-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Snx5bkZc07mSCpJPeefZIav8CPDgwu0MhWusff161bIpdw8I2AblXNlg8PGweqER EmXahbj1UeEp5IIZb5XGIg== 0000950149-96-001488.txt : 19960930 0000950149-96-001488.hdr.sgml : 19960930 ACCESSION NUMBER: 0000950149-96-001488 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960927 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTERNATIONAL MICROCOMPUTER SOFTWARE INC /CA/ CENTRAL INDEX KEY: 0000814929 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 942862863 STATE OF INCORPORATION: CA FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-15949 FILM NUMBER: 96635738 BUSINESS ADDRESS: STREET 1: 1895 EAST FRANCISCO BLVD CITY: SAN RAFAEL STATE: CA ZIP: 94901 BUSINESS PHONE: 4154543000 MAIL ADDRESS: STREET 1: 1895 EAST FRANCISCO BLVD CITY: SAN RAFAEL STATE: CA ZIP: 94901 10-K 1 IMSI FORM 10-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (X) Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Fiscal Year ended June 30, 1996 or ( ) Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Transition Period from _____ to _____ Commission File No. 0-15949 INTERNATIONAL MICROCOMPUTER SOFTWARE, INC. (Exact name of registrant as specified in its charter) CALIFORNIA 94-2862863 (State or other jurisdiction (I.R.S. Employer of incorporation) Identification No.) 1895 FRANCISCO BLVD. EAST., SAN RAFAEL, CALIFORNIA 94901 (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (415) 257-3000 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, no par value Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in the definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.[ ] The aggregate market value of the voting stock of the registrant by non-affiliates of the registrant as of September 16, 1996 was approximately $28,200,000 As of September 16, 1996, 3,273,258 shares of Registrant's Common Stock, no par value, were outstanding. DOCUMENTS INCORPORATED BY REFERENCE: None 2 INTERNATIONAL MICROCOMPUTER SOFTWARE, INC. 1996 FORM 10-K ANNUAL REPORT TABLE OF CONTENTS
PAGE PART I Item 1. Business 2 Item 2. Properties and Facilities 7 Item 3. Legal Proceedings 7 Item 4. Submission of Matters to a Vote of Security Holders 7 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters 8 Item 6. Selected Financial Data 9 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Item 8. Financial Statements and Supplementary Data 14 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 14 PART III Item 10. Directors and Executive Officers of the Registrant 15 Item 11. Executive Compensation 17 Item 12. Security Ownership of Certain Beneficial Owners and Management 18 Item 13. Certain Relationships and Related Transactions 19 PART IV Item 14. Exhibits, Financial Statements, Schedules, and Reports on Form 8-K 20 Signatures 38 Exhibit Index 39
1 3 PART I ITEM 1. BUSINESS GENERAL International Microcomputer Software, Inc. (the "Company") was incorporated in California in November 1982. The Company's corporate headquarters are in San Rafael, California, and subsidiary offices are maintained in the United Kingdom, Germany, Australia, South Africa and France. The Company develops and publishes computer software and manufactures input devices for microcomputers. Any forward looking statements contained in the following discussion or elsewhere in this document involve risks and uncertainties which may cause actual results to differ materially from those discussed. A wide range of factors could contribute to those differences, including those discussed in this document. PRODUCTS The Company has over 20 software products operating on the Microsoft Windows and Apple Macintosh operating platforms, for the small office and consumer markets. The products are organized into four main product groups: CAD (Computer Aided Design) Group; Office Automation; Desktop Publishing and Consumer products. IMSI owns the technology and controls development of its key products, and works with a network of other development companies to provide a stream of new products which the Company publishes, on both an exclusive and non-exclusive basis. COMPUTER AIDED DESIGN IMSI's flagship product, TurboCAD 2D/3D is a professional, mid-range Computer Aided Design (CAD) software product. TurboCAD 2D/3D addresses the design needs for architectural, electrical, mechanical, illustration, and landscape designs in 2D. TurboCAD 2D/3D also includes a full 3D modeler plus over 10,000 CAD symbols. Currently priced at an estimated street price of $99.95, the product has sold over 750,000 units to date and was ranked the best selling mid-range CAD product in terms of unit sales in the U.S. market according to PC Data, as of June 1996. The product is offered in both Windows and Macintosh formats. TurboCAD Designer 2D/3D for Windows is positioned for entry level users to learn and use CAD. Priced at an estimated street price of $29.95, TurboCAD Designer 2D/3D can be used for remodeling projects, CAD instruction, and hobby and house plan designs. The product includes an instruction book for learning and using CAD, over 2,000 CAD symbols, powerful 2D TurboCAD design features, a full 3D modeler, and over 100 HomeStyles plans. FloorPlan Plus 3D for Windows (acquired by the Company in September 1995) allows users to design their homes and gardens with ease. The product can be used for designing home and office layouts, landscaping, decks, kitchens and more in 2D, and can also be used to "view" and walk through their design in full 3D. Priced at an estimated street price of $49.95, FloorPlan Plus 3D also includes over 1,000 home plans, a home design book, a stand alone garden designer, and Internet access to on-line home and garden resources. Over 500,000 units of FloorPlan Plus 3D have been sold in the past few years. 2 4 OFFICE AUTOMATION AND PROJECT MANAGEMENT TurboProject 2.0 is a full featured, easy to use project management application that leads one intuitively through the process of establishing goals and building project plans. The user can choose from a gallery of 28 standard tabular reports or customize one for a specific industry or project. Windelete is an uninstaller software product that allows safe, accurate, and effective removal of programs and files for computers running on Windows. Priced at an estimated street price of $29.95, WinDelete includes Internet management features and full award winning virus protection software. FormTool is the best selling forms automation software product in the U.S. retail market, according to PC Data. FormTool's powerful, easy-to-use design and editing tools enables the user to create professional looking forms in a very short time. It assists businesses to organize and standardize written communication. DESKTOP PUBLISHING AND ART MasterClips Premium Image Collections are a collection of high quality images featuring a wide variety of hand-picked clip art, fonts, and photos for desktop publishing documents as well as web page designs. MasterClips 35,000 shipped in February 1996 and has grown to approximately 15% of the clip art market by May 1996, and was currently ranked as the world's third best selling clip art product by the end of fiscal 1996. IMSI released MasterClips 101,000 in the first quarter of fiscal 1997. Masterclips 101,000 includes 33,000 vector-based color clip images, 40,000 classic black and white Dover images, 22,500 ink-jet ready photos, 3,500 high resolution photos, 2,000 true type fonts, and 500 sound effects, video and animation clips. MasterClips 101,000 includes the powerful MediaPaq Browser to easily locate these images. The estimated street price for MasterClips 101,000 is $59.95. Master Publisher Premium Publishing Suite for Windows is a new desktop publishing suite for the small office or home. Targeted for release in the first half of fiscal 1997, MasterPublisher can be used for high-quality newsletters, brochures, logos, greeting cards, and more. The suite includes TurboPublisher as a layout tool, TurboDraw as a drawing, design and effects tool, 20,000 clip art images, 2,000 fonts, and a browser and image reference catalog. Master Publisher is targeted for an estimated street price of $29.95. MasterPhotos 22,000 Premium Photo Collection is a unique photo library designed to enhance multimedia, desktop or Internet projects. Master Photos will be available for Windows and includes 5,000 BMP high resolution photographs in over 33 categories and 22,500 ink-jet ready photos. The product is expected to ship in the first half of fiscal 1997 with an estimated street price of $29.95. CONSUMER EZ Language allows users to learn their choice of Spanish, French, Russian, German, Italian, Japanese, or English. It is designed for business and leisure travelers as well as language students and enthusiasts to learn the most important words and phrases in another language. The newest version shipped in March 1996 and included more words and phrases than previous versions, plus multimedia tours of the native regions and access to an exclusive Internet site with a wide variety of travel and language Internet links. EZ Language sells for a targeted street price of $49.95 and is available both for Windows and Macintosh in the same package. The Company has sold several hundred thousand input devices over the past few years, and the trend in the computer industry is towards greater use of graphical devices, such as mice, as a means of input. The Company expects its hardware products to make up a smaller percentage of overall revenues during the 1997 fiscal year. 3 5 The Company's primary software products have been internally developed, acquired from independent third parties or developed for the Company by software development companies and individual programmers, in exchange for a development fee. In cases where the Company has publishing rights for a product, the Company generally has exclusive marketing arrangements for the products it sells, as well as ownership of the product name. BACKGROUND AND GROWTH STRATEGY The Company completed its initial public offering in July 1987, raising net proceeds of approximately $2,600,000. In August 1988, the Company acquired Milan Systems America, Inc. and the rights to TurboCAD, the Company's best selling product. In August 1993, the Company acquired the rights to FormTool, and raised approximately $1,300,000 in a private placement. In January 1995, the Company acquired the rights to ViewPoint, a project management software product. In September 1995, the Company acquired the rights to the FloorPlan Plus product line from Forte/ComputerEasy International, Inc. The Company has consistently expanded its line of software products during the last few years. The Company's long term goal is to continue to grow during the next several years, and to either become a major competitor in the markets in which it competes, or consolidate with a strategic partner in the software or information industry. Even if the Company is successful in its goal of increasing revenues and profits, the Company's plans regarding future growth involve several risks to the Company, including among others, increased financing needs, capital and cash flow requirements, changing facilities requirements, the possibility that revenues will not grow at a rate commensurate with increased expenditure levels, and the need to add additional management and other personnel to manage the growth. There can be no assurance that the Company will successfully grow in the future. In the past, expansion of the Company's product line has resulted from acquisition of products, or the right to publish products, from third parties. The Company significantly increased the level of research and development expenses in fiscal 1995 and fiscal 1996 from previous levels and expects such expenses to remain at a high level in fiscal 1997 compared with fiscal 1996. (See "International Subsidiaries") SALES AND MARKETING Sales of the Company's products are divided between sales to companies for resale, such as software distributors, computer dealers, and retail outlets (collectively, "retail channel sales"), and sales direct to end-users ("direct sales"). The majority of the Company's channel sales are to distributors, which in turn resell the products to computer dealers nationally and internationally. Major distributors of the Company's products include Merisel, Ingram Micro and Tech Data, among others. The Company also sells directly to a limited number of computer resellers. The Company's focus in channel sales is to increase sales through its current distributor network, primarily through the introduction of new products. The Company markets products through a combination of telephone sales, advertising, direct mail, trade shows and sales promotion activities. The Company has opened the following international sales offices: London, England in April 1992; Sydney, Australia in April 1993; Munich, Germany in October 1993; Johannesburg, South Africa in November 1994 and Paris, France in April 1995. 