EXHIBIT 99.1
ALLUME SYSTEMS, INC.
REPORT ON AUDITS OF FINANCIAL STATEMENTS
For the year ended June 30, 2005 and the periods from July 1, 2003 through April
18, 2004 and from April 19, 2004 through June 30, 2005.
TABLE OF CONTENTS
PAGE
----
Report of Independent Registered Public Accounting Firm 1
Balance Sheets at June 30, 2005 and 2004 2
Statements of Operations for the year ended June 30, 2005 and for the periods April 19,
2004 to June 30, 2004 and July 1, 2003 to April 18, 2004 3
Statements of Shareholders' Equity for the year ended June 30, 2005 and for the periods
April 19, 2004 to June 30, 2004 and July 1, 2003 to April 18, 2004 4
Statements of Cash Flows for the year ended June 30, 2005 and for the periods April 19,
2004 to June 30, 2004 and July 1, 2003 to April 18, 2004 5
Notes to Financial Statements 6-16
[BPM LOGO]
BURR, PILGER & MAYER LLP
Accountants and Consultants
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
Allume Systems, Inc.
We have audited the accompanying balance sheets of Allume Systems Inc. as of
June 30, 2005 and 2004, and the related statements of operations, shareholders'
equity, and cash flows for the year ended June 30, 2005 and for the periods from
July 1, 2003 through April 18, 2004 and from April 19, 2004 through June 30,
2004. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). 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 financial position of Allume Systems, Inc. as of June
30, 2005 and 2004, and the results of its operations and its cash flows for the
year ended June 30, 2005 and for the periods from July 1, 2004 through April 18,
2004 and from April 19, 2004 through June 30, 2004 in conformity with accounting
principles generally accepted in the United States of America.
As discussed in Note 2, "Basis of Presentation", on April 18, 2004 ("the
acquisition date") all of the outstanding stock of Allume Systems, Inc. was
acquired by International Microcomputer Software, Inc. The accounts of Allume
Systems, Inc. were adjusted as of the acquisition date using the push down basis
of accounting to recognize the allocation of the consideration paid for the
common stock to the respective net assets acquired.
/s/ Burr, Pilger & Mayer LLP
- ----------------------------
Burr, Pilger & Mayer LLP
San Francisco, California
August 29, 2005
600 CALIFORNIA STREET, SUITE 1300 - SAN FRANCISCO, CA 94108 - TEL: 415 421-5757
- --------------------------------------------------------------------------------
- FAX: 415 288-6288 - WWW.BPMLLP.COM
- --------------------------------------------------------------------------------
MEMBER OF CPA ASSOCIATES INTERNATIONAL, INC.
ALLUME SYSTEMS, INC.
BALANCE SHEETS
(Amounts in thousands, except share amounts)
JUNE 30,
-----------------
2005 2004
------- -------
ASSETS
Current assets:
Cash and cash equivalents $ 46 $ 472
Receivables, less allowances for doubtful accounts,
discounts and returns of $280 and $114 856 950
Inventories, net of reserves for obsolescence of $163 and $0 310 539
Note receivable 6 -
Other current assets 245 132
Deferred tax assets 378 692
------- -------
TOTAL CURRENT ASSETS 1,841 2,785
------- -------
PROPERTY AND EQUIPMENT, NET 209 217
------- -------
Intangible assets:
Capitalized software, net 1,921 1,933
Domain names, net 161 182
Distribution rights, net 322 389
Capitalized customer lists, net 480 605
Trademarks 821 821
Goodwill 6,810 6,810
------- -------
TOTAL INTANGIBLE ASSETS 10,515 10,740
------- -------
Other assets:
Prepaid expenses 43 99
------- -------
TOTAL OTHER ASSETS 43 99
------- -------
TOTAL ASSETS $12,608 $13,841
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 68 $ 182
Trade accounts payable 569 956
Accrued and other liabilities 373 392
------- -------
TOTAL CURRENT LIABILITIES 1,010 1,530
Long-term debt 27 -
Due to parent - 464
Deferred tax liabilities 1,104 1,376
------- -------
TOTAL LIABILITIES 2,141 3,370
------- -------
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value; 20,000,000 authorized;
4,709,086 issued and outstanding 47 47
Additional paid-in capital 10,129 10,361
Retained earnings 291 63
------- -------
TOTAL SHAREHOLDERS' EQUITY 10,467 10,471
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $12,608 $13,841
======= =======
The accompanying notes are an integral part of these financial statements
ALLUME SYSTEMS, INC.
