10QSB

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-QSB

Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934

For the quarter ended                 March 31, 2002

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to ____________

Commission File Number        0-15949
INTERNATIONAL MICROCOMPUTER SOFTWARE, INC.
(Exact name of registrant as specified in its charter)

California	94-2862863
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer identification No.)
75 Rowland Way, Novato, CA (Address of principal executive offices)	94945 (Zip code)

(415) 878-4000
(Registrant’s telephone number including area code)

Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.

YES      NO  

As of May 10, 2002, 21,592,827 shares of Registrant’s common stock, no par value, were outstanding.

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION
	Item 1. Condensed Consolidated Financial Statements
		CONDENSED CONSOLIDATED BALANCE SHEETS
		CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
		CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
		NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
PART II — OTHER INFORMATION
	Item 1. Legal Proceedings
	Item 2. Changes in Securities and Use of Proceeds
	Item 3. Defaults upon Senior Securities
	Item 4. Submission of Matters to a Vote of Security Holders
	Item 5. Other Information
	Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
Exhibit Index
Exhibit 10.1
Exhibit 10.2

INTERNATIONAL MICROCOMPUTER SOFTWARE, INC.
AND SUBSIDIARIES

INDEX

PART I – FINANCIAL INFORMATION	3
Item 1. Condensed Consolidated Financial Statements	3
CONDENSED CONSOLIDATED BALANCE SHEETS	3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS	4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS	5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS	6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
PART II — OTHER INFORMATION	28
Item 1. Legal Proceedings	28
Item 2. Changes in Securities and Use of Proceeds	28
Item 3. Defaults upon Senior Securities	29
Item 4. Submission of Matters to a Vote of Security Holders	29
Item 5. Other Information	29
Item 6. Exhibits and Reports on Form 8-K	29
SIGNATURES	30
EXHIBIT INDEX	31
Exhibit 10.1	32
EXECUTIVE EMPLOYMENT AGREEMENT	32
Exhibit 10.2	39
AMENDMENT TO RESTRUCTURE AGREEMENT	39

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PART I – FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

INTERNATIONAL MICROCOMPUTER SOFTWARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)

	(Unaudited)			(Restated)
	March 31, 2002			June 30, 2001
ASSETS
Current assets:
Cash and cash equivalents:	$	2,352		$	1,268
Receivables, less allowances for doubtful Accounts, discounts and returns of $193 and $182		999			1,256
Inventories		376			176
Prepaid royalties and licenses		28			229
Other current assets		374			382
Total current assets		4,129			3,311
Fixed assets, net		429			600
Capitalized software development costs, net		909			1,351
Other assets, net		1,045			1,229
Total assets	$	6,512		$	6,491
LIABILITIES AND SHAREHOLDERS’ DEFICIT
Current liabilities:
Current portion long-term debt	$	2,271		$	11,927
Trade accounts payable		2,163			2,658
Accrued interest and penalties payable		52			2,293
Accrued and other liabilities		2,773			2,741
Accrued arbitration award-current		179			131
Deferred revenue		1,337			1,378
Total current liabilities		8,775			21,128
Accrued arbitration award		625			702
Long term debt and other obligations		440			231
Total liabilities		9,840			22,061
Shareholders’ deficit:
Common stock, no par value; 300,000,000 authorized; Issued and outstanding 21,402,827 and 9,695,740 shares		33,877			29,089
Accumulated deficit		(37,207	)		(44,666	)
Accumulated other comprehensive income (loss)		2			7
Total shareholders’ deficit		(3,328	)		(15,570	)
Total liabilities and shareholders’ deficit	$	6,512		$	6,491

See Notes to Condensed Consolidated Financial Statements

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INTERNATIONAL MICROCOMPUTER SOFTWARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)

		(Unaudited)					(Unaudited)
		Three Months Ended March 31,					Nine Months Ended March 31,
		2002		2001			2002			2001
				(restated)						(restated)
Net revenues		$	3,661	$	3,314		$	9,981		$	9,944
Product costs			692		727			2,213			2,536
Gross margin			2,969		2,587			7,768			7,408
Costs and expenses:
Sales and marketing			846		989			2,356			2,560
General and administrative			1,114		1,228			3,617			3,461
Research and development			535		690			1,743			2,111
Total operating expenses			2,495		2,907			7,716			8,132
Operating income (loss)			474		(320	)		52			(724	)
Gain on product line sale			—		—			20			285
Interest and other, net			101		(576	)		(389	)		(1,665	)
Gain (loss) on disposition of fixed assets			5		(6	)		10			(9	)
Distribution to affiliated company			—		—			(200	)		—
Settlement of fee agreement			—		—			—			(187	)
Income (Loss) before income tax, extraordinary item and cumulative effect of accounting change			580		(902	)		(507	)		(2,300	)
Income tax provision (benefit)			1		(14	)		3			(21	)
Income (Loss) before extraordinary item and cumulative effect of accounting change			579		(888	)		(510	)		(2,279	)
Extraordinary item — gain on forgiveness of debt			—		—			7,970			—
Cumulative effect of change in accounting principle			—		—			—			(285	)
Net income (loss)		$	579	$	(888	)	$	7,460		$	(2,564	)
Basic earnings (loss) per share
	Basic earnings (loss) per share before extraordinary item and accounting change	$	0.04	$	(0.09	)	$	(0.04	)	$	(0.23	)
	Basic earnings (loss) per share _ extraordinary item						$	0.71
	Basic earnings (loss) per share _ Change in accounting principle									$	(0.03	)
	Basic earnings (loss) per share _ Net	$	0.04	$	(0.09	)	$	0.67		$	(0.26	)
Diluted earnings (loss) per share
	Diluted earnings (loss) per share before extraordinary item and accounting change	$	0.04	$	(0.09	)	$	(0.04	)	$	(0.23	)
	Diluted earnings (loss) per share _ extraordinary item						$	0.71
	Diluted earnings (loss) per share _ Change in accounting principle									$	(0.03	)
	Diluted earnings (loss) per share _ Net	$	0.04	$	(0.09	)	$	0.67		$	(0.26	)
Shares used in computing basic earnings (loss) per share			14,082		9,694			11,180			9,680
Shares used in computing diluted earnings (loss) per share			15,490		9,694			11,180			9,680

See Notes to Condensed Consolidated Financial Statements

4

INTERNATIONAL MICROCOMPUTER SOFTWARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

	(Unaudited)
	Nine Months Ended March 31,
	2002			2001 (restated)
Cash flows from operating activities:
Net cash provided by operating activities	$	1,520		$	263
Cash flows from investing activities:
Proceeds from product line and domain name sales		20			285
Purchase of equipment and furniture		(76	)		(371	)
Software development costs		(22	)		(40	)
Acquisition of subsidiary from affiliated company		(50	)		—
Additions to other assets		(304	)		(6	)
Net cash used by investing activities		(432	)		(132	)
Cash flows from financing activities:
Increase in notes payable		708			90
Repayment of loans		(1,358	)		(20	)
Repayment of capital lease obligations		(219	)		(149	)
Capital contributions		116			—
Proceeds from issuance of common stock		754			11
Net cash used by financing activities		1			(68	)
Effect of exchange rate change on cash and cash equivalents		(5	)		13
Net increase (decrease) in cash and cash equivalents		1,084			76
Cash and cash equivalents at beginning of period		1,268			1,775
Cash and cash equivalents at end of the period	$	2,352		$	1,851

See Notes to Condensed Consolidated Financial Statements

5

INTERNATIONAL MICROCOMPUTER SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.   Basis of Presentation

The interim condensed consolidated financial statements have been prepared from the records of International Microcomputer Software, Inc. and Subsidiaries (“IMSI”) without audit. In the opinion of management, all adjustments, which consist only of normal recurring adjustments, necessary to present fairly the financial position at March 31, 2002 and the results of operations and cash flows as of and for the three and nine months ended March 31, 2002 and 2001 have been made. The interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in our Annual Report on Form 10-K for the fiscal year ended June 30, 2001. The results of operations for the three and nine months ended March 31, 2002 are not necessarily indicative of the results to be expected for any other interim period or for the full year.

On October 1, 2001, we acquired from Digital Creative Development Corporation (DCDC) 100% of the outstanding shares of Keynomics, Inc. a productivity software company. The acquisition has been treated as a transfer between entities under common control. We have restated the financial statements for all prior periods to reflect the acquisition as of the beginning of the periods presented. The following tables summarize the effect of the acquisition of Keynomics on IMSI’s Balance Sheet, Statement of Operations, and Statement of Cash Flows:

	June 30, 2001
	Before						After
BALANCE SHEET (in thousands)	Acquisition			Keynomics			Acquisition
ASSETS
Current assets		2,875			436			3,311
Long term assets		3,113			67			3,180
Total assets		5,988			503			6,491
LIABILITIES AND SHAREHOLDERS’ DEFICIT
Current Liabilities		20,354			774			21,128
Long term liabilities		880			53			933
Total liabilities		21,234			827			22,061
Total shareholders’ deficit		(15,246	)		(324	)		(15,570	)
Total liabilities and shareholders’ deficit		5,988			503			6,491

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	Three months ended March 31, 2001
	Before						After
STATEMENTS OF OPERATIONS (in thousands)	Acquisition			Keynomics			Acquisition
Net revenues	$	3,107		$	207		$	3,314
Product costs		720			7			727
Gross margin		2,387			200			2,587
Total operating expenses		2,513			394			2,907
Operating loss		(126	)		(194	)		(320	)
Other Income (Expense)		(578	)		(4	)		(582	)
Loss before income tax		(704	)		(198	)		(902	)
Income tax benefit		(14	)		—			(14	)
Net loss	$	(690	)	$	(198	)	$	(888	)

	Nine months ended March 31, 2001
	Before						After
STATEMENTS OF OPERATIONS (in thousands)	Acquisition			Keynomics			Acquisition
Net revenues	$	9,399		$	545		$	9,944
Product costs		2,521			15			2,536
Gross margin		6,878			530			7,408
Total operating expenses		7,023			1,109			8,132
Operating loss		(145	)		(579	)		(724	)
Other Income (Expense)		(1,572	)		(4	)		(1,576	)
Loss before income tax		(1,717	)		(583	)		(2,300	)
Income tax benefit		(21	)		—			(21	)
Loss before cumulative effect of change in accounting principle		(1,696	)		(583	)		(2,279	)
Cumulative effect of change in accounting principle		(285	)		—			(285	)
Net loss	$	(1,981	)	$	(583	)	$	(2,564	)

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	Nine months ended March 31, 2001
	Before						After
STATEMENT OF CASH FLOWS (in thousands)	Acquisition			Keynomics			Acquisition
Net cash provided (used) by operating activities	$	561		$	(298	)	$	263
Net cash provided (used) by investing activities		(73	)		(59	)		(132	)
Net cash provided (used) by financing activities		(158	)		90			(68	)
Effect of exchange rate change on cash and cash equivalents		13			—			13
Net increase (decrease) in cash and cash equivalents		343			(267	)		76
Cash and cash equivalents at beginning of period		1,477			298			1,775
Cash and cash equivalents at end of the period	$	1,820			31			1,851

2.  Realization of Assets

The financial statements have been prepared on a basis that contemplates our continuation as a going concern and the realization of assets and liquidation of liabilities in the ordinary course of business. We have an accumulated deficit of $37,207,000 and negative working capital of $4,646,000 as of March 31, 2002.

