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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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XX Annual report pursuant to Section 13 or 15(d) of the Securities
---- Exchange Act of 1934 [FEE REQUIRED] for the fiscal year ended March 31,
1996 or
---- Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [NO FEE REQUIRED] for the transition period from
___________ to ___________
Commission File Number 1-10139
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THE SOFTWARE DEVELOPER'S COMPANY, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 04-2911320
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
245 WINTER STREET
WALTHAM, MASSACHUSETTS 02154
(Address of principal executive offices) (Zip Code)
(617) 890-1700
(Registrant's Telephone Number)
Securities registered pursuant to Section 12(b) of Act:
NAME OF EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
- ------------------- -------------------
COMMON STOCK, $.01 PAR VALUE BOSTON STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act: NONE
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Indicate by check mark whether the 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 (or for such other shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. XX Yes No
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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, in
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 voting Common Stock held by non-affiliates of the
Registrant was approximately $25,982,073 based on the closing sale price of the
Registrant's Common Stock on June 10, 1996 as reported by the Nasdaq
Over-the-Counter Interdealer Automated Quotation System ($4.875 per share).
As of June 10, 1996, there were 8,420,367 shares of Common Stock outstanding.
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PART I
ITEM 1. BUSINESS
THE COMPANY
At March 31, 1996 the Company was a recognized national and
international direct marketer and distributor of PC-based specialty software and
hardware to technical and professional PC users. The Company offered a total of
over 8,000 brand-name products through targeted mailings of its three catalogs.
Through its corporate sales group, the Company resold catalog product lines to
medium and large-sized companies. Additionally, the Company addressed the
marketing needs of the developers and publishers of the products it distributed
by providing advertising and promotional services. Software Developer's Company,
GmbH, a wholly-owned subsidiary in Dortmund, Germany, provided similar products
and services to dealers and end users in Germany. The Company distributed
third-party products operating on DOS, Windows, Windows/NT, OS/2, Unix and Apple
operating systems and provided an extensive offering of specialized add-on
hardware for these computers.
The other portion of the Company's business is built around Internet
Security Corporation ("ISC"), a business acquired in November 1995. ISC is a
reseller of leading-edge network security products and services for companies
doing business on the Internet and Intranets. ISC provides products and services
in the four major technology areas used for securing networks: firewall access
control, authentication, encryption and security management. ISC also offers
comprehensive consulting services including risk analysis and security audits,
implementation of enterprise security systems, customized integration of
security systems, on-site training, and post-sales technical support.
The Company is headquartered at 245 Winter Street, Waltham,
Massachusetts, 02154 and its general telephone number is (617) 890-1700.
BUSINESS STRATEGY - CATALOG OPERATION
At March 31, 1996 the Company served business customers in the software
development, networking, engineering and scientific, and professional multimedia
marketplaces by offering a comprehensive range of third-party products. The
breadth of specialized products offered by each of its catalogs established the
Company as a single, credible source for computing solutions required by its
customers. This strategy allowed the Company to provide for all of the specialty
software and hardware needs of its customers, while avoiding direct competition
with larger resellers serving the general computing market.
The Company's corporate sales group targeted mid-size to large
commercial, governmental and educational accounts. Leveraging off of initial
sales made through the catalogs, this group focused on establishing
relationships with customers and becoming their primary source for software and
specialty hardware. It provided corporate customers with a high level of
services including in-depth technical support, training, product sourcing and
volume discounts. The Company's marketing services organization, SDC
Communications, offered marketing and promotional services to software
developers and manufacturers to assist them in launching new products,
generating sales leads, and increasing market visibility. Its principal role was
creating advertisements and publishing all of the Company's catalogs. However,
it also developed and circulated direct mail campaigns and specialty catalogs,
and provided trade show assistance to software developers and manufacturers.
2
CATALOG OPERATIONS AND PUBLICATIONS
As of March 31, 1996, the Company produced two targeted catalogs, each
focused on specialized segments of the PC market. Four editions of each catalog
were published per year with a total annual circulation of approximately 3
million. The Company typically added 250-300 new and updated products into its
catalogs each quarter. Catalog product sales accounted for 91% of the total
sales of the Company in fiscal 1996 and 88% in fiscal 1995.
The Programmer's SuperShop (TPS) catalog, offered software development
tools, utilities, databases, languages and business productivity applications to
software developers and business professionals. Sales from TPS represented
approximately 89% of the Company's total sales in fiscal 1996 and 80% in fiscal
1995.
Personal Computing Tools SuperShop (PCT) offered engineers and
scientists specialty hardware and software products that fill specific
networking and data analysis needs. The PCT catalog featured products for data
acquisition, motion control and data communications, data communications,
networking solutions for LAN (local area network) expansion, LAN management and
administration, as well as remote computing. Sales of PCT's products constituted
approximately 3% of the Company's total sales in fiscal 1996 and 8% in fiscal
1995.
Each of the Company's catalogs were printed with photographs, detailed
product specifications, and comparisons of the manufacturer's suggested list
prices with the Company's discount prices. In large part, the catalogs were
designed and produced in-house by the Company's marketing communications staff,
allowing for significant production cost savings.
MARKETS AND CUSTOMERS - CATALOG OPERATIONS
The Company selectively mailed its catalogs and marketing programs to
attract new customers and stimulate additional purchases from existing
customers. Its mailing list for catalogs and brochures included approximately
120,000 customers who had previously purchased from the Company. The Company
obtained additional names for mailings from various sources, including
manufacturers, suppliers, distributors and industry magazine publishers.
The Company's catalog customers were principally located throughout the
United States, however, the Company also targeted customers in Canada. The
Company's wholly-owned subsidiary in Germany distributed software to dealers and
end users primarily in Germany. Additionally, the Company distributed software
products through resellers on a non-exclusive basis in several foreign
countries, including England, France, Holland, Sweden, Japan and Korea. Total
export sales, including sales from the German subsidiary, accounted for
approximately 10% of fiscal 1996 and 12% of fiscal 1995 revenues.
Through The Programmer's SuperShop, the Company targeted an audience of
software developers, programmers, information systems professionals, documenters
and testing personnel in both large and small organizations. These professionals
often seek a single supplier who can provide a solution to their needs for
PC-based software products, technical support and marketing information.
Personal Computing Tools SuperShop (PCT) targeted a marketplace of engineers,
scientists and technical professionals. PCT had built a customer base serving a
wide variety of businesses including systems integrators, Fortune 500 companies,
and academic and government institutions.
3
MARKETING AND SALES - CATALOG OPERATIONS
Inbound Telemarketing. The Company employed catalog telemarketing
representatives who assisted customers in purchasing decisions and processed
product orders resulting from catalog mailings. Telemarketing representatives
also responded to inquiries regarding order status, product pricing and product
availability. Through the Company's order information system, telemarketers
quickly accessed customer records which detail past purchases as well as billing
information.
Corporate Sales. The Company's dedicated corporate targeted mid-size to
large commercial, governmental and educational accounts. This group performed
outbound business-to-business telesales in an effort to further penetrate the
account. This group focused on build long-term relationships with its business
customers through frequent contact.
Customer Service. The Company believes that providing prompt, efficient
customer service is critical to success. Telemarketing representatives responded
to various inquiries such as order status or the Company's return policy.
Technical Support. The Company's dedicated pre-sales technical support
staff assisted customers in making appropriate product selections based on
technical criteria. Technical support personnel assisted customers in maximizing
the benefits from products purchased from the Company.
PRODUCTS AND MERCHANDISING - CATALOG OPERATION
The Company offered a total of over 8,000 microcomputer products
through its catalog operations, including software for stand-alone and networked
PC's, specialty hardware, peripherals, accessories, and multimedia products.
Software. The Company sold a broad range of PC-related software
products from larger, well known vendors to numerous new technology vendors.
Brands offered by the Company included the product offerings of Adobe Systems,
Borland International, Computer Associates, IBM, Intel, Macromedia, Microsoft,
Oracle, Powersoft and Symantec. General product categories included software
development tools, utilities, databases, languages, business productivity
applications, presentation, authoring, animation, and LAN operating systems,
administration and management tools.
Hardware, peripherals and networking. The Company offered a large
selection of hardware items including peripherals, components and LAN products.
Product categories offered included data communications, data acquisition and
control, networking hubs and routers, video capture and playback, and high
capacity storage devices. Brands sold in this category included AT&T Paradyne,
Eastman Kodak, Ikegami Electronics USA, Nikon, Panasonic, Pioneer Electronics,
Sony, Supra, US Robotics, Zoom Telephonics and 3 COM.
No single product distributed by the Company accounted for more than 2%
of the Company's revenues in the 1996, 1995 and 1994 fiscal years.
4
PURCHASING
Management believes that effective purchasing enables the Company to
obtain favorable product pricing, allowing it to provide customers with name
brand products at competitive prices. The Company purchased approximately 40% of
its products directly from manufacturers and the balance from distributors.
Purchases from Ingram Micro, a wholesaler of microcomputer software products,
accounted for approximately 27% of total purchases in fiscal 1996. The Company
does not consider itself dependent on Ingram Micro as a single source supplier
and believes it can purchase products from other competing wholesalers under
similar terms. The Company has not experienced any material difficulties or
delays in acquiring any of the products which it distributes.