STATEMENTS OF OPERATIONS
(Amounts in thousands)
APRIL 19, 2004 JULY 1, 2003
YEAR ENDED THROUGH JUNE THROUGH APRIL
JUNE 30, 2005 30, 2004 18, 2004
------------- -------------- -------------
Net revenues $ 9,489 $ 1,968 $ 7,091
Product costs 1,904 488 929
--------- ------- -------
GROSS MARGIN 7,585 1,480 6,162
--------- ------- -------
Costs and expenses:
Sales and marketing 3,658 763 2,919
General and administrative 1,106 233 1,022
Research and development 2,459 480 1,772
--------- ------- -------
TOTAL OPERATING EXPENSES 7,223 1,476 5,713
--------- ------- -------
OPERATING INCOME 362 4 449
Interest and other, net 12 14 26
--------- ------- -------
INCOME BEFORE INCOME TAX 374 18 475
Income tax expense (benefit) 146 (45) -
--------- ------- -------
NET INCOME $ 228 $ 63 $ 475
========= ======= =======
The accompanying notes are an integral part of these financial statements
ALLUME SYSTEMS, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED JUNE 30, 2005, AND
FOR THE PERIODS FROM APRIL 19, 2004 THROUGH JUNE 30, 2004, AND
FROM JULY 1, 2003 THROUGH APRIL 18, 2004
(Amounts in thousands, except share amounts)
COMMON STOCK
------------------ ADDITIONAL RETAINED
SHARES AMOUNT PAID-IN CAPITAL EARNINGS TOTAL
--------- ------ --------------- -------- ---------
BALANCE AT JULY 1, 2003 4,709,086 $ 47 $ 782 $ 398 $ 1,227
Net distribution to parent (432) (432)
Net income from July 1, 2003 through April 18, 2004 475 475
Effect of push down basis of accounting 10,011 (873) 9,138
--------- ------ ------------ -------- ---------
BALANCE AT APRIL 18, 2004 4,709,086 47 10,361 - 10,408
Net income from April 19, 2004 through June 30, 2004 63 63
--------- ------ ------------ -------- ---------
BALANCE AT JUNE 30, 2004 4,709,086 47 10,361 63 10,471
Net distribution to parent (232) (232)
Net income for the year ended June 30, 2005 228 228
--------- ------ ------------ -------- ---------
BALANCE AT JUNE 30, 2005 4,709,086 $ 47 $ 10,129 $ 291 $ 10,467
========= ====== ============ ======== =========
The accompanying notes are an integral part of these financial statements
ALLUME SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(Amounts in thousands)
APRIL 19, 2004 JULY 1, 2003
YEAR ENDED THROUGH JUNE THROUGH APRIL
JUNE 30, 2005 30, 2004 18, 2004
------------- -------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 228 $ 63 $ 475
Adjustments to reconcile net income to
net cash generated by operating activities:
Depreciation and amortization 746 116 299
Allowance for doubtful accounts 6 - -
Reserve for returns 106 7 16
Receivables reserve - other 54 - -
Reserve for obsolescence 163 - -
Changes in assets and liabilities:
Receivables (72) (206) 300
Inventories 66 (234) (68)
Note receivable (6) - -
Prepaid expenses and other assets (57) 10 75
Trade accounts payable (387) 669 (173)
Accrued and other liabilities (19) 11 64
Due to parent (696) (196) (724)
Deferred tax asset/liability 42 (46) 730
------------- ------- -----------
NET CASH GENERATED BY OPERATING ACTIVITIES 174 194 994
------------- ------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (55) (7) (55)
Purchase of capitalized software (253) - (50)
------------- ------- -----------
NET CASH USED IN INVESTING ACTIVITIES (308) (7) (105)
------------- ------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings 140 - -
Repayment of debt (432) (327) (23)
Net distribution to parent - - (432)
------------- ------- -----------
NET CASH USED IN FINANCING ACTIVITIES (292) (327) (455)
------------- ------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (426) (140) 434
Cash and cash equivalents at beginning of period 472 612 178
------------- ------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 46 $ 472 $ 612
============= ======= ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ - $ - $ 14
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING ACTIVITIES
Effect of push down basis of accounting $ - $ - $ 9,138
Intangible assets acquired through notes payable $ 205 $ - $ -
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES
Net distribution to parent $ 232 $ - $ -
The accompanying notes are an integral part of these financial statements
ALLUME SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Allume Systems, Inc. ("Allume" or the "Company") develops, publishes, and
distributes computer software for the Macintosh, Windows, Solaris, and Linux
software markets. Products are marketed through independent distributors in the
United States and Canada, through resellers and mail order companies in other
countries, directly to corporate accounts under site licensing agreements, and
directly to end-users through direct marketing and the Internet.