4 6 During fiscal 1996, the Company continued its sales transition away from direct mail in favor of the retail channel, which typically has higher profit margins. An outside sales force has been employed to manage key retail and distribution accounts directly and solidify and expand these relationships, all of which broadened IMSI's overall product distribution. IMSI's direct mail strategy remains focused on mining the Company's substantial user database through cost-effective upgrade and crossgrade mailings. Additionally, new product successes, with products such as TurboCAD 2D/3D and TurboProject have afforded expansion opportunities into the corporate market, which the Company plans to target in fiscal 1997. Nonetheless, the Company depends on direct mail distribution for a significant portion of its sales (approximately 32.8%, 39.9% and 65.9% of total net revenues in fiscal 1996, 1995 and 1994, respectively). The rate at which potential customers respond to the Company's direct mail solicitations has fluctuated from time to time in the past fiscal year and could also change in the future. A relatively small decline in historical response rates has adversely affected and could continue to adversely affect the Company's profitability. In addition, competitors offer competing products through direct mail distribution and other distribution methods to the same persons who receive the Company's direct mailings, reducing the Company's revenues and profits. COMPETITION The microcomputer software and hardware industries are highly competitive and are characterized by rapid changes in technology and customer requirements. The Company competes both in the acquisition of new products and in the marketing and sale of its existing products. Important factors in consumer software marketing include product features, quality, ease of understanding and operation, brand recognition, advertising and dealer merchandising, access to distribution channels, hardware compatibility, pricing, and availability and quality of support services. The Company competes for new and innovative products primarily on the basis of brand-name reputation, the terms offered to software developers, and the ability to market new products successfully as demonstrated by past success and current presence in distribution channels. The Company faces competition from a large number of sources. The Company's competitors vary in size from small companies with limited resources to large corporations, including manufacturers of microcomputers, with substantially greater financial and management resources than the Company and with the technical ability to develop or acquire products similar to those offered by the Company. The Company's relatively small size could adversely affect its ability to compete with larger companies for sales to dealers, distributors, and retail outlets, to obtain shelf space for its products in retail outlets, and to acquire products from third parties (who may desire to have their products sold or published by larger entities) to be sold or published by the Company. Moreover, competition in the Windows applications segment and the multimedia segment from major software publishers is intensifying, and the competitive upgrade price discounting between the major firms is eroding traditional price segmentation that had previously existed in the software industry. There can be no assurance that price and market share competition will not intensify, or that software or hardware manufacturers will not market products that may adversely affect the Company's revenues and income. Currently, a significant portion of the Company's revenues depends upon sales of the TurboCAD and MasterClips product lines. A significant decline in sales of one or more of these products could adversely affect the Company's results of operations. Thus, the Company is more vulnerable to market declines and competition in the markets for such products than companies with more diversified sources of revenues. 5 7 CHANGES IN TECHNOLOGY FOR PRODUCTS Changes in technology, product obsolescence, and advances in computer software and hardware will require the Company to develop or acquire new products and to enhance its products in a timely manner. There can be no assurance that the Company will be successful in such efforts or that the Company will have the resources required to respond to technological changes or to compete successfully in the future. Because of the Company's small size and capital resources relative to some of its competitors, its ability to avoid technological obsolescence through acquisition or development of new products or upgrades of existing products may be more limited than companies with greater funds. In addition, there can be no assurance that upgrades or new releases of the Company's products will be free from program defects, which might reduce sales of such upgrades or new versions. Several major microcomputer software companies have continued to reduce the prices of their products. The Company may be required to reduce the prices of its products in the future to remain competitive. If the Company significantly reduced the prices of one or more of its products, there can be no assurance that such price reductions would result in an increase in unit sales volume or that prices would not continue to decline in the future, which would result in a decrease in the revenues from, and gross profits on, sales of such products. RESEARCH AND DEVELOPMENT Improvements in microcomputer software products are important to keep the products competitive in the rapidly changing technological markets for the Company's products. The Company has significantly increased its expenditures on research and development to upgrade its existing products and allow its products to operate in new environments. Research and development costs for the fiscal years ended June 30, 1996, 1995 and 1994, were $3,170,937, $2,151,069, and $1,152,382 respectively. INTERNATIONAL SUBSIDIARIES In April 1992, the Company formed IMSI (UK) Limited as a wholly-owned subsidiary, with an office and warehouse located in London, England. In April 1993, the Company formed IMSI Australia (PTY) Ltd. as a wholly-owned subsidiary, with an office and warehouse located in Sydney. In October 1993, the Company formed IMSI Germany (GmbH) as a wholly owned subsidiary with an office and warehouse located in Munich. In November 1994, the Company formed IMSI South Africa Ltd. as a wholly-owned subsidiary, with an office and a warehouse located in Johannesburg, South Africa. In April 1995, the Company formed IMSI France as a wholly-owned subsidiary, with an office located in Paris, France. EMPLOYEES As of June 30, 1996, the Company had 144 full-time employees, including approximately 57 marketing and sales employees, 46 administrative, including accounting, MIS and operations personnel, and approximately 41 research and development personnel. The Company also utilizes the services of independent contractors on an as-needed basis. The Company's ability to market, sell, and support its products and establish and maintain its competitive position will depend, in part, on its ability to attract and retain qualified personnel. While the Company believes that it has, to date, been able to attract and retain such personnel, there can be no assurance that it will continue to be able to do so in the future. The Company is not a party to any collective bargaining agreements with its employees and considers its relations with its employees to be satisfactory. 6 8 ITEM 2. PROPERTIES AND FACILITIES The Company's primary facilities include leased corporate office space and warehouse space located in Northern California. The Company leases offices consisting of approximately 15,239 square feet of office space at 1895 Francisco Blvd. East, San Rafael, California and approximately 34,000 square feet of warehouse space in Richmond, California at a combined rate of $32,843 per month. The Company also leases smaller office and warehouse space in the greater metropolitan areas of London, England; Munich, Germany; Sydney, Australia; Johannesburg, South Africa and Paris, France. The Company expects that its current leased facilities will be sufficient to meet its needs for the foreseeable future. ITEM 3. LEGAL PROCEEDINGS There are no material pending legal proceedings to which the Company is a party to or to which any of its property is subject. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders during the fiscal year ended June 30, 1996 other than the election of nominees to the Company's Board of Directors and approval of an amendment to the 1993 Incentive Plan, increasing by 300,000 the number of shares of Common Stock issuable under the plan. 7 9 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Presently, the Common Stock is traded on the NASDAQ Small Cap Market under the symbol "IMSI." Historically, trading volume of the Common Stock has been very small and the market for the Common Stock has been materially less liquid than that of most other publicly traded companies. Significant sales of Common Stock by officers and directors or other shareholders could have an adverse effect on the market price of the Common Stock. The following table sets forth the quarterly high bid and low asked prices of the Common Stock for fiscal 1995 and fiscal 1996, as quoted on the NASDAQ Bulletin Board and NASDAQ. Such prices represent prices between dealers and do not include retail mark-ups, mark-downs or commissions and may not represent actual transactions.
CLOSING SALES PRICES High Bid Low Asked -------- --------- Fiscal Year 1995 First Quarter $ 5.00 $3.42 Second Quarter 5.67 4.00 Third Quarter 6.00 5.33 Fourth Quarter 6.17 5.83 Fiscal Year 1996 First Quarter 6.83 5.50 Second Quarter 9.00 6.67 Third Quarter 8.75 6.00 Fourth Quarter 12.00 8.50
There were approximately 1,092 holders of record of the Common Stock as of September 16, 1996. The Company believes that additional beneficial owners of its Common Stock hold their shares in street names. The Company has not paid any cash dividends on its Common Stock and does not plan to pay any such dividends in the foreseeable future. The Company's future dividend policy will be determined by its Board of Directors on the basis of many factors, including results of operations, capital requirements and general business conditions. 8 10 ITEM 6. SELECTED FINANCIAL DATA
STATEMENT OF OPERATIONS DATA: (Amounts in thousands except share and per share amounts) Year ended June 30, 1996 1995 1994 1993 1992 ------------------- ---- ---- ---- ---- ---- Net Revenues $25,679 $20,300 $23,118 $13,193 $7,764 Total costs and expenses 23,878 20,670 22,565 12,254 7,242 Operating income (loss) 1,801 (370) 553 939 522 Income (loss) before income taxes, cumulative effect of accounting change and extraordinary items 1,539 (424) 573 857 455 Cumulative effect of accounting change -- -- 800 -- -- Extraordinary items: Utilization of income tax carry forward -- -- -- 274 139 Net income (loss) 954 (435) 1,120 760 412 Net income (loss) per share: Primary $ .26 ($ .14) $ .35 (a) $ .31 (b) $ .19 (c) Fully-diluted $ .26 ($ .14) $ .35 (a) $ .30 (b) $ .19 (c) Weighted average common and common equivalent shares outstanding: Primary 3,614,963 3,146,124 3,219,705 2,439,897 2,140,439 Fully diluted 3,614,963 3,146,124 3,219,705 2,534,178 2,140,439 BALANCE SHEET DATA: As of June 30, 1996 1995 1994 1993 1992 -------------- ---- ---- ---- ---- ---- Working capital $ 3,092 $ 1,967 $ 1,918 $ 375 $ 72 Total assets 11,058 7,470 6,752 3,845 2,198 Current liabilities 5,972 3,971 2,968 2,826 1,885 Capital lease and other obligations-long term 565 103 110 -- -- Shareholders' equity 4,522 3,397 3,674 1,019 314
(a) Includes cumulative effect of accounting change of $.25 per share. (b) Includes extraordinary gain of $.11 per share. (c) Includes extraordinary gain of $.06 per share. 9 11 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SUMMARY Net revenues in fiscal 1996 were $25,679,017, an increase of 26% from net revenues of $20,300,361 for fiscal 1995. Net revenues increased primarily due to increased sales into the retail channel as a result of the Company's increased emphasis on selling in the retail channel. The fiscal 1995 revenues decreased 12% from $23,118,193 in fiscal 1994. This decrease was primarily due to lower direct mail sales, resulting from the Company's transition towards an operating model focused increasingly upon retail sales. The Company recorded operating income of $1,801,182 in fiscal 1996 compared with an operating loss in the fiscal year ended June 30, 1995 of $370,360, and operating income of $553,241 in fiscal 1994. The Company attributes the increase of operating income to the increased revenue in 1996 while the 1995 operating loss was attributable to several non-recurring charges recorded during the year. In the fiscal year ended June 30, 1995, the Company incurred charges of approximately $1,000,000 for the write-off of software acquisition costs and the write off of software development costs as a result of reducing the amortization period for such internally developed software from 36 months to 18 months. Additionally, during fiscal 1995, the Company increased its allowances for doubtful accounts and returns as the Company transitioned towards an operating model focused increasingly upon retail sales, resulting in approximately $614,000 of additional expense for the year. RESULTS OF OPERATIONS NET REVENUES Net revenues were $25,679,017, $20,300,361 and $23,118,193 in fiscal 1996, 1995, and 1994 respectively. Increased sales in fiscal 1996 compared to fiscal 1995 were primarily the result of a 41% increase in retail channel sales coupled with an increase of 4% increase in direct mail sales. The decreased sales in fiscal 1995 compared with fiscal 1994 was primarily due to a 47% decrease in direct mail sales, partially offset by an increase of 55% in retail channel sales. Net revenues from retail channel sales accounted for $17,265,000 of total net revenues in fiscal 1996 or 67.2% of total net revenue, compared to $12,202,000 or 60.1% and $7,887,000 or 34.1% in fiscal 1995 and 1994, respectively. Net revenues from direct mail sales were $8,414,000 or 32.8% of total net revenues in fiscal 1996, compared to $8,098,000 or 39.9%, and $15,231,000 or 65.9% in fiscal 1995 and 1994, respectively. The rate at which potential customers respond to the Company's direct mail solicitations could change in the future. A relatively small decline in historical response rates could affect the Company's profitability. In addition, competitors might offer competing products through direct mail distribution or other distribution methods to the same persons who receive the Company's direct mailings, reducing the Company's revenues and net income. Approximately 64.9% and 48.2% of the Company's total net revenues in fiscal 1996 and fiscal 1995, respectively, were comprised of the TurboCAD and MasterClips product lines. International net revenues accounted for $8,614,000, or 33.5% of total net revenues in fiscal 1996, compared to $6,780,000 or 33.4%, and $5,417,000 or 23.4% in fiscal 1995 and 1994, respectively. The increases in international net revenues over the previous periods were primarily the result of increased sales through distribution channels and successful direct mail promotions, as well as continued penetration into international markets where the Company had no prior presence. 