COMPETITION
The market for the catalog distribution of technically-oriented
software and hardware is highly competitive and is characterized by rapid
changes in technology and user needs. In fiscal 1996, the Company's catalog
operation competed in the marketing and sales of its existing products with a
variety of software publishers, specialty hardware manufacturers, dealers and
distributors. Its catalog operation's competitors vary in size and scope. Direct
marketing competitors include other niche catalogers, such as Programmer's
Paradise and ProVantage Corporation in the technical software marketplace, and
Micro Warehouse, CDW Computer Centers and BlackBox who offer a broad range of
hardware and software, including technical software. In addition, the catalog
operation competed with corporate resellers including Corporate Software,
Software Spectrum and Softmart, all of whom focus on providing corporate level
services primarily for business application products. Many of these large
retailers have substantially greater financial and marketing resources.
PRODUCT RESEARCH AND DEVELOPMENT
In fiscal 1996 the Company did not engage in any product research and
development as its activities were limited to marketing and distributing
third-party software and hardware products.
PROPRIETARY RIGHTS
The Company depends upon a combination of trademark laws, license
agreements, nondisclosure and other contractual provisions to protect its
distribution rights. In addition, the Company attempts to protect its
proprietary information and those of its vendors through confidentiality
agreements with employees and others. Despite these precautions, it may be
possible for unauthorized third parties to obtain information that the Company
regards as proprietary.
5
Management believes that, due to the rapid pace of innovation within
the high-tech industry, factors such as technical and creative skills of its
personnel and ongoing reliable services and support are more important in
establishing and maintaining a leadership position within the industry than are
the various forms of legal protections.
The Company does not hold any proprietary copyrights or trade secrets
or exclusive distribution agreements for its catalog operations.
EMPLOYEES
As of March 31, 1996, the Company had approximately 102 employees,
including 72 in marketing and sales, 13 in purchasing, shipping and receiving,
and 17 in administration and accounting. None of the Company's employees is
represented by a labor union. The Company has not experienced work stoppages and
believes that its employee relations are good.
INTERNET SECURITY CORPORATION - NETWORK SECURITY OPERATIONS
The other portion of the Company's business, network security products
and services, is built around Internet Security Corporation ("ISC"), a business
acquired in November 1995. ISC was founded in June 1994 as a non-exclusive
distributor of CheckPoint Software Technologies Ltd.'s ("CheckPoint") FireWall-1
access control product for network security applications. ISC established a
preferred financial relationship with CheckPoint, allowing it to pursue both
large end-user accounts and other resellers. ISC currently has over 350
customers, including Fortune 1000 companies, telecommunication companies, major
banks and large insurance companies. ISC has been able to increase its customer
base by combining CheckPoint's FireWall-1 product with post-sales support
services, including training and customer support.
More recently, ISC has established a consulting service organization to
provide assistance to customers with problems of enterprise security. New
services include assistance in the developing of enterprise-wide security
policies, auditing existing security schemes, performing threat assessments and
evaluating network topologies.
INDUSTRY BACKGROUND OF NETWORK SECURITY APPLICATIONS: Enterprise computing has
been evolving over the last three decades from host-based systems towards
distributed network computing. During the 1980s, the ease-of-use and low cost of
personal computers and the development of personal productivity software had led
to rapid growth in the number of personal computer users throughout
organizations. These organizations increasingly began to connect their personal
computers into local area networks ("LANs") in order to share files within work
groups. Many enterprise applications continued to operate on separate mainframe
or minicomputers. In the mid-1990s, specialized internetworking products have
made it easier for organization to connect their disparate LANs, both local in a
single facility, and through wide area networks ("WANs") in geographically
dispersed locations. Organizations are also increasingly integrating their LANs
with their minicomputers and mainframes, thus enabling users to communicate,
exchange information and share computing resources within and between
organizations. Many of these organizations are seeking to develop client/server
implementations of their enterprise applications to more fully exploit their
distributed networks. These new enterprise networks require a comprehensive set
of network products that can integrate a large number of users and heterogeneous
computing resources into a consistent, manageable and secure computing
environment.
6
Computer and network security has historically been the focus of
businesses engaged in security-conscious industries such as banking,
telecommunications, aerospace and defense. As a result of the increase in the
number of users having direct and remote access to enterprise networks and
corporate data, unauthorized access to information resources has become a
growing and costly problem for businesses. Sensitive data that requires
protection from unauthorized use include financial results, medical records,
personnel files, customer files, research and development projects, marketing
plans and other business information. Unauthorized access to this data may go
undetected by the computer user or system administrator, especially if the
information is not altered by the unauthorized party. Companies are vulnerable
not only to unauthorized access to information resources by suppliers, customers
and other third parties, but also to abuse by employees within their own
organizations.
COMPUTER AND NETWORK SECURITY: There are several different categories of
products for protection of information resources on a computer system or network
which can be grouped into four classes: User Identification and Authentication;
Privilege Definition; Encryption; and Audit.
User Identification and Authentication is the first line of defense to
prevent unauthorized users from accessing computer and network resources.
Products that fall into this category are designed to authenticate the identity
of authorized users. Thus, even users who log onto a network from a node on the
network must also identify themselves by typing in a password of some sort. The
popular systems today are relatively cost-effective and offer greater security
than a simple personal identification number (PIN).
The next line of defense is Privilege Definition, which manages and
controls access to network data and prevents users from taking unauthorized
actions. While routers provide a basic level of privilege control, they do not
provide a sufficiently high level of security. Firewalls, such as CheckPoint's
FireWall-1 product, are the most widely deployed solution in this category.
Their software architecture allows users to monitor traffic into and out of the
network and to deny access to all or specified domains within the enterprise.
The next level, Encryption, is the means by which network data is scrambled and
unscrambled both at the client and server level using a secret key. It protects
the data while it is being transmitted or stored by using IP Packet
cryptography. Finally, at the top of the hierarchy are products for Audit, which
monitor and record user activity on a network. This enables administrators to
determine if the system has been compromised and the source of the unauthorized
entry.
SALES AND MARKETING: ISC markets CheckPoint's FireWall-1 domestically directly
through a telemarketing and telesales organization and indirectly through other
resellers. The CheckPoint FireWall-1 product is used by customers to manage and
control access to network services and prevent users on a network from taking
unauthorized action or entry on the network. ISC's telesales organization is
divided into three territories in the United States. Its sales strategy involves
qualifying prospects initially and determining their information security
requirements, and strategic consultative selling once customers are identified.
ISC primarily markets the CheckPoint FireWall-1 product and offers consulting
services for network security solutions to large, corporate customers that
desire to connect their corporate network to a public network such as the
Internet. A customer's decision to use CheckPoint's FireWall-1 product may
involve a substantial financial commitment including license costs, maintenance
fees, consulting fees and training, and in many cases the cost of a computer
system to implement network security. To date, the desire to connect securely to
the Internet as expeditiously as possible has minimized the length of the sales
cycle. ISC has recently announced a major account program to be staffed with two
field sales representatives. On-site meetings will be conducted with accounts
that have substantial product and service requirements.
7
ISC recently created an indirect distribution channel of approximately
20 value added resellers to distribute the CheckPoint FireWall-1 product. These
value added resellers account for approximately 25% of the license revenue
achieved by ISC. ISC conducts its own marketing programs intended to position
and promote FireWall-1 and its services. Marketing activities include direct
mail, Internet marketing, advertising, public relations and trade shows, as well
as directing ISC's participation in industry programs and forums. ISC also
benefits from the marketing programs conducted by CheckPoint. Many of
Checkpoint's activities result in the generation of qualified leads, some of
which are provided to ISC.
SERVICES: ISC believes that a customer's decision to purchase CheckPoint's
FireWall-1 software from ISC is based, in part, on the services provided by ISC
that help to quickly and effectively install and implement a firewall network
security system, educate the customer's staff, and support its ongoing
operations. New services recently added assist the customer in developing,
implementing and testing its security policies. As of May 31, 1996, ISC had 7
employees providing customer support, consulting and training services.
CUSTOMER SUPPORT: Support for clients is based out of ISC's corporate
headquarters in Waltham, Massachusetts, with hotline access between the hours of
8:30 a.m. and 5:30 p.m. Eastern Time. Annual maintenance contracts are generally
purchased for the first year of a customer's use of CheckPoint's FireWall-1
product and are renewable on an annual basis. Maintenance fees are typically
equal to 20% of the list price for the product.
CONSULTING SERVICES: ISC's consulting services organization was formally
launched in April, 1996. In response to the growing need to protect information
resources on the network, ISC provides fee-based, on-site consulting services.
The consulting services group offers standardized fixed price consulting
packages that can provide an evaluation of existing security systems, identify
short-comings in the networks and suggest corrective action. ISC offers
companies the following services: developing enterprise wide security policies;
auditing existing security; performing assessment to determine security
vulnerability; and providing customization and integration support.
CUSTOMERS: As of March 31, 1996, ISC had licensed CheckPoint's FireWall-1 to
approximately 350 customers. ISC's customers represent a broad cross-section of
industries including banking, insurance, telecommunications, technology and
consumer products.
DISTRIBUTION AGREEMENTS: ISC has signed a three-year, non-exclusive distribution
agreement with CheckPoint whereby it has the right to sell, on a non-exclusive
basis, all of the current and future products by CheckPoint within the United
States and Germany. ISC maintains the right to distribute these products through
its direct sales organization or through resellers. ISC must achieve certain
financial targets each year to maintain its current discount level from
CheckPoint. As of March 31, 1996, ISC satisfied these targets.