Basis of presentation
International Microcomputer Software, Inc. ("IMSI") completed the acquisition of
all the outstanding stock of Allume (formerly Aladdin Systems, Inc. ("Aladdin"))
on April 18, 2004. In connection with this acquisition, the accounts of the
Company have been adjusted using the push down basis of accounting to recognize
the allocation of the consideration paid for the common stock to the respective
net assets acquired. In accordance with the push down basis of accounting, the
Company's net assets were adjusted to their fair values as of the date of the
acquisition which resulted in 1) an increase in goodwill and identifiable
intangible assets, 2) an increase in deferred taxes, and 3) an increase in the
equity section from these adjustments. As of June 30, 2005 and 2004, the Company
was a 100% owned subsidiary of IMSI. The financial statements present the
stand-alone statements of the Company and accordingly may not be indicative of
the financial condition and results of operations had the Company operated
independent of IMSI. Corporate expenses were allocated amongst IMSI and its
subsidiaries based on resource allocations.
IMSI purchased the Company for a combination of cash, stock and notes from its
parent company, Aladdin Systems Holdings, Inc. ("Holdings") and subsequently
changed the Company's name to Allume Systems, Inc.
Revenue recognition
Revenues and accounts receivable are principally derived from:
- Distributors and resellers of the Company's products
- The Company's websites
- Third party products
- Licensing contracts
Sales to distributors and resellers are subject to agreements permitting rights
of return for stock balancing. These revenues are recognized net of reserves for
returns and rebates. Return reserves are based on actual inventory held by
distributors or resellers that is in excess of levels appropriate for that
channel and is likely to be returned. Based on estimated release dates for the
next versions, the Company monitors the channel inventory and only ships product
when the sell through to the customer will be probable. The Company recognizes
revenue, net of estimated returns and rebates, upon shipment of the product,
when no significant obligations remain and collectibility is probable. Revenues
from internet sales are recognized when the software is downloaded or shipped to
the customer. Revenues from third party products make up a portion of internet
sales and the Company recognizes as revenue the net fee the Company collects for
facilitating the sale. Licensing fees are recognized upon delivery of the
software or when the customer has committed to renew their annual fee, as the
Company is not obligated to provide any other deliverables in connection with
these licenses.
Page 6 of 16
ALLUME SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
Use of estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses during
the reported period. Actual results could differ from those estimates.
Cash and cash equivalents
We consider all highly liquid investments purchased with an original maturity of
three months or less to be cash equivalents. We did not have any cash held in
foreign financial institutions as of June 30, 2005 and 2004.
Accounts receivable
The majority of the Company's accounts receivable is due from domestic and
international distributors and from Digital River, the Company's Website
partner. All customer orders that are placed directly on the Website are
processed by Digital River. Digital River collects these revenues and forwards
the funds, less appropriate fees, twice per month to the Company. Credit is
extended based on evaluation of the customers' financial condition and
collateral is not required. The Company maintains allowances for estimated
product returns resulting from new version releases. Management regularly
evaluates the allowance for returns account. As of June 30, 2005 the Company
recorded an allowance for doubtful accounts of $6,000. Based on historical
write-off experience prior to that date, the Company did not maintain an
allowance for doubtful accounts. Therefore, the allowance listed on the balance
sheet for periods other than June 30, 2005 is only for expected returns of
software. If the financial condition of customers were to deteriorate, resulting
in an impairment of their ability to make payments, an additional allowance for
doubtful accounts would be required.