10 12 PRODUCT COSTS Product costs include the direct costs of production (manuals, diskettes, compact disks, duplication, packaging materials and assembly), labor, freight, supplies, royalties, inventory spoilage, reserves for obsolete inventory, and amortization of capitalized software development costs. Product costs were $8,261,583, $7,143,795 and $7,745,258 for fiscal 1996, 1995 and 1994, respectively. Product costs decreased as a percentage of net revenues to 32.2% in fiscal 1996 from approximately 35.2% and 33.5% in fiscal 1995 and 1994. Product costs decreased as a percent of net revenues in fiscal 1996 as a result of decreased software amortization compared to fiscal 1995, coupled with improved costs associated with higher volume purchases. During fiscal 1995, the Company reevaluated and changed the economic lives of capitalized software acquisition and development costs. Beginning with the quarter ending March 31, 1995, the Company reduced the amortization period from 36 months to 18 months, resulting in additional amortization of approximately $500,000 during fiscal 1995. For the period from fiscal 1994 to fiscal 1995, product costs as a percentage of net revenue increased primarily due to increased amortization of capitalized software development costs, freight cost and production labor. As a result of the above factors, gross margins increased to 67.8% in fiscal 1996, compared to 64.8% and 66.5% in fiscal 1995 and 1994, respectively. Amortization of capitalized software development costs and software acquisition costs charged to product costs were $375,206, $939,507 and $341,866 for fiscal 1996, 1995 and 1994, respectively. SALES AND MARKETING Sales and marketing expenses include salaries and benefits for retail channel, direct mail and marketing personnel, commissions, advertising, trade show, design and direct mail promotional costs (design, postage, printing, fulfillment and list rentals). Sales and marketing expenses increased in fiscal 1996 to $9,888,558 from $8,918,867 in 1995, and decreased in fiscal 1995 from $11,039,664 in fiscal 1994. As a percentage of net revenues, sales and marketing expenses were 38.5%, 44.0% and 47.8% in fiscal 1996, 1995 and 1994, respectively. The decrease in fiscal 1996 sales and marketing expenses as a percent of net revenues was primarily a result of decreased direct mail personnel and direct mail promotional activities. The absolute dollar increase in sales and marketing expenses for fiscal 1996 is attributable to increased sales activity in the retail channel. The decrease in fiscal 1995 sales and marketing expenses and the decrease as a percentage of net revenues was primarily a result of decreased direct mail personnel and direct mail promotional activities from fiscal 1994. There were 57, 35 and 59 sales and marketing personnel at June 30, 1996, 1995 and 1994. Direct mail sales expenses comprised 46%, 61%, and 76% of total sales and marketing expenses in fiscal 1996, 1995 and 1994, respectively. The decrease in direct mail sales expense was primarily a result of the Company's decision to focus its operations more upon retail channel sales and less upon direct mail sales. Direct mail costs are relatively variable, as most of the costs consist of mailing, printing and list rental costs. GENERAL AND ADMINISTRATIVE General and administrative expenses were $2,556,757, $2,456,990 and $2,627,649 for fiscal 1996, 1995 and 1994, respectively, representing 10.0%, 12.1% and 11.4% of net revenues for those years. General and administrative expenses remained relatively consistent from the 1996 fiscal year to 1995 fiscal year resulting in a reduced percentage of net revenue due to growth in the Company's net revenue. General and administrative expenses decreased in fiscal 1995 as a result of personnel reductions, partially offset by increased bad debt reserves. There were 32, 31 and 34 administrative personnel at June 30, 1996, 1995 and 1994, respectively. 11 13 RESEARCH AND DEVELOPMENT Research and development expenses are comprised primarily of personnel costs and costs required to conduct the Company's development effort and third-party software development costs. Research and development costs were $3,170,937, $2,151,069 and $1,152,382 for fiscal 1996, 1995 and 1994, respectively, representing 12.3%, 10.6%, and 5.0% of net revenues for those years. These increases resulted primarily from personnel additions related to the development and expansion of the Company's products. Fiscal 1995 research and development costs included approximately $500,000 of in process research and development charges related to the acquisition of various software products. At June 30, 1996, 1995 and 1994 the Company had 41, 28 and 16 research and development employees, respectively. In addition, the Company had independent research and development contractors located in Russia at June 30, 1996, 1995 and 1994. The additional personnel hired in fiscal 1996, 1995 and 1994 were primarily engaged both in enhancing and modifying products that the Company has acquired from third parties as well as developing new products internally. For fiscal 1996, 1995 and 1994, the Company capitalized software acquisition and development costs of $402,469, $191,460 and $992,398, respectively. The amortization of such costs are included in product costs. OTHER INCOME (EXPENSE), NET Other income (expense) was ($262,374),($53,925) and $20,118 for fiscal 1996, 1995 and 1994, respectively. Other income (expense) is comprised primarily of interest expense on short and long-term borrowings and foreign currency transaction gains and losses. In fiscal 1996 there was $81,879 of foreign exchange losses and $180,495 of net interest expense. PROVISION FOR INCOME TAXES The Company's provision for income tax was $585,236, $10,548 and $253,169 for fiscal 1996, 1995 and 1994, respectively. The Company's effective income tax rate was 38% and 44% in fiscal 1996 and 1994, respectively. The Company's effective income tax rate for fiscal 1995 was reduced due to the non-deductibility of significant charges in 1995 for write-offs. See Note 7 to the Consolidated Financial Statements. CUMULATIVE EFFECT OF ACCOUNTING CHANGE During the fiscal year ended June 30, 1994, the Company adopted Statement of Financial Accounting Standards No. 109 ("SFAS 109"), which resulted in an $800,000 or $.25 per share cumulative effect benefit in net income in that period. LIQUIDITY AND CAPITAL RESOURCES The Company has financed its business primarily from cash flows from operations, short-term bank borrowings, and proceeds from the sale of stock. Working capital increased to $3,092,310 at June 30, 1996 from $1,967,042 at June 30, 1995, resulting primarily from growth in receivables and inventories related to increased retail channel sales, offset by an increase in accounts payable and other accrued liabilities and current income taxes payable. The Company has used cash generated from operations and short-term borrowings to fund its working capital requirements and to acquire software products and furniture and equipment. The Company's operating activities provided net cash of $716,657, $277,553 and $579,655 in fiscal 1996, 1995 and 1994, respectively. The increase in fiscal 1996 cash flows from operations was due to increased operating revenues. The Company's capital expenditures totaled $1,089,135, $598,339 and $1,435,800 in fiscal 1996, 1995 and 1994, respectively. These capital expenditures were primarily for the acquisition and development of software, 12 14 trademarks and the purchase of additional office equipment. At June 30, 1996, the Company had no material commitments for capital expenditures. Net cash proceeds provided by financing activities was $236,649, $322,674 and $1,187,956 in fiscal 1996, fiscal 1995 and fiscal 1994, respectively. Net repayments on the line of credit used cash of $400,000 in the year ended June 30, 1996. Proceeds from the issuance of common stock provided cash of $109,074, $40,885 and $1,443,222 in the fiscal years ended June 30, 1996, 1995 and 1994, respectively. As of June 30, 1996, the Company had a credit agreement with a bank under which it can borrow the lesser of $1,500,000 or 25% of eligible inventory up to a cap of $500,000 and 80% of eligible accounts receivable, at the bank's index rate plus 1/2%. Under terms of the agreement, all assets not subject to liens of other financial institutions have been pledged as collateral against the line of credit. As of June 30, 1996 the Company did not have any outstanding balance under this line of credit. The credit line availability at June 30, 1996 was $1,500,000. On September 9, 1996, the bank credit agreement was amended to increase the maximum borrowings to $2,000,000; therefore the amended credit line availability was $ 950,000 at September 9, 1996. (See Note 5 to Consolidated Financial Statements). The Company's business is extremely seasonal. Accordingly, the Company's operating results and cash flow requirements may fluctuate greatly during the year. Historically, the Company's borrowing under its bank credit line have approached the maximum available borrowings during periods of peak cash needs. Such conditions may occur in the future. The Company has experienced, and expects to continue to experience, significant fluctuations in operating results due to a variety of factors, including the size and rate of growth of the consumer software market, market acceptance of the Company's products and those of its competitors, development and promotional expenses relating to the introduction of new products or new versions of existing products, projected and actual changes in computing platforms, the timing and success of product introductions, product returns, changes in pricing policies by the Company and its competitors, difficulty in securing retail shelf space for the Company's products, the accuracy of retailer's forecasts of consumer demand, the timing of orders from major products, order cancellations and delays in shipment. In response to competitive pressures, the Company may take certain pricing or marketing actions that could materially adversely affect the Company's business, operating results and financial condition. The Company may be required to pay fees in advance or to guarantee royalties, which may be substantial, or to obtain licenses to intellectual properties from third parties before such properties have been introduced or achieved market acceptance. A significant portion of the Company's operating expenses are relatively fixed, and planned expenditures are based in part on sales forecasts. If net sales do not meet the Company's expectations, the Company's business, operating results and financial condition could be materially adversely affected. The Company believes that cash flow from operations, together with existing sources of liquidity, will satisfy the Company's working capital (including payment of income tax liabilities, which were approximately $1,000,000 as of June 30, 1996) and capital expenditure requirements for at least the next twelve months. The Company believes that these sources will also be sufficient to satisfy its working capital and capital expenditure requirements beyond the next 12 months at the Company's current level of operations. The Company's long term goal, however, is to grow substantially. Expansion of the Company's current business may involve significant financial risk and require significant capital investment. Significant expansion of the Company's operations, future acquisitions of products or companies, unexpected increases in expenses or other factors might lead the Company to seek additional debt or equity financing. While the Company believes it will be able to raise any necessary funds, there can be no assurances that the Company will be able to do so, and failure to obtain sufficient capital could have a material adverse effect on the Company or adversely affect the Company's ability to continue to grow. In order to finance future growth or for other reasons, the Company may consider an offering of its equity securities within the next year or thereafter. The decision to undertake such an offering, and the size of such an offering, would depend upon many factors, such as the market price of the Common 13 15 Stock, the working capital and capital expenditure needs of the Company, the availability of alternative sources of capital, and general market conditions. NEW ACCOUNTING STANDARDS The Company is required to adopt Statement of Financial Accounting Standards (SFAS) No. 123,"Accounting for Stock Based Compensation" in fiscal 1997. SFAS No. 123 establishes accounting and disclosure requirements using a fair value based method of accounting for stock based employee compensation plans. Under SFAS 123, the Company may either adopt the new fair value based accounting method or continue the intrinsic value based method and provide pro forma disclosures of net income and earnings per share as if the accounting provisions of SFAS No. 123 had been adopted. The Company plans to adopt only the disclosure requirements of SFAS No. 123, and therefore, such adoption will have no effect on the Company's reported net earnings or cash flows. The Company is required to adopt SFAS 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of" in fiscal 1997. SFAS No. 121 establishes recognition and measurement criteria for impairment losses whenever events or changes in circumstances indicate that the carrying value of assets may not be recoverable. The Company does not expect the adoption of SFAS No. 121 to have a material effect on its financial statements. QUARTERLY TRENDS The Company's consolidated results of operations to date have not been materially affected by seasonal trends. However, the Company believes that in the future its results may be impacted by such factors as order deferrals in anticipation of new product releases, delays in shipments of new products, a slower growth rate in the software markets in which the Company operates, or adverse general economic and industry conditions in any of the countries in which the Company does business. In addition, with significant portions of net revenues contributed by international operations, fluctuations of the U.S. dollar against foreign currencies and the seasonality of the European, Asia/Pacific, and other international markets could impact the Company's results of operations and financial position in a particular quarter. Rapid technological change and the Company's ability to develop, manufacture, and market products that successfully adapt to the change may also impact results of operations. Further, increased market competition from competitors either known or unknown to the Company could also negatively impact the Company's results of operations. Due to these factors, the Company's future earnings and stock price may by subject to significant volatility, particularly on a quarterly basis. Any shortfall in revenues or earnings from anticipated levels could have an immediate and adverse effect on the trading price of the Company's common stock. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Financial Statements and the financial statement schedule are attached as an exhibit at Item 14(a). ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE On December 20, 1995, the Company terminated Coopers & Lybrand LLP as independent auditors for the Company. Coopers & Lybrand provided the Company with a letter dated November 1, 1995 which explained that because of independence concerns arising from the recent hiring by the Company of a new employee who had a family relationship to a member of Coopers & Lybrand's San Francisco office, it was transferring responsibility for the audit of the Company from the San Francisco office to the Portland office. Coopers & Lybrand's reports on the consolidated financial statements of the Company as of and for the fiscal years ended June 30, 1994 and 1995 did not contain an adverse opinion or a disclaimer of opinion and the reports were not 14 16 qualified or modified as to uncertainty, audit scope or accounting principles. The decision to change accountants was approved by the Company's Board of Directors. During the Company's two prior fiscal years (June 30, 1994 and 1995) and subsequent interim period (through December 20, 1995), there have been no disagreements with Coopers & Lybrand on any matter of accounting principles or practice, financial statement disclosure, or auditing scope or procedure, which, if not resolved to the satisfaction of Coopers & Lybrand, would have caused Coopers & Lybrand to make a reference to the subject matter of the disagreement in connection with its report. During the Company's two prior fiscal years (June 30, 1994 and 1995) and subsequent interim period (through December 20, 1995), there did not occur any kind of event listed in paragraphs (a)(1)(v)(A) through (D) of Regulation S-K, Item 304. Effective December 20, 1995, the Company engaged Deloitte & Touche LLP as independent auditors to audit the Company's financial statements for the fiscal year ended June 30, 1996. During the Company's two prior fiscal years (1994 and 1995) and subsequent interim period (through December 20, 1995), neither the Company nor any person acting on behalf of the Company consulted Deloitte & Touche regarding (i) either: the application of accounting principles to a specified transaction, either completed or proposed; or the type of audit opinion that might be rendered on the Company's financial statements; or (ii) any matter that was either the subject of a disagreement (as defined in paragraph (a)(1)(iv) of Regulation S-K, Item 304 and the related instructions) or a reportable event (as described in paragraph (a)(1)(v) of Regulation S-K, Item 304). 15 17 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers and directors of the Company are as follows: Name Age Position ---- --- -------- Mark H. Cosmez II 45 Vice President of Finance and CFO Charles Federman 39 Director Geoffrey Koblick 42 Chairman of the Board of Directors, Secretary, General Counsel Robert Mayer 42 Vice President, Director Earl Hamlin 57 Director Gordon Landies 40 Director Martin Sacks 36 President and CEO, Director Directors are elected at the annual meeting of shareholders and hold office until the next annual meeting and until their successors are elected and qualified. During fiscal 1996, one new director, Charles Federman, joined the Board. Directors employed by the Company do not receive any monetary fees for director services performed for the Company; directors are however, eligible to participate in the Company's stock option plans. The Company may pay monetary fees to other directors in the future. Officers serve at the pleasure of the Board of Directors. Mr. Mark H. Cosmez II began serving as the Company's Vice President of Finance and Chief Financial Officer on August 1, 1994. Mr. Cosmez has over 20 years of financial management experience. Prior to joining the Company, he was Corporate Controller for The Software Toolworks, a publicly traded software company. From 1988 to 1994, Mr. Cosmez, who is a CPA, was the Corporate Controller of ShareBase Corporation. He attended California State University, Hayward, where he received a Bachelor of Arts degree in Chemistry in 1973 and a Master of Business degree in Accounting in 1976. Mr. Charles Federman became a director in May 1996. Mr. Federman is the Chairman of the Executive Committee and a Managing Director of Broadview Associates of Fort Lee, New Jersey. Broadview is an information and technology mergers & acquisitions firm. Federman holds a Bachelor of Science degree from the University of Pennsylvania's Wharton School of Business. Mr. Geoffrey Koblick has been the Chairman of the Board of Directors, Secretary and General Counsel of the Company since its inception and served as the Company's President from its inception through September 15, 1987, and then again from July 1, 1988 to June 30, 1990. From 1981 to 1982, Mr. Koblick was legal counsel at MicroPro International Corporation (which later changed its name to WordStar International Incorporated). Between 1979 and 1981, he practiced law in San Francisco with Gunheim & Yturbide. Mr. Robert Mayer has served as the Company's Vice President of Sales since 1990 and as a director since 1985. Prior to 1990 he served as Vice President of Operations. Before joining the Company, Mr. Mayer 16 18 worked at Gundlach Bundschu Winery in Sonoma from 1980 to 1983, where he was the assistant wine maker and oversaw day-to-day operations. Mr. Earl Hamlin became a director in 1995. Mr. Hamlin is a private investor. From 1989 to 1994, he was a portfolio manager at Volpe, Welte and Company, an investment banking firm. From 1973 to 1989, he was employed at Hambrect & Quist, where he held several positions, including financial analyst. He has been a director of 800 Software, a distributor of personal computer software and hardware, and is currently a director of Data Storage Systems, Inc. and National Employment Wire Service, Inc., which are both private companies. Mr. Gordon Landies became a director in 1995. Mr. Landies has held several managerial positions with Mindscape (formerly known as The Software Toolworks) since 1989, most recently as Executive Vice President of Domestic Sales. Between 1984 and 1989, Mr. Landies was the President and founder of Design Software. Prior to founding Design Software, he was employed by several firms in various financial management capacities. Mr. Martin Sacks has been a director of the Company since 1988 and the Company's President and Chief Executive Officer since June 30, 1990. He was the founder of Milan Systems America, Inc. which was acquired by the Company in 1988. Mr. Sacks served as a consultant for Arthur Young and Company. Mr. Sacks also founded a software training company in 1984 and received a Bachelor of Commerce and a Bachelor of Accounting degree from the University of Witwatersrand, South Africa in 1981. 17 19 ITEM 11. EXECUTIVE COMPENSATION COMPENSATION OF EXECUTIVE OFFICERS The following table sets forth all compensation awarded, earned or paid for services rendered in all capacities to the Company and its subsidiaries during each of the fiscal years ended June 30, 1996, 1995 and 1994 to the Company's Chief Executive Officer and the Company's most highly compensated executive officers other than the Chief Executive Officer who were serving as executive officers at the end of the fiscal year ending June 30, 1995 whose compensation exceeded $100,000 for the most recently completed fiscal year.
SUMMARY COMPENSATION TABLE ANNUAL COMPENSATION LONG-TERM COMPENSATION -------------------------------- ----------------------------------------------- Name & Principal Position Year Salary ($) Bonus ($) Other Annual Stock All Other - ------------------------- ---- ---------- --------- ------------- ------ --------- Compensation(1) Options (#) Compensation($) ------------ - ----------- --------------- Martin Sacks, 1996 182,000 5,178 5,412 50,000 -- President and 1995 166,375 28,609 5,324 75,000 -- Chief Executive 1994 160,000 -- 4,300 -- -- Officer Geoff Koblick, 1996 111,665 3,178 5,412 35,000 Chairman of the 1995 94,997 229 5,324 52,500 Board and General 1994 47,833 9,005 4,404 -- Counsel Robert Mayer, 1996 120,000 6,728 5,412 15,000 -- Vice President 1995 120,229 12,790 5,324 15,000 -- 1994 121,005 -- 4,300 -- -- Mark H. Cosmez II 1996 110,001 -- -- -- -- Vice President of 1995 100,834 -- -- 22,500 -- Finance and Chief 1994 -- -- -- -- -- Financial Officer
(1) Consists of payment of medical premiums by the Company. There are no employment agreements between the Company and any of the named executive officers. OPTION GRANTS IN FISCAL 1996 The following table sets forth further information regarding individual grants of options to acquire the Company's Common Stock during fiscal 1996 to each person named in the Summary Compensation Table above.
Individual Grants ----------------- % of Total Options Granted To Name Options Employees In Exercise Or Base Expiration Granted Fiscal Year Price ($/Shr) Date ---- ------- ----------- ------------- ------- Martin Sacks 50,000 15.8% 6.25 2/12/06 Geoff Koblick 35,000 11.0% 6.25 2/12/06 Robert Mayer 15,000 4.7% 6.25 2/12/06
18 20 The following table sets forth information with respect to the options exercised during fiscal 1996 by the executive officers named in the Summary Compensation Table, including the aggregate value of gains on the date of exercise. In addition, this table includes the number of shares covered by both exercisable and non-exercisable stock options as of June 30, 1996. Also reported are the values for "in-the-money" options which represent the positive spread between the exercise price of any such existing stock options and the year-end price of the Common Stock. OPTION/SAR EXERCISES AND YEAR-END VALUE TABLE
Number of Unexercised Value of Unexercised Options/SARs In-The-Money Options At Shares Acquired At June 30, 1996 (#) June 30, 1996 ($) Exercisable/ Exercisable/ Name Exercise (#) Value Realized Unexercisable Unexercisable - ---- ----------- -------------- ------------- ------------- Martin Sacks 0 0 108,848/50,000 (1) $668,494/$131,250 (2) Geoff Koblick 0 0 52,500/35,000 (1) $282,188/$91,875 (2) Robert Mayer 0 0 68,424/15,000 (1) $491,865/$39,375 (2) Mark Cosmez 0 0 4,500/18,000 (1) $27,188/$108,751 (2)