COMPETITION: The market for network security products is also highly competitive
and subject to rapid technological change. The Company believes that competition
in this market is likely to intensify as a result of the increasing demand for
security products. The Company currently experiences competition form a number
of sources including competitors of CheckPoint Software Technologies Ltd.'s
FireWall-1 access control product such as Raptor Systems, Inc., Trusted
Information Systems, Inc. (TIS), Border Network Technologies, Inc., as well as
other resellers of Checkpoint's FireWall-1 product such as Sun Microsystems. As
the Company's network security product offerings expand to other segments of the
security marketplace, the Company will likely incur additional competition.
Current and potential competitors have established or may in the future
establish cooperative relationships among themselves or with third parties to
increase the availability of their products to the marketplace. Accordingly, it
is possible that new competitors or alliances may emerge and rapidly acquire
significant market share. Many of the Company's current and potential
competitors have significantly greater financial, marketing, technical and other
competitive resources than the Company.
ITEM 2. PROPERTIES
At March 31, 1996, the Company leased approximately 25,000 square feet
of office and warehouse space in Pembroke, Massachusetts. The six-month lease
requires average monthly rent payments of $21,500 and expires on September 30,
1996. At June 1, 1996 the Company moved its headquarters and its ISC facility to
Waltham, Massachusetts, leasing 5,760 square feet with monthly payments of
$7,920.
The Company believes that its existing facilities are adequate for its
current needs and that additional space is available at competitive rates should
the Company need to expand. The Company believes that suitable alternative space
will also be available in the future on commercially reasonably terms following
the expiration of the Company's leases.
8
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is involved in litigation relating to
claims arising out of its operations in the normal course of business. The
Company is not presently a party to any legal proceedings, the adverse outcome
of which, in management's opinion, would have a material adverse effect on the
Company's results of operations or financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 16, 1996, the Company entered into an Agreement of Purchase and
Sale of Assets with Programmer's Paradise, Inc. (the "Agreement") to sell
substantilly all of its operating assets relating to its catalog operations,
"The Programmer's SuperShop," its Web Site relating to its catalog operations,
its corporate sales group, inbound and outbound telemarketing operations,
reseller operations, and the operations of its German subsidiary, Software
Developer's Company GmbH.
On June 4, 1996, the Board of Directors caused to be distributed to
stockholders of record as of May 24, 1996, a Notice and Consent Solicitation
Statement for action to be taken by Written Consent in Lieu of a Meeting of
Stockholders. As of the record date, there were issued and outstanding 8,405,017
shares of Common Stock and 628,330 shares of Series C Preferred Stock, each
share entitled to one vote per share, in connection with the approval of the
proposal put forth in the Consent Solicitation Statement.
In connection with the solicitation, stockholders acted upon the
proposal to authorize and approve the proposed sale of certain assets of the
Company to Programmer's Paradise, Inc. pursuant to the terms and conditions of
the Agreement to authorize such further action by the Company's Board of
Directors and proper officers as may in their discretion be necessary or
desirable to carry out the intents and purposes of the Agreement; and in
furtherance of the disposition contemplated by the Agreement, to authorize and
approve an amendment to the Company's Certificate of Incorporation to change the
Company's name to Netegrity, Inc.
Pursuant to the terms of the Agreement the Company agreed to sell to
Programmer's Paradise, Inc. (the "Purchaser") substantially all of its operating
assets, comprised of all of the operating assets relating to its business of The
Programmer's SuperShop ("TPS") catalog, its TPS Web Site, its corporate sales
group, its German subsidiary, Software Developer's Company GmbH ("SDC Germany"),
and SDC Communications (collectively, the "Target Business") for a consideration
of $11,000,000 in cash, subject to certain adjustments and purchase price
reductions based on revenues and tangible net assets as of the Closing. The
aggregate purchase price consists of payment of $10,000,000 in immediately
available funds and the deposit of $1,000,000 under an escrow arrangement.
TPS offers software development tools, utilities, databases, languages
and business productivity applications to software developers and business
professionals. Also included in the purchased assets of the Target Business are
all advertising and promotional operations of SDC Communications and its service
and support operations relating to the TPS catalog business and the German
operations. The assets of the Target Business also include all tradenames,
trademarks and copyrights, mailing lists and customer databases, computer
programs used internally or externally in the business, rights under reseller
contracts with software manufacturers and distributors, all inventory relating
to the TPS catalog and the Target Business, capital equipment and computer
systems relating to the Target Business, all accounts receivable and unfilled
sales and purchase orders relating to the Target Business, and all deferred
charges and prepaid items, advance payments and prepayments for backlog orders
relating to the Target Business.
9
As of March 31, 1996 and 1995 the assets of the Target Business
constituted approximately 58% and 65%, respectively, of the Company's total
assets and operating assets. The operating assets of the Target Business could
be construed to constitute substantially all of the Company's assets from a
historical revenue and book value perspective.
The aggregate purchase price of $11,000,000 assumes that the Company
will transfer to the Purchaser as of the Closing tangible net assets of the
Target Business that equal $1,500,000. These net assets are comprised primarily
of accounts receivable, inventory, equipment, and other assets related to the
TPS catalog operation. In addition to the assets transferred, the Purchaser also
agreed to assume certain liabilities, including accounts payable and other
accrued expenses relating to the TPS catalog business. The Purchaser also agreed
to assume a capitalized lease obligation of the Company for a computer system
relating to the TPS catalog business. The following liabilities are specifically
excluded from the transfer of assets relating to the Target Business: all
employee-related expenses except those specifically assumed; brokerage or
finder's fees; stockholder obligations; secured debt; taxes; product liability
and warranty claims; leases of real property and certain operating leases of
personal property; and shutdown costs associated with the Company's German
operations, except that the Purchaser agrees to pay one-half of the German
subsidiary shutdown costs up to $85,000.
The purchase price is also adjusted for declines in revenues
forecasted prior to the closing and set forth in a transition plan agreed to by
the parties. If, during the thirty days preceding the closing date, the actual
revenues from operations of the Target Business are no more than 12% less than
the Company's projected revenues for this period reflected on the transition
plan, the purchase price shall not be reduced. If, however, such revenues are
greater than 12% and up to 17% less than that reflected on the transition plan,
the purchase price is reduced by $1,000,000. If such revenues are greater than
17% and up to 27% less than that reflected on the transition plan, the purchase
price is reduced by $2,000,000. If such revenues are greater than 27% and up to
32% less than that reflected on the transition plan, the purchase price is
reduced by $4,000,000. If such revenues are greater than 32% and up to 42% less
than that reflected on the transition plan, the purchase price is reduced by
$6,000,000. Finally, if such revenues are more than 42% less than that reflected
on the transition plan, the purchase price is reduced by $8,000,000.
On June 14, 1996, the Company received sufficient shareholder consent
(58% of the outstanding shares of all classes of stock) necessary to approve the
transaction. The transaction is currently scheduled to close at the end of June,
1996.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock is traded principally on the Nasdaq SmallCap
MarketSM tier of the Nasdaq Stock MarketSM under the symbol "SDEV" and is also
traded on the Boston Stock Exchange under the symbol "SDC." The following table
sets forth the range of quarterly high and low bid quotations for the Company's
Common Stock as reported by Nasdaq. The quotations represent interdealer
quotations without adjustment for retail markups, markdowns or commissions, and
may not necessarily represent actual transactions.
FISCAL 1995 QUOTATIONS HIGH TRADE LOW TRADE
First Quarter (4/1/94-6/30/94) $0.875 $0.50
Second Quarter (7/1/94-9/30/94) $0.375 $0.25
Third Quarter (10/1/94-12/31/94) $0.75 $0.375
Fourth Quarter (1/1/95-3/31/95) $1.687 $0.375
FISCAL 1996 QUOTATIONS HIGH TRADE LOW TRADE
First Quarter (4/1/95-6/30/95) $2.00 $1.00
Second Quarter (7/1/95-9/30/95) $2.375 $0.938
Third Quarter (10/1/95-12/31/95) $3.25 $1.563
Fourth Quarter (1/1/96-3/31/96) $1.938 $1.25
10
FISCAL 1997 QUOTATIONS HIGH TRADE LOW TRADE
April 1, 1996 - May 31, 1996 $4.75 $1.563
As of June 10, 1996, there were 147 holders of record and approximately
1,000 beneficial owners of the Company's 8,420,367 shares of Common Stock
outstanding. The Company estimates that approximately 850 shareholders hold
securities in street name. The Company does not know the actual number of
beneficial owners who may be the underlying holders of such shares. Also as of
June 10, 1996, there were 14 holders of record of the 628,330 outstanding shares
of Series C Preferred Stock. The holders of the Series C Preferred Stock vote
with the holders of Common Stock on all matters.