It is possible that we will require additional capital, either through equity or other financing arrangements. Our large accumulated losses and the negative amount of shareholders’ equity as of March 31, 2002 make it difficult for us to obtain new debt financing or to obtain equity financing at attractive prices.

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.

3.  Equity related transactions

The following tables detail the activity regarding our common stock, warrants and stock options for the nine-month period ended March 31, 2002:

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				Number of
Transaction type			Group	securities			Amount
Shares outstanding as of June 30, 2001					9,695,740		$	29,088,425
	Private placement		Accredited investors		835,000			417,500
	Capital contribution		Former Keynomics owner		—			116,580
	Debt to equity conversion		Related parties		9,661,764			3,555,000
	Options issued for consulting services		Consultants		—			41,956
	Warrants issued for consulting services		Consultants		—			269,272
	Options exercised		Employees and consultants		82,000			16,794
	Warrants exercised		Executives & advisers to IMSI		1,282,500			318,750
	Settlement shares and warrants		Vendors		45,823			88,388
	Retirement into treasury		Broderbund settlement		(200,000	)		(52,000	)
	Variable accounting charge		Re-priced stock options		—			16,131
		Total			11,707,087		$	4,788,371
Shares outstanding as of March 31, 2002					21,402,827		$	33,876,796

		Options			Warrants
Outstanding at June 30, 2001			1,976,164			729,291
	Granted		1,056,000			2,092,500
	Exercised		(82,000	)		(1,282,500	)
	Cancelled		(899,927	)		—
Outstanding at March 31, 2002			2,050,237			1,539,291

4.  Segment Information

We have four reportable operating segments based on the sales market. Two of these are geographic segments and generate revenues and incur expenses related to the sale of our PC productivity software. The third and forth segments comprise the revenues and expenses related to ArtToday.com, our graphic design Internet subsidiary and to Keynomics, our newly acquired business applications subsidiary. The following table details segment information (in thousands):

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	ArtToday.com			Keynomics			North America			Other Foreign			Eliminations			Total
Quarter Ended March 31, 2002
Net Revenues-external	$	1,082		$	239		$	2,219		$	121			—		$	3,661
Operating income (loss)		402			(84	)		157			(1	)		—			474
Identifiable assets		1,989			81			4,690			(97	)		(151	)		6,512
Quarter Ended March 31, 2001 (restated)
Net Revenues-external	$	778		$	207		$	2,269		$	60			—		$	3,314
Operating income (loss)		(28	)		(195	)		(57	)		(40	)		—			(320	)
Identifiable assets		2,324			346			6,453			205			(1,587	)		7,741
Nine months Ended March 31, 2002
Net Revenues-external	$	3,013		$	916		$	5,650		$	402			—		$	9,981
Operating income (loss)		1,008			(81	)		(906	)		31			—			52
Identifiable assets		1,989			81			4,690			(97	)		(151	)		6,512
Nine months Ended March 31, 2001 (restated)
Net Revenues-external	$	2,309		$	545		$	6,845		$	245			—		$	9,944
Operating income (loss)		101			(579	)		(231	)		(15	)		—			(724	)
Identifiable assets		2,324			346			6,453			205			(1,587	)		7,741

5.  Earnings (Loss) Per Share

Earnings (loss) per share are computed by dividing net earnings (loss) by the weighted average number of common shares outstanding for the period. The following table summarizes the weighted average shares outstanding:

	Three Months Ended March 31						Nine Months Ended March 31
	2002			2001			2002			2001
Weighted Average Shares Outstanding		14,081,521			9,693,892			11,179,696			9,680,040
Total Stock Options Outstanding		2,050,237			2,142,855			2,050,237			2,142,855
Less: Non Dilutive Stock Options		(1,633,111	)		(2,142,855	)		(2,050,237	)		(2,142,855	)
Total Warrants Outstanding		1,539,291			664,291			1,539,291			664,291
Less: Non Dilutive Warrants		(547,639	)		(664,291	)		(1,539,291	)		(664,291	)
Diluted Weighted Average Shares Outstanding		15,490,299			9,693,892			11,179,696			9,680,040

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6.  Comprehensive Income (Loss)

Comprehensive income (loss) includes changes in the balance of items that are reported directly in a separate component of shareholders’ deficit on the condensed consolidated balance sheets. The reconciliation of net income (loss) to comprehensive income (loss) is as follows.

	Three Months Ended March 31,					Nine Months Ended March 31,
	2002		2001			2002			2001
			(restated)						(restated)
Net Income (Loss)	$	579	$	(888	)	$	7,460		$	(2,564	)
Foreign currency translation adjustments		6		10			(5	)		13
Total comprehensive income (loss)	$	585	$	(878	)	$	7,455		$	(2,551	)

7.  New Accounting Standards

In June 2001, the Financial Accounting Standards Board adopted SFAS No. 142 Goodwill And Intangible Assets. 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, except for the non-amortization provisions of the statement, which are effective for business combinations completed after June 30, 2001. Included in our assets at March 31, 2002, is goodwill with a net carrying value of $112,000 related to the acquisition of ArtToday.com. OrgPlus goodwill, which was included in this category prior to September 30, 2001, was transferred to capitalized distribution rights in conjunction with the settlement of our software license and distribution agreement with Broderbund and concurrent software assignment, license and distribution agreements with Human Concepts.

Upon adoption of SFAS No. 142, we will no longer amortize goodwill related to ArtToday.com, decreasing amortization expense by approximately $81,000 in fiscal 2003. We are required to assess this goodwill for impairment in the year of adoption. We do not expect the adoption of SFAS No. 142 to have a material effect on our financial condition or results of operation.

In 2001, the FASB issued SFAS 143, Accounting for Asset Retirement Obligations. SFAS 143 applies to all entities that have legal obligations associated with the retirement of a tangible long-lived asset. SFAS 143 requires that a liability for an asset retirement obligation be recognized if the obligation meets the definition of a liability in FASB Concepts Statement 6, Elements of Financial Statements, and if the amount of the liability can be reasonably estimated. When a retirement obligation is initially recognized, the asset retirement cost is capitalized by increasing the carrying amount of the related long-lived asset by an amount equal to the liability. The initial recording of the obligation should be at fair market value. SFAS 143 is effective for fiscal years beginning after June 15, 2002, but earlier application is encouraged The Company does not expect this statement to have a material effect on its financial statements.

In 2001, the FASB issued SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS 144 supersedes SFAS 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of, as well as the provisions of APB Opinion 30, Reporting the Results of Operations – Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, that address the disposal of a business. SFAS 144

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also amends ARB 51, Consolidated Financial Statements, to eliminate the exception to consolidate a subsidiary for which control is likely to be temporary. SFAS 144 carries over the recognition and measurement provisions of SFAS 121, but differs from SFAS 121 in that it provides guidance for estimating future cash flows to test recoverability. SFAS 144 also includes criteria that have to be met for an entity to classify a long-lived asset or asset group as held for sale, and extends the presentation of discontinued operations permitted by Opinion 30 to include disposals of a component of an entity. SFAS 144 is effective for fiscal years beginning after December 15, 2001, except for the disposal provisions, which are immediately effective. We do not expect the adoption of SFAS No. 144 to have a material effect on our financial condition or results of operation.

8.  Extraordinary Items

We did not record any extraordinary items during the quarter ended March 31, 2002.

During the fiscal quarter ended December 31, 2001, we recognized $2,243,000 gain from forgiveness of debt. $2,062,000 was related to the forgiveness of a portion of the principal and accrued interest on the promissory note payable to Silicon Valley Bank, one of our senior secured creditors. $140,000 was related to the forgiveness of amounts payable to Light Work Design and $40,500 was related to the forgiveness of amounts payable to Microsoft. Light Work Design and Microsoft are two unsecured creditors that were owed royalties.

In the quarter ended September 30, 2001, we recorded an extraordinary gain of $5,727,000 related to the forgiveness of debt to BayStar Capital and DelRay Technologies. BayStar Capital agreed to settle for 10% of the principal and accrued interest and penalties outstanding. According to the agreement, payments are to be made in four quarterly installments of $177,534 beginning September 30, 2002, with interest accruing at the rate of 8% per annum from August 31, 2001 to the date of the first installment. Thereafter, the interest rate is 12% per annum until the note is paid in full on or before June 30, 2003. DelRay Technologies agreed to a one-time payment of $20,000 as settlement in full of its outstanding claim.

These combined transactions resulted into an aggregate forgiveness of debt gain of $7,970,000 for the nine-month period ended March 31, 2002.

The tax expense on the extraordinary gain on forgiveness of debt is approximately $3,183,000 as calculated at our marginal tax rate of 39.94%. This expense will be entirely offset by the net operating loss carryforward.

9.  Executive Employment Agreement

As of April 27, 2002 we entered into a three-year executive employment agreement commencing January 1, 2002, with Martin Wade which outlined the terms of Mr. Wade’s employment by us as Chief Executive Officer of IMSI. As compensation for his services, Mr. Wade is to receive the following: warrants totaling 1,250,000 at an exercise price of $0.35, vesting on March 1, 2003 and expiring five years after the grant date; an additional 2 million warrants upon the sale, merger, or acquisition of at least fifty one percent of the Company’s common stock by a single corporate entity at an exercise price representing the average closing price of the Company’s stock over the twelve months preceding the execution of a definitive agreement for such sale, merger, or acquisition; an initial bonus of $25,000; an annual bonus for fiscal 2002 of $25,000 if the Company meets its annual plan; two subsequent annual bonuses of $50,000 each if the Company meets its annual plans for fiscal years 2003 and 2004; and the right to participate in the Company’s benefit plans.

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10.  Merger Termination

On August 31, 2001 IMSI and DCDC entered into an Agreement and Plan of Merger and Reorganization (“Merger Agreement”) pursuant to which DCDC was to merge with and into “DCDC Merge, Inc”. (“Merger Sub”), a California corporation and a wholly owned subsidiary of IMSI, and Merger Sub was to continue as the surviving corporation. Simultaneously and pursuant to the Merger Agreement, DCDC agreed to purchase for $2,500,000 all rights as lender and holder under a promissory note between Union Bank of California and IMSI in the original principal amount of $3,580,000.

On March 1, 2002, we entered into a “Mutual Termination Agreement and Release” with DCDC whereby the Merger Agreement was terminated and each company was released from all duties, rights, claims, obligations and liabilities arising from, in connection with, or relating to, the Merger Agreement.

Furthermore the two companies agreed to enter into an agreement entitled Promissory Note Conversion and General Release pursuant to which DCDC agreed to cancel the entire outstanding principal amount of $3,580,000 and all interest due on the promissory note that DCDC had acquired in return for 9,000,000 shares of common stock of IMSI and cash in the amount of $250,000 to be paid in monthly installments over 15 months as follows:

• $10,000 per month for the first five installments starting March 1, 2002

• $20,000 per month for ten months thereafter

11.  Subsequent Events: Silicon Valley note restructure

On October 9, 2001 we 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 provided for a new secured promissory note for $1.2 million with 12 monthly payments of $100,000 plus interest at 12% interest per annum beginning October 20, 2001. We had made the first five payments as of March 31, 2002.