Capitalized software
The Company's research and development costs related to new versions of existing
products are charged to operations when incurred.
Costs incurred in the initial design phase of new software products are expensed
as incurred as research and development. Once the point of technological
feasibility is reached, direct production costs are capitalized. The Company
ceases capitalizing computer software costs when the product is available for
general release to customers. Costs associated with acquired completed software
are capitalized.
The Company amortizes capitalized software development costs on a
product-by-product basis. The amortization charged to operations in each period
for each product is the greater of the amount computed using (a) the ratio of
current gross revenues to the total of current and anticipated future gross
revenues for the product or (b) 60 months. In addition, the Company evaluates
the net realizable value of each software product at each balance sheet date and
records write-downs to net realizable value for any products for which the
carrying value is in excess of the estimated net realizable value.
Domain names
Domain names represent internet addresses, which are registered by the Company
for its exclusive use. These domain names are used in Uniform Resource Locators
(URLs), which users type into their Internet browsers to view proprietary web
sites. Domain names are being amortized over a period of 60 months.
Page 7 of 16
ALLUME SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
Distribution rights
Distribution rights are being amortized over a period of 72 months.
Capitalized customer lists
Customer lists are being amortized over a period of 60 months.
Trademarks
Trademarks have indefinite lives and therefore are not being amortized.
Goodwill
In accordance with SFAS No. 142, Goodwill and Intangible Assets, goodwill is
being assessed for impairment annually or more frequently if circumstances
indicate impairment. We have not recognized any impairment related to goodwill
during the twelve months ended June 30, 2005 and during the periods July 1, 2003
to April 18, 2004 and April 19, 2004 to June 30, 2004.
Inventories
The Company's inventories are valued at the lower of cost or market and are
accounted for on the first-in, first-out basis. Management performs periodic
assessments to determine the existence of obsolete, slow moving and non-salable
inventories, and records necessary provisions to reduce such inventories to net
realizable value.
Property and equipment
The Company's property and equipment are stated at cost. Capital leases are
recorded at the present value of the minimum lease payments at the date of
acquisition. Depreciation is computed on a straight-line basis over the
estimated useful lives of the assets or lease term, whichever is shorter.
Advertising
The Company expenses advertising costs as they are incurred. Advertising and
related promotion expenses for the twelve months ended June 30, 2005 and during
the periods July 1, 2003 to April 18, 2004 and April 19, 2004 to June 30, 2004
were $587,000, $651,000 and $155,000, respectively.
In conjunction with the acquisition of DevDepot, the Company acquired the rights
to one two-page spread advertisement and one full page advertisement (non
premium space) in each issue of Mac Tech published during the three (3) year
period following the Closing. $155,000 of the DevDepot purchase price was
allocated to the prepaid advertising asset and is amortized at $4,300 a month
for three years.
Income taxes
Income taxes are computed using the asset and liability method. Deferred income
tax assets and liabilities are determined based on the differences between the
financial reporting and tax bases of assets and liabilities and are measured
using the currently enacted tax rates and laws. Valuation allowances are
established when necessary to reduce deferred tax assets to the amounts expected
to be realized.
Fair value of financial instruments
The fair value of cash and cash equivalents, trade receivables, trade payables
and debt approximates carrying value due to the short maturity of such
instruments.
Page 8 of 16
ALLUME SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
Stock-based compensation
The Company accounts for stock-based awards to employees using the intrinsic
value method described in Accounting Principles Board Opinion (APB) No. 25,
"Accounting for Stock Issued to Employees" and its related interpretations.
Accordingly, no compensation expense has been recognized in the accompanying
financial statements for stock-based awards to employees when the exercise price
of the award is equal to or greater than the quoted market price of the stock on
the date of the grant.