ITEM 6. SELECTED FINANCIAL DATA
(in thousands, except per share data)
STATEMENT OF OPERATIONS DATA
FOR THE YEAR ENDED MARCH 31,
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Revenues $56,107 $40,849 $30,893 $34,463 $36,816
Income (loss) from continuing
operations before taxes 154 196 (270) (1,481) (1,262)
Income (loss) from
continuing operations 129 196 (270) (1,481) (1,190)
Net income (loss) from
discontinued operation --- --- --- 510 (6,663)
------- ------ ------- ------ ------
Net income (loss) $ 129 $ 196 $ (270) $ (971) $(7,852)
====== ====== ====== ====== ======
Per share amounts:
From continuing operations $0.01 $0.02 $(0.07) $(1.04) $(0.75)
From discontinued operation --- --- --- 0.23 (3.26)
----- ------- ----- ---- ----
Net income (loss) per share $0.01 $0.02 $(0.07) $(0.81) $(4.01)
==== ==== ==== ==== ====
Weighted average common
shares outstanding 8,835 8,710 4,833 2,227 2,041
BALANCE SHEET DATA
AS OF MARCH 31,
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Working capital (deficit) $ 401 $ 651 $ 280 $ (196) $ (649)
Total assets 10,456 9,170 7,127 6,929 9,449
Long-term liabilities 187 300 385 153 3,891
Stockholders' equity (deficit) 1,903 1,950 1,701 451 (1,792)
11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The Private Securities Litigation Reform Act of 1995 contains certain safe
harbors regarding forward-looking statements. In that context, the discussion in
this Item contains forward-looking statements which involve certain degrees of
risk and uncertainties, including statements relating to liquidity and capital
resources. Except for the historical information contained herein, the matters
discussed in this section are such forward-looking statements that involve risks
and uncertainties, including the impact of competitive pricing within the
software industry, the effect any reaction to such competitive pressures has on
current inventory valuations, the need for and effect of any business
restructuring, the presence of competitors with greater financial resources,
capacity and supply constraints or difficulties, and the Company's continuing
need for improved profitability and liquidity.
OVERVIEW
The Company's revenues are generated by marketing and distributing
specialty PC-based software and hardware to technical and professional PC users
through its catalog operations of The Programmer's SuperShop (TPS), Personal
Computing Tools SuperShop (PCT), and New Media SuperShop (NMS). In addition, SDC
provides marketing services to third-party manufacturers, developers and
publishers of the products the Company distributes. Marketing services are
designed to generate sales leads, increase market visibility and assist in the
launch of new products. Through the newly acquired Internet Security Corporation
(ISC), the Company provides product integration and consulting support services
in the area of network security to companies doing business on the Internet.
The following discussion relates to the Company's continuing operations
except where noted.
The following information should be read in conjunction with the
consolidated financial statements and notes thereto:
FOR THE YEAR ENDED MARCH 31,
% to Net Revenues % Change
--------------------------- ---------------
1996 1995 1994 96 v. 95 95 v. 94
---- ---- ---- -------- --------
Net revenues:
Product sales 91% 88% 86% 3% 2%
Marketing services 9% 12% 14% (3%) (2%)
---- --- ---
Combined 100% 100% 100%
Gross Margins:
Product sales 18% 19% 22% (1%) (3%)
Marketing services 38% 36% 26% 2% 10%
-- -- -- - --
Combined 20% 21% 22% (1%) (1%)
Selling, general and administrative expenses 19% 20% 23% (1%) (3%)
Net income (loss) --- --- (1%) --- 1%
12
FISCAL 1996 VS. FISCAL 1995
REVENUES: Total net revenues increased 37%, or $15,258,000, to $56,107,000 in
fiscal 1996 from $40,849,000 in fiscal 1995. Product revenues increased 42% to
$51,301,000 in fiscal 1996 from $36,116,000 in fiscal 1995. The increase in
product revenues resulted from a combination of the growth in the development
tools marketplace in the first half of the fiscal year, significant growth in
the Company's corporate sales group and the addition of ISC's revenues.
Marketing services revenues increased by $73,000, or 2%, to $4,806,000 in
fiscal 1996 from $4,733,000 in fiscal 1995. Revenue obtained from developers of
client/server tools products contributed to an increase in both catalog
advertising pages and promotional marketing programs in TPS.
GROSS MARGIN: Total gross margin increased by $2,389,000, or 28%, to $11,062,000
in fiscal 1996 as compared to $8,673,000 in fiscal 1995 as a result of sales
growth in both product sales and marketing services. Product sales gross margin
increased by $2,250,000, or 32%, to $9,212,000 in fiscal 1996 from $6,962,000 in
fiscal 1995 as a result of the growth provided by the corporate sales group and
the impact of ISC which yields higher margins. Total gross margin from product
revenue as a percent of revenue decreased to 18% in fiscal 1996 from 19% in
fiscal 1995.
Gross margin from marketing services revenue increased by $139,000, or 8%,
to $1,850,000 in fiscal 1996 from $1,711,000 in fiscal 1995. This growth was
attributable to the increase in promotional marketing programs developed and
executed by SDCC. In addition, increased advertising revenues yielded higher
gross margins in the TPS catalog.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE: Selling, general and administrative
("SG&A") expenses increased by $2,527,000, or 31%, to $10,758,000 in fiscal 1996
from $8,231,000 in fiscal 1995. This increase was a result of expenses related
to the hiring of additional sales reps to execute the Company's corporate sales
initiative and the addition of ISC into the Company's operation. SG&A as a
percent of revenue declined from 20% in fiscal 1995 to 19% in fiscal 1996,
reflecting the ability to leverage existing operations to grow revenue.
INTEREST EXPENSE: Net interest expenses decreased by $54,000, or 25%, to
$163,000 in fiscal 1996 from $217,000 in 1995. The decrease was primarily due to
lower borrowing levels comparable to fiscal 1995 and the approximate $20,000 of
interest income provided by ISC.
FISCAL 1995 VS. FISCAL 1994
REVENUES: Total net revenues increased 32%, or $9,955,000, to $40,849,000 in
fiscal 1995 from $30,894,000 in fiscal 1994. Product revenues increased 36% to
$36,116,000 in fiscal 1995 from $26,586,000 in fiscal 1994. The increase in
product revenues resulted from a combination of the growth in the development
tools marketplace, the Company's significant growth in its corporate sales
group, and the full-year impact of the acquisition of Personal Computing Tools.
In fiscal 1995, a new generation of development products, termed client/server
tools, gained widespread acceptance. Corporate Sales showed significant growth
in its first full year of operations by successfully establishing service
relationships and generating incremental revenue from a growing group of
accounts.
Marketing services revenues increased by $425,000, or 10%, to $4,733,000
in fiscal 1995 from $4,308,000 in fiscal 1994. Revenue obtained from developers
of client/server tools products contributed to an increase in both catalog
advertising pages and promotional marketing programs in TPS. The introduction of
the New Media SuperShop catalog in February 1995, funded by advertising revenue,
also contributed to this increase.
13
GROSS MARGIN: Total gross margin increased by $1,786,000, or 26%, to $8,673,000
in fiscal 1995 as compared to $6,887,000 in fiscal 1994 as a result of margin
growth in both product sales and marketing services. Product gross margin
increased 20% to $6,962,000 in fiscal 1995 from $5,788,000 in fiscal 1994 as a
result of the growth provided by the corporate sales group and the full year
impact of the acquisition of PCT. Somewhat offsetting this increase, total gross
margin from product revenue as a percent of revenue decreased to 19% in fiscal
1995 from 22% in fiscal 1994 as a result of industry-wide competitive pricing
pressures and the increase in sales of higher volume, lower margin products to
larger corporations.
Gross margin from marketing services revenue increased 56% to $1,711,000
in fiscal 1995 from $1,099,000 in fiscal 1994. This growth was attributable to
the increase in promotional marketing programs developed and executed by SDCC.
In addition, increased advertising revenues yielded higher gross margins in the
TPS catalog.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE: Selling, general and
administrative ("SG&A") expenses increased by $1,239,000 or 18%, to $8,231,000
in fiscal 1995 from $6,992,000 in fiscal 1994. This increase was a result of
expenses related to the hiring of additional sales reps to execute the Company's
corporate sales initiative. SG&A as a percent of revenue declined from 23% in
fiscal 1994 to 20% in fiscal 1995, reflecting the ability to leverage existing
operations to grow revenue.
INTEREST EXPENSE: Net interest expenses increased to $217,000 in fiscal 1995
from $149,000 in 1994 primarily as a result of an increase in the prime interest
lending rate during this period.
LIQUIDITY AND CAPITAL RESOURCES
(in thousands, except ratios)
AS OF MARCH 31,
1996 1995
---- ----
Cash and cash equivalents $1,410 $672
Working capital (deficit) 401 651
Current ratio 1.05 1.09
FOR THE YEAR ENDED MARCH 31,
1996 1995
---- ----
Net cash provided by (used for) continuing
operating activities $1,968 $864
Net cash provided by (used for) discontinued
operating activities --- (68)
Net cash used for investing activities (240) (253)
Net cash used for financing activities (989) (195)
The Company's net cash flow for continuing operations increased in fiscal
1996 to $1,968,000 from $864,000 in fiscal 1995. The Company was granted
increases in credit lines extended by its major suppliers, resulting in an
increase in accounts payable of $264,000, or 6%, to $4,631,000 in fiscal 1996
compared to $4,367,000 in fiscal 1995.
As a result of improved inventory management, the Company's inventories
decreased to $1,293,000 in fiscal 1996 from $1,696,000 in fiscal 1995, a
decrease of 24%, which is well below the increase in product sales of 42%.
14
Accounts receivable-trade, before allowances for doubtful accounts,
increased by $909,000, or 18%, to $5,950,000 at March 31, 1996 from $5,041,000
at March 31, 1995. This increase was a direct result of the revenue growth in
fiscal 1996. Overall, the collection period increased to 27 days at March 31,
1996 from 26 days at March 31, 1995.
