition thereto may proceed by a suit or suits
at law or in equity to foreclose the security interests herein
granted and sell the Collateral, or any portion thereof, under a
judgment or decree of a court or courts of competent
jurisdiction. Pledgor hereby agrees that any disposition of
Collateral by way of a private placement or other method which,
in the opinion of SVB, is required or advisable under federal
and state securities laws is commercially reasonable.
Application of Proceeds. The proceeds or collections or payments on any
collateral shall be applied first to the reasonable expenses of retaking,
holding, preparing for sale, discharging all liens, selling and the like, then
to the reasonable attorneys' fees and legal expenses incurred by SVB, and then
to the DCDC Obligations in such order as SVB may determine. Should the net
proceeds resulting from any such sale or disposition exceed the amount owing to
SVB, SVB shall pay such surplus to the person(s) legally entitled thereto.
Deficiency. Regardless of any foreclosure, any person liable for all or any
portion of the DCDC Obligations shall remain liable for the unsatisfied portion
of such DCDC Obligations, and shall promptly pay the same to SVB immediately and
without demand.
Costs and Expenses.
Pledgor shall, to the extent permitted by applicable law, reimburse SVB promptly
for all costs and expenses incurred by SVB in performing any agreement of such
Pledgor which Pledgor shall fail to perform or in taking any other action which
SVB deems necessary for the maintenance or preservation of the Collateral
pledged by Pledgor hereunder or SVB's interest therein, which costs and expenses
shall constitute DCDC Obligations under this Agreement.
Pledgor agrees to reimburse SVB promptly upon demand for any expenses SVB may
incur while acting as Pledgor's attorney-in-fact, which expenses shall
constitute IMSI Obligations under this Agreement.
Authorization and Power of Attorney.
Authorized Action by SVB. Pledgor hereby irrevocably appoints SVB as its
attorney-in-fact to do at any time prior to or subsequent to an Event of Default
hereunder, any act which Pledgor is obligated by this Pledge Agreement to do
(but SVB shall not be obligated to nor shall it incur any liability to Pledgor
or any third parties for failure so to do). In addition, at any time prior to or
subsequent to the occurrence of an Event of Default, SVB is authorized:
to make any modifications to any of the UBOC Loan Documents with the
consent of the obligors thereon;
to assign any of the UBOC Loan Documents with the assignment of the DCDC
Subordination Agreement;
to take and hold additional security for the performance of the
obligations under the UBOC Loan Documents;
to endorse, receive, and receipt for all payments, proceeds, and other
sums and property now or hereafter payable on or on account of the
Collateral which come into Secured Party's possession;
to deposit, accept, hold, or apply other property in exchange for the
Collateral or surrender any item of Collateral to the person who
provided said item; and
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at any time after the occurrence of an Event of Default under any of the
UBOC Loan Documents (the "Defaulted Document"), SVB is authorized to:
to demand, receive and enforce Debtor's rights with respect to the
Defaulted Document.
to give appropriate receipts, releases and satisfactions for and on
behalf of and in the name of Pledgor and take any action SVB deems
advisable with respect to the Defaulted Document.
to deposit all collections or proceeds of the Defaulted Document into an
interest bearing account in the name of SVB and to hold such account as
additional collateral under this Pledge Agreement.
at any time after the occurrence of an Event of Default under this
Pledge Agreement, SVB is authorized:
to demand, receive and enforce Pledgor's rights with respect to
the Collateral;
to enter into any agreement pertaining to the Collateral;
to give appropriate receipts, releases and satisfactions for and on
behalf of and in the name of Pledgor and take any action SVB deems
advisable with respect to the Collateral; and
to transfer the Collateral to its own name or its nominee's name in
accordance with applicable law.
exercise as to the Collateral all the rights, powers and remedies of an
owner whether or not SVB has foreclosed upon such asset.
The appointment granted herein is irrevocable and coupled with an interest.
Any third party may rely on representations of SVB that a default exists
hereunder or that the power of attorney hereby granted by Pledgor to SVB is
effective, without further inquiry.
Waivers of Pledgor.
Application of Payments. Notwithstanding the rights given to Pledgor pursuant to
California Civil Code Sections 1479 and 2822 or equivalent provisions in the
laws of the state specified in the governing law clause of this document (and
any amendments or successors thereto), to designate how payments will be
applied, Pledgor hereby waives such rights and SVB shall have the right in its
sole discretion to determine the order and method of the application of payments
received from Pledgor or from the sale or disposition of the Collateral and to
revise such application prospectively or retroactively at its discretion
(notwithstanding any entry by SVB on its books).
Presentment. Pledgor hereby waives demand, protest, notice of protest, notice of
dishonor, notice of payment and nonpayment, or notice of nonpayment at maturity.
Enforcement. Pledgor hereby waives any right to require SVB (i) to proceed
against any person, (ii) to exhaust any Collateral or (iii) to pursue any remedy
in SVB's power in any order or whatsoever. SVB shall not be required to take any
action to preserve rights against prior parties with respect to any of the
Collateral. Pledgor waives the right to plead any statute of limitations or any
defense to the personal liability of Pledgor as a defense to SVB's exercise of
any right or remedy hereunder.
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Subrogation. To the extent Pledgor has any rights of subrogation, until the DCDC
Obligations has been paid or otherwise discharged in full, Pledgor does hereby
waive all rights of subrogation and any right to enforce any remedy which SVB
now has, or may have, and Pledgor does hereby waive any benefit of, and any
right to participate in, any security now or hereafter held by SVB. Pledgor
hereby waives any defense it may have now or in the future based on any election
of remedies by SVB which destroys Pledgor's subrogation rights to proceed
against any party for reimbursement, and Pledgor acknowledges that it will be
liable to SVB even though Pledgor may well have no such recourse against said
party.
Release of Third Parties. Pledgor hereby waives any right or defense it may now
or hereafter have based upon (i) SVB's release of any party who may be obligated
to SVB; (ii) SVB's release or impairment of any collateral for the DCDC
Obligations; and (iii) the modification or extension of the DCDC Obligations.
Suretyship Defenses. Pledgor hereby waives any and all suretyship defenses now
or hereafter available to it under the California Civil Code or the California
Uniform Commercial Code.
General Waivers. Without limiting the generality of any other waiver or other
provision of this Agreement, Pledgor hereby waives, to the maximum extent such
waiver is permitted by law, any and all benefits or defenses arising directly or
indirectly under any one or more of: (i) California Civil Code Sections 2799,
2808, 2809, 2810, 2815, 2819, 2820, 2821, 2822, 2838, 2839, 2845, 2846, 2847,
2848, 2849, 2850, 2899, and 3433; (ii) Chapter 2 of Title 14 of the California
Civil Code; (iii) California Code of Civil Procedure Sections 580a, 580b, 580c,
580d, and 726; or (iv) California Uniform Commercial Code.
Non-Waiver.
Subject to Section 10.3, SVB may, in the exercise of its sole discretion, waive
an Event of Default, or cure an Event of Default, at Pledgor's expense.
SVB's Duties.
SVB's sole duty with respect to the Collateral in its possession shall be to use
reasonable care in the custody and preservation thereof. SVB shall be deemed to
have exercised reasonable care in the custody and preservation of such
Collateral if such Collateral is accorded treatment substantially equal to that
which SVB and accords its own property, it being understood that SVB shall not
have any responsibility for (i) ascertaining or taking action with respect to
calls, conversions, exchanges, maturities, declining value, tender or other
matters relative to any Collateral, regardless of whether SVB have or are deemed
to have knowledge of such matters or (ii) taking any steps to preserve any
rights against any person with respect to any Collateral. Under no circumstances
shall SVB be responsible for an injury or loss to the Collateral, or any part
thereof, arising from any cause beyond the reasonable control of SVB.
SVB may at any time deliver the Collateral or any part thereof to any Pledgor or
arrange for the delivery thereof and such Pledgor's receipt shall be a complete
and full acquittance for the Collateral so delivered, and SVB shall thereafter
be discharged from any liability or responsibility therefor.
Upon satisfaction of the obligations under the DCDC Subordination Agreement or
payment of all amounts owed to SVB by IMSI, SVB shall release all collateral
hereunder to Pledgor.
General Provisions.
Notices. Any notice given by any party under this Agreement shall be in writing
and personally delivered, deposited in the United States mail, postage prepaid,
or sent by telex or other authenticated message, charges prepaid, and addressed
as follows:
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To Pledgor: To SVB:
Digital Creative Development Corporation Silicon Valley Bank
67 Irving Place North, 4th Floor 160 Spear Street, Suite 360
New York, New York 10003 San Francisco, CA 94105
Attn: Martin Wade, President & CEO Attn: Susan Phillips McGee
Facsimile: 212-388-9897 Facsimile: 415-369-0195
Each party may change the address to which notices, requests and other
communications are to be sent by giving written notice of such change to each
other party.
Binding Effect. This Agreement shall be binding upon Pledgor, its permitted
successors, representatives and assigns, and shall inure to the benefit of SVB
and its successors, representatives and assigns; provided, however, that Pledgor
may not assign or transfer its obligations under this Agreement without
SVB's prior written consent. SVB reserves the right to sell, assign, or transfer
its rights and powers under this Agreement, in whole or in part, without notice
to Pledgor. In that connection, SVB may disclose all documents and information
which SVB now has or hereafter may have relating to this Agreement, Pledgor or
its business.
No Waiver. Any waiver, consent or approval by SVB of any Event of Default or
breach of any provision, condition or covenant of this Agreement must be in
writing and shall be effective only to the extent set forth in writing. No
waiver of any breach or default shall be deemed a waiver of any later breach or
default of this Agreement. No failure or delay on the part of SVB in exercising
any power, right or privilege under this Agreement shall operate as a waiver
thereof, and no single or partial exercise of any such power, right or privilege
shall preclude any further power, right or privilege.
Rights Cumulative. All rights and remedies existing under this Agreement are
cumulative to, and not exclusive of, any other rights or remedies available
under contract or applicable law. The obligations of Pledgor under this
Agreement shall continue to be effective or be reinstated, as the case may be,
if at any time any payment of any IMSI Obligations is rescinded or must
otherwise be returned by SVB upon, on account of, or in connection with, the
insolvency, bankruptcy or reorganization of Borrower, Pledgor or otherwise, all
as though such payment had not been made.
Unenforceable Provisions. Any provision of this Agreement which is prohibited or
unenforceable in any jurisdiction shall be so only as to such jurisdiction and
only to the extent of such prohibition or unenforceability, but all the
remaining provisions of this Agreement shall remain valid and enforceable.
Waiver of Notice. To the fullest extent permitted by law, Pledgor hereby waives
presentment, demand, protest, notice of dishonor and all other notices and
demands, as well as any applicable statute of limitations.
Indemnification. Pledgor agrees it shall pay and protect, defend and indemnify
SVB and SVB's employees, officers, directors, shareholders, affiliates,
correspondents, agents, attorneys and representatives (other than SVB,
collectively "Agents") against, and hold SVB and each such Agent harmless from,
all claims, actions, proceedings, liabilities, damages, losses, expenses
(including, without limitation, attorneys' fees and costs) and other amounts
incurred by SVB and each such Agent, arising from or related to this Agreement;
provided, however, that this indemnification shall not apply to any of the
foregoing incurred solely as the result of SVB's or any Agent's gross negligence
or willful misconduct. This indemnification shall survive the payment and
satisfaction of all of Pledgor's obligations and liabilities to SVB.
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Attorney Fees. Pledgor shall reimburse SVB for all costs and expenses, including
without limitation reasonable attorneys' fees and disbursements (and fees and
disbursements of SVB's in-house counsel) expended or incurred by SVB in any
arbitration, mediation, judicial reference, legal action or otherwise in
connection with (a) the negotiation, preparation, amendment, interpretation and
enforcement of this Agreement, including without limitation during any workout,
attempted workout, and/or in connection with the rendering of legal advice as to
SVB's rights, remedies and obligations under this Agreement, (b) collecting any
sum which becomes due SVB under this Agreement, (c) any proceeding, or any
appeal, or (d) the protection, preservation or enforcement of any rights of SVB.