(1) These options which have a five year vesting period become exercisable over time based on continuous employment with the Company. (2) Based on the difference between the market price of the Common Stock at June 30, 1996 ($8.875 per share) and the aggregate exercise prices of options shown in the table. COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT Section 16(a) of the Exchange Act requires the Company's directors and executive officers, and persons who own more than ten percent of a registered class of the Company's equity securities, to file with the Commission initial reports of ownership and reports of changes in ownership of the Company's Common Stock and other equity securities of the Company. Officers, directors and greater than ten percent shareholders are required by the Commission's regulations to furnish the Company with copies of all Section 16(a) forms they filed. To the Company's knowledge, based solely on review of the copies of such reports furnished to the Company, during the last fiscal year all Section 16(a) filing requirements applicable to the Company's officers, directors, and greater than ten percent beneficial owners were complied with. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth, as of September 16, 1996 the ownership of the Company's Common Stock by (i) each person who is known by the Company to be owners of record or beneficially own more than 5% of the Company's Common Stock, (ii) each of the Company's directors (or nominees to be directors) and (iii) all directors and executive officers as a group. Except as otherwise indicated, the shareholders listed in the table have sole voting and investment powers with respect to the shares indicated, subject to community property laws where applicable. 19 21 Name and Address Number of Shares Percentage of of Beneficial Owner Beneficially Owned Common Stock(1) ------------------- ------------------ --------------- Geoffrey Koblick (2) P.O. 776 Ross, CA 94957 300,692 9.04% Robert Mayer(3) 1895 Francisco Blvd. East San Rafael, CA 94901 308,576 9.23% Martin Sacks(4) 1895 Francisco Blvd. East San Rafael, CA 94901 514,914 15.22% Earl Hamlin (5) 1895 Francisco Blvd. East San Rafael, CA 94901 14,088 0.43% Gordon Landies (6) 1895 Francisco Blvd. East San Rafael, CA 94901 41,000 1.25% Charles Federman 1 Bridge Plaza Fort Lee, NJ 07024 15,750 0.48% Tudor Investment Corporation (7) One Liberty Plaza, 51st floor New York, NY 10006 223,350 6.82% All directors and executive officers as a group (7 persons) 1,208,520 34.23% (1) Does not give effect to the exercise of outstanding options held by persons other than the named individuals of the group. (2) Includes 52,500 shares issuable upon the exercise of stock options held by Mr. Koblick. (3) Includes 68,424 shares issuable upon the exercise of stock options held by Mr. Mayer. (4) Includes 108,848 shares issuable upon the exercise of stock options held by Mr. Sacks. (5) Includes 3,000 shares issuable upon the exercise of stock options held by Mr. Hamlin. (6) Includes 11,000 shares issuable upon the exercise of stock options held by Mr. Landies. (7) Based solely on a Schedule 13D filed on July 11, 1994. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The Company previously leased office and warehouse space from a partnership which is partially owned by Geoffrey and Phyllis Koblick (25% interest), the Company's Chairman, and Maury and Jane Koblick (25% interest), Mr. Koblick's parents. The Company terminated its lease with the above mentioned partnership in fiscal 1995. The Company believes that the terms of said lease were as favorable as those that the Company could have obtained from unaffiliated third parties. 20 22 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K (a) DOCUMENTS FILED AS PART OF THIS ANNUAL REPORT ON FORM 10-K: 1. Financial Statements Independent Auditors' Reports 22 Consolidated Balance Sheets at June 30, 1996 and 1995 24 Consolidated Statements of Operations for the years ended June 30, 1996, 1995 and 1994 25 Consolidated Statements of Shareholders' Equity for the years ended June 30, 1996, 1995 and 1994 26 Consolidated Statements of Cash Flows for the years ended June 30, 1996, 1995 and 1994 27 Notes to Consolidated Financial Statements 28 2. Financial Statement Schedules Schedule II - Valuation and Qualifying Accounts for the years ended June 30, 1996, 1995 and 1994 38 (B) REPORTS ON FORM 8-K: NONE. (C) EXHIBITS: SEE EXHIBIT INDEX 40
21 23 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareholders International Microcomputer Software, Inc. We have audited the accompanying consolidated balance sheet of International Microcomputer Software, Inc. and subsidiaries (the "Company") as of June 30, 1996 and the related consolidated statements of operations, shareholders' equity, and of cash flows for the fiscal year then ended. Our audit also included the consolidated financial statement schedule for the fiscal year ended June 30, 1996 listed in the Index at Item 14(a)2. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of International Microcomputer Software, Inc. and subsidiaries as of June 30, 1996, and the results of their operations and their cash flows for the fiscal year then ended in conformity with generally accepted accounting principles. Also, in our opinion, the 1996 consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. /s/ DELOITTE & TOUCHE LLP - --------------------------- San Francisco, California August 16, 1996 (September 9,1996 as to the third sentence of Note 5) 22 24 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders International Microcomputer Software, Inc. San Rafael, California We have audited the accompanying consolidated financial statements and financial statement schedule of International Microcomputer Software, Inc. and Subsidiaries as of June 30, 1995 and for the years ended June 30, 1995 and 1994. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of International Microcomputer Software, Inc. and Subsidiaries as of June 30, 1995, and the consolidated results of their operations and their cash flows for the years ended June 30, 1995 and 1994 in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. /s/ COOPERS & LYBRAND L.L.P. - ------------------------------- Coopers & Lybrand L.L.P. San Francisco, California August 28, 1995, except for note 10, for which the date is September 21, 1995 23 25 INTERNATIONAL MICROCOMPUTER SOFTWARE, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS June 30, 1996 and 1995
ASSETS 1996 1995 ---- ---- Current assets: Cash and cash equivalents $ 387,406 $ 523,235 Receivables, less allowances for doubtful accounts and returns of $1,301,509 and $777,718 4,121,210 2,590,322 Inventories, net 2,538,093 1,625,631 Prepaid royalties and licenses 746,677 336,053 Deferred direct mail costs 217,513 358,398 Deferred tax assets, net 791,301 321,362 Other current assets 262,108 182,637 ----------- ---------- Total current assets 9,064,308 5,937,638 Furniture and equipment, net 1,101,306 836,610 Deferred tax assets, net 344,067 411,721 Capitalized software development costs, net 272,102 244,839 Intangibles and other assets, net 276,595 39,583 ----------- ---------- Total assets $11,058,378 $7,470,391 =========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Credit line payable $ -- $ 400,000 Accounts payable and accrued expenses 4,395,461 3,139,059 Income taxes payable 1,011,118 245,008 Current portion of notes payable 333,778 -- Current portion of capital lease obligations 231,641 186,529 ----------- ---------- Total current liabilities 5,971,998 3,970,596 Capital lease and other long-term obligations 283,321 102,570 Notes payable 281,250 -- ----------- ---------- Total liabilities 6,536,569 4,073,166 ----------- ---------- Commitments and contigencies Shareholders' equity: Preferred stock, no par value; 20,000,000 shares authorized; none issued or outstanding -- -- Common stock, no par value; 300,000,000 shares authorized; Issued and outstanding - 3,223,125 and 3,173,304 shares, respectively 5,972,850 5,863,776 Accumulated deficit (1,223,797) (2,177,369) Cumulative translation adjustment 66,214 (23,724) Notes receivable from shareholders (293,458) (265,458) ----------- ---------- Total shareholders' equity 4,521,809 3,397,225 ----------- ---------- Total liabilities and shareholders' equity $11,058,378 $7,470,391 =========== ==========
See Notes to Consolidated Financial Statements 24 26 INTERNATIONAL MICROCOMPUTER SOFTWARE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Years ended June 30, 1996, 1995 and 1994
1996 1995 1994 ---- ---- ---- Net revenues $25,679,017 100.0% $20,300,361 100.0% $23,118,193 100.0% Product costs 8,261,583 32.2% 7,143,795 35.2% 7,745,258 33.5% ----------- ----- ----------- ----- ----------- ----- Gross margin 17,417,434 67.8% 13,156,566 64.8% 15,372,935 66.5% ----------- ----- ----------- ----- ----------- ----- Costs and expenses: Sales and marketing 9,888,558 38.5% 8,918,867 44.0% 11,039,663 47.8% General and administrative 2,556,757 10.0% 2,456,990 12.1% 2,627,649 11.4% Research and development 3,170,937 12.3% 2,151,069 10.6% 1,152,382 5.0% ----------- ----- ----------- ----- ----------- ----- 15,616,252 60.8% 13,526,926 66.6% 14,819,694 64.1% ----------- ----- ----------- ----- ----------- ----- Operating income (loss) 1,801,182 7.0% (370,360) (1.8)% 553,241 2.4% Other income (expense), net (262,374) (1.0)% (53,925) (0.3)% 20,118 0.1% ----------- ----- ----------- ----- ----------- ----- Income (loss) before taxes and cumulative effect of accounting change 1,538,808 6.0% (424,285) (2.1)% 573,359 2.5% Provision for income taxes 585,236 2.3% 10,548 0.1% 253,169 1.1% ----------- ----- ----------- ----- ----------- ----- Income (loss) before cumulative effect of accounting change 953,572 3.7% (434,833) (2.1)% 320,190 1.4% Cumulative effect of accounting change -- -- -- -- 800,000 3.5% ----------- ----- ----------- ----- ----------- ----- Net income (loss) $953,572 3.7% $(434,833) (2.1)% $1,120,190 4.8% =========== ===== =========== ===== =========== =====
Net income (loss) per common and common equivalent share: Primary and Fully diluted Income (loss) before cumulative effect of accounting change $ 0.26 $ (0.14) $ 0.10 Cumulative effect of accounting change 0.00 0.00 0.25 $ 0.26 $ (0.14) $ 0.35 Weighted average common and common equivalent shares used to compute income (loss) per share: Primary and Fully diluted 3,614,963 3,146,124 3,219,705
See Notes to Consolidated Financial Statements 25 27 INTERNATIONAL MICROCOMPUTER SOFTWARE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Years Ended June 30, 1996, 1995, and 1994
Notes Cumulative Receivable from Common Stock Accumulated Translation ------------ Shares Amount Deficit Adjustment Shareholders ------ ------ ------- ---------- ------------ Balance at July 1, 1993 2,688,298 $4,233,528 $(2,862,726) $(52,009) $(299,500) Issuance of common stock for cash 301,695 1,338,345 -- -- -- Issuance of common stock for inventory and prepaid royalties 15,287 100,000 -- -- -- Loan to shareholder -- -- -- -- (43,908) Issuance of common stock under stock bonus plan 36,844 39,501 -- -- -- Issuance of common stock for options exercised 73,760 77,375 -- -- -- Repurchase and cancellation of stock (16,500) (17,000) -- -- 10,000 Payment of principal on notes receivable 40,450 Net income -- -- 1,120,190 Foreign currency translation -- -- -- (9,881) -- --------- ---------- ----------- ------- --------- Balance at June 30, 1994 3,099,384 5,771,749 (1,742,536) (61,890) (292,958) Issuance of common stock under stock bonus plan 3,321 11,629 -- -- -- Issuance of common stock for options exercised 70,599 80,398 -- -- -- Forgiveness of principal on notes receivable -- -- -- -- 27,500 Net loss -- -- (434,833) -- -- Foreign currency translation -- -- -- 38,166 -- --------- ---------- ----------- ------- --------- Balance at June 30, 1995 3,173,304 5,863,776 (2,177,369) (23,724) (265,458) Issuance of common stock under stock bonus plan 3,059 14,607 -- -- -- Stock issued for note receivable 2,222 20,000 -- -- (20,000) Issuance of common stock for options exercised 44,540 74,467 -- -- -- Net income -- -- 953,572 -- -- Foreign currency translation -- -- -- 89,938 -- Loan to shareholder -- -- -- -- (8,000) --------- ---------- ----------- ------- --------- Balance at June 30, 1996 3,223,125 $5,972,850 $(1,223,797) $66,214 $(293,458) ========= ========== =========== ======= =========
See Notes to Consolidated Financial Statements 26 28 INTERNATIONAL MICROCOMPUTER SOFTWARE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended June 30, 1996, 1995, and 1994
1996 1995 1994 ---- ---- ---- Cash flows from operating activities: Net income (loss) $ 953,572 $ (434,833) $ 1,120,190 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Cumulative effect of accounting change -- -- (800,000) Depreciation 363,445 351,822 292,925 Amortization 482,035 975,641 362,431 Compensation expense -- 78,642 -- Deferred taxes (402,285) (225,721) 260,433 Loss on equipment write-offs -- 37,279 -- Changes in: -- -- -- Receivables, net (1,530,888) (934,551) (498,056) Inventories (912,462) (337,863) (365,754) Prepaid royalties and licenses (410,624) (102,547) (171,006) Deferred direct marketing costs 140,885 333,849 187,978 Other current assets (79,471) (24,912) (50,146) Accounts payable and accrued expenses 1,256,402 262,124 325,935 Income taxes payable/receivable, net 766,110 260,457 (71,068) Foreign currency translation 89,938 38,166 (14,207) ----------- ----------- ----------- Net cash provided by operating activities 716,657 277,553 579,655 ----------- ----------- ----------- Cash flows from investing activities: Purchases of furniture and equipment (342,826) (356,969) (465,795) Floor Plan acquisition (687,500) -- -- Capitalized software development costs (58,719) (191,460) (992,399) Other (90) (49,910) 22,394 ----------- ----------- ----------- Net cash (used) by investing activities (1,089,135) (598,339) (1,435,800) ----------- ----------- ----------- Cash flows from financing activities: Credit line borrowings 1,525,000 2,245,000 -- Credit line repayments (1,925,000) (1,845,000) (205,000) Borrowings through term loan and other obligations 768,750 -- -- Repayments on capital lease and other obligations (241,175) (118,211) (51,808) Other -- -- 1,542 Proceeds from issuance of common stock-net 109,074 40,885 1,443,222 ----------- ----------- ----------- Net cash provided by financing activities 236,649 322,674 1,187,956 ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents (135,829) 1,888 331,811 Cash and cash equivalents at beginning of period 523,235 521,347 189,536 ----------- ----------- ----------- Cash and cash equivalents at end of the period $ 387,406 $ 523,235 $ 521,347 =========== =========== =========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Interest paid $ 180,484 $ 53,958 $ 19,999 Income taxes paid $ 165,000 $ 7,619 $ 82,953 SUPPLEMENTAL DISCLOSURES OF NON-CASH FINANCING AND INVESTING ACTIVITIES Equipment acquired through capital lease obligations $ 401,263 $ 206,291 $ 252,828 Issuance of common stock for inventory and prepaid royalties -- -- $ 100,000 Other -- $ 78,642 $ 5,000