The Company has a $2,000,000 secured bank line of credit under which
borrowings bear interest at the bank's prime rate plus 2.5%. The line is subject
to renewal on July 31, 1996. Available borrowings under the line are based on
60% of eligible accounts receivable. Covenants under the line of credit require
the Company to maintain certain net worth and financial ratios. As of March 31,
1996, the Company was in compliance with the covenants relating to its line of
credit. At March 31, 1996, $723,000 was outstanding under the line of credit.
Working capital decreased to $401,000 at March 31, 1996 from $651,000 at
March 31, 1995.
The Company anticipates that its existing cash resources, cash flow
from operations and the continued availability of its bank line of credit will
be sufficient to fund its operations through March 31, 1997, provided it meets
its operating plan and remains in compliance with its credit agreement. The
Company's ability to finance its operations will depend on its ability to
renegotiate its bank line of credit for a continued availability of borrowing
thereunder. There can be no assurance that the Company will be successful in
renegotiating its line of credit or that the bank will permit continued
borrowings under its line of credit. If the Company is unsuccessful in
renegotiating its line of credit with the bank, it will need to seek alternative
financing for working capital. Future capital requirements will depend on many
factors, including cash flow from continuing operations, competition from larger
catalog distributors and market developments, and the Company's ability to
distribute products and marketing services successfully. To the extent cash flow
from operations is insufficient to fund the Company's activities, it may be
necessary to raise additional funds through equity or debt financing. The
Company is exploring additional sources of capital; however, there are currently
no firm commitments at this time. Additional debt financings will result in
higher interest charges. Additional equity financings will result in dilution of
stockholders' interests. The Company's ability to generate cash from operations
depends upon, among other things, revenue growth, improvements in operating
productivity, its credit and payment terms with vendors and collections of
accounts receivable. The Company's ability to borrow under this facility is
dependent upon satisfying certain financial covenants, among other things, and
there can be no assurances that the Company will remain in compliance. If such
sources of cash prove insufficient, the Company will be required to make changes
in its operations or to seek additional debt or equity financing. There can be
no assurances that cash generated from operations and borrowings under its
credit facility will be sufficient to meet its operating requirements, or if
required, that additional debt or equity financing will be available on terms
acceptable to the Company. The Company currently anticipates that its available
cash, expected cash flows from operations, and its borrowing capacity will be
sufficient to fund operations through fiscal year 1997.
INFLATION: To date, management believes that inflation has not had a material
impact on operations.
ENVIRONMENTAL LIABILITY: The Company has no known environmental violations and
assessments.
ACCOUNTING FOR INCOME TAXES: Effective April 1, 1993, the Company changed its
method of accounting for income taxes from the deferred method to the liability
method required by FASB Statement No. 109, "Accounting for Income Taxes." The
effect of the adoption of this statement had no impact on the operating results,
components of the income tax expense, or the financial position of the Company.
POST-RETIREMENT BENEFITS OTHER THAN PENSIONS: The Company does not offer
post-employment benefits to its retirees and as a result, is unaffected by
Statement of Financial Accounting Standards No. 106 or No. 112 issued in
December 1990 and November 1992, respectively.
15
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's consolidated financial statements and the related auditors'
reports are presented in the following pages. The consolidated financial
statements filed in this Item 8 are as follows:
Report of Independent Auditors
Consolidated Balance Sheets - March 31, 1996 and 1995
Consolidated Statements of Operations for the years ended March 31, 1996,
1995 and 1994
Consolidated Statements of Stockholders' Equity for the years ended March
31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the years ended March 31, 1996,
1995 and 1994
Notes to Consolidated Financial Statements
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
16
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
The Software Developer's Company, Inc.
We have audited the accompanying consolidated balance sheets of The Software
Developer's Company, Inc. as of March 31, 1996 and 1995 and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended March 31, 1996. 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 audit.
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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
The Software Developer's Company, Inc. as of March 31, 1996 and 1995, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended March 31, 1996 in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND, L.L.P.
Boston, Massachusetts
May 15, 1996
17
THE SOFTWARE DEVELOPER'S COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
March 31, March 31,
1996 1995
ASSETS (Note C) --------- ---------
CURRENT ASSETS
Cash and cash equivalents $ 1,410,445 $ 672,386
Accounts receivable--trade, net of allowance for doubtful
accounts of $274,272 and $347,432 in 1996 and
1995, respectively 5,676,239 4,693,728
Accounts receivable--product, net of valuation reserve
of $73,714 and $60,745 in 1996 and 1995, respectively 83,237 99,977
Inventory 1,292,961 1,695,993
Other current assets 303,429 409,138
----------- ----------
TOTAL CURRENT ASSETS 8,766,311 7,571,222
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, NET (Note B) 745,268 540,971
INTANGIBLE ASSETS, NET, INCLUDING GOODWILL (Note H) 834,266 968,280
OTHER ASSETS 109,900 89,696
----------- ----------
TOTAL ASSETS $10,455,745 $9,170,169
========== =========
The accompanying notes are an integral part of the consolidated financial statements.
18
THE SOFTWARE DEVELOPER'S COMPANY, INC.
CONSOLIDATED BALANCE SHEETS (CONT.)
March 31, March 31,
1996 1995
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable--trade $ 4,631,213 $4,367,025
Line of credit (Note C) 723,470 1,423,470
Other accrued expenses 2,029,303 658,425
Accrued payroll 498,769 297,468
Customer advances 69,480 124,689
Notes payable - related party (Note C) 300,000 22,092
Current portion of capitalized lease obligations (Note D) 112,730 27,011
---------- ----------
TOTAL CURRENT LIABILITIES 8,364,965 6,920,180
LONG-TERM DEBT-RELATED PARTY (Note C) --- 300,000
LONG-TERM CAPITAL LEASE OBLIGATION (Note D) 187,417 ---
COMMITMENTS AND CONTINGENCIES (Note D) --- ---
STOCKHOLDERS' EQUITY (Notes F and G)
Preferred stock, $.01 par value, authorized 25,000,000 shares:
Series C voting, non-cumulative, (628,330 and 905,968
shares in fiscal 1996 and 1995, respectively) issued and
outstanding (liquidation preference of $2.00 per share) 6,283 9,060
Common Stock, voting, $.01 par value, authorized 25,000,000
shares; issued 8,197,887, outstanding 8,172,786 shares
(7,787,437 and 7,762,336 in 1995) 81,979 77,875
Additional paid-in capital 10,024,710 9,944,908
Cumulative translation adjustment 21,569 22,242
Cumulative deficit (8,147,521) (8,020,439)
---------- ---------
1,987,020 2,033,646
Less treasury stock at cost, 25,101 shares (83,657) (83,657)
------------ -----------
TOTAL STOCKHOLDERS' EQUITY 1,903,363 1,949,989
---------- ---------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $10,455,745 $9,170,169
========== =========
The accompanying notes are an integral part of the consolidated financial statements.
19
THE SOFTWARE DEVELOPER'S COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended March 31,
1996 1995 1994
------------- ------------- --------------
Net revenues:
Product sales $51,301,158 $36,116,191 $26,585,817
Marketing services 4,805,488 4,733,290 4,307,855
----------- ----------- -----------
56,106,646 40,849,481 30,893,672
---------- ---------- ----------
Costs and expenses:
Cost of products sold 42,088,936 29,153,709 20,798,098
Cost of marketing services 2,955,924 3,022,666 3,209,115
Selling, general and administrative 10,757,890 8,230,850 6,991,821
---------- ----------- ----------
55,802,750 40,407,225 30,999,034
---------- ---------- ----------
Income (loss) from operations before interest and taxes 303,896 442,256 (105,362)
Interest expense, net - third party 126,887 181,251 104,076
Interest expense, net - related party 36,000 36,000 45,000
Provision for taxes 25,200 --- ---
Other (income) expense (13,109) 29,324 15,753
------------ ----------- -----------
NET INCOME (LOSS) $ 128,918 $ 195,681 $ (270,191)
=========== =========== ==========
EARNINGS (LOSS) PER SHARE $0.01 $0.02 $(0.07)
==== ==== ====
Weighted average shares outstanding 8,835,000 8,594,000 4,883,000
The accompanying notes are an integral part of the consolidated financial statements.
20
THE SOFTWARE DEVELOPER'S COMPANY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Series C Additional
Preferred Common Paid-in Cumulative Translation Treasury Stockholders'
Stock Stock Capital Deficit Adjustment Stock Equity
----- ----- ------- ------- ---------- ----- ------
BALANCE AT MARCH 31, 1994 $9,060 $77,834 $9,941,748 $(8,216,120) $(28,075) $(83,657) $1,700,790
===== ====== ========= ========= ====== ====== =========
Net income --- --- --- 195,681 --- --- 195,681
Issuance of Common Stock
(4,045 shares) --- 41 3,160 --- --- --- 3,201
Translation adjustment --- --- --- --- 50,317 --- 50,317
------- --------- ------------- ------------ ------ -------- ---------
BALANCE AT MARCH 31, 1995 $9,060 $77,875 $9,944,908 $(8,020,439) $22,242 $(83,657) $1,949,989
===== ====== ========= ========= ====== ====== =========
Net Income --- --- --- 128,918 --- --- 128,918
Conversion of Preferred Stock
(277,638 shares) - Series C (2,777) 2,777 --- --- --- --- ---
Issuance of Common Stock
(410,450 shares) --- 1,327 79,802 --- --- --- 81,129
Translation adjustment --- --- --- --- (673) --- (673)
Distributions --- --- --- (256,000) --- --- (256,000)
------- --------- -------------- ---------- ---------- --------- --------
BALANCE AT MARCH 31, 1996 $6,283 $81,979 $10,024,710 $(8,147,521) $21,569 $(83,657) $1,903,363
===== ====== ========== ========= ====== ====== =========
The accompanying notes are an integral part of the consolidated financial statements.