On April 3, 2002, we amended this agreement whereby we offered to Silicon Valley Bank and Silicon Valley Bank accepted an early payment of the $700,000 balance of the note at a $100,000 discount. The payment of the $600,000 was made on April 5, 2002, on which date Silicon Valley Bank declared all our obligations to them under the revised promissory note, the related ArtToday Security Agreement and the related Pledge Agreement to have been satisfied and therefore released its interest in the collateral securing the note and the note itself.

In the next fiscal quarter, we will recognize an additional gain from forgiveness of debt of $100,000 arising from this transaction as an extraordinary item.

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following information should be read in conjunction with the consolidated financial statements and the notes thereto and in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Fiscal 2001 Form 10-K and previously filed fiscal 2002 Forms 10-QSB. This quarterly report on Form 10-QSB, and in particular this “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” may contain forward-looking statements regarding future

13

events or our future performance. These future events and future performance involve certain risks and uncertainties including those discussed in the “Other Factors That May Affect Future Operating Results” section of this Form 10-QSB, as well as in our Fiscal 2001 Form 10-K, as filed with the Securities and Exchange Commission (“SEC”). Actual events or our actual future results may differ materially from any forward-looking statements due to such risks and uncertainties. We assume no obligation to update these forward-looking statements to reflect actual results or changes in factors or assumptions affecting such forward-looking statements. This analysis is not intended to serve as a basis for projection of future events.

Recent Events

         Fiscal Quarter ended March 31, 2002.

         Merger Termination

On August 31, 2001 IMSI and DCDC entered into an Agreement and Plan of Merger and Reorganization (“Merger Agreement”) pursuant to which DCDC was to merge with and into “DCDC Merge, Inc”. (“Merger Sub”), a California corporation and a wholly owned subsidiary of IMSI, and Merger Sub was to continue as the surviving corporation. Simultaneously and pursuant to the Merger Agreement, DCDC agreed to purchase for $2,500,000 all rights as lender and holder under a promissory note between Union Bank of California and IMSI in the original principal amount of $3,580,000.

On March 1, 2002, we entered into a “Mutual Termination Agreement and Release” with DCDC whereby the Merger Agreement was terminated and each company was released from all duties, rights, claims, obligations and liabilities arising from, in connection with, or relating to, the Merger Agreement.

Furthermore the two companies agreed to enter into an agreement entitled Promissory Note Conversion and General Release pursuant to which DCDC agreed to cancel the entire outstanding principal amount of $3,580,000 and all interest due on the promissory note that DCDC had acquired in return for 9,000,000 shares of common stock of IMSI and cash in the amount of $250,000 to be paid in monthly installments over 15 months as follows:

• $10,000 per month for the first five installments starting March 1, 2002

• $20,000 per month for ten months thereafter

         Private Placement of Shares and Warrants Exercised

During the fiscal quarter ended March 31, 2002, we were successful in raising additional working capital through a private offering of IMSI shares. We offered shares of common stock at $.50 per share to certain investors in a private placement offering to qualified private investors. The money received in the offering, together with additional funds received pursuant to certain warrant exercises (as described below), contributed significantly to our ability to pay off early and at a $100,000 discount the remaining $700,000 principal balance of the Silicon Valley Bank note. This repayment occurred on April 5, 2002.

As of March 31, 2002, we had received formal commitment from investors to purchase 1,005,000 shares of IMSI’s capital stock at an aggregate purchase price of $502,500. We received funds totaling $417,500 from the subscribers as of the end of the quarter. Subsequently and as of the date of this filing, all committed funds have been received and deposited and all shares have been issued. None of the participants in this private placement, except Mr. John Wade who is our CEO’s brother and Mr. Matthew

14

Rexon who is our chairman’s cousin, were deemed to be an “affiliate” or a “related party” as defined in the Glossary to Statement of Financial Standards No.57, Related Party Disclosures.

The shares related to the offering have not been registered under the Securities Act of 1933 nor have they been registered under the securities laws of any state. The offer and sale of the shares was exempt from registration under section 4(2) of the Securities Act of 1933, and Rule 506 of Regulation D thereunder and exempt from the qualification requirements of state securities laws under the respective rules and regulations of the states in which the shares were being offered and sold.

Also, during the fiscal quarter ended March 31, 2002, certain officers and advisors to the company exercised previously issued warrants in the aggregate number of 1,282,500 at exercise prices ranging from $.20 to $.30 (averaging $.25). The proceeds to the company from this warrant exercise totaled $318,750.

         Silicon Valley note restructure

On October 9, 2001, we 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 provided for a new secured promissory note for $1.2 million with 12 monthly payments of $100,000 plus interest at 12% interest per annum beginning October 20, 2001. We had made the first five payments as of March 31, 2002.

On April 3, 2002, we amended this agreement whereby we offered to Silicon Valley Bank and Silicon Valley Bank accepted an early payment of the $700,000 balance of the note at a $100,000 discount. The payment of the $600,000 was made on April 5, 2002, on which date Silicon Valley Bank declared all our obligations to them under the revised promissory note, the related ArtToday Security Agreement and the related Pledge Agreement to have been satisfied and therefore released its interest in the collateral securing the note and the note itself.

In the next fiscal quarter, we will recognize an additional gain from forgiveness of debt of $100,000 arising from this transaction as an extraordinary item.

         Fiscal Quarters ended December 31, 2001

         Keynomics acquisition

On November 29, 2001, we entered into a stock purchase agreement with DCDC to acquire all issued and outstanding shares of capital stock of Keynomics, a California corporation focused on productivity enhancement software and wholly owned and controlled by DCDC. Incorporated in April 2000, Keynomics provides ergonomic and keyboard training for Fortune 1000 companies for worker-related safety, productivity and ergonomic compliance improvements. Keynomics currently offers “The KeySoft Performance System” in its server and ASP versions as its core products. The company’s mission is to reduce the costs and risks associated with the use of computer keyboards by workers in companies and provide significant long-term savings through ergonomic and productivity training and awareness.

The transaction was accounted for as a transfer between entities under common control. The total aggregate purchase price of Keynomics was $200,000 payable in installments to DCDC. As of March 31, 2002, $125,000 had been paid. The stock purchase agreement also calls for potential payments in the future to DCDC depending on Keynomics’ performance. These amounts, payable 60 days after the end of the next three fiscal years, consist of 50% of Keynomics’ net operating income, if any, in excess of:

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• $500,000 in the fiscal year ending June 30, 2003

• $1,000,000 in the fiscal year ending June 30, 2004

• $1,500,000 in the fiscal year ending June 30, 2005

Furthermore, potential payments may be due DCDC if we sell substantially all of the capital stock or substantially all of the assets of Keynomics within six months following the closing of the transaction. Such payments would consist of fifty percent of any amount paid for Keynomics in excess of $1.2 million.

As of the date of the purchase, Keynomics had $245,000 of promissory notes outstanding. Subsequent to the execution of the stock purchase agreement, holders of an aggregate $225,000 of the outstanding notes agreed to convert them into 661,765 shares of IMSI’s capital stock at $0.34 per share. Gordon Landies, our president, and Paul Jakab, our Chief Operating Officer, received 192,079 and 10,232 shares of IMSI’s capital stock, respectively, in exchange for their outstanding promissory notes from Keynomics. Joe Abrams, an IMSI related party and ,at the date of the transaction, owner of shares of IMSI’s capital stock in excess of 5% of the total outstanding also received 287,389 shares in exchange of his outstanding promissory note to Keynomics.

         Debt Restructuring

Along with the termination of the merger agreement with DCDC and the restructure of the Silicon Valley Bank note, we restructured our remaining outstanding debt as follows:

• On July 27, 2001, and as subsequently amended on September 24, 2001 and October 5, 2001, IMSI and Imageline, Inc agreed on the settlement of a) an arbitration award issued in January 2000 in favor of Imageline; and b) a variety of on going issues between the parties involving the intellectual property rights of Imageline. The agreement, effective September 30, 2001, calls for us to provide Imageline a variety of considerations including the following:

o The dismissal of any further appeal of the award (which dismissal occurred on October 11, 2001).

o Cash installments over a 12-year period, starting October 2001. These payments are to be made as follows: twelve monthly payments of $11,500 beginning on October 5, 2001; four equal quarterly payments of $78,750 beginning on September 30, 2002 and, 132 monthly payments of $6,500 thereafter. These payments had a net present value at June 30, 2001 of approximately $833,000 assuming a 12% discount rate.

o Certain rights to royalties, licenses, and inventories pertaining to our MasterClips line of products.

o A percentage of any net recovery we obtain from an indemnification claim we have against a third party associated with the original circumstances leading to the arbitration award. On March 28, 2002 we received a payment in the amount of $300,000 as settlement of all and any claims we had regarding the adverse arbitration award arising from the ImageLine dispute. On April 26, 2002 we made a payment to ImageLine in the amount of $30,000 representing an advance on its share of the net recovery from the indemnification claims. The remaining balance will be paid as soon as information regarding related legal fees necessary to compute the net recovery amount becomes available.

• On July 30, 2001 we entered into an agreement with Baystar Capital wherein Baystar agreed to accept $626,000 as settlement of all obligations due totaling $6,260,000. According to the

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agreement, payments are to be made in four quarterly payments beginning September 30, 2002. Interest is to accrue at 8% per annum from August 31, 2001 until the September 2002 payment, and at 12% per annum thereafter until the claim is paid in full on or before June 30, 2003.

•

We negotiated an agreement with most of our remaining unsecured creditors, which provides for the discounting to 10% of all outstanding amounts owed to them (plus the payment of interest from February 1, 2000 at the rate of 8% per annum). These payments are to be made in quarterly installments beginning August 15, 2002. These unsecured creditors comprise approximately $3,800,000 of debt on our balance sheet.

We believe that the reduction in our liabilities under planned and completed settlements will assist us to become profitable in the future and help provide a remedy to our working capital needs. In addition, we will continue to engage in discussions with third parties concerning the sale or license of non-core product lines; the sale or license of part of our assets; and raising additional capital investment through the issuance of stock and short or long term debt financing.