For the purposes of this section, attorneys' fees shall include, without
limitation, fees incurred in connection with the following: (1) contempt
proceedings; (2) discovery; (3) any motion, proceeding or other activity of any
kind in connection with a bankruptcy proceeding or case arising out of or
relating to any petition under Title 11 of the United States Code, as the same
shall be in effect from time to time, or any similar law; (4) garnishment, levy,
and any Pledgor and third party examinations; and (5) post-judgment motions and
proceedings of any kind, including without limitation any activity taken to
collect or enforce any judgment.
Multiple Pledgors. In all cases where there is more than one Pledgor, or when
this Agreement is executed by more than one Pledgor, the term "Pledgor" shall
include each or any Pledgor, and all terms appearing in the singular shall be
deemed to have been used in the plural where the context and construction so
require.
Joint and Several. Should more than one person sign this Agreement as Pledgor,
the obligations of each signer shall be joint and several.
Entire Agreement. This Agreement is intended by each Pledgor and SVB as the
final expression of such Pledgor's obligations to SVB in connection with the
Collateral and supersedes all prior understandings or agreements concerning the
subject matter hereof. This Agreement may be amended only by a writing signed by
each Pledgor and accepted by SVB in writing.
Execution in Counterparts. This Agreement may be executed simultaneously in one
or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
Legal Matters.
Choice of Law. The validity, terms, performance and enforcement of this
Agreement shall be governed by those laws of the State of California which are
applicable to agreements which are negotiated, executed/delivered and performed
solely in the State of California.
Jurisdiction, Venue, Service of Process. The State and Federal District Courts
located in San Jose, California shall have exclusive jurisdiction and venue of
any action or proceeding arising out of or related to the negotiation,
execution, delivery, performance, breach or enforcement of this Agreement or any
other agreement, document or instrument negotiated, executed, delivered, entered
into or performed in connection with this Agreement or any of the transactions
contemplated hereby or thereby; any waiver, modification, amendment or
termination hereof or thereof or any action taken or omission made by any
Pledgor or SVB or any of their respective directors, officers, employees, agents
or attorneys in connection with the payment, performance, exercise or
enforcement of any right, duty or obligation created or implied hereby or
thereby or arising hereunder or thereunder, regardless of whether any claim,
counter-claim or defense in any such action, suit or proceeding is characterized
as arising out of fraud, negligence, recklessness, intentional misconduct, a
breach of contract or fiduciary duty, or violation of a statute, law, ordinance,
rule or regulation. The parties hereto hereby irrevocably consent to the
personal jurisdiction of such courts, to such venue and to the service of
process in the manner provided for the giving of notices
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in this Agreement. The parties hereto hereby waive all objections to such
jurisdiction and venue including those which might be based upon inconvenience
or the nature of the forum.
Waiver of Jury Trial. PLEDGOR HEREBY VOLUNTARILY, KNOWINGLY, IRREVOCABLY AND
UNCONDITIONALLY WAIVES AND RELINQUISHES ITS RIGHT TO TRIAL BY JURY UNDER THE
CONSTITUTION OF THE UNITED STATES OF AMERICA OR OF THE STATE OF CALIFORNIA OR
ANY OTHER CONSTITUTION, OR UNDER ANY STATUTE OR LAW IN ANY CIVIL LEGAL ACTION,
SUIT OR PROCEEDING ARISING OUT OF OR RELATED TO THE NEGOTIATION, EXECUTION,
DELIVERY, PERFORMANCE, BREACH OR ENFORCEMENT OF THIS AGREEMENT OR ANY OTHER
AGREEMENT, DOCUMENT OR INSTRUMENT NEGOTIATED, EXECUTED, DELIVERED, ENTERED INTO
OR PERFORMED IN CONNECTION WITH THIS AGREEMENT OR ANY OF THE TRANSACTIONS
CONTEMPLATED HEREBY OR THEREBY, ANY WAIVER, MODIFICATION, AMENDMENT OR
TERMINATION HEREOF OR THEREOF OR ANY ACTION TAKEN OR OMISSION MADE BY SUCH
PLEDGOR OR SVB OR ANY OF THEIR RESPECTIVE DIRECTORS, OFFICERS, EMPLOYEES, AGENTS
OR ATTORNEYS IN CONNECTION WITH THE PAYMENT, PERFORMANCE, EXERCISE OR
ENFORCEMENT OF ANY RIGHT, DUTY OR OBLIGATION CREATED OR IMPLIED HEREBY OR
THEREBY OR ARISING HEREUNDER OR THEREUNDER, REGARDLESS OF WHETHER ANY CLAIM,
COUNTERCLAIM OR DEFENSE IN ANY SUCH ACTION, SUIT OR PROCEEDING IS CHARACTERIZED
AS ARISING OUT OF FRAUD, NEGLIGENCE, RECKLESSNESS, INTENTIONAL MISCONDUCT, A
BREACH OF CONTRACT OR FIDUCIARY DUTY, OR VIOLATION OF A STATUTE, LAW, ORDINANCE,
RULE OR REGULATION.
All terms and conditions set forth in the Exhibits and Addendum(s) attached to
this Agreement are incorporated by this reference.
127
IN WITNESS WHEREOF, the parties hereto have executed this Pledge Agreement as of
the date set forth above.
SVB: PLEDGOR:
SILICON VALLEY BANK, DIGITAL CREATIVE DEVELOPMENT CORPORATION
a California banking corporation
By: /s/ SUSAN PHILLIPS McGEE By: /s/ MARTIN WADE III
-------------------------------- -----------------------------------
Its: Vice President Its: President and CEO
-------------------------------- -----------------------------------
128
EX-10.6
8
f76300ex10-6.txt
EXHIBIT 10.6
EXHIBIT 10.6
REAFFIRMATION OF SUBORDINATION AGREEMENT AND PLEDGE AGREEMENT
This Reaffirmation of Subordination Agreement and Pledge Agreement
("Agreement") is made as of ____________ __, 2001 by and among SILICON VALLEY
BANK, a California banking corporation ("SVB"), and DCDC Merge ("Merger
Subsidiary"), a California corporation.
RECITALS
A. IMSI is indebted to SVB pursuant to a Loan and Security Agreement
dated November 3, 1998 ("SVB Loan Agreement").
The obligations under the SVB Loan Agreement ("SVB Obligations") are
secured by all assets of IMSI described in said agreement
("Collateral").
In addition the SVB Obligations are secured by the terms of an
Intellectual Property Security Agreement ("IMSI IP Security
Agreement") executed by IMSI dated November 3, 1999 and by the assets
described therein ("IP Collateral").
In addition the SVB Obligations are secured by the terms of a Pledge
Agreement ("Pledge Agreement") executed by IMSI encumbering all
shares of stock in ArtToday which are owned by IMSI.
B. IMSI was obligated to Union Bank of California ("UBOC") pursuant to
the terms of the First Amended and Restated Loan Agreement dated as
of April 23, 1999, between IMSI and UBOC, including any promissory
notes issued thereto and all documents executed in connection
therewith, as amended and modified (collectively, "UBOC Loan
Agreement").
The obligations under the UBOC Loan Agreement ("UBOC Obligations")
are secured by the Collateral.
In addition the UBOC Obligations are secured by the terms of the
Intellectual Property Security Agreement executed by IMSI dated
November 3, 1999 and by the IP Collateral.
In addition the UBOC Obligations are secured by the terms of the
Pledge Agreement encumbering all shares of stock in ArtToday which
are owned by Borrower.
C. Prior hereto IMSI and SVB and other parties entered into a
Restructure Agreement, dated as of October 9, 2001 which restructured
and reduced the monetary obligations owed by IMSI under the SVB Loan
Agreement.
D. On October 9, 2001 IMSI executed as maker a promissory note ("Revised
Promissory Note") in the original principal sum of $1,200,000 which
reflects the reduction of the monetary obligations of IMSI under the
SVB Loan Agreement.
E. Prior hereto DCDC purchased the UBOC Loan Agreement; and subordinated
the repayment of the UBOC Loan Agreement to the repayment of the SVB
Loan Agreement and subordinated all liens which secure the UBOC Loan
Agreement to the liens which secure the repayment of the SVB Loan
Agreement, and pledged the UBOC Loan Agreement as collateral to
secure such subordination.
129
J. Digital Creative Development Corporation ("DCDC") intends to merge
with a wholly owned subsidiary of IMSI ("Merger Subsidiary") in such
a manner that Merger Subsidiary acquires all assets and obligations
of DCDC (the "Merger Transaction"). As a result of the Merger
Transaction Merger Subsidiary shall acquire the UBOC Loan Agreement
and all liens related thereto subject to the subordination agreed to
by DCDC.
AGREEMENT
NOW THEREFORE, in consideration of the above recitals and the covenants
contained herein and for other good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the parties hereto agree as follows:
Reaffirmation. Merger Subsidiary hereby reaffirms the DCDC Subordination
Agreement and each and every covenant, representation and warranty
contained therein as if it were made by Merger Subsidiary in the
original document.
Acknowledgment of Pledge Agreement. Merger Subsidiary hereby recognizes
and agrees that it is obligated as pledgor under the Pledge Agreement
and bound by all of the terms thereof.
Enforceability and No Defenses. Merger Subsidiary hereby confirms that
the DCDC Subordination Agreement and the Pledge Agreement remain in full
force and effect and that there are no defenses, offsets or
counter-claims to its liability thereunder.
Acknowledgment of Liens Under Pledge Agreement. Merger
Subsidiary hereby recognizes and agrees that the security
provisions of the DCDC Pledge Agreement continue to secure the
performance of all obligations under the DCDC Subordination
Agreement;
Effectiveness of Reaffirmation. This Reaffirmation Agreement
is effective upon completion of the Merger Transaction.
Controlling Provisions. To the extent that there is any inconsistency or
conflict between the terms, conditions and provisions of the DCDC Pledge
Agreement or the Pledge Agreement and this Agreement, the terms,
conditions and provisions of this Agreement will prevail.
Successors and Assigns. This Agreement shall bind and inure to the
benefit of the parties hereto and their respective successors and
assigns; provided, however, that Merger Subsidiary may not assign this
Agreement or any rights and duties or obligations of them hereunder
without the prior written consent of SVB. SVB may assign this Agreement
with the assignment of the SVB Loan Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date set forth above.
____________________., SILICON VALLEY BANK,
a California corporation a California corporation
By: /s/ MARTIN WADE III By: /s/ SUSAN PHILLIPS McGEE
------------------------------ -------------------------------
Its: CEO Its: Vice President
------------------------------ -------------------------------
130
EX-10.7
9
f76300ex10-7.txt
EXHIBIT 10.7
EXHIBIT 10.7
REAFFIRMATION OF GUARANTY AND SECURITY AGREEMENT
This Reaffirmation of Guaranty ("Agreement") is made as of October 9,
2001 by and among SILICON VALLEY BANK, a California banking corporation ("SVB"),
and ARTTODAY.COM, INC., an Arizona corporation ("ArtToday").
RECITALS
A. International Microcomputer Software, Inc. ("IMSI") is indebted to
SVB pursuant to a Loan and Security Agreement dated November 3, 1998
("SVB Loan Agreement").
The obligations under the SVB Loan Agreement ("SVB Obligations") are
secured by all assets of IMSI described in said agreement
("Collateral").
In addition the SVB Obligations are secured by the terms of the
Intellectual Property Security Agreement ("IMSI IP Security
Agreement") executed by IMSI dated November 3, 1999 and by the assets
described therein ("IP Collateral").
In addition the SVB Obligations are secured by the terms of a Pledge
Agreement ("Pledge Agreement") executed by IMSI encumbering all
shares of stock in ArtToday which are owned by IMSI.
B. IMSI is obligated to Union Bank of California ("UBOC") pursuant to
the terms of the First Amended and Restated Loan Agreement dated as
of April 23, 1999, between IMSI and UBOC, including any promissory
notes issued thereto and all documents executed in connection
therewith, as amended and modified (collectively, "UBOC Loan
Agreement").
C. The obligations under the UBOC Loan Agreement ("UBOC Obligations")
are secured by the Collateral.
In addition the UBOC Obligations are secured by the terms of the
Intellectual Property Security Agreement executed by IMSI dated
November 3, 1999 and by the IP Collateral.
In addition the UBOC Obligations are secured by the terms of the
Pledge Agreement encumbering all shares of stock in ArtToday which
are owned by Borrower.
D. UBOC and SVB have entered into an Intercreditor Agreement dated as of
November 3, 1998 ("Intercreditor Agreement") which among other things
provides that UBOC's lien on the assets of Borrower shall be senior
to SVB's lien.