21
THE SOFTWARE DEVELOPER'S COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended March 31,
1996 1995 1994
----------- ----------- --------
OPERATING ACTIVITIES
Net income (loss) from continuing operations $ 128,918 $ 195,681 $ (270,191)
Adjustments to reconcile net income (loss) to
net cash used for operating activities:
Sale of marketing services for product (867,603) (1,235,590) (1,435,469)
Depreciation and amortization 456,293 473,732 444,823
Provision for losses on inventory 267,030 57,480 61,622
Provision for doubtful accounts receivable 722,415 340,751 380,160
Change in operating assets and liabilities:
Accounts receivable (905,580) (1,940,632) 479,977
Inventory 403,032 944,502 (121,574)
Other current assets 106,709 (17,067) 82,032
Other assets (138,387) (14,250) (22,242)
Accounts payable 278,077 1,928,242 (729,585)
Accrued payroll 201,301 158,823 (37,280)
Other accrued expenses 1,370,878 110,991 (586,419)
Customer Advances (55,209) (138,171) 34,998
---------- --------- -----------
Total adjustments 1,838,956 668,811 (1,448,957)
--------- ---------- ---------
Net cash provided by (used for)
continuing operating activities 1,967,874 864,492 (1,719,148)
Net cash (used for) provided by
discontinued operating activities --- (68,216) 627,581
--------------- ---------- ----------
Net cash provided by (used for)
operating activities $1,967,874 $ 796,276 $(1,091,567)
--------- ---------- ---------
The accompanying notes are an integral part of the consolidated financial statements.
22
THE SOFTWARE DEVELOPER'S COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT.)
Years Ended March 31,
1996 1995 1994
----------- ----------- --------
INVESTING ACTIVITIES
Capital expenditures for equipment and
leasehold improvements $ (239,824) $ (252,835) $ (227,443)
Business acquired in purchase transaction, net
of cash acquired --- --- 8,228
------------- ------------ -----------
Net cash used for investing activities $ (239,824) $ (252,835) $ (219,215)
--------- ---------- ----------
FINANCING ACTIVITIES
Net payments on line of credit (700,000) (1,401,000) (150,500)
Principal debt payments (22,092) (200,000) (121,171)
Principal payments under capital leases (44,711) (42,695) (39,324)
Proceeds from line of credit --- 1,423,470 ---
Net proceeds from debt --- 19,592 200,000
Dividends paid --- --- (49,678)
Distributions to ISC shareholder (231,000) --- ---
Net proceeds from issuance of stock 8,485 5,701 781,193
----------- ----------- -------
Net cash (used for) provided by
financing activities $ (989,318) $ (194,932) $ 620,520
--------- ---------- ----------
Effect of exchange rate changes on cash (673) 50,317 (24,946)
------------- ---------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 738,059 398,826 (715,208)
Cash and cash equivalents at beginning of year 672,386 273,560 988,768
---------- ---------- ----------
CASH AND CASH EQUIVALENTS AT
END OF YEAR $1,410,445 $ 672,386 $ 273,560
========= ========== ==========
Supplemental Disclosures of Cash Flow Information
Interest paid $ 162,887 $ 217,251 $ 208,974
Supplemental Disclosure of Non-Cash Activities
Non-cash distributions to ISC shareholder $ 25,000 --- ---
Property purchased under capitalized leases $ 317,847 --- ---
Collection of products in satisfaction of accounts
receivable-product $ 693,273 $1,203,640 $1,341,735
========= ========= =========
The accompanying notes are an integral part of the consolidated financial statements.
23
THE SOFTWARE DEVELOPER'S COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A -- NATURE OF THE BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION: The Company currently operates in one industry
segment. It distributes and markets specialty software and hardware and provides
marketing services to third-party software publishers. The financial statements
include the accounts and operations of the Company and its wholly-owned
subsidiaries, Software Developer's Company, GmbH and Internet Security
Corporation ("ISC"). The fiscal 1995 and 1994 financial statements presented
herein have been restated to reflect the financial results of the ISC
acquisition which has been accounted for as a pooling (also see Note I).
The financial statements of the Company also include the accounts and
operations of Personal Computing Tools (PCT), of which the Company acquired 94%
of the outstanding capital stock on June 29, 1993. The 6% equity interest in PCT
not acquired by the Company would be shown as minority interest in the fiscal
1996 and fiscal 1995 consolidated balance sheets and the fiscal 1996, 1995 and
1994 statements of operations, respectively. As of March 31, 1996, the Company
did not report minority interest because PCT incurred net losses that preclude
reporting minority interest (see Note H). All intercompany amounts and
transactions of all subsidiaries have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS: Cash and cash equivalents include time deposits with
a maturity of three months or less at the date of purchase.
CONCENTRATION OF CREDIT RISK: Financial instruments that potentially subject the
Company to concentration of credit risk consist primarily of cash and cash
equivalents and trade receivables. The Company restricts investment of temporary
cash investments to financial institutions with high credit standing. Credit
risk on trade receivables is minimal as a result of the large and diverse nature
of the Company's customer base.
REVENUE RECOGNITION: The Company's revenues from continuing operations are
primarily generated from the sale of "off-the-shelf" computer software and
specialty hardware to end-users and other resellers in both foreign and domestic
markets and the sale of advertising space within its own marketing programs such
as "The Programmer's SuperShop" catalog. The Company also resells advertising
space in third-party publications.
Revenues from software and hardware sales are recognized at the time of
shipment. These revenues are reflected as net product sales in the accompanying
Consolidated Statements of Operations and their related costs are reflected as
cost of products sold.
Net revenues from marketing services such as advertising in its
publications, direct mail and trade show promotions are reflected as net
marketing services income in the Consolidated Statements of Operations when the
services are substantially completed and their related costs are reflected as
cost of marketing services income.
Value received for marketing services may be in the form of cash or an
equivalent value of products for inventory. The inventory received as
consideration is sold through The Programmer's SuperShop. The amount owed the
Company in the form of inventory is reflected as accounts receivable - product
in the Consolidated Balance Sheets.
24
The Company also resells advertising space in other vendors' publications
and those proceeds are recognized upon distribution of the publication and the
proceeds are offset against advertising costs and are reflected in Selling,
General and Administrative expenses in the Consolidated Statements of
Operations.
The Company's ISC subsidiary generates revenue from licensing the
rights to use software products developed by Checkpoint Software to end users
and resellers. ISC also generates revenues from consulting and training services
performed for license customers and from support and software update rights
(i.e., maintenance).
Revenues from perpetual software license agreements are recognized as
revenue upon delivery of the software as long as there are no significant
post-delivery obligations.
Revenues for maintenance are recognized ratably over the term of the
support period. If maintenance is included in a license agreement, such amounts
are unbundled from the license fee at their fair market value based on the value
established by independent sale of such maintenance to customers. Consulting
revenues are primarily related to implementation services performed under
separate service arrangements related to the installation of ISC's software
products. Such services do not include customization or modification of the
underlying software code. If included in a license agreement, such services are
unbundled at their fair market value based on the value established by the
independent sale of such services to customers. Revenues from consulting and
training services are recognized as the services are performed.
ACCOUNTS RECEIVABLE - PRODUCT: The Company provides marketing services to
third-party software publishers which is paid in cash or product that the
Company resells in the normal course of business. Until these products are
received into inventory, they are carried as accounts receivable - product.
These receivables are valued at the equivalent value of marketing services
income. The Company evaluates the marketability of these products by comparing
recent sales history and forecasted sales levels to the balances in accounts
receivable - product, resulting in periodic adjustments to the carrying value of
accounts receivable - product or the resultant inventory balance.
INVENTORIES: Inventories are stated at the lower of cost (first-in, first-out)
or market and consists of products held for sale.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS: Equipment and leasehold improvements are
stated at cost, less accumulated depreciation and amortization. Depreciation is
provided using an accelerated method over an estimated useful life of five
years. Amortization of leasehold improvements is provided using the
straight-line method over the lives of the respective leases or the useful lives
of the improvements, whichever is shorter.
Maintenance and repairs are charged to operations as incurred. Renewals
and betterments which materially extend the life of assets are capitalized and
depreciated. Upon disposal, the asset cost and related accumulated depreciation
are removed from their respective accounts. Any resulting gain or loss is
reflected in earnings.
INTANGIBLE ASSETS: Intangible assets consist of goodwill, customer lists and
non-compete agreements arising from a business acquisition (see Note H). The
values assigned to intangible assets, based in part on independent appraisals,
are being amortized on a straight-line basis.
Goodwill representing the purchase price over the estimated fair value of
the net assets of the acquired business is being amortized over a fifteen-year
period. Other intangible assets are being amortized over a five-year period.
25
CUSTOMER ADVANCES: Prepayments made by customers are included as customer
advances and recorded as sales when shipments are made.
INCOME TAXES: The Company adopted Statement of Financial Accounting Standards
No. 109 "Accounting for Income Taxes" (SFAS 109) in fiscal 1994.
The adoption of SFAS 109 changes the Company's method of accounting for
income taxes from the deferred method (APB 11) to an asset and liability method.