Results of Operations

The following tables set forth our results of operations for the three and nine-month periods ended March 31, 2002 and 2001 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:

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			Fiscal quarter ended March 31,
			2002												2001 (restated)
									$ Change			% Change
									from			from
						As %			previous			previous						As %
			$			of sales			year			year			$			of sales
Net Revenues			$	3,661			100.0	%	$	347			10.5	%	$	3,314			100.0	%
Product Cost				692			18.9	%		(35	)		-4.8	%		727			21.9	%
		Gross Margin		2,969			81.1	%		382			14.8	%		2,587			78.1	%
Operating Expenses
	Sales & Marketing			846			23.1	%		(143	)		-14.5	%		989			29.8	%
	General & Administrative			1,114			30.4	%		(114	)		-9.3	%		1,228			37.1	%
	Research & Development			535			14.6	%		(155	)		-22.5	%		690			20.8	%
		Total Operating Expenses		2,495			68.2	%		(412	)		-14.2	%		2,907			87.7	%
		Operating Income		474			12.9	%		794			248.1	%		(320	)		-9.7	%
Other Income (Expenses)
	Interest (expense)			(75	)		-2.0	%		501			87.0	%		(576	)		-17.4	%
	Interest income			3			0.1	%		3			100	%					0.0	%
	Foreign exchange gain (loss)			14			0.4	%		14			100	%					0.0	%
	Other Income (Expenses)			159			4.3	%		159			100	%					0.0	%
	Distribution to affiliated company			—			0.0	%		—									0.0	%
	Gain (loss) on disposal of fixed assets			5			0.1	%		11			183.3	%		(6	)		-0.2	%
	Gain on sales of product line						0.0	%											0.0	%
	Settlement costs						0.0	%											0.0	%
		Total other expenses		106			2.9	%		688			118.2	%		(582	)		-17.6	%
	Income (loss) before tax and extraordinary items			580			15.8	%		1,482			164.3	%		(902	)		-27.2	%
	Income tax expense (benefit)			1			0.0	%		15			-107.1	%		(14	)		-0.4	%
	Loss before extraordinary items			579			15.8	%		1,467			165.2	%		(888	)		-26.8	%
	Cumulative effect of change in accounting principles						0.0	%											0.0	%
	Gain from forgiveness of debt						0.0	%											0.0	%
	Net income (loss)		$	579			15.8	%	$	1,467			165.2	%	$	(888	)		-26.8	%

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			Nine months ended March 31,
			2002												2001 (restated)
									$ Change			% Change
									from			from
						As %			previous			previous						As %
			$			of sales			year			year			$			of sales
Net Revenues			$	9,981			100.0	%	$	37			0.4	%	$	9,944			100.0	%
Product Cost				2,213			22.2	%		(323	)		-12.7	%		2,536			25.5	%
		Gross Margin		7,768			77.8	%		360			4.9	%		7,408			74.5	%
Operating Expenses
	Sales & Marketing			2,356			23.6	%		(204	)		-8.0	%		2,560			25.7	%
	General & Administrative			3,617			36.2	%		156			4.5	%		3,461			34.8	%
	Research & Development			1,743			17.5	%		(368	)		-17.4	%		2,111			21.2	%
		Total Operating Expenses		7,716			77.3	%		(416	)		-5.1	%		8,132			81.8	%
		Operating Income		52			0.5	%		776			107.2	%		(724	)		-7.3	%
Other Income (Expenses)
	Interest (expense)			(552	)		-5.5	%		1,113			66.8	%		(1,665	)		-16.7	%
	Interest income			9			0.1	%		9			100	%					0.0	%
	Foreign exchange gain (loss)			15			0.2	%		15			100	%					0.0	%
	Other Income (Expenses)			139			1.4	%		139			100	%					0.0	%
	Distribution to affiliated company			(200	)		-2.0	%		(200	)		100	%					0.0	%
	Gain (loss) on disposal of fixed assets			10			0.1	%		19			211.1	%		(9	)		-0.1	%
	Gain on sales of product line			20			0.2	%		(265	)		-93.0	%		285			2.9	%
	Settlement costs			—						187			100.0	%		(187	)		-1.9	%
		Total other expenses		(559	)		-5.6	%		1,017			64.5	%		(1,576	)		-15.8	%
	Income (loss) before tax and extraordinary items			(507	)		-5.1	%		1,793			78.0	%		(2,300	)		-23.1	%
	Income tax expense (benefit)			3			0.0	%		24			114.3	%		(21	)		-0.2	%
	Loss before extraordinary items			(510	)		-5.1	%		1,769			77.6	%		(2,279	)		-22.9	%
	Cumulative effect of change in accounting principles			—			0.0	%		285			100.0	%		(285	)		-2.9	%
	Gain from forgiveness of debt			7,970			79.9	%		7,970			100	%		—			0.0	%
	Net income (loss)		$	7,460			74.7	%	$	10,024			391.0	%	$	(2,564	)		-25.8	%

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Net Revenues

Net revenues of each of our principal product categories in dollars and as a percentage of total net revenues for the three and nine-month periods ended March 31, 2002 and 2001 are summarized in the following table (in thousands except for percentage amounts):

	Three Months Ended March 31,																	Nine Months Ended March 31,
	2002						2001						Changes					2002						2001						Changes
	$			%			$			%			$		%			$			%			$			%			$			%
Visual Design	$	1,427			39	%	$	1,306			39	%	$	121		9	%	$	3,362			34	%	$	3,594			36	%	$	(232	)		-6	%
Graphic Design	$	1,340			37	%		1,208			36	%		132		11	%		3,767			38	%		4,073			41	%		(306	)	-8		%
Business Application & Other	$	937			26	%		848			26	%		89		10	%		2,911			29	%		2,659			27	%		252			9	%
Provision for returns and rebates not yet received		(43	)		-1	%		(48	)		-1	%		5		-11	%	$	(59	)		-1	%		(382	)		-4	%		323		-85		%
Net Revenues	$	3,661			100	%	$	3,314			100	%	$	347		10	%	$	9,981			100	%	$	9,944			100	%	$	37			0	%

The sales figures provided in this table have been restated to include Keynomics’ sales into the business application and other category.

For the fiscal quarter ended March 31, 2002, sales of FloorPlan and TurboCAD increased as compared to the same reporting period in the previous fiscal year. This increase is the result of more focused direct marketing campaigns targeted toward the end users of these products. Sales of IMSI’s flagship product, TurboCAD, decreased in the nine-month period ended March 31, 2002 as compared to the same reporting period in the previous fiscal year, resulting in an overall decrease in revenues in the visual design category. The intense competition that characterized the computer-aided design market and the delays in introducing the new version 8.0 of TurboCAD negatively impacted sales of the visual design category in the nine-month period ended March 31, 2002.

In the three and nine month periods ended March 31, 2002, revenues in the graphic design category consisted mostly of subscription revenues for graphic content from our wholly owned subsidiary ArtToday.com. When compared to the same periods in the previous fiscal year, ArtToday.com’s sales increased in the quarter ended March 31, 2002 from $778,000 to $1,082,000 and from $2,310,000 to $3,012,000 for the nine-months ended March 31, 2002. This increase is the result of more paid subscribers as a result of a wider range of subscription choices. Because ArtToday.com’s revenues are based on subscriptions, these amounts are initially deferred and then amortized over the subscription periods, which extend up to twelve months. As of March 31, 2002, approximately $1,044,000 of revenue related to ArtToday.com remained deferred. The following table details the amortization schedule of these deferred revenues for the upcoming year:

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	ArtToday.com Deferred revenues to be recognized
4th Quarter of Fiscal 2002	$	543,000
1st Quarter of Fiscal 2003	$	296,000
2nd Quarter of Fiscal 2003	$	162,000
3rd Quarter of Fiscal 2003	$	43,000
Total	$	1,044,000

The decrease in overall revenues in the graphic design category for the nine-month period ended March 31, 2002 is attributable to the steep decline in the revenues from our historically most important revenue producing product line within this category, MasterClips, and to the decline in sales of our Hijaak product line. The significant decrease in Masterclips’ revenues was the result of decreased sales from our republisher Vivendi who acquired the rights to the product during the previous fiscal year. The republishing agreement with Vivendi expired according to its own terms and we subsequently released new versions of Masterclips in December 2001.

We intend to continue publishing new versions of Masterclips in the future. Future sales of Masterclips along with the increasing trend of ArtToday.com sales should contribute to higher revenues in the graphic design category in future reporting periods. The 40% increase in ArtToday’s revenues in the quarter ended March 31, 2002 as compared to the same quarter from the previous fiscal year more than offset the decreases in the revenues from MasterClips and Hijaak resulting in an overall increase in the revenues derived from the graphic design category.

During the quarter ended December 31, 2001, we acquired Keynomics, a company focused on productivity enhancement software. Sales of Keynomics’ products contributed $239,000 and $916,000 to the business application and other category during the fiscal quarter and the nine-month periods ended March 31, 2002 respectively as compared to $207,000 and $545,000 for the same reporting periods in fiscal 2001.

Prior to September 30, 2000, our focus had been primarily on our Internet business and our graphic and visual design products. Because we did not spend as much on marketing non-core products as during previous periods, sales of Flow!, FormTool, Maplinx, MasterPublisher, OrgPlus, People Scheduler, Web Business Builder and TurboProject all declined up to March 2001. These factors combined to bring revenues from the business application and other category to an all time low. During the nine month period ended March 31, 2002, however, demand for some of our non-core products in this category such as Flow!, FormTool, OrgPlus and Graphics converter increased. This increased demand along with the $371,000 increase in Keynomics’ revenues replaced lost revenues from the sale of Update Now, a Y2K related product that was popular during fiscal 2001, and therefore maintain revenues from the business application and other category at the same level as in the previous fiscal year.

Net revenues from domestic sales increased by $419,000 or 14% to $3,377,000 and were 92% of total net revenues for the three-month period ended March 31, 2002. This compares to net revenues from domestic sales of $2,958,000, or 89% of total net revenues, for the comparable period in the previous fiscal year. For the nine month period ended March 31, 2002, net revenues from domestic sales decreased slightly to $9,030,000 and were 90% of total net revenues. This compares to $9,048,000 or 91% of total net revenues, for the comparable period in the previous fiscal year.

Net revenues from international sales decreased by $72,000 or 20%, and were $284,000 or 8% of net revenues for the three-month period ended March 31, 2002. This compares to $356,000 or 11% of net revenues for the three months ended March 31, 2001. For the nine month period ended March 31, 2002,

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net revenues from international sales increased by $55,000 or 6% to $951,000 and were 10% of total net revenues. This compares to $896,000 or 9% of total net revenues, for the comparable period in the previous fiscal year.

We are currently serving the domestic and international retail markets using direct sales methods and republishing agreements. In addition, we are increasing our presence in the retail market through selected distribution channels. Low barriers to entry, intense price competition, and business consolidations continue to characterize the consumer software industry. Any one of these factors along with the intermittent unfavorable retail conditions, including erosion of margins from competitive marketing and high rates of product returns, may adversely affect our revenues in the future.

Product Costs

Our product costs include the costs of CD-ROM duplication, printing of manuals, packaging and fulfillment, freight-in, freight out, license fees, royalties that we pay to third parties based on sales of published software, and amortization of capitalized software acquisition and development costs. Costs associated with the return of products, such as refurbishment and the write down in value of returned goods are also included in product costs. The decrease in product costs in absolute dollars and as a percentage of net revenues in the three and nine-month periods ended March 31, 2002 as compared to the same periods from the previous fiscal year was primarily attributable to lower amortization costs.