E. The SVB Obligations and the UBOC Obligations are guarantied pursuant
to the terms of a Limited Guaranty executed by ArtToday ("Limited
Guaranty").
F. The obligations of ArtToday under the ArtToday Guaranty are secured
by all of the assets of ArtToday pursuant to the terms of:
a Security Agreement (All Personal Property Assets) ("ArtToday
Security Agreement"); and
an Intellectual Property Security Agreement executed by Art Today
("ArtToday IP Security Agreement").
131
G. Concurrent herewith IMSI and SVB and DCDC and other parties are
entering into a Restructure Agreement of even date which will
restructure and reduce the monetary obligations owed by IMSI under
the SVB Loan Agreement.
H. Concurrent herewith IMSI is executing as maker a promissory note of
even date ("Revised Promissory Note") in the original principal sum
of $1,200,000 which shall reflect the reduction of the monetary
obligations of IMSI under the SVB Loan Agreement.
I. DCDC intends to merge with a wholly owned subsidiary of IMSI ("Merger
Subsidiary") in such a manner that Merger Subsidiary acquires all
assets and obligations of DCDC (the "Merger Transaction"). Prior to
such merger DCDC will purchase the UBOC Loan Agreement. As a result
of the Merger Transaction Merger Subsidiary shall acquire the UBOC
Loan Agreement and all liens related thereto.
AGREEMENT
NOW THEREFORE, in consideration of the above recitals and the covenants
contained herein and for other good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the parties hereto agree as follows:
Acknowledgment of Guaranty. ArtToday hereby recognizes and agrees that:
it is obligated as guarantor of all obligations and indebtedness under
the SVB Loan Agreement pursuant to the terms provided in the Limited
Guaranty; and
the Limited Guaranty guaranties all obligations of IMSI under the
Revised Promissory Note in addition to such other obligations as are
included in the SVB Loan Agreement.
Enforceability and No Defenses. ArtToday hereby confirms that the Limited
Guaranty remains in full force and effect and that there are no defenses,
offsets or counter-claims to its liability under the Limited Guaranty.
Acknowledgment of Security Agreements. ArtToday hereby recognizes and agrees:
It is obligated as debtor under the ArtToday Security Agreement and
bound by all of the terms thereof;
It is obligated as debtor under the ArtToday IP Security Agreement and
bound by all of the terms thereof;
The ArtToday Security Agreement and the ArtToday IP Security Agreement
remain in full force and effect and there are no defenses, offsets or
counter-claims to ArtToday's liability thereunder;
The ArtToday Security Agreement and the ArtToday IP Security Agreement
continue to secure the obligations of ArtToday under the Limited
Guaranty.
Consent. ArtToday hereby consents to the restructure of the SVB Loan Agreement
as provided in the Restructure Agreement and the related documents executed
concurrent herewith.
Reaffirmation. ArtToday hereby reaffirms: (i) the Limited Guaranty and the SVB
Loan Agreement and all terms thereof following the Merger Transaction; and (ii)
the ArtToday Security Agreement and the ArtToday IP Security Agreement and all
of the terms and all comments, representations and warranties contained therein
and thereof.
Waiver and Release.
132
Waiver and Release. In further consideration of SVB entering into the
Restructure Agreement, ArtToday and each of its past and present officers,
shareholders, directors, employees and agents (collectively referred to as the
"Releasing Parties") hereby waives and releases any and all claims, rights and
defenses, causes of action and offsets of any nature whatsoever (known or
unknown) which each of them now has (or might have) against SVB, all of SVB's
past and present officers, directors, employees, agents, attorneys or
representatives arising under or related to the SVB Loan Agreement, the Limited
Guaranty, the Restructure Agreement or any other document executed in connection
with any of the foregoing documents. This waiver and release includes, but is
not limited to, claims, defenses, offsets and causes of action arising from or
in any way related to the SVB Loan Agreement, the Limited Guaranty and all
modifications, supplements and extensions thereto, all the advances thereunder
and SVB's actions in connection therewith. The Releasing Parties hereby
recognize and agree that the release herein releases and waives all defenses set
forth above.
Release of Third Parties. ArtToday hereby waives any right or defense it may now
or hereafter have based upon (i) SVB's release of any party who may be obligated
to SVB; (ii) SVB's release or impairment of any collateral for the SVB
Obligation; and (iii) the modification or extension of the SVB Obligation.
General Waivers. Without limiting the generality of any other waiver or other
provision of this Agreement, ArtToday hereby waives, to the maximum extent such
waiver is permitted by law, any and all benefits or defenses arising directly or
indirectly under any one or more of: (i) California Civil Code Sections 2808,
2809, 2810, 2815, 2819, 2820, 2821, 2822, 2838, 2839, 2845, 2849, 2850, 2899,
and 3433; or (ii) California Uniform Commercial Code 3605.
Release. The Releasing Parties each understand (a) that it is possible that
unknown losses or claims may exist, or (b) that past known losses have been
underestimated; nevertheless each of the Releasing Parties is taking this risk
into account in determining the consideration it is to receive for this release
through this Agreement. Consequently, each of the Releasing Parties expressly
waives all rights and benefits conferred by Section 1542 of the California Civil
Code which provides as follows:
"A general release does not extend to claims which the creditor does not
know or suspect to exist in his favor at the time of executing the
release, which if known by him must have materially affected his
settlement with the debtor."
Preservation of Agreements. Except as expressly modified herein, the terms and
conditions of the Limited Guaranty the ArtToday Security Agreement and the
ArtToday IP Security Agreement remain in full force and effect and unmodified.
Controlling Provisions. To the extent that there is any inconsistency or
conflict between the terms, conditions and provisions of the Limited Guaranty
and this Agreement, the terms, conditions and provisions of this Agreement will
prevail.
Successors and Assigns. This Agreement shall bind and inure to the benefit of
the parties hereto and their respective successors and assigns; provided,
however, that ArtToday may not assign this Agreement or any rights and duties or
obligations of them hereunder without the prior written consent of SVB. SVB may
assign this Agreement with the assignment of the Limited Guaranty.
133
IN WITNESS WHEREOF, the parties hereto have executed this Reaffirmation
of Guaranty Agreement as of the date set forth above.
ARTTODAY.COM, INC., SILICON VALLEY BANK,
a Utah corporation a California corporation
By: /s/ MARTIN WADE III By: /s/ SUSAN PHILLIPS McGEE
------------------------------ ----------------------------------
Its: CEO Its: Vice President
------------------------------ ----------------------------------
134
EX-10.8
10
f76300ex10-8.txt
EXHIBIT 10.8
EXHIBIT 10.8
SUBORDINATION AND TERMINATION AGREEMENT
This SUBORDINATION AND TERMINATION AGREEMENT ("Agreement") is being entered into
as of October 9, 2001, between SILICON VALLEY BANK, a California banking
corporation ("SVB"), and DIGITAL CREATIVE DEVELOPMENT CORPORATION ("DCDC"), a
Utah corporation.
RECITALS
A. IMSI as debtor and borrower ("Debtor") is indebted to SVB pursuant to
a Loan and Security Agreement dated November 3, 1998 ("SVB Loan
Agreement").
The obligations under the SVB Loan Agreement ("SVB Obligations") are
secured by all assets of IMSI described in said agreement
("Collateral").
In addition the SVB Obligations are secured by the terms of the
Intellectual Property Security Agreement ("IMSI IP Security
Agreement") executed by IMSI dated November 3, 1999 and by the assets
described therein ("IP Collateral").
In addition the SVB Obligations are secured by the terms of a Pledge
Agreement ("Pledge Agreement") executed by IMSI encumbering all
shares of stock in ArtToday.com, Inc. ("ArtToday") which are owned by
IMSI.
B. IMSI is obligated to Union Bank of California ("UBOC") pursuant to
the terms of the First Amended and Restated Loan Agreement dated as
of April 23, 1999, between IMSI and UBOC, including any promissory
notes issued thereto and all documents executed in connection
therewith, as amended and modified (collectively, "UBOC Loan
Agreement").
The obligations under the UBOC Loan Agreement ("UBOC Obligations")
are secured by the Collateral. In addition the UBOC Obligations are
secured by the terms of the Intellectual Property Security Agreement
executed by IMSI dated November 3, 1999 and by the IP Collateral.
In addition the UBOC Obligations are secured by the terms of the
Pledge Agreement encumbering all shares of stock in ArtToday which
are owned by Borrower.
C. UBOC and SVB have entered into an Intercreditor Agreement dated as of
November 3, 1998 ("Intercreditor Agreement") which among other things
provides that UBOC's lien on the assets of Borrower shall be senior
to SVB's lien.
D. The SVB Obligations and the UBOC Obligations are guarantied pursuant
to the terms of a Limited Guaranty executed by ArtToday ("ArtToday
Guaranty").
E. The Obligations of ArtToday under the ArtToday Guaranty are secured
by all of the assets of ArtToday pursuant to the terms of:
(i) a Security Agreement (All Personal Property Assets) ("ArtToday
Security Agreement"); and
(ii) an Intellectual Property Security Agreement executed by
ArtToday ("ArtToday IP Security Agreement").
135
F. DCDC intends to merge with a subsidiary of IMSI ("Merger Subsidiary)
in such a manner that Merger Subsidiary acquires all assets and
obligations of DCDC (the "Merger Transaction"). Prior to such merger
DCDC will purchase the UBOC Loan Agreement. As a result of the Merger
Transaction, Merger Subsidiary shall acquire the UBOC Loan Agreement
and all liens related thereto.
G. Concurrent herewith IMSI and Bank and DCDC and other parties are
entering into a Restructure Agreement of even date which will
restructure and reduce the obligations owed by IMSI under the SVB
Loan Agreement.
H. Concurrent herewith IMSI is executing as maker a promissory note of
even date herewith ("Revised Promissory Note") in the original
principal sum of $1,200,000 which shall reflect the reduction of the
monetary obligations of IMSI under the SVB Loan Agreement.
NOW, THEREFORE, in consideration of the premises and for other good valuable
consideration, the receipt and sufficiency of which is hereby acknowledged, SVB
and DCDC ("Creditor") agree as follows:
No Third Party Beneficiaries. All understandings, agreements, representations
and warranties contained herein are solely for the benefit of the parties hereto
and there are no other parties (including, without limitation, IMSI) who are
intended to be benefited in any way by this Agreement.
Definitions.
The term "Obligations" is used in this Agreement in its broadest and most
comprehensive sense and shall mean all present and future indebtedness of Debtor
which may be, from time to time, directly or indirectly, incurred by Debtor,
including without limitation, any negotiable instruments evidencing the same,
and all guaranties, debts, demands, monies, indebtedness, liabilities and
obligations owed (or to become owing), including interest, principal, costs and
other charges and all claims, rights, causes of action, judgments, decrees,
remedies, security interests, or other obligations of any kind whatsoever, and
however arising whether voluntary, involuntary, absolute, contingent or by
operation of law.
For purposes of this Agreement, "Creditor Obligations" shall mean all
Obligations owing at any time by Debtor to Creditor, including, without
limitation, obligations owed under the UBOC Loan Agreement, and all interest
accruing during a bankruptcy proceeding with respect to Debtor, notwithstanding
any law to the contrary.
For purposes of this Agreement, "Senior Obligations" shall mean all Obligations
owing at any time by Debtor to SVB including without limitation all obligations
under the SVB Loan Agreement and the Restructure Agreement and including,
without limitation, interest accruing during a bankruptcy proceeding with
respect to Debtor, notwithstanding any law to the contrary.
Subordination.
Creditor agrees that payment of any Creditor Obligations and any guaranty
thereof is and shall be expressly subordinate and junior in right of payment to
the prior indefeasible payment in full in cash or cash equivalents of all Senior
Obligations. In furtherance of the foregoing, Debtor shall not make, and
Creditor shall not accept, receive or retain from Debtor, any direct or indirect
payment (in cash, property, or securities or by set-off or otherwise) upon or in
respect of the Creditor Obligations, or in respect of any acceleration, demand,
suit for collection, action or enforcement of the Creditor Obligations or in
respect of any prepayment, redemption, retirement, purchase or other acquisition
of the Creditor Obligations, until all the Senior Obligations have been
indefeasibly paid in full in cash or cash equivalents. For the purpose hereof, a
credit bid at a foreclosure sale by Bank or its successor or assign shall be
deemed a "cash equivalent" in the amount of the credit bid.