SFAS No. 123, "Accounting for Stock-Based Compensation" and SFAS No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure - an
amendment of FASB Statement No. 123" require disclosures as if the Company had
applied the fair value method to employee awards rather than the intrinsic value
method. The fair value of stock-based awards to employees is calculated through
the use of option pricing models, even though such models were developed to
estimate the fair value of freely tradable, fully transferable options without
vesting restrictions, which differ significantly from the Company's stock option
awards. These models also require subjective assumptions, including future stock
price volatility and expected time to exercise, which greatly affect the
calculated values. The Company's fair value calculations for awards from stock
option plans were made using the Black-Scholes option pricing model with the
following weighted average assumptions for the year ended June 30, 2005 and the
periods ended June 30, 2004 and April 18, 2004: expected term, ten years from
the date of grants; stock price volatility of 62.83%, 63.31% and 99.87%,
respectively; risk free interest rate of 4.31%, 4.62% and 4.1%, respectively;
and no dividends during the expected term. If the computed fair values of the
stock-based awards had been amortized to expense over the vesting period of the
awards, net income would have been as follows:
April 19, 2004 July 1, 2003
Year Ended through June through April 18,
June 30, 2005 30, 2004 2004
------------- -------------- -----------------
Net income, as reported $ 228,000 $ 63,000 $ 475,000
Add: intrinsic compensation charge recorded under APB
25, net of tax - - -
Deduct: pro forma compensation charge under SFAS 123,
net of tax (130,000) (128,000) (103,000)
Pro forma net income (loss) $ 98,000 $ (65,000) $ 372,000
NOTE 2 - PRODUCT LINE ACQUISITION
On May 11, 2004 we entered into an asset purchase agreement with DevDepot, LLC,
whereby we acquired certain assets of DevDepot. The assets included inventories,
customers' profiles, rights to all contracts and license agreements in addition
to certain interests in intellectual properties related to the business. The
consideration for the acquisition was paid in a combination of cash in the
amount of $525,000 and 112,000 unregistered common shares valued at $128,996
based on the three-day average of IMSI common stock before the closing date. A
portion of the stock tendered as part of the acquisition was subject to an
escrow period.
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment consisted of:
Page 9 of 16
ALLUME SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
As of June 30,
Useful Lives ----------------------
(years) 2005 2004
--------- ----------
Computer equipment 5 $ 197,000 $ 143,000
Office equipment 5 29,000 29,000
Furniture and fixtures 5 44,000 44,000
Building improvements 5 1,000 -
Displays 5 18,000 18,000
--------- ----------
289,000 234,000
Less accumulated depreciation (80,000) (17,000)
--------- ----------
$ 209,000 $ 217,000
========= ==========
Depreciation expenses were $63,000, $74,000 and $17,000 for the twelve months
ended June 30, 2005 and the periods July 1, 2003 to April 18, 2004 and April 19,
2004 to June 30, 2004 respectively.
NOTE 4 - SOFTWARE DEVELOPMENT COSTS AND LICENSE FEES
Capitalized software development costs and license fees consist of the
following:
As of June 30,
-------------------------
2005 2004
----------- -----------
Acquired cost $ 2,441,000 $ 2,000,000
Accumulated amortization (520,000) (67,000)
----------- -----------
Capitalized software and license fees, net $ 1,921,000 $ 1,933,000
=========== ===========
NOTE 5 - DOMAIN NAMES
Capitalized domain names consist of the following:
As of June 30,
---------------------
2005 2004
--------- ---------
Acquired cost $ 201,000 $ 184,000
Accumulated amortization (40,000) (2,000)
--------- ---------
Capitalized domain names, net $ 161,000 $ 182,000
========= =========
NOTE 6 - DISTRIBUTION RIGHTS
Capitalized distribution rights consist of the following:
As of June 30,
---------------------
2005 2004
--------- ---------
Acquired cost $ 400,000 $ 400,000
Accumulated amortization (78,000) (11,000)
--------- ---------
Capitalized distribution rights, net $ 322,000 $ 389,000
========= =========
Page 10 of 16
ALLUME SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 7 - CAPITALIZED CUSTOMER LISTS
Capitalized customer lists consist of the following:
As of June 30,
---------------------
2005 2004