We amortize capitalized software development costs and license fees on a product-by-product basis. The amortization for each product is the greater of the amount computed using (a) the ratio of current gross revenues to the total of current and anticipated future gross revenues for the product or (b) the economic life of the product. During the first nine months of fiscal 2002, we capitalized new software development costs in the amount of $22,000 related to purchases made by ArtToday and Keynomics. Amortization of such costs was $533,000, and $1,006,000 in the nine-month periods ended March 31, 2002 and March 31, 2001, respectively.

Sales and Marketing

Our sales and marketing expenses consist primarily of sales and marketing personnel salaries and benefits, commissions, advertising, printing and direct mail expenses. Decreased commissions paid to our sales force along with reduced advertising expenses were the primary reasons for the overall decrease in sales and marketing expenses in the three and nine months ended March 31, 2002. The steady ratio of sales and marketing expenses as a percentage of net revenues over the three and nine-month periods ended March 31, 2002 reflects our commitment to our core products and ArtToday’s online products.

General and Administrative

Our general and administrative expenses consist primarily of salaries and benefits for employees in the legal, finance, accounting, human resources, information systems and operations departments and fees to our professional advisors. The decrease in general and administrative expenses in the quarter ended March 31, 2002 as compared to the same period from the previous year reflects our commitment to control overhead expenses throughout the Company. For the nine-month period ended March 31, 2002, a one time charge of $211,000 relating to issuance of warrants to outside consultants, totaling 785,000 warrants with an average exercise price of $0.27 and terms of three to ten years, combined with the severance cost of $60,000 payable to one of our former executives were the primary causes of the increase in general and administrative expense.

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Research and Development

Our research and development expenses consist primarily of salaries and benefits for research and development employees and payments to independent contractors. Research and development costs decreased in the three and nine-month periods ended March 31, 2002 as compared to the same reporting periods in the previous fiscal year. This decrease is mainly due to lower payroll charges and outside consulting fees relating to the Design.Net division, which was spun off effective October 1, 2001, and to the decrease in the number of products under development. Despite this decrease in research and development expenses, we are still committed to sustaining our investment in developing our core products by maintaining strong relationships with our development team in Russia.

Interest and Other, Net

Interest and other expenses, net, include interest and penalties on debt instruments, foreign currency transaction gains and losses, and other non-recurring items. The following table summarizes the components of interest and other, net for the three and nine-month periods ended March 31, 2002 and 2001:

			Fiscal quarter ended March 31,
			2002			2001 (restated)
			$			$
Interest and other, net
		Interest expense	$	(75	)	$	(410	)
		Interest income		3			6
		Foreign exchange gain (loss)		14			(37	)
		Penalties		—			(135	)
		Other income		159			—
	Total		$	101		$	(576	)

		Nine months ended March 31,
		2002			2001 (restated)
		$			$
Interest and other, net
	Interest expense	$	(397	)	$	(1,218	)
	Interest related to warrants issued		(65	)		—
	Interest income		9			19
	Foreign exchange gain (loss)		15			(61	)
	Penalties		(90	)		(405	)
	Other income		139			—
Total		$	(389	)	$	(1,665	)

Interest and other expense, net, decreased substantially in the three and nine-month periods ended March 31, 2002, as compared to the same reporting period in fiscal 2001. This decrease is mainly the result of our debt restructuring and the plan of merger we signed with DCDC on August 31, 2001. We did not accrue penalties on the Baystar note after August 2001, and interest expenses of 8% per annum on the new negotiated balance of the Baystar note is substantially reduced as compared to the same period from the previous year. We saved on the interest previously paid to Union Bank of California since the note

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was acquired by DCDC. The original merger agreement provided that the note not bear interest except in the event of the termination of the plan of merger. The plan of merger was terminated and the two companies entered into an agreement entitled Promissory Note Conversion and General Release, pursuant to which DCDC converted the entire outstanding principal amount of $3,580,000 and all interest due under the promissory note it had acquired into 9,000,000 shares of common stock of IMSI and cash in the amount of $250,000 to be paid in monthly installments over 15 months.

In the fiscal quarter ended March 31, 2002, Interest and other expense, net, included $159,000 of other income representing the net recovery amount of $164,000 we obtained from indemnification claims we had against third parties associated with the original circumstances leading to the adverse Imageline arbitration award offset by a $5,000 expense related to ArtToday.

Gain on sales of product line

During the second quarter of fiscal 2002 we sold the rights to the Visual Cadd software product to TriTools Partners, a California company, for $20,000. The entire amount of the sale was recorded as a gain since the product had a zero book value at the time of the transaction. This was the only transaction involving a gain or loss on sales of product lines during the nine-month period ended March 31, 2002.

During the nine-month period ended March 31, 2001, we collected the remaining $200,000 pertaining to the sale of the Easy Language line of product and recognized that amount as a one-time gain on product line sale. During the same period, ArtToday.com sold the domain name “Caboodles” for $85,000 and recorded a one-time gain for the same amount.

Extraordinary item — gain on forgiveness of debt

We did not record any gain from forgiveness of debt during the quarter ended March 31, 2002. On April 3, 2002, we offered to Silicon Valley Bank and Silicon Valley Bank accepted an early payment of the $700,000 balance of their note at a $100,000 discount. The payment of $600,000 was made on April 5, 2002. In the next fiscal quarter, we will recognize an additional gain from forgiveness of debt of $100,000 arising from this transaction as an extraordinary item.

During the fiscal quarter ended December 31, 2001, we recognized a $2,243,000 gain from forgiveness of debt. $2,062,000 was related to the forgiveness of a portion of the principal and accrued interest on the Silicon Valley Bank note. $140,000 was related to the forgiveness of amounts payable to Light Work Design and $40,500 was related to the forgiveness of amounts payable to Microsoft. Light Work Design and Microsoft are two unsecured creditors that were owed royalties.

In the quarter ended September 30, 2001, we recorded an extraordinary gain of $5,727,000 related to the forgiveness of debt to BayStar Capital and DelRay Technologies. BayStar Capital agreed to settle for 10% of the principal and accrued interest and penalties outstanding. According to the original agreement, payments are to be made in four quarterly installments beginning September 30, 2002, with interest accruing at the rate of 8% per annum from August 31, 2001 to the date of the first installment. Thereafter, the interest rate is 12% per annum until the note is paid in full on or before June 30, 2003. DelRay Technologies agreed to a one-time payment of $20,000 as settlement in full of its outstanding claim.

These combined transactions resulted into an aggregate forgiveness of debt gain of $7,970,000 for the nine-month period ended March 31, 2002.

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The tax expense on the extraordinary gain on forgiveness of debt is approximately $3,183,000 as calculated at our marginal tax rate of 39.94%. This expense will be entirely offset by the net operating loss carryforward.

Settlement costs

We recorded a charge of $187,000 during the fiscal quarter ended September 30, 2000 relating to the issuance of 185,005 shares of common stock in July 2000 as a settlement of the ArtToday.com Fee Agreement. We had no similar transactions during the current fiscal year.

Provision for Income Taxes

We did not record a tax benefit in the nine months ending March 31, 2002 for domestic tax losses because of the uncertainty of realization. We adhere to Statement of Financial Accounting Standards No. 109 “Accounting for Income Taxes,” which requires an asset and liability approach to financial accounting and reporting for income taxes. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.

Liquidity and Capital Resources

As of March 31, 2002, we had $2,352,000 in cash and cash equivalents. This represents a $1,084,000 increase from the $1,268,000 balance at June 30, 2001. Working capital at March 31, 2002 was a negative $4,646,000. This represents an improvement of $13,171,000 over the negative working capital at June 30, 2001 of $17,817,000. The improvement in working capital over the past nine-month period is mainly the result of the decline in current liabilities following the restructuring of our debt combined with an increase in cash of $1,084,000.

The increase in cash and cash equivalents during the quarter and the nine-months ended March 31, 2002 resulted primarily from our improved operations and from the cash we raised through the private placement and the warrant exercises, in part offset by our debt payouts. During the quarter ended March 31, 2002 we raised cash through a combination of a private placement and the exercise of warrants by certain executives and senior advisers to the company. Part of the proceeds were subsequently used to pay off the Silicon Valley Bank note at a discount in the beginning of the fourth quarter of fiscal year 2002.

Our operating activities generated cash of $1,077,000 and $1,520,000 during the three and nine-month period ended March 31, 2002. The loss from continuing operations before extraordinary items was $510,000 for the nine months ended March 31, 2002. The main items that helped reconcile this loss to the net cash provided by operating activities during the nine-month period ended March 31, 2002 included depreciation and amortization expenses of $1,034,000, increases of accrued interest expenses of $277,000 and a non cash charge of $310,000 related to warrants issued to outside consultants and other third parties. During the nine-months ended March 31, 2002, our net receivables decreased by $260,000 as we improved our collection cycle. Part of the cash collected was used to build inventories in order to satisfy the increased demand of our products. During the quarter ended March 31, 2002 we recovered $300,000 related to indemnification claims we have against third parties associated with the original circumstances leading to the arbitration award. The recovered amount was subsequently offset by expenses totaling $136,000 representing fees related to this matter.

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Our investing activities during the nine months ended March 31, 2002 consumed $432,000 in cash used mainly in acquiring new domain names necessary to increase traffic to ArtToday’s websites, in acquiring new equipment for ArtToday and in acquiring Keynomics during the previous quarter.

Our financing activities did not consume or generate significant cash during the nine-month period ended March 31, 2002. During this period, we decreased our obligation to Union Bank by $350,000 bringing the balance of all amounts due to the bank to $3,580,000. Subsequent to these payments and pursuant to our original merger agreement with DCDC, DCDC acquired the Union Bank’s note in August 2001 and later converted the note into shares of IMSI’s common stock. Also during the same period of fiscal 2002, we made payments relating to capital lease obligations of $219,000 and we repaid $500,000 to Silicon Valley Bank pursuant to the new $1.2 million secured promissory note. Subsequently, and during the fourth quarter of fiscal 2002, we paid the remaining balance of the Silicon Valley Bank at a $100,000 discount. We were able to do so after we raised funds in excess of $800,000 through a private placement and the exercise of warrants by certain executives and senior advisers to the company.

If we fail to raise additional capital, the negative working capital position could have a material adverse effect on our liquidity in the future. The financial statements have been prepared on a basis that contemplates our continuation as a going concern and the realization of our assets and liquidation of our liabilities in the ordinary course of business. We have an accumulated deficit of $37 million and negative working capital of $4.6 million at March 31, 2002. We also lack sustained profitability across all business segments during our recent history. All these issues raise substantial doubt about our ability to be a going concern for a reasonable period of time and the auditors’ report on our financial statements filed within our fiscal 2001 Form 10-K 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. Our continued existence is dependent on our ability to complete the repayment of debt and obtain additional financing sufficient to allow us to meet our obligations as they become due and to achieve and maintain profitable operations.

Historically, we financed our working capital and capital expenditure requirements primarily from retained earnings, short-term and long-term bank borrowings, capitalized leases and sales of common stock. We will require additional working capital to meet our ongoing operating expenses, to develop new products, and to properly conduct business activities. We believe that the reduction in our liabilities under planned and completed settlements will allow us to continue as a going concern, remain profitable in the future, and remedy our working capital needs. In addition, we will continue to evaluate raising additional capital investment through the issuance of stock and short or long term debt financing.