136
Any and all liens on assets of Debtor which secure the Senior Obligations,
including, without limitation, on the IP Collateral and Collateral, shall at all
times be and remain senior to any and all liens on such assets which secure the
Creditor Obligations regardless of the time or priority of any filings to
perfect such liens. All proceeds received by Creditor on such liens will be
disposed of as provided above.
Creditor's rights to collect from any guarantor ("Guarantor") under any guaranty
of any Creditor Obligations shall be junior to all rights which SVB may have to
collect from said Guarantor under any guaranty of the Senior Obligations.
Any and all liens on assets of any Guarantor which secure a guaranty of the
Senior Obligations shall at all times be and remain senior to any and all liens
on such assets which secure a guaranty of the Creditor Obligations regardless of
the time or priority of any filings to perfect such liens.
No Enforcement. Unless and until all the Senior Obligations shall be
indefeasibly paid in full in cash, Creditor covenants and agrees that during the
Standstill Period (defined below) it shall not, directly or indirectly: (i)
exercise or enforce any right of acceleration, demand or set-off against Debtor
or the assets or property of Debtor; (ii) make any claim or commence or initiate
any action, lawsuit, case or proceeding against Debtor or join together or with
any creditor in any action, lawsuit, case or proceeding against Debtor (other
than filing any claims in Debtor's bankruptcy); (iii) ask for, demand, take,
accept, receive or take any action to obtain, any security interest or lien on
the assets or property of Debtor, except as specified below, or exercise any
right or remedy with respect to Debtor or the assets or property of Debtor; (iv)
contact any account debtors of Debtor or otherwise seek payment from any obligor
an any collateral held by Creditor to secure any Creditor Obligations; (v)
exercise any right of foreclosure or any right or remedy with respect to any
lien (consensual or otherwise) held on any asset of Debtor including; (vi)
enforce any rights under any guaranty of the Creditor Obligations or any
collateral for such guaranty; or (vii) take any other action that interferes
with, is prejudice to or inconsistent with SVB's rights and senior position with
respect to Debtor or the assets or property of Debtor including, without
limitation, that Creditor shall not take any action that will impede, interfere
with, restrict, or restrain the exercise by SVB of its rights and remedies. The
"Standstill Period" shall be 180 days from the date that Creditor provides
written notice to SVB that an event of default with respect to all or any part
of the Creditor Obligations has occurred; provided, however, that the Standstill
Period will be extended beyond 180 days to the extent (and for the duration of
the period) that (A) SVB is taking action to enforce its rights or (B) SVB is
stayed from taking action to enforce its rights by operation of law or court
order.
Representation Warranties and Covenants. Creditor represents, covenants and
agrees that it (a) is the owner and holder of a portion of the Creditor
Obligations and that it has not sold or assigned any interest therein, (b) does
not have a security interest or lien on the property or the assets of Debtor
except the liens which secure the UBOC Loan Agreement, (c) will not, without
SVB's prior written consent, sell, assign or dispose of Creditor Obligations or
any interest therein, (d) will not, without SVB's prior written consent, grant,
create, or incur any security interest, lien, charge or other encumbrance
whatsoever upon the Creditor Obligations and (e) will not, without SVB's prior
written consent, change the payment terms as regards any of the Creditor
Obligations. Creditor agrees that if any Creditor Obligations constitute
promissory notes, such notes shall have a legend printed on their faces stating
that payments and enforcement of the said notes are subordinated to the Senior
Obligations pursuant to the terms of this Agreement.
Assignment. In furtherance of the foregoing effective upon a bankruptcy or
liquidation of Debtor, Creditor assigns to SVB all of its rights in any claims
it may then have against Debtor or its properties arising out of or relating to
the Creditor Obligations ("Creditor Claims"); and pursuant hereto, in the event
of any assignment by Debtor for the benefit of Debtor's creditors in any
bankruptcy, receivership or other insolvency proceeding relative to Debtor or
its properties, SVB shall have the right to act as Creditor's attorney-in-fact
for the purposes specified herein. Creditor hereby irrevocably appoints SVB, and
each of its partners, its true and lawful attorney, and grants to SVB a power of
attorney with full power of substitution in the name of Creditor or in the name
of SVB (which power is coupled with an interest and is irrevocable), for the use
and benefit of SVB, without notice to Creditor or its successors or
137
assigns, at SVB's option, to: (a) enforce the Creditor Claims either in SVB's
own name or in the name of Creditor, by proof of debt, proof of claim, suit or
otherwise; (b) collect any assets of Debtor distributed, divided or applied by
way of dividend or payment, or any securities or the proceeds of any realization
upon the same in respect of the Creditor Claims, and apply same to the Senior
Obligations until all of such have been indefeasibly paid in full in cash or
cash equivalents; and (c) vote and exercise any and all rights in respect of the
Creditor Claims including without limitation, to accept or reject any plan of
partial or complete liquidation, reorganization or arrangement. Any Assignee for
the benefit of creditors, Bankruptcy Trustee or Receiver for Debtor, or any
person in charge of Debtor, is hereby directed to pay to Bank the full amount of
the Senior Obligations before making any payment to Creditor.
Trust. Any payments by Debtor or any Guarantor or any distribution of assets of
Debtor or any Guarantor of any kind or character, whether in cash, property or
securities or by set-off or otherwise, which are not permitted to be received or
retained by Creditor hereunder or are received by Creditor during any
reorganization or insolvency proceeding prior to payment of the Senior
Obligations in full shall be held by Creditor in trust for, and turned over to,
SVB for application to the Senior Obligations until all such Senior Obligations
shall have been indefeasibly paid in full in cash or cash equivalents.
Effectiveness.
This Agreement shall become effective, immediately and automatically upon the
effectiveness of the Revised Promissory Note as set forth in Section 11 of the
Restructure Agreement.
The subordinations and agreements set forth herein shall remain in full force
and effect until Debtor has paid in full in cash or cash equivalents the Senior
Obligations. The rights and obligations of Creditor and SVB hereunder shall not
be affected by any act or failure to act by Debtor (regardless of any knowledge
Bank may have thereof) or the bankruptcy or insolvency of Debtor and shall be
effective regardless of whether either SVB or Creditor in the future seeks to
rescind, amend, terminate or reform by litigation or otherwise their respective
agreements with Debtor.
Termination of Intercreditor Agreement.
Effective immediately and automatically upon the Revised Promissory Note
becoming effective as set forth in Section 11 of the Restructure Agreement, the
Intercreditor Agreement shall be deemed terminated and of no further force or
effect.
If thereafter for any reason the obligations under the SVB Loan Agreement as
reinstated, the Intercreditor Agreement shall continue to be terminated and
shall not revive or be reinstated.
No Attachment. Except as hereafter provided, Creditor further agrees that in
case Creditor should take or receive any additional security interest in, or
additional lien by way of attachment, execution, or otherwise on any property,
real or personal, or should take or join in any other measure or advantage
contrary to this Agreement, at any time prior to the payment in full of all of
the Senior Obligations, SVB shall be entitled to have the same vacated,
dissolved and set aside by such proceedings at law, or otherwise, as SVB may
deem proper, and this Agreement shall be and constitutes full and sufficient
grounds therefor and shall entitle SVB to intervene and become a party to any
proceedings at law, or otherwise, initiated by SVB or by Creditor or by any
other party, in or by which SVB may deem it proper to protect SVB's interests
hereunder. Creditor agrees that if it violates this Agreement, it shall be
liable to SVB for all losses and damages sustained by SVB by reason of such
breach, including SVB's reasonable attorneys' fees and costs in any such legal
action.
No Information. Creditor agrees that SVB shall have no duty to advise Creditor
of any information known to SVB regarding the financial condition of Debtor or
any circumstance relating to the Senior Obligations. Creditor assumes sole,
continuing responsibility for obtaining such information from sources other than
SVB.
138
Collection of Senior Obligations. Creditor agrees that SVB shall have absolute
power and discretion, without notice to Creditor, to deal in any manner with the
Senior Obligations and any security therefor including (without limitation)
release, surrender, extension or renewal, acceleration, compromise or
substitution. Creditor hereby waives and agrees not to assert against SVB any
and all rights which a guarantor or surety could exercise. (However, nothing
herein shall constitute Creditor a guarantor or surety.) Creditor hereby waives
the right, if any, to require that SVB marshal or otherwise require SVB to
proceed to dispose of or foreclose upon collateral in any matter or order.
Creditor further waives any defense arising by reason of any claim or defense
based upon an election of remedies by SVB which in any manner impairs, affects,
reduces, releases, destroys and/or extinguishes Creditor's subrogation rights,
rights to proceed against the Debtor for reimbursement, and/or any other rights
of Creditor.
Further Assurances. Creditor agrees to execute and deliver such additional
instruments and documents and take such additional actions as SVB may reasonably
request in order to carry out and evidence the terms of this Agreement.
Choice of Law. This Agreement shall be governed by and construed under the laws
of the State of California and shall be binding and inure to the benefit of the
successors and assigns of the parties hereto. In case any provision hereof shall
be determined to be unenforceable, the remaining provisions hereof shall remain
valid and enforceable.
Notices. All notices hereunder shall be in writing to the addresses set forth
below and shall be deemed to be effective one day after sending by reputable
overnight courier service or three days after mailing by certified or registered
mail, postage prepaid, return receipt requested.
SVB: WITH NOTICE TO:
Silicon Valley Bank Peter S. Munoz
160 Spear Street, Suite 360 Crosby, Heafey, Roach & May
San Francisco, CA 94105 Two Embarcadero Center, 20th Floor
Attn: Susan Phillips McGee San Francisco, CA 94111
Facsimile: 415-369-0195 Facsimile: (415) 391-8269
DCDC: WITH NOTICE TO:
Martin Wade, President & CEO Hank Gracin, Esq.
Digital Creative Development Corporation Lehman & Eilen, LLP
67 Irving Place North, 4th Floor 50 Charles Lindbergh Blvd., Suite 505
New York, New York 10003 Uniondale, New York 11553
Facsimile: 212-388-9897 Facsimile: 516-222-0948
Integration. This Agreement constitutes the final and complete agreement of the
parties hereto and shall not be amended or modified except in writing signed by
SVB and Creditor. This Agreement may be executed in any number of counterparts,
each of which when signed will be deemed to be an original and all such
counterparts together shall be deemed to be an original.
Revivor. If, after payment of the Senior Debt, the Debtor thereafter becomes
liable to Bank on account of the Senior Debt, or any payment made on the Senior
Debt shall for any reason be returned by SVB, this Agreement shall thereupon in
all respects become effective with respect to such subsequent or reinstated
Senior Debt, without the necessity of any further act or agreement between SVB
and Creditor.
Attorneys' Fees. In the event of any litigation between the parties based upon,
arising out of, or in any way relating to this Agreement, the prevailing party
shall be entitled to recover all of its costs and expenses (including, without
limitation, reasonable attorneys' fees) from the non-prevailing party.
139
In witness whereof, the parties hereto have executed this Subordination and
Termination Agreement as of the date first written above.
BANK: CREDITORS:
SILICON VALLEY BANK, DIGITAL CREATIVE DEVELOPMENT CORPORATION,
a California banking corporation a Utah corporation
By: /s/ SUSAN PHILLIPS McGEE By: /s/ MARTIN WADE III
------------------------------- ----------------------------------
Name: MARTIN WADE III
----------------------------------
Title: President and CEO
----------------------------------
By:
----------------------------------
Its:
----------------------------------
By:
-----------------------------
Its:
-----------------------------
140
EX-10.9
11
f76300ex10-9.txt
EXHIBIT 10.9
EXHIBIT 10.9
July 30, 2001
Mr. Brian Davidson
Baystar Capital LP
c/o Stark Investments
1500 West Market Street
Mequon, Wisconsin 53092
RE: SETTLEMENT TERMS $4,500,000 9% SENIOR SUBORDINATED CONVERTIBLE NOTE DUE
MAY 24, 2002
Dear Brian,
Confirming our July 27, 2001 telephone conversation, this letter summarizes our
understanding of the terms for settling all of Baystar Capital LP's ("Baystar")
claims against International Microcomputer, Inc. ("IMSI") related to the 9%
Senior Subordinated Convertible Note Due May 24, 2002 ("Note").