--------- ---------
Acquired cost $ 625,000 $ 625,000
Accumulated amortization (145,000) (20,000)
--------- ---------
Capitalized customer lists, net $ 480,000 $ 605,000
========= =========
NOTE 8 - TRADEMARKS
Capitalized trademarks consist of the following:
As of June 30,
---------------------
2005 2004
--------- ---------
Acquired cost $ 821,000 $ 821,000
Accumulated amortization - -
--------- ---------
Capitalized trademarks, net $ 821,000 $ 821,000
========= =========
NOTE 9 - GOODWILL
Goodwill consists of the following:
As of June 30,
-------------------------
2005 2004
----------- -----------
Acquired cost $ 6,810,000 $ 6,810,000
Accumulated amortization - -
----------- -----------
Goodwill, net $ 6,810,000 $ 6,810,000
----------- -----------
NOTE 10 - AMORTIZATION EXPENSE
The following table summarizes the actual and estimated amortization expense for
our intangible assets for the periods indicated:
Periods: Year Ended June 30,
July 1, April 19,
2003 2004
through through
April 18, June 30, 2005 2006 2007 2008 2009 2010
2004 2004 Actual Estimate Estimate Estimate Estimate Estimate
--------- --------- -------- -------- --------- --------- --------- --------
Capitalized software $ 225,000 $ 67,000 $453,000 $488,000 $ 488,000 $ 488,000 $ 456,000 $ -
Capitalized domain names - 2,000 39,000 40,000 40,000 40,000 40,000 -
Capitalized distribution rights - 11,000 67,000 67,000 67,000 67,000 67,000 56,000
Capitalized customer lists - 20,000 125,000 125,000 125,000 125,000 105,000 -
--------- --------- -------- -------- --------- --------- --------- --------
Total amortization expense $ 225,000 $ 100,000 $684,000 $720,000 $ 720,000 $ 720,000 $ 668,000 $ 56,000
========= ========= ======== ======== ========= ========= ========= ========
Page 11 of 16
ALLUME SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
Amortization of capitalized software is included in product cost. Amortization
of capitalized domain names, capitalized distribution rights, and capitalized
customer lists is included in operating expenses.
NOTE 11 - LONG-TERM DEBT
Long-term debt consists of:
At June At June
30,2005 30, 2004
--------- ---------
License related payable $ 95,000 $ -
Software related payable - 182,000
--------- ---------
95,000 182,000
Less current portion (68,000) (182,000)
--------- ---------
$ 27,000 $ -
--------- ---------
License related payable is the amount to be paid to Yaakov Gringeler for a JPEG
license agreement the Company acquired in November 2004. The total purchase
price was $427,000 consisting of $50,000 in cash, a new $205,000 note payable
and $172,000 in stock and stock options in the parent company.
Software related payable is the amount to be paid to Vcommunications, Inc. for
the acquisition of Easy Uninstall, Internet Cleanup and ZipMagic products in
October 2002. The total purchase price was $800,000.
Aggregate annual maturities are as follows for the years ended June 30:
2006 : $ 68,000
2007 : $ 27,000
- ---- --------
TOTAL $ 95,000
NOTE 12 - CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentration of
credit risk consist primarily of cash and cash equivalents and accounts
receivable.
The Company maintains cash at one financial institution in excess of the FDIC
insured limit of $100,000. At June 30, 2005 and 2004, the Company's uninsured
cash balance was approximately $40,000 and $370,000, respectively.
The Company has one major customer that accounted for $2,127,000 or 22% of
revenues, $1,721,000 or 24% of revenues and $429,000 or 22% of revenues for the
twelve months ended June 30, 2005 and during the periods July 1, 2003 to April
18, 2004 and April 19, 2004 to June 30, 2004, respectively. The accounts
receivable balance of the same customer represented 55% of total accounts
receivable as of June 30, 2005 and 72% as of June 30, 2004.
Page 12 of 16
ALLUME SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 13 - RETIREMENT PLAN
The employees of the Company participate in a 401(k) retirement plan at the
parent company level. The plan allows eligible employees to contribute up to 15%
of their compensation to the plan or the annual maximum as defined by the
Internal Revenue Service. At the discretion of the board of directors, IMSI may
also make contributions each year for the benefit of all eligible employees
under the plan. Discretionary contributions for the twelve months ended June 30,
2005 was $40,000. There was no discretionary contribution for the periods July
1, 2003 to April 18, 2004 and April 19, 2004 to June 30, 2004.