The forecasted period of time through which our financial resources will be adequate to support working capital and capital expenditure requirements is a forward-looking statement that involves risks and uncertainties, and actual results could vary. The factors described in “Risk Factors”, as filed in our fiscal 2001 Form 10-K, will affect future capital requirements and the adequacy of available funds. We 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. Failure to raise capital when needed will have a material adverse effect on our business, operating results, financial condition and ability to continue as a going concern.

We had no material commitments for future capital expenditures or material long-term debt at March 31, 2002 except as previously disclosed under the heading “Debt restructuring” regarding long term obligations to Imageline, Baystar Capital and other unsecured creditors.

Other Factors that May Affect Future Operating Results

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Other factors that may cause fluctuations of, or a decline in, operating results in the future include the market factors and competitive factors described in our Fiscal 2001 Form 10-K, under “Future Performance and Additional Risk Factors.” Factors that may affect operating results in the future include, but are not limited to:

• Market acceptance of our products or those of our 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 cancellations from major customers

• Changes or disruptions in the consumer software distribution channels

• Failure of Keynomics to become profitable on a sustained basis

• Economic conditions, both generally and within the software or Internet industries

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PART II — OTHER INFORMATION

Item 1.  Legal Proceedings

Not Applicable

Item 2.  Changes in Securities and Use of Proceeds

On March 1, 2002, we mutually agreed with DCDC to terminate our planned merger and released each other from all duties, rights, claims, obligations and liabilities arising from, in connection with, or relating to, the Merger Agreement signed on August 31, 2001. We also agreed to enter into an agreement entitled Promissory Note Conversion and General Release pursuant to which DCDC agreed to convert the entire outstanding principal amount and all interest due under the Union Bank note into 9,000,000 shares of common stock of IMSI and cash in the amount of $250,000 to be paid in monthly installments over 15 months.

In addition, we raised capital through a private offering of IMSI shares during the fiscal quarter ended March 31, 2002. We offered shares of common stock at $.50 per share in a private placement offering to certain qualified accredited investors. The money received in the offering, together with additional funds received pursuant to certain warrant exercises (as described below), contributed significantly to our ability to pay off early and at a $100,000 discount the remaining $700,000 principal balance of the Silicon Valley Bank note. This repayment occurred on April 5, 2002.

As of March 31, 2002, we received formal commitment from investors to purchase 1,005,000 shares of IMSI’s capital stock at an aggregate purchase price of $502,500. We received funds totaling $417,500 from the subscribers as of the end of the quarter. Subsequently and as of the date of this filing all committed funds have been received and deposited and all shares have been issued. None of the participants in this private placement, except for Mr. John Wade who is our CEO’s brother and Mr. Matthew Rexon who is our chairman’s cousin are “affiliates” or a “related parties”.

The shares related to the offering have not been registered under the Securities Act of 1933 nor have they been registered under the securities laws of any state. The offer and sale of the shares are exempt from registration under section 4(2) of the Securities Act of 1933, and Rule 506 of Regulation D thereunder and exempt from securities qualification and related requirements under the respective rules and regulations of the states in which the shares were being offered and sold. All the investors represented to IMSI that they are accredited investors under Rule 501 of Regulation D.

Also, during the fiscal quarter ended March 31, 2002, certain officers and advisors to the company exercised previously issued warrants in the aggregate number of 1,282,500 at exercise prices ranging from $.20 to $.30 (averaging $.25). The proceeds to the company from these warrant exercises totaled $318,750.

These transactions resulted in the issuance of 11,117,500 shares of common stock that significantly diluted the 10,212,327 shares of IMSI’s capital stock issued and outstanding as of December 31, 2001. The following table details the activity regarding common stock for the quarter ended March 31, 2002.

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				Number of
Transaction type			Group	securities		Amount
Shares outstanding as of December 31, 2001					10,212,327	$	29,737,465
	Private placement		Accredited investors		835,000		417,500
	Debt to equity conversion		Related parties		9,000,000		3,330,000
	Options issued for consulting services		Consultants				41,956
	Options exercised		Employees and consultants		73,000		14,994
	Warrants exercised		Executives & advisers to IMSI		1,282,500		318,750
	Variable accounting charge		Re-priced stock options				16,131
		Total			11,190,500		4,139,331
Shares outstanding as of March 31, 2002					21,402,827	$	33,876,796

Item 3.  Defaults upon Senior Securities

Not Applicable

Item 4.  Submission of Matters to a Vote of Security Holders

Not Applicable

Item 5.  Other Information

Not Applicable

Item 6.  Exhibits and Reports on Form 8-K

(a)	See Exhibits
(b)	Reports on Form 8-K

One report on Form 8-K was filed during the third quarter of fiscal year 2002, on March 13, 2002, to discuss the mutual termination of the plan of merger with DCDC and the resignation of four directors as well as the addition of two new directors to our Board.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: May 20, 2002, INTERNATIONAL MICROCOMPUTER SOFTWARE, INC.

By: /s/ Martin Wade, III
Martin Wade, III
Director , Chief Executive Officer & Chief Financial Officer

By: /s/ Gordon Landies
Gordon Landies
President

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INTERNATIONAL MICROCOMPUTER SOFTWARE, INC.
2001 Form 10-QSB QUARTERLY Report

Exhibit Index

Exhibit
Number	EXHIBIT TITLE	Page
10.1	Executive Employment Agreement_ Martin Wade		29
10.2	Amendment To Restructure Agreement _ Silicon Valley Bank		38

31 EX-10.1 3 f81840ex10-1.htm EXHIBIT 10.1

Exhibit 10.1

     EXECUTIVE EMPLOYMENT AGREEMENT

This AGREEMENT is made and entered into as of the 27th day of April, 2002, by INTERNATIONAL MICROCOMPUTER SOFTWARE, INC., (“IMSI”) a California corporation having its principal place of business at 75 Rowland Way, Novato, California 94945 (the “Company”) and MARTIN R. WADE, III, residing at 19 Roland Drive, Short Hills, New Jersey 07078 (“Executive”).

WITNESSETH

WHEREAS, the Company desires to engage for itself the experience, abilities and service of Executive in principal executive capacities, and Executive desires to be so engaged, upon the terms and conditions specified herein;

NOW, THEREFORE, in consideration of the premises and the mutual covenants, terms and conditions hereinafter set forth, and for other good and valuable consideration, receipt of which is specifically acknowledged, the parties hereto hereby agree as follows:

1.  Employment — The Company hereby employs Executive, and Executive hereby accepts such employment from the Company, to serve as the Chief Executive Officer of the Company in accordance with the terms of this Agreement.

2.  Executive’s Duties

(a) The Company hereby agrees to employ Executive, and Executive agrees faithfully and to the best of his ability, in the position of Chief Executive Officer, to discharge the duties of said office, which shall include general and active management and supervision of the Company, identifying, evaluating and executing acquisitions and strategic investments, analyzing new business ventures and negotiating strategic alliances, and performance of such other duties and services of an executive, administrative and managerial nature as shall be specified and designated from time to time by the Board of Directors of the Company in connection with the business and activities of the Company.

(b) Executive agrees to devote his best efforts, energy and skill to the performance of his duties described in Section 2(a) of this Agreement; provided, however, that Executive may engage in consulting activities for other entities with the prior written consent of the Company, which may be withheld in its discretion. Except for any such consulting services approved by the Company and the consulting services specified in the last sentence of this paragraph, Executive shall devote his full business time to his duties under this Agreement. Notwithstanding the foregoing, Executive may continue his consulting arrangements with Bengal Capital and their respective affiliates and may continue to serve on the boards of directors of DIMON Incorporated and Energy Transfer Group, Inc., as long as the time devoted to such consulting arrangements and service as a director of the boards of directors of other companies during regular business hours does not exceed 10 hours per month in the aggregate.

(c) Executive agrees to observe and comply with all rules, regulations, policies and practices adopted by the Company, either orally or in writing, both as they now exist and as they may be adopted or modified from time to time.

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3.  Term — The term of this Agreement shall be for a period of thirty-six (36) months commencing on January 1, 2002 and ending on December 31, 2004 (the “Initial Term”) and shall not automatically extend for additional one-year periods (each, an “Extended Term”) unless the Company gives Executive notice (the “Non-Renewal Notice”), not fewer than 60 days prior to the end of the then current term, that the Agreement will be so extended.

4.  Compensation — The Company shall pay Executive a base annual salary of $200,000 in equal monthly installments. The Compensation Committee of the Company’s Board of Directors shall determine any increases in Executive’s base annual salary in its sole discretion based on the Company’s performance under the Company’s annual plan. The Company shall pay an initial bonus of $25,000 by 5/1/2002.

The Company shall pay to Executive an annual bonus payable in a lump sum according to the following schedule and terms:

8/15/2002	$25,000 if the Company meets its annual plan for fiscal 2002.
8/15/2003	$50,000, if the Company meets its annual plan for fiscal 2003.
8/15/2004	$50,000, if the Company meets its annual plan for fiscal 2004.

All amounts paid to Executive under this Agreement shall be paid in accordance with normal payroll practices of the Company.

5.  Equity Participation –Warrants –

(a) The Company and Executive have executed and delivered the Warrant Agreement (the “Warrant Agreement”) in the form attached hereto as Exhibit A and incorporated herein by this reference providing Executive the right to acquire One Million Two Hundred and Fifty Thousand (1,250,000) shares of the Company’s common stock at the closing price of the Company’s common stock on March 1, 2002, with vesting of the warrants on March 1, 2003, and other terms as are set forth in the Warrant Agreement and any Warrant Plan of the Company then in effect.

(b) In addition, upon the sale or merger of the Company, or acquisition of at least fifty one percent (51%) of the Company’s common stock by a single corporate entity, while Executive is employed as Chief Executive Officer of the Company or as a result of Executive’s efforts while so employed, the Company shall grant Executive a warrant to purchase Two Million (2,000,000) shares of the Company’s common stock at the average closing price of the Company’s stock over the twelve (12) months preceding the execution of a definitive agreement for such sale, merger, or acquisition.

6.  Termination.

(a) The Company may terminate Executive’s employment under this Agreement for Cause, as defined in Section 6(b)(i). This Agreement shall also terminate upon Executive’s death or, to the extent permitted under the law, Disability as defined in Section 7(a).

(b) For purposes of this Agreement, the following terms shall be defined as follows:

(i) “Cause” shall mean termination due to the Executive’s dishonesty, fraud, insubordination to the Board of Directors, willful misconduct, refusal to perform services, materially unsatisfactory performance of duties, exceeding consulting limits of Paragraph 2.(b) above, or unauthorized use or disclosure to any person or entity of any confidential information or trade secrets of the Company or its affiliates, conviction of a crime other than a minor traffic

33

violation, or Executive acts in a way that has a material adverse effect on the Company’s reputation, all as determined by the Board of Directors.

(ii) Notice of Termination – If the Company terminates this Agreement for any reason, the Company shall communicate such termination by written Notice of Termination to Executive, which shall set forth the basis for termination.