IMSI will continue to calculate and accrue interest, penalty interest and
penalties through the day of the close of Digital Creative Development
Corporation's ("DCDC") investment in IMSI. As we discussed, DCDC has indicated
that they are going to do everything possible to close by August 31, 2001.
Attached is a schedule that summarizes the calculation of the total interest,
penalty interest and penalties as of that date. That total is $1,755,735.42. On
the closing date the Baystar claim against IMSI will be calculated as 10% of the
Note balance plus the total accrued interest, penalty interest and penalties.
Based on an August 31, 2001 close the total claim would be $625,573.54.
DCDC will pay this claim plus accrued interest in four installments on September
30, 2002, December 31, 2002, March 31, 2003 and June 30, 2003. Interest will
accrue at 8% per annum from the date of the close until the September 30, 2002
payment. Thereafter, interest will accrue at the rate of 12% per annum until the
claim is paid in full on or before June 30, 2003. Attached is a second schedule
that summarizes the calculation of the four payments based on an August 31, 2001
close. The first three would be $177,533.92 and the final one would be
$177,533.93 for a total of $710,135.69.
Attached is a letter that summarizes the debt settlement for all of IMSI's
creditors. Union Bank of California, Silicon Valley Bank and the Creditors'
Committee have all agreed orally to the proposed terms. Imageline has actually
signed an agreement that provides for the 10% settlement of their arbitration
award plus a twelve year consulting agreement to cover possible additional
claims, assistance in the Zoom litigation and sales of IMSI's MasterClips
products.
If you agree that this letter and the attached schedules do accurately state the
terms of our understanding, we would appreciate your signing one copy of this
letter and returning it to us. As soon as the attorneys complete drafting the
actual consent form, we will send one to you for your signature.
Brian, I have very much appreciated working with you, Colin and Joe Gill. Thank
you very much for your assistance and patience.
Yours truly, ACCEPTED AND AGREED:
Baystar Capital LP
Jeffrey B. Morgan By: /s/ BRIAN DAVIDSON
---------------------------- ------------------------------------
Chief Financial Officer Brian Davidson
Attachments
141
EX-10.10
12
f76300ex10-10.txt
EXHIBIT 10.10
EXHIBIT 10.10
SETTLEMENT AGREEMENT
International Microcomputer Software, Inc. and ArtToday.com, Inc. (hereinafter
collectively "IMSI") and Imageline, Inc., George P. Riddick, III, and any
assignees (hereinafter collectively "Imageline") hereby enter into this binding
Settlement Agreement wherein Imageline agrees to settle its judgment against
IMSI for approximately $2.6 million, and any other claims which exist now or may
exist in the future based on any events that have occurred up to the date of
this Agreement, and also agrees to hold harmless IMSI from any future claims
based on claims of events that have occurred prior to the date of this Agreement
with respect to any images delivered by Imageline to IMSI; in consideration of
the following:
1.IMSI will pay Imageline $1,311,000 payable as follows: four equal quarterly
payments of $78,750, payable on September 30, 2002, December 30, 2002, March 30,
2003 and June 30, 2003; $11,500 per month for twelve (12) monthly payments
beginning upon closing of the DCDC - IMSI investment, and then $6,500 per month
for an additional eleven years for a total of one hundred and forty four (144)
monthly payments over twelve years.
Imageline will earn royalties on MasterClips revenues (cash received from sales)
from the date of closing as follows. No royalties will be disbursed until 30
days following the final payment to Silicon Valley Bank. After that time, all
royalty payments shall be made quarterly, 45 days after the end of each calendar
quarter.
A. 30% of all Masterclips OEM/licensing revenues earned and/or received
by IMSI from the date of the closing.
B. 50% of any OEM license deals brought forward by Imageline.
C. 6% of gross revenues for all new MasterClips product sales from
products published by IMSI, ArtToday.com, or any parent company,
related business, subsidiary, or affiliate directly associated with
IMSI.
D. Rights to manufacture and bundle 200,000 old MasterClips units for
any MasterClips product published by IMSI for which IMSI has
sublicense rights prior to October 1, 1999.
E. License for 50K IMSI clip art images delivered to Imageline by IMSI
in October 1999.
F. Imageline shall receive all standing MasterClips inventory as of
closing, which can only be resold under the same terms and conditions
as those offered to ROI in the inventory purchase agreement sent to
Imageline by IMSI.
IMSI will pay Imageline 22.5% of the net recovery (after attorney fees) from
IMSI's indemnification or other claims against NBCi/Xoom. Imageline will also be
paid for all out-of-pocket expenses as incurred relating to such indemnification
claim so long as they receive pre-approval from IMSI.
This Agreement is conditioned upon agreement of all other creditors and required
notices to Xoom/NBCi being delivered and consent received from Xoom/NBCi,
relative to IMSI's indemnification claim against them. This Agreement is also
conditional upon the closing of a merger/investment between DCDC and IMSI. This
Agreement shall expire if a merger/investment between DCDC and IMSI is not
completed within 60 days of the date of this Agreement, but in no case later
than September 30, 2001. The parties intend to enter into a more comprehensive
agreement that will supercede this Agreement within 14 days hereof. In the event
that no other agreement is entered into between the parties, this Agreement
shall remain in effect until it expires.
142
WAIVER OF CAL. CIV. CODE SEC. 1542. In entering into this Agreement and making
this release IMSI and Imageline each expressly waive the provisions of Section
1542 of the California Civil Code which provides as follows: "A general release
does not extend to claims which the creditor does not know or suspect to exist
in his favor at the time of executing the release, which if known by him, must
have materially affected his settlement with the debtor." Each Party understands
and acknowledges the significance and consequences of waiving the provisions and
benefits of Section 1542, and each specifically intends to waive both known and
unknown claims under this provision as well as under any similar federal or
common law principle.
The parties agree to keep all terms and conditions of this agreement
confidential.
Dated: July 27, 2001 Dated: July 27, 2001
------------------------------ --------------------------------
By: /s/ GEOFFREY B. KOBLICK By: /s/ GEORGE P. RIDDICK III
------------------------------ --------------------------------
IMSI Imageline
143
EX-10.11
13
f76300ex10-11.txt
EXHIBIT 10.11
EXHIBIT 10.11
AMENDMENT TO SETTLEMENT AGREEMENT
International Microcomputer Software, Inc. and ArtToday.com, Inc. (hereinafter
collectively "IMSI") and Imageline, Inc., George P. Riddick, III, and any
assignees (hereinafter collectively "Imageline") hereby agree to amend the
Settlement Agreement between the parties dated July 27, 2001 ("Amendment") as
follows:
1. All references to "closing" in the Settlement Agreement shall
mean the earlier of a) the date upon which the merger of IMSI and
DCDC becomes legally final and binding, or b) November 30, 2001.
2. Paragraph 4 is hereby deleted in its entirety and replaced by the
following: "IMSI hereby agrees to dismiss its appeal of the
arbitration award in favor of Imageline currently pending before
the 9th Circuit Court of Appeals."
3. Additional language is added as Paragragh 7 as follows: "IMSI
hereby warrants that it has rights to license the 50,000 clip art
images licensed to Imageline under this Settlement Agreement, and
agrees to indemnify Imageline from any claims by third parties as
to copyright ownership, infringement, or other claims of misuse
of the images by Imageline, including the reimbursement of any
actual costs of product recalls, re-manufacturing, or
re-packaging, and related legal fees and expenses, incurred by
Imageline as a result of any such claim by third parties, except
to the extent such claims of misuse are attributeable solely to
the actions of Imageline."
4. Additional language is added as Paragraph 8 as follows: "IMSI
hereby warrants that no changes have been made to the inventory
on hand that includes Imageline clip art illustrations,
including, but not limited to all MasterClips product inventory,
since the original ROI sales proposal was made, and that no
changes will be made prior to the closing of this Agreement as
called for in this Amendment."
5. Additional language is added as Paragraph 9 as follows: "All
MasterClips royalty accruals, as called for in the original
Settlement Agreement executed July 27, 2001 will continue to
accrue from August 31, 2001 in accordance with the terms and
conditions called for in the original July 27, 2001 Settlement
Agreement."
6. All other terms and conditions of the Settlement Agreement shall
remain as originally written and are hereby reaffirmed.
Dated: September 24, 2001 Dated: September 21, 2001
------------------------------ --------------------------------
By: /s/ GORDON LANDIS By: /s/ GEORGE P. RIDDICK III
------------------------------ --------------------------------
IMSI Imageline
144
EX-10.12
14
f76300ex10-12.txt
EXHIBIT 10.12
EXHIBIT 10.12
ADDENDUM #2 TO SETTLEMENT AGREEMENT
International Microcomputer Software, Inc. and ArtToday.com, Inc.
(hereinafter collectively "IMSI") and Imageline, Inc., George P.
Riddick, III, and any assignees (hereinafter collectively "Imageline")
hereby agree to amend the Settlement Agreement dated July 27, 2001 and
amended September 24, 2001 as follows:
Imageline and IMSI hereby agree that in the event IMSI defaults on any payments
pursuant to the Settlement Agreement and IMSI does not cure the default within
30 days of notice from Imageline; then interest on the remaining amounts due
shall begin to accrue at the rate of 12% per annum and be payable to Imageline
until such default is cured. In addition, a one-time penalty of 5% of the
remaining amounts due at the time of default shall be due to Imageline within
fifteen (15) business days of any uncured default.
IMSI further agrees to begin the monthly payments to Imageline on Friday,
October 5, 2001 by wire transfer to an account designated by Imageline, and to
continue to make monthly payments on or before the 5th of each month thereafter.
The effective date of the settlement with Imageline shall be 9/30/01.
All other terms and conditions of the Settlement Agreement shall remain as
originally written and are hereby confirmed.
Dated: 10\5\01 Dated: 10\5\01
------------------------------ --------------------------------
By: /s/ GORDON LANDIS By: /s/ GEORGE P. RIDDICK III
------------------------------ --------------------------------
IMSI Imageline
145
EX-10.13
15
f76300ex10-13.txt
EXHIBIT 10.13
EXHIBIT 10.13
MANAGEMENT AGREEMENT
As of the last date written below, International Microcomputer
Software, Inc., a California corporation, ("IMSI") and Gordon A.
Landies ("Executive") enter into this Management Agreement
("Agreement").
A. WHEREAS, IMSI desires to enter into a management agreement with Executive;
B. WHEREAS, IMSI requires Executive's personal services on a regular basis to
operate and expand the business of IMSI; and
C. WHEREAS, Executive requires that IMSI provide the necessary resources for
Executive to discharge his responsibilities under this Agreement:
NOW, THEREFORE, the Parties agree as follows:
1. EMPLOYMENT - IMSI hereby hires Executive as President IMSI with overall
responsibility for IMSI's profitability and operations.
2. COMPENSATION - IMSI shall compensate Executive as follows:
Base Salary - IMSI shall pay Executive $156,000 per year ($13,000 per month) in
salary payable on the 15th and the last day of each month. Executive's salary
will be adjusted based upon the following events or milestones: overall
compensation shall be reviewed by the Board after the initial 6 months and
compensation shall be increased if the company is ahead of its cash and profit
forecasts for the prior month period.
Options - Executive shall be granted 350,000 options. The strike price shall be
in accordance with IMSI's stock option plans. In the event that the majority
control of IMSI changes or Executive is terminated without cause, all options
held by Executive shall immediately vest and the right to exercise them shall
survive for one year thereafter. Options shall vest pro rata monthly over 24
months.
(c) Consulting agreements -- Executive shall be paid fees due under the April
21, 2000 consulting agreement and the February 24, 2000 agreement between Gordon
Landies and IMSI as scheduled unless the board and Executive agree to amended
terms by September 30, 2001.
Bonuses - IMSI shall pay Executive a bonus of up to 25% of Executive base pay on
the 15th day of the 2d month after the end of each calendar quarter if and when
Executive meets profit and cash goals agreed to by the Executive committee. The
initial plan for bonus purposes will be completed the week of 9/2/01 and shall
include the combined forecasts for IMSI, ArtToday and Keynomics.