NOTE 14 - COMMITMENTS AND CONTINGENCIES
Leases
The Company conducts the majority of its operations from one facility in
Watsonville, CA that is leased under an operating lease. Rent expense was
$320,000, $228,000 and $56,000 for the twelve months ended June 30, 2005 and
during the periods July 1, 2003 to April 18, 2004 and April 19, 2004 to June 30,
2004, respectively.
In June 2005, the Company signed a Surrender of Lease for the current facility
location in Watsonville and concurrently entered into a new operating lease to
move to a different location as of October 2005. This new lease commences on
October 1, 2005 and expires September 30, 2010. Under the terms of the lease
surrender, IMSI is to assume all obligations arising from the old lease.
The Company also has an operating lease with Inter-tel for a phone system that
was purchased in October 2004.
Future minimum commitments under operating leases are as follows:
Operating Leases
----------------
Year ending June 30,
2006 $ 167,000
2007 171,000
2008 165,000
2009 160,000
2010 128,000
Thereafter 36,000
---------
Total minimum lease payments $ 827,000
=========
The company is responsible for its pro-rata share of building maintenance and
utilities.
Page 13 of 16
ALLUME SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 15 - SHAREHOLDERS' EQUITY
Stock options
The Aladdin Systems Holdings, Inc. 1999 Stock Option Plan allows for the
issuance of incentive stock options and non-qualified stock options to purchase
shares of the Company's common stock. Under the option plan, incentive stock
options may be granted to employees, directors, and officers of the Company and
non-qualified stock options may be granted to consultants, employees, directors,
and officers of the Company. Options granted under the option plan are for
periods not to exceed ten years, and must be issued at prices not less than 100%
of the fair market value of the stock on the date of grant. Options granted to
shareholders who own greater than 10% of the outstanding stock are for periods
not to exceed five years and must be issued at prices not less than 110% of the
fair market value of the stock on the date of grant. Options granted under the
option plan generally vest within four years. As of April 18, 2005 all of the
options held by employees of Allume Systems, Inc. were converted to stock
options of IMSI.
During the year ended June 30, 2004, IMSI adopted a new stock option plan "The
2004 Incentive Stock Option Plan" (the "2004 Plan"). The purpose of the 2004
Plan was to further the growth and general prosperity of IMSI by enabling our
employees to acquire common shares, increasing their personal involvement in the
Company and thereby enabling IMSI to attract and retain those employees.
The 2004 Plan provides for the granting of options to purchase up to an
aggregate of 3,000,000 common shares to employees, directors and other service
providers of IMSI. Any options that expire prior to exercise will become
available for new grants from the "pool" of ungranted options. Options that are
granted under the 2004 Plan may be either options that qualify as incentive
stock options under the Internal Revenue Code ("Incentive Options"), or those
that do not qualify as such incentive stock options ("Non-Incentive Options").
The 2004 Incentive Options may not be granted at a purchase price less than the
fair market value of the Common Shares on the date of the grant (or, for an
option granted to a person holding more than 10% of the Company's voting stock,
at less than 110% of fair market value) and Non-Incentive Options may not be
granted at a purchase price less than 85% of fair market value on the date of
grant.
The term of each option, under the 2004 plan, which is fixed at the date of
grant, may not exceed ten years from the date the option is granted (by law, an
Incentive Option granted to a person holding more than 10% of the company's
voting stock may be exercisable only for five years). Options vest and become
exercisable in accordance with a schedule to be fixed by the Compensation
Committee.
Option activity under the 2004 and 1999 plan is as follows:
Number of Weighted Average
Shares Exercise Price
---------- ----------------
Outstanding, July 1, 2003 1,911,824 $ 0.56
Granted (weighted average fair value of $ 0.23) 78,360 0.23
Exercised -- --
Cancelled (217,764) 1.03
---------- --------
Outstanding, April 18, 2004 1,772,420 $ 0.59
Granted (weighted average fair value of $ 1.05) 388,100 1.40
Exercised -- --
Cancelled -- --
Converted (1,143,458) 0.49
---------- --------
Outstanding, June 30, 2004 1,017,062 $ 1.56
Page 14 of 16
ALLUME SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
Granted (weighted average fair value of $0.75) 60,500 1.01
Exercised -- --
Cancelled (102,904) 1.46
-------- ------------
Outstanding, June 30, 2005 974,658 $ 1.54
======== ============
Additional information regarding stock options outstanding as of June 30, 2005
is as follows:
Options Outstanding Options Exercisable
- ---------------------------------------------------------------------------- ---------------------------
Number Weighted Avg. Weighted Avg. Number Weighted Avg.