Previously, the Company deferred the tax effects of timing differences between
financial reporting and taxable income. The asset and liability method requires
the recognition of deferred tax liabilities and assets for the expected future
tax consequences of temporary differences between tax bases and financial
reporting bases of other assets and liabilities.
MARKETING EXPENSES: Marketing expenses are charged to Selling, General &
Administrative expenses as incurred.
SUPPORT SERVICES: In conjunction with the sale of "off the shelf" products, the
Company provides, free of charge, pre-sale telephone technical support and
vendor supplied product literature. The Company provides only minimum levels of
post-sales support to its customers, as the manufacturers of the software
generally provide post-sales support to end-users. The costs, which are not
material, relating to these services are expensed as incurred and included in
Selling, General & Administrative expenses.
EARNINGS (LOSS) PER SHARE: Income per share of common stock is based upon the
weighted average number of common shares outstanding excluding the effects of
certain options and warrants, which are deemed to be anti-dilutive. Included in
the calculation of weighted average shares is the 465,838 shares issued for the
merger with Internet Security Corp. (see footnote J). The amount of the assumed
dividend was $0 for fiscal 1996 and 1995, and $50,000 for fiscal 1994.
EXPORT SALES: The Company generates revenues through the sale of products both
domestically and overseas. Export sales generated revenues of approximately
$1,694,000, $2,097,000 and $2,842,000 during fiscal 1996, 1995 and 1994,
respectively.
FOREIGN CURRENCY TRANSLATION: The functional currency of the Company's only
foreign subsidiary is the local currency. Balance sheet accounts of the
Company's foreign subsidiary are translated into U.S. dollars at current
exchange rates. Income statement items are translated at the average rates
during the year. Net translation gains or losses are recorded directly to a
separate component of stockholders' equity. Foreign currency transaction gains
and losses are included in the determination of fiscal 1996, 1995 and 1994
income, respectively.
POST-RETIREMENT BENEFITS OTHER THAN PENSIONS: The Company does not offer
post-employment benefits to its retirees and as a result, is unaffected by
Statement of Financial Accounting Standards No. 106 or 112 issued in December
1990 and November 1992, respectively.
401K PLAN: Since fiscal year 1991, the Company has maintained a 401K Plan for
its employees. The Plan is intended as a retirement and tax deferred savings
vehicle. All employees of the Company whose customary employment is for more
than 20 hours per week are eligible to participate in the 401K Plan. Employees
make their contributions through biweekly payroll deductions which are invested
in any combination of several investment funds. The Company has no matching
contribution obligation and made no contribution to this Plan in either fiscal
1996, 1995 or 1994.
26
FAIR VALUE OF FINANCIAL INSTRUMENTS: Statement of Financial Accounting Standards
No. 107, "Disclosures About Fair Value of Financial Instruments," requires the
Company to disclose estimated fair values for its financial instruments,
exclusive of leases, for which it is practicable to estimate fair value.
For financial instruments including cash, accounts receivable and
payable, and accrued expenses, working capital line of credit and term loan with
a related party due within one year, it is assumed that the carrying amount
approximates fair value due to their short maturities.
RISKS AND UNCERTAINTIES: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amount of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amount of revenues and expenses during
the reported period. Actual results could differ from those estimates.
NOTE B -- EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are stated at cost and consist of the
following:
1996 1995
---- ----
Computer equipment $1,757,049 $1,251,372
Leasehold improvements 581,336 559,892
Furniture and fixtures 330,070 299,520
Vehicle --- 25,000
--------------- -----------
2,668,455 2,135,784
Less accumulated depreciation and
amortization (1,923,187) (1,594,813)
--------- ---------
$ 745,268 $ 540,971
========== ==========
The depreciation expense recognized for the fiscal years ended March 31,
1996, 1995 and 1994 was $328,374, $340,389 and $345,076, respectively.
NOTE C -- BORROWINGS
During March 1995, the Company entered into a working capital line of
credit (the "Line") with Silicon Valley Bank. Under the agreement, the Company
may borrow up to a maximum of $2,000,000 based upon the availability of eligible
accounts receivable. The Line bears interest at Prime plus 2.5%. Prime was 8.25%
at March 31, 1996. The Line is collateralized by all assets of the Company and
it expires in July, 1996. The Line requires the Company, among other things, to
maintain certain minimum levels of earnings, net worth and certain financial
ratios.
On October 19, 1993, the Company exchanged and extended a term loan with
Stephen L. Watson, the Company's Chairman of the Board of Directors. The note is
collateralized by all assets of the Company. The note was due and payable in
December 1993 with interest payable monthly at 16% per annum. The principal of
$300,000 was extended to December 1996, with interest accruing at 12% per annum,
interest payable monthly in arrears. In any month which the Company does not
make a profit, the interest will be deferred and paid to the extent of profits
in the following months without compounding unpaid interest. The note is
subordinated to any commercial bank or other financial institution debt up to
$4,000,000.
27
NOTE D -- COMMITMENTS AND CONTINGENCIES
The Company leases office space and equipment under leases classified as
operating leases. Rent expense amounted to $585,469 in fiscal 1996, $653,872 in
fiscal 1995, and $787,143 in fiscal 1994. During fiscal 1996, the Company
entered into a capital lease for computer software and hardware totaling
$317,847. Total payments on the capitalized lease were $19,243 in fiscal 1996.
Total accumulated amortization on the capitalized lease was $28,066 in fiscal
1996. Future minimum lease payments under all noncancelable capital and
operating leases as of March 31, 1996 are as follows:
Capital Operating
Year ending March 31, Leases Leases
------ ------
1997 $115,457 $288,291
1998 115,457 40,062
1999 96,214 9,960
2000 --- 2,080
------------ ---------
$327,128 $340,393
=======
Less amount representing interest $ 26,981
Present value of net minimum lease payments $300,147
=======
There are no material outstanding legal proceedings.
NOTE E -- INCOME TAXES
As discussed in Note A, the Company adopted SFAS 109 in fiscal 1994. SFAS
109 requires the recognition of deferred tax assets and liabilities for the
future tax consequences attributable to the differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. In addition, the new accounting standard requires the
recognition of future tax benefits, such as net operating loss carryforwards, to
the extent that realization of such benefits is more likely than not.
The cumulative effect of initial adoption on prior years' retained
earnings was not significant. Additionally, the effect of the adoption of SFAS
109 upon income before taxes for fiscal 1994 was not significant.
The components of the provision for income taxes are as follows:
1996 1995 1994
---- ---- ----
Current tax expense:
Federal $ 6,200 --- ---
State 19,000 --- ---
------ ------- -----
Deferred tax expense (benefit):
Federal --- --- ---
State --- --- ---
--------- ------- -----
Total $25,200 --- ---
====== ======= =====
28
Significant components of the deferred tax assets are as follows:
1996 1995 1994
---- ---- ----
Net operating loss carryforward $2,809,833 $3,004,321 $2,928,907
Accruals and reserves 258,662 180,012 457,400
Research and development tax credits 154,238 86,600 86,600
Depreciation 65,524 184,573 165,800
Other, net --- 10,060 58,600
Valuation allowance (3,288,257) (3,465,566) (3,697,307)
--------- --------- ---------
$ --- $ --- $ ---
============== ============= =============
The provision for income taxes differs from the federal statutory rate of
34% as follows:
1996 1995 1994
---- ---- ----
Federal provision (benefit) at 34% $43,832 $ 66,532 $(91,865)
State income taxes 19,000 --- ---
Alternative minimum tax-Federal 6,200 --- ---
Meals and entertainment 6,913 3,826 ---
Foreign loss, not benefitted 8,431 77,233 35,900
Goodwill 45,219 45,222 ---
Net operating losses (NOL) - not benefitted --- --- 38,739
Utilization of previously unrecognized NOL (75,787) (192,813) ---
S-Corporation income not subject to tax (28,608) --- ---
Other --- --- 17,226
--------- ---------- ------
$25,200 $ --- $ ---
========= ========== ==========
Due to the uncertainty surrounding the realization of tax benefits in
future tax returns, the net deferred tax assets at March 31, 1996, 1995 and 1994
have been offset by a valuation allowance.
At March 31, 1996, the Company has available for Federal income tax
purposes net operating tax loss carryforwards of approximately $6,975,000 that
are available to offset future taxable income at various dates through fiscal
2011. Certain provisions in the Internal Revenue Code may limit the net
operating loss available for use in any given year in the event of any
significant change of ownership.
NOTE F -- CAPITAL STOCK AND CAPITAL STOCK WARRANTS
COMMON STOCK: On January 13, 1993 the Company completed a private placement of
537,898 shares of Common Stock for net proceeds of approximately $992,173.
29
On June 29, 1993 the Company acquired 94% of the outstanding capital
stock of Personal Computing Tools, Inc. (PCT) of Campbell, California in
exchange for 392,996 shares of the Company's Common Stock. This agreement became
effective on June 29, 1993 and was accounted for under the purchase method of
accounting. If the actual selling price of the Company's Common Stock failed to
average less than two dollars ($2.00) per share (adjusted for stock splits or
stock dividends or other similar events) for any consecutive thirty-day period
within eighteen months of the June 29, 1993 closing date, additional shares of
the Company's Common Stock would have been issued to the PCT selling
stockholders (on a pro-rata basis) such that the total aggregate number of
shares of the Company's Common Stock to be issued to the PCT selling
stockholders (including the initial shares) would be the number of shares
calculated by dividing $850,000 by the average actual selling price per share of
the Company's Common Stock during the thirty-day period immediately prior to the
completion of eighteen months from the June 29, 1993 closing date.