Executive Benefits - Executive shall have the right to participate in any and
all health benefits, executive retirement income and welfare benefit plans,
policies, programs, agreements or arrangements generally made available from
time to time to salaried executives and/or other executives of IMSI which shall
include, at a minimum, medical and dental insurance (the premiums for which
shall be paid in full by IMSI) and other benefits which are presently in effect
for executives of IMSI. Executive shall be entitled to thirty (30) days'
vacation time each year without loss of compensation. In the event Executive is
unable to take the total amount of vacation time authorized herein during any
year, he may accrue that time and add it to vacation time for the following
year. Executive's specific rights under any of the Executive Benefits, however,
shall be governed by the terms, provisions and conditions of the underlying
plans, policies, programs, agreements or arrangements relating to the particular
Executive Benefits. At Executive's option IMSI shall pay Executive the amount of
the premium for medical and dental insurance so that Executive can maintain and
pay for health and dental insurance directly. IMSI agrees to maintain adequate
146
errors and omissions insurance for Executive as an officer of the corporation
and agrees to pay all legal expense related to claims against Executive as an
officer or Director of IMSI.
(f) Incentive Plans - Executive shall be covered under and participate in any
incentive compensation, bonus, discretionary pay, or performance award plans,
programs, polices, arrangements, or any stock option or stock appreciation
rights plans which IMSI may have or put into effect for its executives
(Incentive Plans).
3. TERMINATION OF EMPLOYMENT - IMSI may terminate Executive's employment at any
time with or without cause.
Termination Without Cause - Termination without cause shall include, but not be
limited to, IMSI choosing to substantially alter the position, geographic
location or responsibilities of Executive during the term of this Agreement.
Termination without cause shall result in IMSI paying full compensation to
Executive for a minimum of six (6) months and Executive Benefits and Incentive
Plans shall also be paid for a period of six (6) months and will be paid to
Executive on a normally scheduled basis. If termination without cause occurs in
connection with the merger or acquisition of IMSI or change in control of the
Board of IMSI, Executive shall be entitled to twenty four (24) months of
compensation and benefits.
Termination by IMSI For Cause - IMSI may terminate this Agreement for cause by
giving thirty (30) days' written notice to Employee. For purposes of this
Agreement, "for cause" shall be limited to the following: Conviction by a court
of competent jurisdiction of any crime constituting a felony under the criminal
laws of the jurisdiction in which the conviction is entered.
Termination by Executive - Executive may terminate his employment with
IMSI at any time with or without cause.
Effect of Termination by Executive - Executive shall continue to receive
compensation for a period of three (3) months after termination of employment
and IMSI shall pay his medical and dental benefits for twelve (12) months after
any termination.
These termination provisions shall survive termination of this Agreement and can
only be modified by a subsequent written agreement executed by Executive and
IMSI.
4. TRADE SECRETS - Executive acknowledges that IMSI possesses and will continue
to develop and acquire valuable Proprietary Information. The value of that
Proprietary Information depends on it remaining confidential. IMSI depends on
Executive to maintain that confidentiality, and Executive accepts that position
of trust. Executive agrees, upon leaving employment with IMSI for any reason, to
promptly deliver to IMSI all material documents, including but not limited to,
writings and computer data, in Executive's possession, custody, or under
Executive's control containing or disclosing Proprietary Information.
5. CONFLICTS WITH OTHER ACTIVITIES - Executive agrees that his employment with
IMSI is non-exclusive but requires substantial attention and effort. Therefore,
while employed by IMSI, Executive will not, without IMSI's consent, engage in
any employment or business competitive with the business. It is agreed that
Executive is an owner in GL Ventures, Inc., which has consulting relationships
with Lego Media, Big Idea Productions, Findex, Inc. and Valusoft. Such
relationships shall not be deemed competitive with IMSI. Consultant shall
restructure the relationship with Valusoft within 90 days to discontinue monthly
consulting services to Valusoft.
6. ADDITIONAL PROVISIONS RELATING TO PAYMENTS - If IMSI finds that, at the time
any payment is due under this Agreement, Executive is unable to care for his
affairs because of illness or accident, payment (unless a duly qualified
guardian or other legal representative of Executive has made IMSI an earlier
claim for it) may be paid to any individual deemed by IMSI to be maintaining
Executive or responsible for Executive's maintenance, and any such payment shall
be deemed to be payment for the Executive's account and shall be a complete
discharge of any liability under this Agreement. IMSI will honor any request
made prior to his disability by Executive regarding
147
such payments. IMSI may withhold from any amounts payable under this Agreement
all federal, state, city or other taxes as required under any law or government
regulation or ruling.
7. GOVERNING LAW - This Agreement shall be construed and its performance
enforced in accordance with the laws of the State of California, excluding its
choice of law provisions.
8. MODIFICATIONS - Any and all modifications, amendments, or additions to this
Agreement shall be in writing. Similarly, any and all waivers of any terms of
this Agreement shall be in writing. Any and all oral modifications, amendments,
additions, and/or waivers shall be unenforceable.
9. DISPUTE RESOLUTION - The Parties agree to submit any disputes involving money
or damages greater than $5,000 relating to this Agreement and/or transactions,
duties, or obligations to be performed under this Agreement, to mediation with a
mediator approved by the Parties to the dispute. If the Parties resolve their
disputes through mediation, the Parties shall share the mediator's fees evenly
but pay their own attorneys' fees and other expenses related to mediation. If
mediation fails to resolve all disputes within thirty (30) days after submission
to the mediator, then either Party may file a lawsuit or request arbitration.
The Parties agree that mediation is a pre-condition to filing a lawsuit. The
prevailing Party in any law suit or arbitration relating to the transactions
contemplated by this Agreement shall be entitled to costs and expenses including
reasonable attorneys fees and the attorneys' fees and expenses incurred in
connection with mediation that failed to resolve the dispute. Claims of $5,000
or less may be submitted to mediation or small claims court.
10. SEVERABILITY - If a court of competent jurisdiction or arbitrator finds that
one or more provisions of this Agreement is or are illegal or unenforceable, the
remaining provisions of this Agreement shall remain in full force and effect as
if such provision or provisions never existed.
11. WAIVER - No Party's right to require performance of another Party's
obligations under this Agreement shall be affected by any previous delay in
enforcing such right, express waiver of prior similar right to require
performance, or course of dealing.
12. INTEGRATION CLAUSE - This Agreement contains the entire agreement of the
Parties relating to the subject matter of this Agreement. The Parties have made
no agreements, representations, or warranties relating to the subject matter of
these Agreements that are not stated herein.
13. INTERPRETATION OF THIS AGREEMENT - The Parties acknowledge that they and
their attorneys have had an opportunity to review this Agreement in detail and
to comment on and draft any and all additional terms or modifications to this
Agreement. Accordingly, the Parties agree that this Agreement shall not be
interpreted against any Party under California Civil Code Section 1654 because
the attorney for that Party drafted this Agreement or any provision of this
Agreement.
14. SUCCESSORS - Should any change in IMSI ownership or structure occur, this
Agreement shall survive and inure to the benefit of and be binding on all legal
representatives, successors and assigns.
15. INDEMNIFICATION OF LOSSES OF EMPLOYEE - IMSI shall indemnify Executive for
all losses sustained by Executive in direct consequence of the discharge of his
duties on IMSI's behalf.
16. NOTICES. Notices under this Agreement shall be sufficient only if sent (a)
by overnight courier, or (b) by facsimile or other electronic means and by U. S.
Mail, or (c) personally delivered to the other Party. Notices shall be addressed
as follows:
To IMSI To Executive:
Tel: Fax: Tel: Fax:
148
With a copy to:
Vince Tricarico Los Angeles CA 90017
Clark and Trevithick Fax: 310/624 9441
800 Wilshire Boulevard, 12th Floor Tel: 310/629 5700
17. COUNTERPARTS. This Agreement may executed in one or more counterparts, each
of which shall be deemed to be an original, but all of which together shall
constitute one and the only Agreement.
IN WITNESS WHEREOF, the Parties execute this Agreement as of the last date
written below.
Date: September 1, 2001 By: /s/ GORDON A. LANDIS
-----------------------------------
DATE: SEPTEMBER 1, 2001 By: /s/ MARTIN WADE III
-----------------------------------
149
EX-10.14
16
f76300ex10-14.txt
EXHIBIT 10.14
EXHIBIT 10.14
MANAGEMENT AGREEMENT
As of the last date written below, International Microcomputer Software, Inc., a
California corporation, ("IMSI") and Paul A. Jakab ("Executive") enter into this
Management Agreement ("Agreement").
A. WHEREAS, IMSI desires to enter into a management agreement with Executive;
B. WHEREAS, IMSI requires Executive's personal services on a regular basis to
operate and expand the business of IMSI; and
C. WHEREAS, Executive requires that IMSI provide the necessary resources for
Executive to discharge his responsibilities under this Agreement:
NOW, THEREFORE, the Parties agree as follows:
15. EMPLOYMENT - IMSI hereby hires Executive as Executive Vice President, COO,
IMSI. The Executive agrees to accept the responsibilities of Executive Vice
President and the duties assigned by the President.
16. COMPENSATION - IMSI shall compensate Executive as follows:
Base Salary - IMSI shall pay Executive $156,000 per year ($13,000 per month) in
salary payable on the 15th and the last day of each month. Executive's salary
will be adjusted based upon the following events or milestones: overall
compensation shall be reviewed by the Board after the initial 6 months and
compensation shall be increased if the company is ahead of its cash and profit
forecasts for the prior month period.
Options - Executive shall be granted 350,000 options. The strike price shall be
in accordance with IMSI's stock option plans. In the event that the majority
control of IMSI changes or Executive is terminated without cause, all options
held by Executive shall immediately vest and the right to exercise them shall
survive for one year thereafter. Options shall vest pro rata monthly over 24
months.
Bonuses - IMSI shall pay Executive a bonus of up to 25% of Executive base pay on
the 15th day of the 2d month after the end of each calendar quarter if and when
Executive meets profit and cash goals agreed to by the Executive committee. The
initial plan for bonus purposes will be completed the week of 9/2/01 and shall
include the combined forecasts for IMSI, ArtToday and Keynomics.
Executive Benefits - Executive shall have the right to participate in any and
all health benefits, executive retirement income and welfare benefit plans,
policies, programs, agreements or arrangements generally made available from
time to time to salaried executives and/or other executives of IMSI which shall
include, at a minimum, medical and dental insurance (the premiums for which
shall be paid in full by IMSI) and other benefits which are presently in effect
for executives of IMSI. Executive shall be entitled to thirty (30) days'
vacation time each year without loss of compensation. In the event Executive is
unable to take the total amount of vacation time authorized herein during any
year, he may accrue that time and add it to vacation time for the following
year. Executive's specific rights under any of the Executive Benefits, however,
shall be governed by the terms, provisions and conditions of the underlying
plans, policies, programs, agreements or arrangements relating to the particular
Executive Benefits. At Executive's option IMSI shall pay Executive the amount of
the premium for medical and dental insurance at the same cost that IMSI would
incur for such premium so that Executive can maintain and pay for health and
dental insurance directly. IMSI agrees to maintain adequate errors and omissions
insurance for Executive as an officer of the corporation and agrees to pay all
legal expense related to claims against Executive as an officer or Director of
IMSI.
150
(f) Incentive Plans - Executive shall be covered under and participate in any
incentive compensation, bonus, discretionary pay, or performance award plans,
programs, polices, arrangements, or any stock option or stock appreciation
rights plans which IMSI may have or put into effect for its executives
(Incentive Plans).
17. TERMINATION OF EMPLOYMENT - IMSI may terminate Executive's employment at any
time with or without cause.
Termination Without Cause - Termination without cause shall include, but not be
limited to, IMSI choosing to substantially alter the position, geographic
location or responsibilities of Executive during the term of this Agreement.
Termination without cause shall result in IMSI paying full compensation to
Executive for a minimum of six (6) months and Executive Benefits and Incentive
Plans shall also be paid for a period of six (6) months and will be paid to
Executive on a normally scheduled basis. If termination without cause occurs in
connection with the merger or acquisition of IMSI or change in control of the
Board of IMSI, Executive shall be entitled to twenty four (24) months of
compensation and benefits.
Termination by IMSI For Cause - IMSI may terminate this Agreement for cause by
giving thirty (30) days' written notice to Employee. For purposes of this
Agreement, "for cause" shall be limited to the following:
Commitment of a crime or illegal act constituting a felony under the criminal
laws of the jurisdiction in which the act occurs.
b) Gross negligence.
Termination by Executive - Executive may terminate his employment with IMSI at
any time with or without cause.