7.  Compensation Upon Termination by Company or During Disability

(a) During any period that Executive fails to perform his duties under this Agreement as a result of circumstances under which Executive’s physical or mental condition renders him unable to perform his duties and such inability continues for in excess of ninety (90) consecutive or one-hundred eighty (180) non-consecutive calendar days in any consecutive twelve-month period (such circumstances referred to herein as “Disability”), Executive’s benefits shall be determined in accordance with the Company’s long-term disability plan, if any, then in effect; provided that in all events Executive shall continue to be provided all salary and benefits hereunder during any elimination or waiting period under any such plan.

(b) If the Company terminates this Agreement for Cause (other than Death or Disability), the Company shall pay Executive’s compensation under this Agreement through the Date of Termination at the rate in effect at the time Notice of Termination is given and the Company shall have no further obligation to Executive under this Agreement except in respect of the Executive’s rights to and under Warrants issued prior to the date of termination under this Agreement. If this Agreement terminates by reason of Executive’s death or Disability, the Company shall pay Executive’s full base annual salary to Executive or Executive’s beneficiaries or estate, as appropriate through the period ending six (6) months after the date of termination at the rate in effect at the time of Executive’s death or commencement of Disability, as the case may be, and the Company shall have no further obligation under this Agreement except in respect of the Executive’s rights to and under Warrants issued and vested prior to the date of termination under this Agreement, all of which may be transferred to the Executive’s heirs.

(c) If the Company terminates this Agreement other than for Cause or other than by reason of death or Disability, then Executive shall be entitled to the benefits provided below:

(i) The Company shall pay Executive’ s full base annual salary to Executive through the date of termination, and on a monthly basis for twelve (12) months after the date of termination at the rate in effect at the time Notice of Termination is given; and

(ii) All of Executive’s vested Warrants shall remain vested and all unvested Warrants of the Company then in effect shall immediately vest as of the date of termination and not be subject to forfeiture.

8.  Executive’s Rights Under Certain Plans: Reimbursement for Expenses — The Company agrees that nothing contained herein is intended to or shall be deemed to be granted to Executive in lieu of any rights and privileges which Executive shall be entitled to as an employee of the Company under any retirement, pension, insurance, hospitalization, medical, disability or other plan which may now or hereafter be in effect and generally applicable to executives of the Company, it being understood that Executive shall have the right and privilege to participate in such plan or benefits. Executive shall be entitled to incur on behalf of the Company reasonable and necessary expenses in connection with the performance of his duties, and the Company shall pay for or reimburse Executive for all such expenses upon presentation of proper receipts therefore, subject to such policies as the Company may from time to time establish for its

34

employees and executives. In addition to reimbursement for all reasonable and necessary expenses in connection with the performance of his duties, Executive shall be entitled to receive reimbursement for reasonable and necessary moving expenses of a maximum of $25,000 and temporary living expenses of a maximum of $5,000 per month for six months, upon presentation of proper receipts therefor.

9.  Vacation — Executive shall accrue paid vacation time of four (4) weeks during each year subject to the Company’s standard vacation policy for executives.

10.  Protection of the Company’s Interest

(a) Proprietary and Confidential Information — Executive acknowledges that while he performs services hereunder, he will receive, will have access to, and become acquainted with information and materials setting forth the Company’s Confidential Information (as defined below). Executive hereby agrees that all such Confidential Information is the sole and exclusive property of the Company, and that, during the term of this Agreement and continuing thereafter, Executive will not use or disclose any such information other than in the course of performing his duties under this Agreement or as authorized in writing by the Company. Executive further agrees that upon expiration or termination of this Agreement, Executive shall not take or use any such information or materials of the Company. Executive further agrees that, upon termination of his services with the Company, all such information or materials then in Executive’s possession, whether prepared by him or others will be left with the Company. For purposes of this Section 10, ''Confidential Information” means information disclosed to Executive, not generally known in the industry in which the Company is or may become engaged, about the Company’s products, processes, services, suppliers, vendors, customers, employees, marketing plans and strategies, contracts, licenses, disputes, financial projections, partners, joint ventures and affiliates.

(b) Notwithstanding anything to the contrary set forth in this Section 10, if any provision of this Section 10, or the application thereof to any circumstance, is held invalid for any reason whatsoever, such invalid provision shall be severable and such invalidity shall not affect any other provision of this Section 10, or the application thereof to any other circumstance, which can be given effect without such invalid provision or application.

(c) With respect to all Inventions (as hereinafter defined) made or conceived by Executive, whether or not during the hours of Executive’s services, or with the use of the Company’s and/or its affiliates’ facilities, materials, or personnel, either solely or jointly with others, during the term of this Agreement, and without royalty or any other consideration, the following shall apply:

(i) Reports — Executive shall inform the Company promptly and fully of such Inventions by a written report, setting forth in detail the structures, procedures, and methodology employed and the results achieved.

(ii) Assignment — Executive hereby assigns and agrees to assign to the Company all of his right, title and interest to Executive’s Inventions and to all proprietary rights of every kind and nature therein, based thereon, or related thereto, including, but not limited to, applications for United States and foreign letters patent and resulting letters patent, trademarks, and copyrights. This assignment provision shall not apply to an invention that qualifies fully under the provisions of California Labor Code Section 2870, which is set forth in Exhibit B attached hereto and incorporated herein.

(iii) Patents — At the Company’s request and expense, Executive shall execute such documents as the Company deems necessary to vest in the Company sole and exclusive title to or otherwise to

35

secure and protect the Company’s rights in such Inventions and in all related trademarks, copyrights and/or patent rights, and Executive shall provide such assistance as may be deemed necessary by the Company to apply for, defend or enforce any United States and foreign letters patent, trademarks or copyrights based upon or related to such Inventions, as well as all reissues, renewals and extensions thereof.

(iv) “Inventions” — mean all inventions, improvements, and trade secrets, whether or not patentable or otherwise protectable, that Executive conceives, develops, or reduces to practice, alone or jointly with others, which relate to any present or prospective activities of the Company and/or its affiliates, including, but not limited to, devices, processes, methods, formulae, techniques, modifications and improvements to the Inventions.

(v) Non-Exclusive License — In the event that the Company terminates Executive’ s services other than for Cause, then Executive shall have hereby a royalty free, transferable, non-exclusive, perpetual license with respect to all Inventions assigned, licensed or developed by Executive to the Company during the term of this Agreement and Executive shall have the right to retain any Confidential Information with respect to such Inventions.

(d) Executive acknowledges and agrees that a violation of this Section 10 of this Agreement shall cause irreparable harm to the Company and that the Company shall be entitled to specific performance of this Agreement or an injunction without proof of special damages, together with the costs and reasonable attorneys’ fees incurred by the Company in enforcing its rights under this Section 10. Further, Executive acknowledges that the restrictions and agreements set forth in this Section 10 are in addition to, and are not intended to limit or diminish in any way, any other restrictions or remedies of law or contract, and that the Company shall be entitled, in addition to any other right and remedy available to it at law or in equity, to an injunction enjoining or restraining Executive from any violation or threatened violation of this Section 10, and Executive hereby consents to the issuance of such injunction without bond or other security.

(e) The provisions of this Section 10 of this Agreement shall survive the termination of Executive’s retention hereunder and continue to be binding upon Executive.

11.  No Unfair Competition — Executive will not, at any time through the end of the then current term (either Initial Term or Extended Term, as the case may be), anywhere in the United States, either directly or indirectly, engage in, with or for any enterprise, institution, whether or not for profit, business, or company, competitive with the business (as identified herein) of the Company as such business may be conducted on the date thereof as a creditor, guarantor or financial backer, stockholder, director, officer, consultant, advisor, employee, member, inventor, producer, director, or otherwise of or through any corporation, partnership, association, sole proprietorship or other entity; provided, that an investment by Executive, his spouse or his children or other affiliate of not more than five (5%) percent of the total equity of such entity shall be permitted. For purposes of this Section 11, the business of the Company shall be limited to publishing or reselling of software and providing content or services over the Internet and wireless communications. For a period of one (1) year following the termination of this Agreement, Executive agrees that he will not solicit or hire, either as an employee or independent contractor, any employee of the Company or its affiliates or any person who had been an employee of the Company or its affiliates within one year prior to such solicitation or engagement.

12.  Offering Allocation — In the event that the Company files a registration statement under the Securities Act of 1933, as amended (the “Securities Act”) for the sale of shares of the Company’s common stock to the public, then the Company shall, if the Company has established a directed share or similar program to

36

enable a class of persons to purchase, on a pro rata basis a portion of the common stock so offered, include Executive in such class of persons.

13.  Board Seat — The Company shall use its best efforts to cause the nomination and election of Executive to the Board of Directors of the Company so long as this Agreement is in effect.

14.  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 the Parties submit the dispute to a mediator, then either Party may file a court action or request arbitration. The Parties agree that mediation is a pre-condition to filing an action of any kind. The prevailing Party in any action or arbitration relating to transactions contemplated by this Agreement shall be entitled to costs and expenses including reasonable attorneys fees and the attorney’s 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.

15.  Entire Agreement — This Agreement supersedes and cancels any and all prior agreements between the parties hereto, express or implied, relating to the subject matter hereof. This Agreement, together with the Warrant Agreement, sets forth the entire agreement between the parties hereto. It may not be changed, altered, modified, or amended except in a writing signed by both parties.

16.  Non-Waiver — The failure or refusal of either party to insist upon the strict performance of any provision of this Agreement or to exercise any right in any one or more instances or circumstances shall not be construed as a waiver or relinquishment of such provision or right, nor shall such failure or refusal be deemed a custom or practice contrary to such provision or right.

17.  Non-Assignment — Executive shall have no right to delegate any of the duties created by this Agreement, and any delegation or attempted delegation of Executive duties, shall be null and void. In all other respects, this Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective heirs, beneficiaries, personal representatives, successors, permitted assigns, officers and directors.

18.  Severability — If any paragraph, term or provision of this Agreement shall be held or determined to be unenforceable, the balance of this Agreement shall nevertheless continue in full force and effect unaffected by such holding or determination. In addition, in any such event, the parties agree that it is their intention and agreement that any such paragraph, term or provision which is held or determined to be unenforceable as written, shall nonetheless be enforced and binding to the fullest extent permitted by law as though such paragraph, term or provision has been written in such a manner and to such an extent as to be enforceable under the circumstances. Without limitation of the foregoing, with respect to any restrictive covenant contained herein, if it is determined that any such provision is excessive as to duration or scope, it is intended that it nonetheless be enforced for such shorter duration or with such narrower scope as will render it enforceable.

19.  Notices — All notices hereunder shall be in writing. Notices may be delivered personally, or by mail, Postage prepaid, to the respective addresses noted above.

20.  Governing Law — The laws of the State of California shall govern this Agreement which is executed and to be performed in the State of California. The parties agree that Marin County, California shall be the proper venue for any actions or proceedings relating to disputes arising out of this Agreement.

37

21.  Captions and Titles — Captions and titles have been used in this Agreement only for convenience, and in no way define, limit, or describe the meaning of this Agreement or any part thereof.