See Notes to Consolidated Financial Statements 27 29 INTERNATIONAL MICROCOMPUTER SOFTWARE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION International Microcomputer Software, Inc. (IMSI or the Company) was incorporated in California in November 1982. The Company has wholly-owned subsidiaries located in Munich, Germany; Sydney, Australia; London, England; Johannesburg, South Africa and Paris, France. The Company develops, publishes and markets a diversified line of personal computer software and sells complementary computer hardware for use in homes and small businesses. The Company sells its products primarily through a network of dealers and distributors and by direct sales to end users. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of IMSI and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates used in the consolidated financial statements include the estimates of (i) anticipated future gross revenues from products for which software development costs have been capitalized, (ii) provision for income taxes, (iii) the life of identifiable intangible assets from acquisitions, and (iv) realizability of the deferred tax asset. The amounts the Company will ultimately incur or recover could differ materially from the Company's current estimates. The underlying assumptions and facts supporting these estimates could change in fiscal 1997 or thereafter. REVENUE RECOGNITION The Company recognizes revenue, net of estimated returns and allowances, upon shipment of a product and only when no significant obligations remain and collectability is probable. Certain of the Company's sales are made to customers under agreements permitting rights of return for stock balancing. CONCENTRATIONS OF CREDIT RISK The Company sells its products principally through a network of distributors and on a direct customer basis. The Company performs ongoing credit evaluations of its distributors and customers' financial condition and generally requires no collateral. ROYALTY AGREEMENTS The Company has entered into certain agreements whereby it is obligated to pay royalties on software published. Software royalties are expensed as product costs during the period in which related revenues are recorded. 28 30 DEFERRED DIRECT MAIL COSTS Deferred direct mail advertising costs consist primarily of design, printing, postage and material costs. Costs are deferred which have been determined to benefit future product sales based on specific response data from customers. Deferred costs are amortized at the earlier of revenue recognition (on a ratable basis) or over a period of approximately two months on the straight line basis. Direct mail costs deferred for the fiscal years ended June 30, 1996, 1995 and 1994, were $3,819,189, $3,961,234 and $6,816,773 respectively. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments purchased with a original maturity of 90 days or less to be cash equivalents. CAPITALIZED SOFTWARE DEVELOPMENT COSTS Costs incurred in the initial design phase of software development are expensed as incurred as research and development. Once the point of technological feasibility is reached, direct production costs (programming and testing) are capitalized. Costs associated with acquired software are capitalized. Total capitalized software development costs at June 30, 1996, 1995 and 1994 were $2,012,607, $1,610,138 and $1,418,678, respectively, less accumulated amortization of $1,740,505, $1,365,299 and $425,791, respectively. Capitalized costs are being amortized ratably as revenues are recognized, but not less than on the straight line basis over an eighteen month period. During the fiscal year ended June 30, 1995, due to rapid technology enhancements, the Company reevaluated the economic lives of products for which it capitalized software acquisition or development costs. As a result, beginning with the quarter ending March 31, 1995, the Company reduced the amortization period from 36 to 18 months. Amortization expense, charged to product costs, was $375,206, $939,507 and $341,866 in fiscal years 1996, 1995 and 1994, respectively. The Company evaluates the estimated net realizable value of each software product at each balance sheet date and records writedowns to net realizable value for any products for which the carrying value is in excess of the net estimated realizable value. INVENTORIES Inventories, consisting primarily of diskettes, manuals, hardware, freight in, production costs and packing supplies, are valued at the lower of cost or market and are accounted for on the first-in, first-out basis. FURNITURE AND EQUIPMENT Furniture and equipment are stated at cost. Depreciation of furniture and equipment is computed using accelerated depreciation methods over the estimated useful lives of the respective assets of 5 to 7 years. Depreciation of software and computer equipment is computed using the straight line method over an estimated useful life of 3 years. INCOME TAXES Effective July 1, 1993, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 109 "Accounting for Income Taxes," which requires an asset and liability approach to financial accounting and reporting for income taxes. Adoption of SFAS No. 109 resulted in a cumulative effect benefit of $800,000 or $.25 per share in fiscal 1994. Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax basis of assets and liabilities that will result in taxable or deductible amounts in the future, based on enacted tax laws and rates applicable to the periods in which the differences are 29 31 expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. FOREIGN CURRENCY TRANSLATION The asset and liability accounts of foreign subsidiaries are translated from their respective functional currencies at the rates in effect at the balance sheet date, and revenue and expense accounts are translated at weighted average rates during the periods. Foreign currency translation adjustments are reflected as a separate component of shareholders' equity. Losses resulting from foreign currency transactions were $81,879 in fiscal 1996 and were not material in fiscal 1995 or 1994. NET INCOME (LOSS) PER SHARE Net income (loss) per share is computed based on the weighted average number of common stock and dilutive common stock equivalents outstanding during the periods. In October 1995, the Company's Board of Directors announced a 3 for 2 stock split to shareholders of record as of October 20, 1995 which was effected as a stock dividend distributed to shareholders on November 3, 1995. The accompanying consolidated financial statements have been restated to give retroactive recognition to the stock split. FAIR VALUE OF FINANCIAL INSTRUMENTS The Company believes the carrying amount of its financial instruments, which consists primarily of cash and investments, receivables, payables and notes payable, approximates their fair value due to the short term maturity of these instruments. NEW ACCOUNTING STANDARDS The Company is required to adopt Statement of Financial Accounting Standards (SFAS) No.123, "Accounting for Stock-Based Compensation" in fiscal 1997. SFAS No. 123 establishes accounting and disclosure requirements using a fair value based method of accounting for stock based employee compensation plans. Under SFAS No. 123 the Company may either adopt the new fair value based accounting method or continue the intrinsic value based method and provide pro forma disclosures of the net income and earnings per share as if the accounting provisions of SFAS No. 123 had been adopted. The Company plans to adopt only the disclosure requirements of SFAS No.123, therefore, such adoption will have no effect on the Company's net earnings or cash flows. The Company is required to adopt SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of" in fiscal 1997. SFAS No.121 establishes recognition and measurement criteria for impairment loses whenever events or changes in circumstances indicate that the carrying value of assets may not be recoverable. The Company does not expect the adoption of SFAS No. 121 to have a material effect on its financial statements. RECLASSIFICATIONS Certain fiscal 1995 and 1994 amounts have been reclassified to conform with the method of presentation in fiscal 1996. 30 32 2. INFORMATION ABOUT FOREIGN OPERATIONS Total assets, net revenues and net income (loss) of U.S., United Kingdom (UK), Australia, Germany, South Africa (SA), France and Rest of World (which includes Japan, the Pacific rim and Latin America) as of and for the years ended June 30 were as follows:
Total Assets: 1996 1995 1994 ---- ---- ---- U.S. $ 8,901,078 $ 5,545,653 $ 5,129,929 U.K. 789,591 667,294 822,140 Australia 541,245 335,335 448,032 Germany 276,074 425,539 352,218 South Africa 243,768 145,221 -- France 82,391 33,750 -- Rest of World 224,231 317,599 -- ------------ ------------ ------------ $ 11,058,378 $ 7,470,391 $ 6,752,319 ============ ============ ============ Net Revenues: U.S. $ 17,064,530 $ 12,900,924 $ 17,700,957 U.K. 2,911,292 2,894,521 3,202,636 Australia 1,891,285 1,798,258 1,370,620 Germany 2,095,072 1,864,341 843,980 South Africa 481,388 222,729 -- France 119,350 -- -- Rest of World 1,116,100 619,588 -- ------------ ------------ ------------ $ 25,679,017 $ 20,300,361 $ 23,118,193 ============ ============ ============ Net income (loss): U.S. $ 1,021,305 $ (323,446) $ 1,087,292 U.K. (3,673) 16,383 6,301 Australia (29,465) (694) (1,853) Germany 74,892 (12,306) 28,450 South Africa (136,890) (63,121) -- France (59,769) (36,461) -- Rest of World 87,172 (15,188) -- ------------ ------------ ------------ $ 953,572 $ (434,833) $ 1,120,190 ============ ============ ============
3. INVENTORIES At June 30, inventories consist of:
1996 1995 ---- ---- Raw materials $ 775,026 $ 771,162 Finished goods 1,959,248 1,040,793 ----------- ----------- 2,734,274 1,811,955 Reserves for Obsolescence (196,181) (186,324) ----------- ----------- $ 2,538,093 $ 1,625,631 =========== ===========
31 33 4. FURNITURE AND EQUIPMENT At June 30, furniture and equipment consist of:
1996 1995 ---- ---- Computer and office equipment $1,912,873 $1,487,135 Software 173,707 167,990 ---------- ---------- 2,086,580 1,655,125 Less accumulated depreciation 985,274 818,515 ---------- ---------- $1,101,306 $ 836,610 ========== ==========
Included in computer and office equipment at June 30, 1996 and 1995 is equipment acquired under capital leases of $401,263 and $459,119, respectively, with accumulated depreciation of $234,419 and $141,567, respectively. 5. CREDIT LINE AND NOTE PAYABLE As of June 30, 1996, the Company had a credit agreement with a bank under which it can borrow the lesser of $1,500,000 or 25% of eligible inventory up to a cap of $500,000 and 80% of eligible accounts receivable, at the bank's index rate plus 1/2% (8.75% at June 30, 1996). The amount of the unused credit line at June 30, 1996 was $ 1,500,000. On September 9, 1996 the bank credit agreement was amended to increase the maximum borrowing to $2,000,000. The line of credit agreement requires the Company to maintain certain financial ratios including net worth and working capital. Under terms of the agreement, all assets not subject to liens of other financial institutions have been pledged as collateral against the line of credit. The credit line expires October 31, 1996. Management believes that the Company will be able to renew or replace such credit agreement with the bank or another financial institution on substantially similar terms. In September 1995, the Company entered into a term loan for $675,000 payable over a three year period in equal monthly installments at an annual rate of 1 percent over the bank's prime rate (9.25% at June 30, 1996)(See Note 10). 6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable and accrued expenses consist of the following at June 30:
1996 1995 ---- ---- Trade accounts payable $3,803,690 $2,831,626 Sales tax and VAT payable 194,083 120,517 Wages, vacation, and bonus payable 375,952 111,916 Contracts payable 21,736 75,000 ---------- ---------- $4,395,461 $3,139,059 ========== ==========
32 34 7. INCOME TAXES Taxes on income are based on income (loss) before taxes as follows:
1996 1995 1994 ---- ---- ---- Domestic $ 1,382,808 $(394,239) $540,461 Foreign 156,000 (30,406) 32,898 ----------- --------- -------- $ 1,538,808 $(424,285) $573,359 =========== ========= ========
The provision for taxes on income for the years ended June 30, 1996, 1995 and 1994 comprised the following:
1996 1995 1994 ---- ---- ---- Current: Federal $ 821,104 $ 123,026 $ 16,723 State 132,417 57,341 (44,987) Foreign 34,000 55,947 21,000 --------- --------- --------- 987,521 236,314 (7,264) --------- --------- --------- Deferred Federal (334,454) (170,834) 245,689 State (67,831) (54,932) 14,744 --------- --------- --------- (402,285) (225,766) 260,433 --------- --------- --------- Total tax provision $ 585,236 $ 10,548 $ 253,169 ========= ========= =========
33 35 Deferred tax balances consisted of the following:
JUNE 30, 1996 1995 ---- ---- Current assets Package design cost $ 19,199 $ 15,485 Allowance for inventory 164,906 63,824 Capitalized inventory costs 113,319 63,922 Allowance for doubtful accounts and returns 455,079 265,743 Other 126,042 42,744 ----------- --------- 878,545 451,718 Noncurrent assets Package design costs 76,796 61,942 NOL carryforward 280,039 265,118 Purchased intangibles 116,771 133,788 Other 25,585 71,812 ----------- --------- 499,191 532,660 ----------- --------- Total assets 1,377,736 984,378 ----------- --------- Current liabilities Deferred direct mail costs (54,566) (98,107) Noncurrent liabilities Capitalized software development costs (50,100) (89,110) ----------- --------- Total liabilities (104,666) (187,217) ----------- --------- Net assets, before allowance 1,273,070 797,161 Valuation allowance (137,702) (64,078) ----------- --------- Net deferred tax assets $ 1,135,368 $ 733,083 =========== =========
The Company has recorded a valuation allowance for foreign deferred tax assets due to the uncertainty of the realization of the assets during the ultimate benefit period. At June 30, 1996, the Company had an operating loss carryforward of approximately $515,000 for federal tax purposes which expires in various amounts in 2000 - 2005. 34 36 The effective tax rate differs from the federal statutory rate of 34% for the years ended June 30 as follows:
1996 1995 1994 ---- ---- ---- Federal tax at statutory rate on net income (loss) before taxes and cumulative effect of accounting change $ 523,260 34.0% $(144,257) (34.0%) $194,942 34.0% State tax provision, net of federal benefit 94,464 6.1% (2,409) (0.6%) 35,193 6.1% Change in valuation allowance 73,624 4.8% 64,078 15.1% -- -- Foreign -- -- (34,947) (8.2%) 21,000 3.7% Unrecognized benefit from foreign losses -- -- 34,159 8.0% -- -- Amortization of intangibles and other 39,888 2.6% 17,174 4.0% -- -- Federal & state research and experimentation credits (146,000) (9.5%) Adjustment to prior years' estimated net assets -- -- 76,750 18.1% 2,034 0.3% --------- ---- --------- ---- -------- ---- Total $ 585,236 38.0% $ 10,548 2.4% $253,169 44.1% ========= ==== ========= ==== ======== ====
8. STOCK OPTIONS AND EMPLOYEE STOCK INCENTIVE PLANS The Company has a qualified and non-qualified employee stock option plans, as amended, that reserves shares of common stock for issuance to employees and consultants. Under the terms of the Plan, the Board may grant stock options to purchase common stock of the Company over a period of ten years at the fair market value at the time of grant. Incentive stock options generally become exercisable on the grant date, although the Board may establish a vesting schedule at the time the options are granted. Unexercised stock options expire in ten years, in the case of incentive stock options, and ten years and two days, in the case of non-qualified stock options, from the date of grant. On April 27, 1987, the Plan was amended to allow the issuance of nonqualified options to purchase common stock at a minimum exercise price of 85% of the fair market value of the common stock on the date of grant. Incentive stock options granted under the revised plan will expire three months after an employee's termination and nonqualified options will expire between three and seven months after an employee's termination. On April 21, 1992, the shareholders approved the 1992 Stock Option Plan, authorizing the issuance of up to 600,000 shares of common stock under the Plan. On November 18, 1993, the Company filed a Form S-8 with the Securities and Exchange Commission registering 37,500 shares of common stock for issuance to employees pursuant to the 1993 Employee Incentive Plan and 35 37 1993 Profit Sharing Plan. The Company issued 36,845 shares of common stock to employees pursuant to the plan in fiscal year 1994. On April 30, 1994, the shareholders approved the 1993 Incentive Plan which increased by 300,000 the number of shares eligible for the Plan. On April 1, 1995, the stockholders approved an amendment to the Company's 1993 Incentive Plan which increased by 150,000 the number of shares eligible for the Plan. On January 19, 1996, the stockholders approved an amendment to the Company's 1993 Incentive Plan which increased by 300,000 the number of shares eligible for the Plan. The following summarizes the activity under the Plans for the fiscal years ended June 30, 1996, 1995 and 1994:
Options outstanding ------------------- Qualified Non-qualified --------- ------------- Price per Price per Shares Share Shares Share ------ ----- ------ ----- Outstanding on July 1, 1993 268,091 $0.33 -$12.33 42,443 $0.72 - $2.33 Granted 63,750 $4.00 - $8.00 15,000 $6.17 Canceled (38,166) $0.54 - $7.00 (15,000) $0.33 Exercised (53,970) $0.54 - $4.00 (23,255) $0.72 - 1.80 ------- ------------- ------- ------------- Outstanding on June 30, 1994 239,705 $0.33 -$12.33 19,188 $0.72 - $1.80 ======= ============= ======== ============= Granted 283,500 $2.83 - $5.33 82,500 $3.50 - 6.00 Canceled (6,000) $3.50 (18,000) $3.50 Exercised (66,099) $0.54 - $3.50 (4,500) $3.50 Outstanding on June 30, 1995 451,106 $0.33 -$12.33 79,188 $0.72 - $6.00 ======= ============= ======= ============= Granted 318,911 $5.50 - $8.50 176,044 $6.25 - $9.50 Canceled (24,630) $0.54- $12.33 (73,638) $0.72 - $3.50 Exercised (28,373) $0.54 - $3.50 (16,167) $0.72 - $1.80 ------- ------------- ------- ------------- Outstanding on June 30, 1996 717,014 $0.33 - $8.50 165,427 $1.80 - $9.50 ======= ============= ======= ============= Exercisable at June 30, 1996 180,072 $0.33 - $4.00 18,177 $1.80 - $9.00 ======= ============= ======= =============
The Company has several notes receivable from officers and directors which are collateralized by shares of common stock and bear interest at rates ranging from 5.34% to 7.91%, and are due in various amounts through fiscal year 2005. The principal balances on these notes are shown as a reduction to shareholders' equity in the consolidated balance sheets. 36 38 9. COMMITMENTS The Company leases its facilities and certain equipment under various noncancelable operating lease agreements. The Company also leases equipment under capital equipment leases which expire at various dates through 2001. The Company is required to pay property taxes, insurance, and normal maintenance costs on certain leases. Future minimum payments for capital leases and other obligations and rental commitments for noncancelable operating leases with remaining terms of over one year at June 30, 1996 are as follows: Year ending June 30:
Capital Lease Obligations Operating Leases 1997 $261,734 $418,553 1998 188,049 106,437 1999 97,118 30,136 2000 21,703 41,346 2001 10,851 41,333 -------- -------- Total minimum lease payments 579,455 $637,805 ======== Less amount representing interest 64,493 -------- Capital lease obligations 514,962 Less current portion 231,641 -------- Long term portion $283,321 ========
Total rent expense for all operating leases was $467,214, $402,124 and $261,175 for the fiscal years ended June 30, 1996, 1995, and 1994 respectively. The Company previously leased a building from a partnership in which certain shareholders, including the Chairman of the Company, are partners. The Company terminated its lease with the above mentioned partnership in fiscal 1995. Total rent expense under this lease was $47,786 and $129,018 for the years ended June 30, 1995 and 1994. 10. ACQUISITION In September 1995 the Company entered into an agreement with Forte/ComputerEasy International, Inc. to acquire certain assets including the software assets known as FloorPlan, FloorPlan 3D, and 3D Design for approximately $687,500 (see Note 5 regarding related term loan). The acquisition was accounted for as a purchase with $343,750 allocated to capitalized software development costs and $343,750 allocated to intangibles (amortized over three years). 37 39 SCHEDULE II INTERNATIONAL MICROCOMPUTER SOFTWARE, INC. AND SUBSIDIARIES Valuation and Qualifying Accounts Years ended June 30, 1996, 1995 and 1994
Column A Column B Column C Column D Column E Additions Balance at charged to Balance at beginning of costs and end of period Description period Expenses Deductions Year ended June 30, 1996: Allowance for doubtful accounts and returns $777,718 $4,016,890 $3,493,099 $1,301,509 -------- ---------- ---------- ---------- Year ended June 30, 1995: Allowance for doubtful accounts and returns $163,437 $3,172,028 $2,557,747 $ 777,718 -------- ---------- ---------- ---------- Year ended June 30, 1994: Allowance for doubtful accounts and returns $125,180 $1,537,575 $1,499,318 $ 163,437 -------- ---------- ---------- ----------
38 40 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of San Rafael, State of California on September 20, 1996. INTERNATIONAL MICROCOMPUTER SOFTWARE, INC. By: /s/ MARTIN SACKS ----------------------------------- Martin Sacks Chief Executive Officer, President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities and on September 20, 1996. By: /s/ MARTIN SACKS ----------------------------------- Martin Sacks Chief Executive Officer, President and Director By: /s/ GEOFFREY KOBLICK ----------------------------------- Geoffrey Koblick Chairman of the Board of Directors, Secretary and General Counsel By: /s/ ROBERT MAYER ----------------------------------- Robert Mayer Vice President Sales and Director By: /s/ MARK H. COSMEZ II ----------------------------------- Mark H. Cosmez II Vice President Finance and Chief Financial Officer (Principal Financial and Accounting Officer) By: /s/ CHARLES FEDERMAN ----------------------------------- Charles Federman Director By: /s/ EARL HAMLIN ----------------------------------- Earl Hamlin Director By: /s/ GORDON LANDIES ----------------------------------- Gordon Landies Director 39 41 INTERNATIONAL MICROCOMPUTER SOFTWARE, INC. 1996 FORM 10-K ANNUAL REPORT EXHIBIT INDEX
Exhibit Number EXHIBIT TITLE Page - -------------- ------------- ----- 3.1 Restated Articles of Incorporation of the Company. (1) - 3.2 Bylaws, as amended. (1) - 10.1 Commercial Lease and Deposit Receipt between the Registrant and Miracle Mile Partners, a California Limited Partnership, dated November 11, 1992. (3) - 10.2 Software Sale Agreement, dated August 11, 1993 between the Company and Bloc Development Corporation, a Florida corporation and Bloc Publishing Corporation. (3) - 10.3 Software Development and Technology License Agreement, dated August 4, 1993 between the Company and Media Cybernetics. (3) - 10.4 1993 Stock Option Plan (2) - 10.5 Loan Agreement between the Registrant and Westamerica Bank, dated November 14, 1994. (4) 10.6 Promissory Note and Commercial Security Agreement between the Registrant and Westamerica Bank, dated September 21, 1995. (4) 10.7 Commercial Sublease Agreement between the Registrant and Headlands Mortgage Company, dated September 28, 1994. (4) 10.8 Commercial Lease Agreement between the Registrant and Price Enterprises, Inc., dated December 12, 1994. (4) 10.9 Amendments to Loan Agreement between the Registrant and Westamerica Bank, dated October 30, 1995 and September 9, 1996. 21.1 Subsidiaries of the Registrant 23.1 Consent of Deloitte & Touche LLP 23.2 Consent of Coopers & Lybrand L.L.P. 27 Financial Data Schedule
40 42 - ------------------ (1) Incorporated by reference to exhibits to the Company's registration statement on Form S-3 filed on September 22, 1993, file no. 33-69206. (2) Incorporated by reference to Exhibits to the Company's registration statement on Form S-8 filed on August 11, 1993. (3) Incorporated by reference to exhibits to the Company's Annual Report on Form 10-K for the year ended June 30, 1993, as amended. (4) Incorporated by reference to exhibits to the Company's Annual Report on Form 10-K for the year ended June 30, 1995. 41 EX-10.9 2 EXHIBIT 10.9 1 CHANGE IN TERMS AGREEMENT
- ----------------------------------------------------------------------------------------------------------------------------------- Principal Loan Date Maturity Loan No. Call Collateral Account Officer Initials $1,500,000.00 10-31-1996 501-61065 - ---------------------------------------------------------------------------------------------------------------------------------- References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular plan or item. - ----------------------------------------------------------------------------------------------------------------------------------
BORROWER: INTERNATIONAL MICROCOMPUTER SOFTWARE, INC. 1895 EAST FRANCISCO BOULEVARD SAN RAFAEL, CA 94901-5568 LENDER: WESTAMERICA BANK MARIN CREDIT ADMINISTRATION 1177 EAST FRANCISCO BOULEVARD SUITE B SAN RAFAEL, CA 94901 ================================================================================ PRINCIPAL AMOUNT: $1,500,000.00 DATE OF AGREEMENT: OCTOBER 30, 1995 DESCRIPTION OF EXISTING INDEBTEDNESS. THAT CERTAIN NOTE DATED JANUARY 13, 1994 IN THE ORIGINAL AMOUNT OF $750,000.00, WHICH WAS SUBSEQUENTLY INCREASED TO $1,500,000.00, CURRENTLY MATURING ON OCTOBER 31, 1995 WITH AN OUTSTANDING BALANCE AS OF THIS DATE OF $350,000.00. DESCRIPTION OF COLLATERAL. THIS NOTE IS SECURED BY THAT CERTAIN COMMERCIAL SECURITY AGREEMENT DATED APRIL 19, 1993. DESCRIPTION OF CHANGE IN TERMS. EFFECTIVE THE DATE OF THIS AGREEMENT THE MATURITY DATE IS CHANGED FROM OCTOBER 31, 1995 TO OCTOBER 31, 1996. EFFECTIVE THE DATE OF THIS AGREEMENT THE INTEREST RATE IS CHANGED FROM WESTAMERICA BANK'S INDEX RATE PLUS 0.75% TO WESTAMERICA BANK'S INDEX RATE PLUS 0.50% FLOATING DAILY. ACCRUED INTEREST SHALL BE PAYABLE ON THE LAST DAY OF EACH MONTH BEGINNING NOVEMBER 30, 1995 AND ON OCTOBER 31, 1996 ALL OUTSTANDING PRINCIPAL PLUS ALL ACCRUED BUT UNPAID INTEREST SHALL BE DUE AND PAYABLE. EFFECTIVE THE DATE OF THIS AGREEMENT THE FOLLOWING PROVISION IN THAT CERTAIN LOAN AGREEMENT DATED NOVEMBER 14, 1994 IS AMENDED AS FOLLOWS: ** BORROWER SHALL MAINTAIN A MAXIMUM RATIO OF TOTAL LIABILITIES TO TANGIBLE NET WORTH OF 2.25:1.00. BORROWER AGREES THAT UPON EXECUTION OF THIS AGREEMENT TO PAY A LOAN FEE OF $3,750.00 PLUS A DOCUMENTATION FEE OF $100.00. CONTINUING VALIDITY. Except as expressly changed by this Agreement, the terms of the original obligation or obligations, including all agreements evidenced or securing the obligation(s), remain unchanged and in full force and effect. Consent by Lender to this Agreement does not waive Lender's right to strict performance of the obligation(s) as changed, nor obligate Lender to make any future change in terms. Nothing in this Agreement will constitute a satisfaction of the obligation(s). It is the intention of Lender to retain as liable parties all makers and endorsers of the original obligation(s), including accommodation parties, unless a party is expressly released by Lender in writing. Any maker or endorser, including accommodation makers, will not be released by virtue of this Agreement. If any person who signed the original obligation does not sign this Agreement below, then all persons signing below acknowledge that this Agreement is given conditionally, based on the representation to Lender that the non-signing party consents to the changes and provisions of this Agreement or otherwise will not be released by it. This waiver applies not only to any initial extension, modification or release, but also to all such subsequent actions. PRIOR TO SIGNING THIS AGREEMENT, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS AGREEMENT, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO THE TERMS OF THE AGREEMENT AND ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THE AGREEMENT. BORROWER: INTERNATIONAL MICROCOMPUTER SOFTWARE, INC. By: /s/ Martin Sacks ---------------------------------------- MARTIN SACKS, PRESIDENT ================================================================================ 2 CORPORATE RESOLUTION TO BORROW