Effect of Termination by Executive - Executive shall continue to receive
compensation for a period of three (3) months after termination of employment
and IMSI shall pay his medical and dental benefits for twelve (12) months after
any termination.
These termination provisions shall survive termination of this Agreement and can
only be modified by a subsequent written agreement executed by Executive and
IMSI.
18. TRADE SECRETS - Executive acknowledges that IMSI possesses and will continue
to develop and acquire valuable Proprietary Information. The value of that
Proprietary Information depends on it remaining confidential. IMSI depends on
Executive to maintain that confidentiality, and Executive accepts that position
of trust. Executive agrees, upon leaving employment with IMSI for any reason, to
promptly deliver to IMSI all material documents, including but not limited to,
writings and computer data, in Executive's possession, custody, or under
Executive's control containing or disclosing Proprietary Information.
19. CONFLICTS WITH OTHER ACTIVITIES - Executive agrees that his employment with
IMSI is non-exclusive but requires substantial attention and effort. Therefore,
while employed by IMSI, Executive will not, without IMSI's consent, engage in
any employment or business competitive with the business.
20. ADDITIONAL PROVISIONS RELATING TO PAYMENTS - If IMSI finds that, at the time
any payment is due under this Agreement, Executive is unable to care for his
affairs because of illness or accident, payment (unless a duly qualified
guardian or other legal representative of Executive has made IMSI an earlier
claim for it) may be paid to any individual deemed by IMSI to be maintaining
Executive or responsible for Executive's maintenance, and any such payment shall
be deemed to be payment for the Executive's account and shall be a complete
discharge of any liability under this Agreement. IMSI will honor any request
made prior to his disability by Executive regarding such payments. IMSI may
withhold from any amounts payable under this Agreement all federal, state, city
or other taxes as required under any law or government regulation or ruling.
151
21. GOVERNING LAW - This Agreement shall be construed and its performance
enforced in accordance with the laws of the State of California, excluding its
choice of law provisions.
22. MODIFICATIONS - Any and all modifications, amendments, or additions to this
Agreement shall be in writing. Similarly, any and all waivers of any terms of
this Agreement shall be in writing. Any and all oral modifications, amendments,
additions, and/or waivers shall be unenforceable.
23. DISPUTE RESOLUTION - The Parties agree to submit any disputes involving
money or damages greater than $5,000 relating to this Agreement and/or
transactions, duties, or obligations to be performed under this Agreement, to
mediation with a mediator approved by the Parties to the dispute. If the Parties
resolve their disputes through mediation, the Parties shall share the mediator's
fees evenly but pay their own attorneys' fees and other expenses related to
mediation. If mediation fails to resolve all disputes within thirty (30) days
after submission to the mediator, then either Party may file a lawsuit or
request arbitration. The Parties agree that mediation is a pre-condition to
filing a lawsuit. The prevailing Party in any law suit or arbitration relating
to the transactions contemplated by this Agreement shall be entitled to costs
and expenses including reasonable attorneys fees and the attorneys' fees and
expenses incurred in connection with mediation that failed to resolve the
dispute. Claims of $5,000 or less may be submitted to mediation or small claims
court.
24. SEVERABILITY - If a court of competent jurisdiction or arbitrator finds that
one or more provisions of this Agreement is or are illegal or unenforceable, the
remaining provisions of this Agreement shall remain in full force and effect as
if such provision or provisions never existed.
25. WAIVER - No Party's right to require performance of another Party's
obligations under this Agreement shall be affected by any previous delay in
enforcing such right, express waiver of prior similar right to require
performance, or course of dealing.
26. INTEGRATION CLAUSE - This Agreement contains the entire agreement of the
Parties relating to the subject matter of this Agreement. The Parties have made
no agreements, representations, or warranties relating to the subject matter of
these Agreements that are not stated herein.
27. INTERPRETATION OF THIS AGREEMENT - The Parties acknowledge that they and
their attorneys have had an opportunity to review this Agreement in detail and
to comment on and draft any and all additional terms or modifications to this
Agreement. Accordingly, the Parties agree that this Agreement shall not be
interpreted against any Party under California Civil Code Section 1654 because
the attorney for that Party drafted this Agreement or any provision of this
Agreement.
28. SUCCESSORS - Should any change in IMSI ownership or structure occur, this
Agreement shall survive and inure to the benefit of and be binding on the legal
representatives, successors and assigns of the parties.
15. INDEMNIFICATION OF LOSSES OF EMPLOYEE - IMSI shall indemnify Executive for
all losses sustained by Executive in direct consequence of the discharge of his
duties on IMSI's behalf.
16. NOTICES. Notices under this Agreement shall be sufficient only if
sent (a) by overnight courier, or (b) by facsimile or other electronic
means and by U. S. Mail, or (c) personally delivered to the other
Party. Notices shall be addressed as follows:
To IMSI To Executive:
Fax: Fax:
Tel: Tel:
152
Any Party may change the above information by giving written notice as set forth
above.
17. COUNTERPARTS. This Agreement may executed in one or more counterparts, each
of which shall be deemed to be an original, but all of which together shall
constitute one and the only Agreement.
IN WITNESS WHEREOF, the Parties execute this Agreement as of the last date
written below.
Date: September 1, 2001 By: /s/ PAUL A. JAKAB
------------------------------------
Date: September 1, 2001 By: /s/ MARTIN WADE III
------------------------------------
153
EX-10.15
17
f76300ex10-15.txt
EXHIBIT 10.15
EXHIBIT 10.15
MANAGEMENT AGREEMENT
AGREEMENT made as of this 21st day of September 2001, between INTERNATIONAL
MICROCOMPUTER SOFTWARE, INC., a California Corporation having an office at 75
Rowland Way, Novato, California ("IMSI") and DIGITAL CREATIVE DEVELOPMENT
CORPORATION, a Utah corporation, having an office at 67 Irving Place North,
Fourth Floor, New York, New York 10003 ("DCDC") (this "Agreement").
WHEREAS, pursuant to the Agreement and Plan of Merger (THE "merger
Agreement") dated as of August 31, 2001 between IMSI and DCDC, martin Wade, the
Chief Executive Officer of DCDC ("Wade"), became CEO of IMSI, and the members of
the Board of Directors of DCDC became members of the Board of Directors of IMSI.
WHEREAS, IMSI'S desire to retain DCDC to provide management services in
connection with its day to day business and coordinate the accounting functions
of IMSI.
NOW, THEREFORE, in consideration of the mutual premises, undertakings
and conditions hereinafter set forth, the parties hereto agree as follows:
Operations and Management of the Business
(a) DCDC agrees that the following individuals will provide to
IMSI certain advisory services in the areas of financial
management, insurance, investment banking, and business
planning, and cause the following individuals to serve as
follows:
i. CEO Wade will act as the Chief Executive Officer ("CEO")
of IMSI, and shall be required to perform those duties
that are generally associated with the role of CEO,
including the general and active management of the
business of IMSI.
ii. CFO Vincent De Lorenzo ("De Lorenzo") shall act as Chief
Financial Officer ("CFO") of IMSI and perform general
financial services for IMSI including those duties, which
are generally associated with the role of a CFO.
iii. Assistants to CFO Various individuals shall from time to
time perform financial record keeping and other financial
services for IMSI at the direction of Wade and De Lorenzo
and may assist De Lorenzo in performing his duties as CFO
(Wade and De Lorenzo and any assistants are collectively
referred to as the "Executives").
(b) IMSI acknowledges that although the Executives shall be
obligated to devote a sufficient amount of time to perform the
services contemplated by this Agreement, the Executives will
not devote their time exclusively to IMSI and will continue to
serve in similar capacities for DCDC.
(c) DCDC shall be responsible for payment of all salary, benefits
and other compensation to the Executives and for payment of
all payroll taxes with respect to their employment.
(d) DCDC shall cause the Executives to serve at the direction of
the Board of Directors of IMSI and to comply with all rules
and policies adopted by IMSI as they may be adopted or
modified from time to time.
Termination Date
154
This Agreement shall be effective for a period of six (6) months from the date
hereof, unless sooner terminates with or without cause by either party upon 15
days written notice, and may be renewed upon the mutual agreement of IMSI and
DCDC for additional thirty (30) day periods.
Representations and Warranties of DCDC
DCDC warrants and represents that it is a good corporation duly incorporated,
validly existing and in good standing under the laws of the State of Utah and
that the execution, delivery and performance of this Agreement has been duly
authorized by all requisite corporate action and do not violate, result in a
default under or contravene any other agreement to which DCDC is bound.
Representations and Warranties of IMSI
IMSI warrants and represents that it is a good corporation duly incorporated,
validly existing and in good standing under the laws of the State of California
and that the execution, delivery and performance of this Agreement has been duly
authorized by all requisite corporate action and do not violate, result in a
default under or contravene any other agreement to which IMSI is bound.
Compensation
In consideration for the services to be provided by DCDC to IMSI, DCDC shall be
entitled to compensation in the amount of $50,000 per month in arrears.
Other Provisions
(a) Notice of Agreement This Agreement shall not be deemed to
create any relationship of franchise, agency, partnership or
joint venture between the parties hereto.
(b) Non-Waiver The failure of either party to enforce at any time
any term, provision or condition of this Agreement, or to
exercise any right or option herein, shall in no way operate
as a waiver thereof, nor shall any single or partial exercise
preclude any other right or option herein; and no waiver
whatsoever shall be valid unless in writing, signed by the
waiving party, and only to the extent herein set forth.
(c) Parties in Interest All the terms and provisions of this
Agreement shall be binding upon and inure to the benefit of
and be enforceable by the successors in interest of the
respective parties hereto.
(d) Laws Governing This Agreement shall be construed and
interpreted according to the laws of the State of New York,
with the same force and effect as is fully executed and to be
performed therein.
(e) Notices All notices, requests, demands and other
communications hereunder shall be in writing and shall be
deemed to have been duly given if delivered by hand or mailed,
certified or registered mail, with first-class postage paid,
at the addresses first set forth above or to such person and
place as the parties may specify by written notice.
(f) Counterparts This agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but
all of which together shall constitute one and the same
instrument.
155
(g) Severability If any provisions or any portion of any provision
of this Agreement shall be construed to be illegal, invalid,
or unenforceable, such shall be deemed stricken and deleted
from this Agreement to the same extent and effect as if never
incorporated herein, but all other provisions of this
Agreement and the remaining portion of any provision which is
illegal, invalid or unenforceable in part shall continue in
full force and effect.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year first above written.
INTERNATIONAL MICROCOMPUTER SOFTWARE, INC.
a California corporation
By: /s/ GORDON LANDIS
Name: Gordon Landis
Title: President
DIGITAL CREATIVE DEVELOPMENT CORPORATION
a Utah corporation
By: /s/ MARTIN R. WADE III
Name: Martin R. Wade III
Title: President
156
EX-10.16
18
f76300ex10-16.txt
EXHIBIT 10.16
EXHIBIT 10.16
WORKOUT AGREEMENT FOR INTERNATIONAL MICROCOMPUTER SOFTWARE,INC.
This Workout Agreement ("Agreement") is made between International Microcomputer
Software, Inc., a California corporation, ("Debtor") and each of the creditors
of the Debtor which executes a Consent in the form attached hereto as Exhibit A
(individually, a Creditor and, collectively, the "Creditors").
BACKGROUND
As of February 1, 2000, ("Workout Date"), the Debtor was indebted to the holders
of unsecured claims totaling approximately $12.3 million, not including
approximately $4.3 million of deferred revenue.
On February 4, 2000, the Debtor executed a security agreement ("Security
Agreement") in which the Debtor granted a security interest ("Security
Interest") in substantially all of its assets to CMA Business Credit Services
("CMA") as trustee for its creditors.
The Debtor convened a meeting on February 18, 2000, to which its unsecured
creditors were invited. At that meeting, the management of Debtor discussed the
Debtor's financial condition and its future prospects. At the conclusion of that
meeting, the creditors formed a committee of creditors ("Committee") which is
currently composed of the following creditors:
Americ Disc, Inc.
Microweb
Stan Walker & Associates, Inc.
Interim Credit Services
D. Thereafter, the Debtor met with its secured creditors and the Committee and
developed a plan for satisfaction of its financial obligations. This Agreement
embodies such plan. The Committee supports this Agreement and recommends that
all creditors consent to the provisions for payment of claims contained herein.