22.  Executive’s Representations and Warranties — Executive represents and warrants that he has returned to or left with his former employer all of the former employer’s property and confidential proprietary material and that he will not disclose to Company, or use during his employment by Company, any of his previous employer’s trade secrets and confidential proprietary information. Executive further represents and warrants that neither the execution of this Agreement, nor employment with Company, nor performance of the duties required hereby will violate any obligations of Executive to any former employer or breach any agreement to keep in confidence information acquired by him or her before his employment by Company, and that he has not entered into, and will not enter into any agreement, either written or oral, that conflicts with this Agreement. Executive understands and agrees that the representations and warranties set forth in this paragraph are material inducements upon which Company has relied in entering into this Agreement.

23.  Special Indemnity — The Company shall indemnify Executive if Executive is made a party or is threatened to be made a party to any threatened, pending, or completed action, suit or proceeding, whether civil, criminal, administrative, or investigative by reason of the fact that Executive is or was a director, officer, employee, or agent of the Company, or is or was serving at the request of the Company as a director, officer, employee, or agent of another corporation, partnership, joint venture, trust or other enterprise, against judgments, fines and amounts paid in settlement and expenses (including, without limitation, attorneys’ fees) actually incurred by Executive in connection with such action, suit or proceeding if Executive acted in good faith and in a manner Executive reasonably believed to be in or not opposed to the best interest of the Company, and, with respect to any criminal action or proceeding, had no reasonable cause to believe Executive’s conduct was unlawful. The foregoing indemnity shall be in addition to and not in lieu of any other or additional indemnity provided from time to time by the Company. This paragraph does not apply to any claims resulting from Executive’s services as a director, officer, or agent of Digital Creative Development Corp., known as DCDC.

IN WITNESS WHEREOF, the parties have executed and delivered this Agreement as of the date first above written.

ACKNOWLEDGED AND AGREED:

INTERNATIONAL MICROCOMPUTER SOFTWARE, INC	EXECUTIVE
By:/S/ Bruce Galloway	By: /s/ Martin Wade, III
Bruce Galloway	Martin Wade, III
Chairman	Director, Chief Executive Officer & Chief Financial Officer

38 EX-10.2 4 f81840ex10-2.htm EXHIBIT 10.2

Exhibit 10.2

     AMENDMENT TO RESTRUCTURE AGREEMENT

         This Amendment to Restructure Agreement (“Amendment”) is made as of April 3, 2002 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 and amends that certain Restructure Agreement dated as of October 9, 2001 executed by the same parties.

RECITALS

A.	SVB, IMSI, ArtToday and DCDC entered into a Restructure Agreement (“Restructure Agreement”) dated as of October 9, 2001 which related among other things to (i) a Loan and Security Agreement dated November 3, 1998 between SVB and IMSI (“SVB Loan Agreement”); and (ii) a First Amended and Restated Loan Agreement (“UBOC Loan Agreement”) dated as of April 23, 1999, between IMSI and Union Bank of California (“UBOC”).
B.	In connection with the Restructure Agreement, (i) DCDC acquired the UBOC Loan Agreement and the related promissory notes, (ii) DCDC executed a Subordination Agreement with SVB dated as of October 9, 2001 relating to the UBOC Loan Agreement; (iii) DCDC executed a Pledge Agreement in favor of SVB dated as of October 9, 2001.
C.	Following execution of the Restructure Agreement, a Reaffirmation of Subordination Agreement was executed in favor of SVB (“Reaffirmation Agreement”) upon completion of a merger between DCDC and a subsidiary of DCDC. The term “DCDC” shall herein refer to the surviving entity from and after such merger, and to the prior entity prior to such merger.
D.	In connection with the Restructure Agreement IMSI executed a Revised Promissory Note payable to SVB in the original principal sum of $1,200,000 dated as of October 9, 2001 (“Revised SVB Note”).
E.	The obligations of IMSI under the Restructure Agreement and the related documents were guaranteed by ArtToday under the terms of a Guaranty (“ArtToday Guaranty”), which was subject to a Reaffirmation of Guaranty executed by ArtToday dated as of October 9, 2001.
F.	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”)

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G.	The obligations of IMSI under the Restructure Agreement and the SVB Loan Agreement and the Revised Promissory Note are also secured by the assets which had secured the UBOC Loan agreement including without limitation the stock in ArtToday held by UBOC under a Pledge Agreement executed by IMSI (“IMSI Pledge Agreement”).
H.	Defined terms used but not defined in this Agreement shall have the meaning provided in the Restructure Agreement and/or the SVB 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:

1. Acknowledgement of SVB Obligations. IMSI and DCDC and ArtToday hereby acknowledge as follows:

a.	Borrower is obligated to SVB according to the terms of the Restructure Agreement and under SVB Loan Agreement.
b.	As of March 27, 2002 the following amounts were outstanding: principal in the sum of $700,000; interest as provided in the Revised Promissory Note; and costs of SVB, including reasonable attorneys’ fees and costs in an amount to be specified.

2.	Acknowledgment of Liens and Guaranties. IMSI, DCDC, and ArtToday hereby agree and acknowledge that the guarantees and security agreements and the pledge agreement referred to in the above Recitals still remain in effect and all liens have been fully perfected.
3.	Discounted Payment.

a.	SVB agrees that if payment is made not later than close of business on the Deadline Date SVB shall accept the Discounted Payment Sum in satisfaction of IMSI’s obligations under the Revised Promissory Note and the SVB Loan Agreement.
b.	IMSI hereby agrees to pay to SVB the Discounted Payment Sum not later than close of business on the Deadline Date.
c.	The Discounted Payment Sum shall mean:

i.	Six hundred thousand dollars ($600,000) plus
ii.	Any and all interest, which shall accrue on the Deposit.

d. The Deadline Date shall be Friday April 5, 2002.

4. Satisfaction of Obligations. Upon timely payment of the Discounted Payment Sum and upon satisfaction of the terms herein:

a.	IMSI’s obligations under the Revised Promissory Note and the SVB Loan Agreement shall be deemed satisfied;
b.	ArtToday’s obligations under the Limited Guaranty, the ArtToday Security Agreement, and the ArtToday IP Security Agreement shall be deemed satisfied;
c.	SVB shall release all collateral for the Revised Promissory Note, the SVB Loan Agreement and the Limited Guaranty and all collateral held under the Restructure Agreement. The IP Security Agreement, and the Pledge Agreement shall be deemed terminated.
d.	DCDC’s obligation under the Subordination Agreement shall be deemed satisfied;
e.	SVB shall release all collateral held for the Subordination Agreement.

5. Deposit of Funds. Not later than Thursday March 28, 2002, IMSI shall deposit with SVB the sum of six hundred thousand dollars ($600,000) (“Deposit”). IMSI shall not withdraw such funds or any interest, which accrues thereon except to provide to SVB the Discounted Payment Sum by the Deadline Date.

40

6.

Grant of Security Interest. IMSI hereby grants to SVB a security interest in the Deposit and all funds maintained therein to secure performance and payment of all obligations under this Amendment, the Restructure Agreement and under the SVB Loan Agreement. SVB shall have all rights in the Deposit as provided in the California Commercial Code. In the event of a breach of or the occurrence of an event of default under this Amendment, under the Restructure Agreement or under the SVB Loan Agreement, SVB shall have all rights provided in the California Commercial Code relative to the Deposit and all rights to enforce its security interest therein..

7.

Indemnification.

a. IMSI, DCDC and ArtToday (“Indemnifying Parties”) each hereby agrees to indemnify and hold SVB harmless against and from any and all claims, liability, Losses, defined below, damages, judgments or expenses of any nature whatsoever (collectively the “Indemnified Liabilities”) which the SVB may suffer or incur or which may arise in connection with the this Amendment, the Restructure Agreement, the SVB Loan Agreement, the UBOC Loan Agreement and any and all documents and/or instruments and/or agreements executed in connection with any of the foregoing (or any extensions, renewals, modifications or replacements thereof) (collectively the “Indemnification Documents”) or any demand made upon Bank which are related to or arise from:

i.	Action taken by any of the Indemnifying Parties in connection with, or related to, any of the Indemnification Documents;
ii.	Any claims by the Unsecured Creditors, Imageline, Baystar Capital and/or Heller Financial;

b.	The term “Losses” as used above shall include, without limitation, any and all losses incurred by Bank including the inability of the Bank to recover from the proceeds of the IMSI, DCDC and ArtToday Collateral and the obligations owed under Guaranteed Agreements.
c.	This indemnification shall remain in effect even after payment of the Discounted Payment Sum.

8.

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.

9.

Additional Representations and Warranties To SVB. The following representations and warranties are made to SVB:

a. DCDC hereby represents and warrants to SVB as follows:

i. 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 1325 Avenue of the Americas, 26th Flr., New York, NY 10019, and has all requisite corporate power and authority to carry on its business as now conducted or proposed to be conducted; and

b. IMSI represents and warrants to SVB as follows:

i. 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;

c. ArtToday represents and warrants to SVB as follows:

41

i. 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;

d. DCDC, IMSI, and ArtToday each severally represents and warrants to SVB as follows:

i.

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.

ii.

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.

10. Events of Default. At the option of SVB, the following shall constitute an “Event of Default” under this Agreement:

a.	Breach of any provision of this Agreement or any agreement, instrument or certificate executed pursuant hereto.
b.	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 Restructure Agreement.
c.	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.

11. Remedies Upon Default. Upon the occurrence of an Event of Default, SVB may at its option and without notice or demand:

a.	Immediately enforce all rights and remedies provided under the Restructure Agreement and all related documents.
b.	Immediately enforce all rights under this Amendment and under applicable law.
c.	Exercise any or all of its remedies against the Deposit.

12. Waiver and Release of SVB.

a.

In further consideration of SVB entering into this IMSI and DCDC and ArtToday and each of their past and present officers, 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.

b.

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

42

or related to this Agreement and the breach of any representation, warranty or covenant contained herein.

c.

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.”

Initials

d. 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.

13.	Preservation of Agreements. Except as expressly modified herein, the terms and conditions of Restructure Agreement and all related documents (including without limitation 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.
14.	Execution in Counterparts. This Amendment 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.
15.	Advice of Attorney. Each of the parties hereto expressly declares that it knows and understands the contents of this Amendment and has had an opportunity to consult with an attorney regarding its form and content.

IN WITNESS WHEREOF, the parties hereto have executed this Amendment to Restructure Agreement.

DIGITAL CREATIVE DEVELOPMENT CORPORATION,	SILICON VALLEY BANK,
a Utah corporation	a California banking corporation
By: /S/ Gary Herman	By: /S/ Susan Phillips McGee
Gary Herman	Susan Phillips McGee
CEO	Senior Vice President
INTERNATIONAL MICROCOMPUTER SOFTWARE, INC.,
a California corporation
By: /s/ Martin Wade, III
Martin Wade, III
Director , CEO & CFO
ARTTODAY.COM, INC.,
an Arizona corporation
By: /s/ Martin Wade, III
Martin Wade, III
CEO

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EX-10.1

ex10-1

EX-10.2

ex10-2