- --------------------------------------------------------------------------------------------------------------------------------- PRINCIPAL LOAN DATE MATURITY LOAN NO CALL COLLATERAL ACCOUNT OFFICER INITIALS $2,000,000.00 10-31-1996 501-61065 - ---------------------------------------------------------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan or item. - -------------------------------------------------------------------------------- BORROWER: INTERNATIONAL MICROCOMPUTER LENDER: WESTAMERICA BANK SOFTWARE, INC. MARIN CREDIT ADMINISTRATION 1895 EAST FRANCISCO BOULEVARD 1177 EAST FRANCISCO BOULEVARD SAN RAFAEL, CA 94901 SUITE B SAN RAFAEL, CA 94901 ================================================================================ I, the undersigned Secretary or Assistant Secretary of INTERNATIONAL MICROCOMPUTER SOFTWARE, INC. (the "Corporation"), HEREBY CERTIFY that the Corporation is organized and existing under and by virtue of the laws of the State of California as a corporation for profit, with its principal office at 1895 EAST FRANCISCO BOULEVARD, SAN RAFAEL, CA 94901, and is duly authorized to transact business in the State of California. I FURTHER CERTIFY that at a meeting of the Directors of the Corporation, duly called and held on SEPTEMBER 9, 1996, at which a quorum was present and voting, or by other duly authorized corporate action in lieu of a meeting, the following resolutions were adopted: BE IT RESOLVED, that any one (1) of the following named officers, employees, or agents of this Corporation, whose actual signatures are shown below: NAME POSITION ACTUAL SIGNATURE ---- -------- ---------------- GEOFFREY KOBLICK CHAIRMAN OF THE BOARD X /s/ Geoffrey Koblick ----------------------- acting for and on behalf of the Corporation and as its act and deed be, and he or she hereby is, authorized and empowered: BORROW MONEY. To borrow from time to time from WESTAMERICA BANK ("Lender"), on such terms as may be agreed upon between the Corporation and Lender, such sum or sums of money as in his or her judgment should be borrowed; however, not exceeding at any one time the amount of TWO MILLION SEVEN HUNDRED THOUSAND & 00/100 DOLLARS ($2,700,000.00), in addition to such sum or sums of money as may be currently borrowed by the Corporation from Lender. EXECUTE NOTES. To execute and deliver to Lender the promissory note or notes, or other evidence of credit accommodations and/or revision agreement or other evidence of obligation of the Corporation, on Lender's forms, as such rates of interest and on such terms as may be agreed upon, evidencing the sums of money so borrowed or any indebtedness of the Corporation to Lender, and also to execute and deliver to Lender one or more renewals, extensions, modifications, refinancings, consolidations, or substitutions for one or more of the notes, any portion of the notes, or any other evidence of credit accommodations. GRANT SECURITY. To mortgage, pledge, transfer, endorse, hypothecate, or otherwise encumber and deliver to Lender, as security for the payment of any loans or credit accommodations so obtained, any promissory notes so executed (including any amendments to or modifications, renewals, and extensions of such promissory notes), or any other or further indebtedness of the Corporation to Lender at any time owing, however the same may be evidenced, any property now or hereafter belonging to the Corporation or in which the Corporation now or hereafter may have an interest, including without limitation all real property and all personal property (tangible or intangible) of the Corporation. Such property may be mortgaged, pledged, transferred, endorsed, hypothecated, or encumbered at the time such loans are obtained or such indebtedness is incurred, or at any other time or times, and may be either in addition to or in lieu of any property theretofore mortgaged, pledged, transferred, endorsed, hypothecated, or encumbered. EXECUTE SECURITY DOCUMENTS. To execute and deliver to Lender the forms of mortgage, deed of trust, pledge agreement, hypothecation agreement, and other security agreements and financing statements which may be required by Lender, and which shall evidence the terms and conditions under and pursuant to which such liens and encumbrances, or any of them, are given; and also to execute and deliver to Lender any other written instruments, any chattel paper, or any other collateral, of any kind or nature, which Lender may deem necessary or proper in connection with or pertaining to the giving of the liens and encumbrances. NEGOTIATE ITEMS. To draw, endorse, and discount with Lender all drafts, trade acceptances, promissory notes, or other evidences of indebtedness payable to or belonging to the Corporation in which the Corporation may have an interest, and either to receive cash for the same or to cause such proceeds to be credited to the account of the Corporation with Lender, or to cause such other disposition of the proceeds derived therefrom as they may deem advisable. FURTHER ACTS. In the case of lines of credit, to designate additional or alternate individuals as being authorized to request advances thereunder, and in all cases, to do and perform such other acts and things, to pay any and all fees and costs, and to execute and deliver such other documents and agreements, INCLUDING AGREEMENTS WAIVING THE RIGHT TO A TRIAL BY JURY, as he or she may in his or discretion deem reasonably necessary or proper in order to carry into effect the provisions of these Resolutions. The following person or persons currently are authorized to request advances and authorize payments under the line of credit until Lender receives written notice of revocation of their authority: MARTIN SACKS, PRESIDENT; MARK H. COSMEZ II, VICE PRESIDENT/CFO; and ROBIN NEHASIL, CONTROLLER. BE IT FURTHER RESOLVED, that any and all acts authorized pursuant to these Resolutions and performed prior to the passage of these Resolutions are hereby ratified and approved, that these Resolutions shall remain in full force and effect and Lender may rely on these Resolutions until written notice of his or her revocation shall have been delivered to and received by Lender. Any such notice shall not affect any of the Corporation's agreements or commitments in effect at the time notice is given. BE IT FURTHER RESOLVED, that the Corporation will notify Lender in writing at Lender's address shown above (or such other addresses as Lender may designate from time to time) prior to any (a) change in the name of the Corporation, (b) change in the assumed business name(s) of the Corporation, (c) change in the management of the Corporation, (d) change in the authorized signer(s) or (e) change in any other aspect of the Corporation that directly or indirectly relates to any agreements between the Corporation and the Lender. No change in the name of the Corporation will take effect until after Lender has been notified. I FURTHER CERTIFY that the officer, employee, or agent named above is duly elected, appointed, or employed by or for the Corporation, as the case may be, and occupies the position set opposite the name; that the foregoing Resolutions now stand of record on the books of the Corporation; and that the Resolutions are in full force and effect and have not been modified or revoked in any manner whatsoever. The Corporation has no corporate seal, and therefore, no seal is affixed to this certificate. 3 CHANGE IN TERMS AGREEMENT
- ----------------------------------------------------------------------------------------------------- PRINCIPAL LOAN DATE MATURITY LOAN NO CALL COLLATERAL ACCOUNT OFFICER INITIALS $2,000,000.00 10-31-1996 501-61065 - ----------------------------------------------------------------------------------------------------- References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan or item. - -----------------------------------------------------------------------------------------------------
Borrower: INTERNATIONAL MICROCOMPUTER SOFTWARE, Lender: WESTAMERICA BANK INC. MARIN CREDIT ADMINISTRATION 1895 EAST FRANCISCO BOULEVARD 1177 EAST FRANCISCO BOULEVARD SUITE B SAN RAFAEL, CA 94901 SAN RAFAEL, CA 94901 ==================================================================================================== Principal Amount: $2,000,000.00 Date of Agreement: September 9, 1996
DESCRIPTION OF EXISTING INDEBTEDNESS. THAT CERTAIN NOTE DATED JANUARY 13, 1994 IN THE ORIGINAL AMOUNT OF $750,000.00, WHICH WAS SUBSEQUENTLY INCREASED TO $1,500,000.00, CURRENTLY MATURING ON OCTOBER 31, 1996 WITH AN OUTSTANDING BALANCE AS OF THIS DATE OF $850,000.00. DESCRIPTION OF COLLATERAL. THIS NOTE IS SECURED BY THAT CERTAIN COMMERCIAL SECURITY AGREEMENT DATED APRIL 19, 1993. DESCRIPTION OF CHANGE IN TERMS. EFFECTIVE THE DATE OF THIS AGREEMENT THE FACE AMOUNT OF THE NOTE IS INCREASED FROM $1,500,000.00 TO $2,000,000.00. ACCRUED INTEREST SHALL BE PAYABLE ON THE LAST DAY OF EACH MONTH BEGINNING SEPTEMBER 30, 1996, AND ON OCTOBER 31, 1996 ALL OUTSTANDING PRINCIPAL PLUS ALL ACCRUED BUT UNPAID INTEREST SHALL BE DUE AND PAYABLE. EFFECTIVE THE DATE OF THIS AGREEMENT THE FOLLOWING PROVISION IN THAT CERTAIN LOAN AGREEMENT DATED NOVEMBER 14, 1994 IS HEREBY AMENDED AS FOLLOWS: BORROWING BASE. THE WORDS "BORROWING BASE" MEAN, AS DETERMINED FROM TIME TO TIME, THE LESSER OF (a) $2,000,000.00; OR (b) THE SUM OF (i) 80% OF THE AGGREGATE AMOUNT OF ELIGIBLE ACCOUNTS, PLUS (ii) 25.000% OF THE AGGREGATE AMOUNT OF ELIGIBLE INVENTORY, UP TO A CAP OF $500,000.00. EFFECTIVE THE DATE OF THIS AGREEMENT THAT CERTAIN CORPORATE RESOLUTION TO BORROW DATED JANUARY 29, 1996 IN THE AMOUNT OF $2,500,000.00 EXECUTED BY THE BORROWER IS REPLACED BY A CORPORATE RESOLUTION TO BORROW DATED SEPTEMBER 9, 1996 IN THE AMOUNT OF $2,700,000.00 WHICH SHALL BE EXECUTED BY THE BORROWER. EFFECTIVE THE DATE OF THIS AGREEMENT, THE OFFICERS AUTHORIZED TO REQUEST ADVANCES ARE: MARTIN SACKS, PRESIDENT, MARK H. COSMEZ II, VICE PRESIDENT/CFO AND GEOFFREY KOBLICK, CHAIRMAN OF THE BOARD. BORROWER AGREES THAT UPON EXECUTION OF THIS AGREEMENT TO PAY A LOAN FEE OF $100.00 AND A DOCUMENTATION FEE OF $100.00. CONTINUING VALIDITY. Except as expressly changed by this Agreement, the terms of the original obligation or obligations, including all agreements evidenced or securing the obligation(s), remain unchanged and in full force and effect. Consent by Lender to this Agreement does not waive Lender's right to strict performance of the obligation(s) as changed, nor obligate Lender to make any future change in terms. Nothing in this Agreement will constitute a satisfaction of the obligation(s). It is the intention of Lender to retain as liable parties all makers and endorsers of the original obligation(s), including accommodation parties, unless a party is expressly released by Lender in writing. Any maker or endorser, including accommodation makers, will not be released by virtue of this Agreement. If any person who signed the original obligation does not sign this Agreement below, then all persons signing below acknowledge that this Agreement is given conditionally, based on the representation to Lender that the non-signing party consents to the changes and provisions of this Agreement or otherwise will not be released by it. This waiver applies not only to any initial extension, modification or release, but also to all such subsequent actions. PRIOR TO SIGNING THIS AGREEMENT, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS AGREEMENT. BORROWER AGREES TO THE TERMS OF THE AGREEMENT AND ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THE AGREEMENT. BORROWER: INTERNATIONAL MICROCOMPUTER SOFTWARE, INC. COPY By: /s/ Geoffrey Koblick ---------------------------------------- GEOFFREY KOBLICK, CHAIRMAN OF THE BOARD ================================================================================ Variable Rate. Line of Credit. LASER PRO, Reg. U.S. Pat. & T.M. Off., Ver. 3.22(c) 1994 CFI ProServices, Inc. All rights reserved. [0200161085.LNC2.OVL] EX-21.1 3 EXHIBIT 21.1 1 EXHIBIT 21.1 SUBSIDIARIES OF THE REGISTRANT IMSI (UK) Limited IMSI Australia (PTY) Ltd. IMSI Germany (GmbH) IMSI South Africa Pty Ltd. IMSI France 42 EX-23.1 4 EXHIBIT 23.1 1 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration statements of International Microcomputer Software, Inc. and Subsidiaries on Form S-8 (No. 33-67208, 33-52480 and 33-71872) and Form S-3 (No. 33-69206 and 33-80394) of our report dated August 16, 1996 (September 9, 1996 as to the third sentence of Note 5) appearing the Annual Report on Form 10-K of International Microcomputer Software, Inc. and Subsidiaries for the year ended June 30, 1996. DELOITTE & TOUCHE LLP San Francisco, California September 26, 1996 43 EX-23.2 5 EXHIBIT 23.2 1 EXHIBIT 23.2 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statements of International Microcomputer Software, Inc. and Subsidiaries on Form S-3 (File No. 33-69206 and 33-80394) and Form S-8 (File No. 33-67208, 33-52480 and 33-71872) of our report dated August 28, 1995, except for note 10 for which the date is September 21, 1995, on our audits of the consolidated financial statements and financial statement schedule of International Microcomputer Software, Inc. and Subsidiaries as of June 30, 1995, and for the years ended June 30, 1995 and 1994, which report is included in this Annual Report on Form 10-K. /s/ COOPERS & LYBRAND L.L.P. - ------------------------------- Coopers & Lybrand L. L. P. San Francisco, California September 26, 1996 44 EX-27 6 FINANCIAL DATA SCHEDULE
5 US DOLLARS YEAR JUN-30-1996 JUL-01-1995 JUN-30-1996 1 387,406 0 4,121,210 1,607,338 2,538,093 8,876,058 1,101,306 985,274 11,058,378 5,971,998 0 0 0 5,972,850 (1,351,041) 11,058,378 25,679,017 25,679,017 8,261,583 8,261,583 15,616,252 203,033 262,374 1,538,808 585,236 953,572 0 0 0 953,572 0.26 0.26
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