The actual selling price of the Company's Common Stock did fail to
average less than two dollars ($2.00) per share for a consecutive thirty-day
period within the eighteen-month period ended December 29, 1994. Per the terms
of the Agreement, the amount of additional shares that would have been issued
equaled 575,000 shares. On June 26, 1995 the Company and representatives of the
former PCT shareholders signed a Stock Issuance and Settlement Agreement whereby
only an additional 79,460 shares of Common Stock would be issued.
SERIES C PREFERRED STOCK: On October 19, 1993, the Company completed a private
placement of Series C Preferred Stock and a recapitalization transaction.
Private investors purchased 905,968 shares of Series C Preferred Stock at a
price of $1.00 per share, resulting in net proceeds of approximately $781,000.
The Series C Preferred Stock is convertible into Common Stock on a one-for-one
basis and votes with the Common Stock on the same basis. The Series C Preferred
Stock contains a number of features including a fixed liquidation preference of
$2.00 per share, anti-dilution rights and two (2) Board of Director positions.
The Company used the net proceeds from the private placement for working capital
and general corporate purposes.
The recapitalization transaction involved the exchange of all of the
Company's Series A Preferred Stock and Series B Senior Preferred Stock for
4,288,890 shares of Common Stock, increasing the total number of shares of
Common Stock outstanding to 7,292,453. This recapitalization removed the
liquidation preference, including cumulative dividends, payable to the preferred
holders of approximately $7,000,000. In the recapitalization, holders of the
Company's previously existing preferred stock exchanged their shares for Common
Stock, terminating all prior agreements, but retaining certain registration
rights.
Included in the aggregate of 905,968 shares of Series C Preferred Stock
issued by the Company were 26,877 shares of Series C Preferred Stock issued in
complete satisfaction of a $25,000 note payable plus $1,877 of accrued interest
to Trinity Ventures I, L.P. The note was acquired in the Company's prior
purchase of the capital stock of Personal Computing Tools, Inc.
During fiscal 1996, 277,638 shares of Series C Preferred Stock were
converted into 277,638 shares of Common Stock.
WARRANTS: In fiscal 1987, warrants to purchase 31,500 shares of Common Stock
exercisable at $2.57 were issued and expire June 30, 1997.
During fiscal 1991, the Company issued warrants to purchase 300,000
shares of Common Stock at $4.00 per share. These warrants expire June 30, 1997.
At March 31, 1996, the Company has reserved 331,500 shares of Common Stock
for the issuance upon exercise of these warrants.
30
NOTE G -- STOCK OPTION PLANS
The Company has stock option plans as described hereunder. Options are
granted at fair market value at the date of grant being the average of the
closing bid and asked prices of the Common Stock on the day preceding the date
of grant.
1986 NONSTATUTORY STOCK OPTION PLAN: The 1986 Nonstatutory Stock Option Plan
provides for the issuance of options to purchase shares of Common Stock, up to
an aggregate of 52,500 shares which are reserved for issuance. Options can be
granted to employees, consultants or others as approved by the Board of
Directors. These options have exercise prices of 100% of the fair market value
of Common Stock on the date of grant. The options terminate for employees with
respect to all shares of stock not previously purchased within 30 days upon the
date of termination of the employee's employment or for non-employees at the end
of ten years from the date of grant.
1987 STOCK PLAN: The 1987 Stock Plan reserves for issuance 750,000 shares of
Common Stock for the benefit of all employees as authorized by the Board of
Directors. Incentive stock options may be granted to employees and officers, and
non-qualified options may be granted to directors, officers, employees and
consultants of the Company under the 1987 Stock Plan. The exercise price is set
at 100% of the fair market value of Common Stock on the date of grant. The
aggregate fair market value of shares issuable under the 1987 Stock Plan due to
the exercising of incentive stock options by an employee or officer may not
exceed $100,000 in any calendar year.
1988 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN: The 1988 Non-Employee Director
Stock Option Plan ("1988 Director Plan") offers options to members of the Board
of Directors who are neither employees nor officers of the Company in
appreciation of their service. The 1988 Director Plan is administered by the
Compensation Committee of the Company.
This plan authorizes the grant of options for 70,000 shares of Common
Stock. Each newly elected non-employee director will automatically receive an
option to purchase 8,750 shares. The exercise price per share of options granted
under the 1988 Director Plan is 100% of the fair market value of Common Stock on
the date of grant. The options shall expire six years from the date of the
option grant. They terminate thirty days (or one hundred and eighty days if due
to disability or death) following the date on which the optionee ceases to be a
member of the Board of Directors. They are exercisable in installments, with 20%
becoming exercisable on each anniversary of the date of grant.
1990 EMPLOYEE STOCK PURCHASE PLAN: The 1990 Employee Stock Purchase Plan ("Stock
Purchase Plan") is intended as an incentive to, and to encourage stock ownership
by, all eligible employees of the Company and participating subsidiaries and to
encourage them to remain in the employ of the Company. Substantially all
employees of the Company and any participating subsidiary who have completed six
months of employment with the Company or any subsidiary and whose customary
employment is for more than 20 hours per week and more than five months per
calendar year are eligible to participate in the Stock Purchase Plan.
The Stock Purchase Plan presently authorizes the issuance of 100,000
shares of Common Stock (subject to adjustment for capital changes) pursuant to
the exercise of nontransferable options granted to participating employees.
During fiscal 1996, 1995 and 1994, 1,216, 4,045, and 2,325, shares,
respectively, of the Company's Common Stock were issued under the Stock Purchase
Plan.
31
1991 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN: The 1991 Non-Employee Director
Stock Option Plan authorizes the grant of options for up to 70,000 shares of
Common Stock. This plan is identical to the 1988 Director Plan, except that
options shall expire ten years from the date of the option grant. On May 15,
1991, each of the non-employee directors was granted options to purchase 8,750
shares of Common Stock. After May 15, 1991, each new director also received an
option to purchase 8,750 shares of Common Stock.
1993 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN: The 1993 Non-Employee Director
Stock Option Plan authorizes the grant of options of up to 60,000 shares of
Common Stock. This plan is identical to the 1988 and 1991 Director Plans, except
the options shall expire ten years from the date of the option grant and options
are granted after the performance of services. On each of April 1, 1993 (fiscal
year 1994), April 1, 1994 (fiscal year 1995), and April 1, 1995 (fiscal year
1996) each of the non-employee directors was granted 3,500 shares of Common
Stock.
1994 STOCK PLAN: The 1994 Stock Plan is authorized to grant up to 1,500,000
options to purchase shares of Common Stock as incentives to officers, directors,
employees and consultants of the Company, as approved by the Board of Directors.
The options have an exercise price of 100% of the fair market value of Common
Stock on the date of the grant and vest over periods as determined by the Board
of Directors. At March 31, 1996, 1,077,500 options have been granted under the
plan.
1994 NON-EMPLOYEE DIRECTOR PLAN: The 1994 Non-Employee Director Plan authorizes
the grant of up to 105,000 shares to directors who are not employees or officers
of the Company as an inducement to obtain and retain the services of qualified
persons. Each director who is neither an officer nor employee of the Company was
automatically granted an option to purchase 17,500 shares of the Company's
Common Stock at an exercise price equal to 100% of the fair market value of the
Company's Common Stock on the date of grant. Options vest ratably over five
years from the date of grant and expire ten years from the date of grant. During
fiscal 1994, each of the six (6) qualified directors received an option to
purchase 17,500 shares of the Company's Common Stock.
Information as to the Company's stock options is as follows:
1996 1995 1994
---- ---- ----
Options outstanding at beginning of year 1,389,404 768,330 583,575
Option activity during the year:
Granted 417,500 845,052 435,000
Exercised (75,450) --- ---
Cancelled (207,600) (223,978) (250,245)
---------- ---------- -------
Options outstanding at end of year 1,523,854 1,389,404 768,330
========= ========= =======
Price range of outstanding options $0.50-8.13 $0.50-8.13 $1.00-8.13
========= ========= =========
Price range of options exercised $0.50-1.25 --- ---
========= ============ ==========
Options exercisable at end of year 852,636 717,495 431,563
========= ========= =========
Options available for grant at end of year 1,083,646 1,218,096 234,170
========= ========= =========
32
NOTE H -- ACQUISITION
On June 29, 1993, the Company acquired 94% of the outstanding capital
stock of Personal Computing Tools, Inc. ("PCT"). PCT, a California corporation,
is a catalog distributor of PC-based specialty hardware and software products
for engineers, scientists and technical professionals. This acquisition has been
recorded using the purchase method of accounting.
In August 1993, the Company integrated the California operations of PCT
into the Company's Massachusetts operations and added PCT's catalog to its line
of direct marketing activities. The results of operations since the acquisition
of PCT have been included in the Company's Consolidated Statements of
Operations. The six percent equity interest in PCT not acquired by the Company
would be shown as minority interest in the fiscal 1996 Consolidated Statement of
Operations and balance sheet. However, as of March 31, 1996, the Company
reported no minority interest because PCT incurred net operating losses that
preclude reporting minority interest.
Intangibles recognized in the transaction consisted of customer lists of
$248,000 and non-compete agreements of $150,000. The intangibles will be
amortized using the straight-line method over a five-year period. Goodwill
recognized in the transaction of $803,000 is being amortized using the
straight-line method over a fifteen-year period. The Company recognized
amortization expense of