Range of Exercise Prices Outstanding Remaining Life Exercise Price Exercisable Exercise Price
- ------------------------ ------------------- -------------- -------------- ----------- --------------
$ 0.88 25,916 9.4 $ 0.88 12,958 $ 0.88
$ 1.03 13,000 9.4 $ 1.03 6,500 $ 1.03
$ 1.16 83 9.1 $ 1.16 21 $ 1.16
$ 1.24 15,500 9.6 $ 1.24 3,875 $ 1.24
$ 1.40 327,600 8.9 $ 1.40 109,200 $ 1.40
$ 1.66 592,559 8.8 $ 1.66 592,559 $ 1.66
------- -------
974,658 725,113
NOTE 16 - INCOME TAXES
Income tax expense (benefit), for the periods indicated, consisted of:
July 1, 2003
Year ended June 30, April 19, 2004 through through April
2005 June 30, 2004 18, 2004
------------------- ---------------------- -------------
Current:
Federal $ 104,076 $ -- $ --
State 800 800 --
------------------- ---------------------- -------------
Current Sub-total: 104,876 800 --
------------------- ---------------------- -------------
Deferred:
Federal 11,608 (13,587) --
State 29,864 (32,416) --
------------------- ---------------------- -------------
Deferred Sub-total: 41,472 (46,003) --
------------------- ---------------------- -------------
Total $ 146,348 $ (45,203) $ --
=================== ====================== =============
Deferred tax balances consist of the following:
At June 30, 2005 At June 30, 2004
---------------- ----------------
Deferred Tax Assets
Research Credits 147,443 646,683
Other 230,787 45,577
---------------- ----------------
Total Deferred Tax Assets 378,230 692,260
Deferred Tax Liabilities
Acquired Intangibles (1,104,120) (1,376,405)
---------------- ----------------
Net Deferred Tax Assets: $ (725,890) $ (684,145)
================ ================
Page 15 of 16
ALLUME SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
The effective tax rate differs from the federal statutory rate for the year
ended June 30, 2005 and the period from April 19, 2004 through June 30, 2004 as
follows:
April 19, 2004
Year ended through June 30,
June 30, 2005 2004
------------- -------------------
Federal tax at 34% statutory rate $ 127,271 $ 6,387
State tax provision, net of federal benefit 20,238 (19,549)
Research & Development Credits (3,781) (32,513)
Other 2,619 472
------------- -------------------
Total income tax expense (benefit) $ 146,347 $ (45,203)
============= ===================
NOTE 17 - INTEREST AND OTHER, NET
Interest and other, net, include interest expense and other non-recurring items.
The components of interest and other, net for the year ended June 30, 2005 and
the periods from April 19, 2004 through June 30, 2004 and from July 1, 2003
through April 18, 2004 are as follows:
Year ended June 30, April 19, 2004 through July 1, 2003 through
2005 June 30, 2004 April 18, 2004
------------------- ---------------------- ---------------------
Interest (expense) $ - $ - $ (14,000)
Other income 12,000 14,000 40,000
------------------- ---------------------- ---------------------
Interest and other, net $ 12,000 $ 14,000 $ 26,000
=================== ====================== =====================
NOTE 18 - SUBSEQUENT EVENT
On July 1, 2005, International Microcomputer Software, Inc. sold 100% of the
issued and outstanding capital stock of the Company to Smith Micro Software,
Inc. for $11 million cash and 397,547 unregistered shares of its common stock,
having a market value, based on a ten day trading average ending June 29, 2005,
of $1,750,000. A portion of the purchase price, including $1,250,000 cash and
shares of common stock having a market value of $750,000 is deposited in an
indemnity escrow to secure certain representations and warranties included in
the Stock Purchase Agreement.
Page 16 of 16