ARTICLE I
Description and Determination of Claims
1.1 CLAIMS TREATED UNDER THIS AGREEMENT. Claims subject to this Agreement
("Unsecured Claims") shall include all unsecured claims against the
Debtor which existed on the Workout Date and all claims that existed on
such date which are unsecured but for (a) the value of their beneficial
interest under the Security Agreement or (b) any value of their interest
under a judgment lien, attachment lien, or similar charge in connection
with their claim which is subordinate to the Security Interest.
Unsecured Claims shall include (a) all unsecured claims arising under
leases or executory contracts entered into prior to the Workout Date
except to the extent of the reasonable value of the use of goods,
services or space actually used or occupied by the Debtor after the
Workout Date and (b) interest at the annual rate of six percent (6%)
accruing on or before September 30, 2000. Unsecured Claims shall not
include those claims described in Exhibit B hereto ("Schedule of
Excluded Claims") or an amendment to such Schedule B which is approved
by the Debtor and the Committee on or before the Effective Date.
1.2 DESIGNATION OF CLAIM AMOUNT BY CREDITOR. Upon execution of a Consent in
the form attached hereto as Exhibit A, each Creditor shall state thereon
the amount of its Unsecured Claim. Such Unsecured Claim
157
shall not include late charges or similar amounts accrued after the
Workout Date nor interest accruing after September 30, 2000, all of
which accruals shall be deemed waived by the execution of the Consent.
1.3 DELIVERY OF CONSENT. The Creditor shall deliver such Consent to CMA at
the address or facsimile number shown thereon. CMA shall note on each
Consent the date it is received and shall immediately transmit a copy of
such Consent to the Debtor.
1.4 NOTICE OF DISPUTE. Not later than twenty-one days after the Effective
Date (see Section 4.2 below), if the Debtor disputes any portion of the
Unsecured Claim asserted by a Creditor in its Consent, the Debtor shall
transmit written notice to the Creditor stating the amount in dispute.
1.5 DETERMINATION OF ALLOWED CLAIM. If the Debtor gives timely notice of a
disputed claim, the portion of such claim which the Debtor disputes
shall be deemed a "Disputed Claim." Any Unsecured Claim, or portion
thereof, which the Debtor does not timely dispute shall be deemed an
Allowed Claim.
1.6 TREATMENT OF DISPUTED CLAIMS.
(a) RESOLUTION THROUGH ARBITRATION. The allowability of each
Disputed Claim shall be determined by either (i) agreement
between the Debtor and the Creditor or (ii) binding arbitration
pursuant to the Commercial Arbitration Rules of the American
Arbitration Association upon demand submitted to the Association
by either party. The award of the arbitrator in such proceeding
shall be a declaration only of the amount of the Creditor's
Allowed Claim under this Agreement and shall specify that it may
be satisfied only in accordance with this Agreement. The
allocation of the cost of such arbitration (including the fees,
if any, of the arbitrator) shall be determined by the arbitrator
in the award.
(b) RESERVE FOR DISPUTED CLAIMS. At the time when any distribution
is to be made to the holders of Allowed Claims, the Disbursing
Agent shall withhold an amount equal to the distribution that
would have been made on all Disputed Claims if they had been
Allowed Claims. The Disbursing Agent shall hold such amount in
an interest bearing, federally insured deposit account ("Claims
Reserve") pending resolution of the Disputed Claim as provided
herein.
(c) DISTRIBUTIONS ON DISPUTED CLAIMS. Not later than thirty days
after the Disbursing Agent receives written notice that the
allowability of a Disputed Claim is resolved, the Disbursing
Agent shall pay to the Creditor holding such claim , from the
Claims Reserve, (a) the portion of the distributions that were
withheld on account of the Disputed Claim to which the holder
thereof is entitled and (b) the interest accrued in the Claims
Reserve on account of such portion. The portion of such
distributions to which the holder is not entitled shall be
returned to the Debtor.
ARTICLE II
Treatment of Claims
2.1 ACCEPTANCE OF AGREEMENT AS NOVATION; CONSIDERATION. By execution of a
Consent, a Creditor accepts this Agreement and the payment of an amount
equal to ten percent (10%) of its allowed Unsecured Claims, as
contemplated hereby, in full settlement of its Unsecured Claims.
Effective upon CMA's receipt of the funds identified in Article III
below and subsequent distribution to Creditor of its pro rata portion
thereof, Creditor hereby releases and discharges Debtor from any and all
amounts due to Creditor in respect of its Unsecured Claims.
158
ARTICLE III
Distributions
PROVISIONS FOR PAYMENT OF ALLOWED CLAIMS. Not later than the date on which the
Debtor's secured creditors, Union Bank of California and Silicon Valley Bank,
are paid approximately $3.5 million and $1.5 million, respectively, the Debtor
shall pay to CMA, as Disbursing Agent, cash in an amount sufficient to pay ten
percent of the sum of Allowed Claims and Disputed Claims. Upon such payment, the
Security Interest shall be terminated. The Disbursing Agent's reasonable
expenses and a fee equal to five percent (5%) of the first $100,000 in
distributions by the Disbursing Agent, three percent (3%) of the next $900,000,
and one-half of one percent (.5%) of additional distributions shall be paid by
the Debtor. The Disbursing Agent shall serve as the agent and trustee of the
Creditors.
ARTICLE IV
Effective Date
4.1 ACCEPTANCE OF CREDITORS. This Agreement shall become effective only if
it is accepted by the holders of 93% or more in dollar amount of
Unsecured Claims or by such lower percentage to which the Debtor and the
Committee agree. In determining such percentage, Unsecured Claims held
by creditors who do not submit Consents shall be deemed to be in the
amounts shown in the Debtor's books and records.
4.2 DEFINITION OF EFFECTIVE DATE. The "Effective Date" of this Agreement
shall be the day on which the Disbursing Agent certifies that the
required percentage of acceptances has been received. If such percentage
has not been received by December 31, 2000, this Agreement shall be null
and void and of no further effect.
ARTICLE V
General Provisions
5.1 GOVERNING LAW. This Agreement and all controversies relating to the
subject matter hereof shall be governed by and determined in accordance
with the laws of the State of California.
5.2 COUNTERPARTS. This Agreement, when executed by the Debtor and the
Committee, and the Consents, when executed by Creditors, shall
constitute a single agreement.
5.3 ENTIRE AGREEMENT. This Agreement and the Consents shall constitute the
entire agreement of the Debtor, the Creditors, and the Committee, and
supersede and replace all prior and contemporaneous agreements,
documents, or understandings, whether written or oral. All such prior
and contemporaneous agreements, documents, and understandings shall have
no legal effect.
IN WITNESS WHEREOF, the Debtor and the Committee have executed this Agreement as
of the date written below, and each Creditor shall be deemed to have executed
this Agreement by execution of a Consent.
Dated: November 6, 2000
International Microcomputer Software, Inc. Committee of Creditors
By: /s/ By: /s/
------------------------------------- -------------------------------
Geoffrey Koblick, CEO Alex Romano, Chair
159
International Microcomputer Software, Inc.
EXHIBIT A (REVISED)
to
WORKOUT AGREEMENT
Consent to Workout Agreement
The undersigned Creditor ("Creditor") hereby accepts all of the terms and
conditions of the Workout Agreement of International Microcomputer Software,
Inc. ("Debtor") dated November 6, 2000 ("Workout Agreement"). I certify that I
have read the Workout Agreement and understand all of its terms, including the
provision that the cash I receive in the amount of 10% of my Unsecured Claim
will be in full satisfaction of such Unsecured Claim (as defined in the Workout
Agreement).
I further certify that, as of February 1, 2000, the amount of my Unsecured Claim
was $_____________ and that interest on such amount, at an annual rate of 6%, to
September 30, 2000, is $_________ so that the total of my claim is $__________ .
[Do not include late charges or similar fees after February 1, 2000, nor
interest after September 30, 2000.]
Legal Name of Creditor ____________________________________
Signature of Creditor or Authorized
Representative /s/_________________________________
Printed or Typed Name of Person Signing ____________________________________
Title of Person Signing ____________________________________
Address of Creditor ____________________________________
____________________________________
Telephone Number (____) ____________________________
Facsimile Number (____) ____________________________
PLEASE SIGN AND RETURN TO: Adjustment Bureau
CMA Business Credit Services
P.O. Box 1838
San Leandro, California 94577-9922
Facsimile: (510) 346-6020
160
INTERNATIONAL MICROCOMPUTER SOFTWARE, INC.
EXHIBIT B
to
Workout Agreement
SCHEDULE OF EXCLUDED CLAIMS
The claims of the following persons and entities shall not be included as
Unsecured Claims subject to this Workout Agreement, notwithstanding their
existence on February 1, 2000:
1. Accrued salaries, wages, vacation pay, and similar benefits (but not
severance pay/benefits) payable to persons employed by the Debtor on
November 1, 2000, and all employment taxes relating thereto.
2. Insurance premiums and other amounts payable with respect to the
Debtor's life and health insurance policies.
3. Accrued utility charges for gas, electricity, telephone, waste disposal,
and other similar services.
4. Reimbursement of out-of-pocket expenses incurred by employees and
directors.
5. Personal property tax claims.
161
EX-10.17
19
f76300ex10-17.txt
EXHIBIT 10.17
EXHIBIT 10.17
ADDENDUM TO WORKOUT AGREEMENT FOR INTERNATIONAL MICROCOMPUTER SOFTWARE, INC.
The Workout Agreement dated November 6, 2000, between the Debtor and its
Creditors ("Workout Agreement") is hereby amended as follows:
The second sentence of paragraph 1.1 shall be replaced with the following:
"Unsecured Claims shall include (a) all unsecured claims arising under leases or
executory contracts entered into prior to the Workout Date except to the extent
of the reasonable value of the use of goods, services, or space actually used or
occupied by the Debtor after the Workout Date and (b) interest at the annual
rate of 8% from February 1, 2000, to September 30, 2002, and then 12% interest
thereafter until paid."
The first sentence of paragraph 3.1 shall be replaced as follows: Not later than
September 30, 2002, Creditors shall receive the first of four equal payments,
the sum of which shall equal 10% of the amount of their Unsecured Claims. The
three remaining payments shall be made not later than December 31, 2002, March
31, 2003, and June 30, 203. Interest shall be paid on the unpaid balance from
February 1, 2000.
The first sentence of paragraph 4.1 shall be replaced with the following: "This
Agreement shall become effective only if it is accepted by the holders of 93% or
more in dollar amount of Unsecured Claims not later than August 17, 2001, or by
such lower percentage to which the Debtor and the Committee agree.
Paragraph 4.2 shall be deleted.
Consent to Addendum to Workout Agreement
The undersigned Creditor ("Creditor") hereby accepts all of the terms and
conditions of the above Addendum. I certify that I have read the Workout
Agreement and understand all of its terms, including the provision that the cash
I receive in the amount of 10% of my Unsecured Claim will be in full
satisfaction of such Unsecured Claim (as defined in the Workout Agreement).
Legal Name of Creditor ____________________________________
Signature of Creditor or Authorized
Representative /s/_________________________________
Printed or Typed Name of Person Signing ____________________________________
Title of Person Signing ____________________________________
Address of Creditor ____________________________________
____________________________________
Telephone Number (____) ____________________________
Facsimile Number (____) ____________________________
162
Adjustment Bureau
PLEASE SIGN AND RETURN TO: CMA Business Credit Services
P.O. Box 1838
San Leandro, California 94577-9922
Facsimile: (510) 346-6020
163
EX-21.1
20
f76300ex21-1.txt
EXHIBIT 21.1
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
IMSI Australia (PTY) Ltd.
ArtToday.com Inc.
164
EX-23.1
21
f76300ex23-1.txt
EXHIBIT 23.1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Registration Statements of
International Microcomputer Software, Inc. on Form S-8 (Nos. 33-67208 and
33-71872) and Form S-3 (Nos. 33-69206 and 33-80394) of our report dated
September 28, 2001, except for Note 13 and the last sentence of Note 4 as to
which the date is October 9, 2001, appearing in the Annual Report on Form 10-K
of International Microcomputer Software, Inc. and Subsidiaries for the year
ended June 30, 2001.
/s/ GRANT THORNTON LLP
-------------------------------
San Francisco, California
September 28, 2001
165