U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
X Annual Report under Section 13 or 15 (d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 1997
Transition report under Section 13 or 15 (d) of the Securities
Exchange Act of 1934 (No fee required)
For the transition period from __________ to __________
Commission file number 0-13049
ALYDAAR SOFTWARE CORPORATION
(Name of Small Business Issuer in its Charter)
North Carolina 13-3006788
(State of Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2101 W. Rexford Road, Charlotte, North Carolina 28211
(Address of Principal Executive Offices) (Zip Code)
(704) 365-2324
(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12 (g) of the Exchange Act:
Common Stock
(Title of Class)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for past 90 days.
Yes X No_____
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-K is not contained in this form, and no disclosure will
be contained, to the best of registrant's knowledge, 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. X
State the aggregate market value of the voting stock held by
non-affiliates computed by reference to the price at which the stock was sold,
or the average bid and asked prices of such stock, as of a specified date within
the past 60 days. $173,952,160 as of March 30, 1998.
Documents Incorporated by Reference: See Footnotes to Exhibits
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PART I
Item 1. Business
Background
Alydaar Software Corporation ("Alydaar" or the "Company") is presently
engaged in the business of providing software reengineering services
specializing in the correction of existing mainframe computer software systems
to manage the year 2000 and thereafter.
Alydaar was founded in 1982 as a Utah corporation under the name of
Enertronix Corporation ("Enertronix"). In 1992 Enertronix changed its name to
Alydaar. Alydaar later changed its corporate domicile to North Carolina through
a same day merger with and into a North Carolina corporation, Daar Corporation,
established by Alydaar for that express purpose. Alydaar became the surviving
corporation.
The Company commenced business in 1992. Initially, the Company focused
on research and development of proprietary software known as SmartCode(R)
("SmartCode") to provide automated software re-engineering services specializing
in computer language translation and systems migration. SmartCode is computer
language and platform independent with the capability of understanding all
computer language dialects, including multi-dialect languages such as PL/1,
COBOL, Fortran and Natural. In 1994 and 1995, the Company performed software
language translation services for such companies as The First Boston Corporation
and Stratacom, Inc. In 1995 the Company concluded that SmartCode could be used
for more complex tasks than language translation and devoted its efforts,
utilizing the basic framework of SmartCode, to develop a proprietary detection
and solution process to address the forthcoming year 2000 ("Y2K") problem (the
"Y2K Problem").
The Y2K Problem arises from the fact that most software programs
automatically assume the first two digits of any year reference are "19," and
thus the year 2000 and thereafter will be read as "1900," "1901," and etc. If
the software is not converted to correct the Y2K Problem, the two digit field
"00" could result in improper calculations and, in many cases, cause programs
not to work properly or cease to function. The Gartner Group, Inc., one of the
leading technology and consulting firms, estimates that correcting the Y2K
Problem ("Remediation") will involve expenditures by corporations and
governments ranging from $300 to $600 billion globally. The standard method
employed in estimating the cost for Remediation is to determine the number of
lines of code ("LOC") that are contained within each user's programs and
multiplying it times a cost per LOC. Industry wide, the costs per LOC generally
range from $.30 to $1.50. It is anticipated that such costs will increase
significantly as the year 2000 approaches.
Worldwide, large business and governmental organizations rely on
large-scale computer applications to help manage their businesses. These
applications, many of
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which are mission-critical, contain the core knowledge and processes that
support the major operations of these organizations. Examples of such
applications include insurance claims processing systems, on-line banking
systems, manufacturing systems and utility and telephone billing systems. These
mission-critical applications primarily run on large, mainframe computers using
programs written in a variety of mainframe programming languages. Most of these
applications must be remediated to become Y2K compliant.
Because most businesses, large or small, and governments rely on
"mission-critical" software to operate their core business functions, failure to
correct latent Y2K software problems will result in malfunction of these
essential processes. The result of these malfunctions can range from incorrect
customer billings to complete shutdown of the companies' operations. Therefore,
there is no alternative to addressing and eliminating the latent defects.
Between 1995 and the first quarter of 1997, the Company devoted all of
its efforts to extensive research in order to perfect SmartCode as a cost
effective and fully automated, artificial intelligence-based solution to the Y2K
Problem. The goal was to develop SmartCode and a scalable and repeatable
methodology which would not be disruptive or interfere with the operations of a
client's normal business processes.
As a result of the research and development, the Company has now
developed a Remediation solution to the Y2K Problem utilizing SmartCode to
automatically identify and remediate a client's Y2K Problem. Most importantly,
SmartCode can automatically remediate at least 15 different computer languages
and dialects. It is this latter capability which presently distinguishes Alydaar
from its competitors, who mainly have automated solutions to remediate the
computer language COBOL only. The Company believes that its automated
Remediation capabilities for computer languages other than COBOL gives it a
competitive advantage.
Alydaar's approach to Y2K services consists of a step-by-step process
starting with a methodology for extraction of the clients' software programs
which the clients deem necessary to correct and delivery of this code to
Alydaar. Once Alydaar receives the programs, they are processed and corrected
and then sent back to the clients for testing and reintroduction back into the
clients' production system. Since all Remediation is performed at the Company's
facilities, the Company believes that it is saving its clients time and money by
not using the clients' valuable computer resources and personnel during
Remediation. Each step of Alydaar's factory process is controlled by procedures
and checks to insure the most accurate results possible. In addition, extensive
use of Alydaar's proprietary SmartCode software reduces manual corrections to
the minimum extent practicable resulting in a low defect rate on code returned
to the client. Because of Alydaar's approach, a minimum amount of client
software must be changed.
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Present Operations
Since the second quarter of 1997, the Company has been engaged full
time in performing Remediation services pursuant to contracts with various
corporations as well as state governments. Prior to the Company actually
providing its services, the client is required to package its software in
accordance with Alydaar's Guide to Packaging. Once the client's software is
received at Alydaar and properly compiled, there are five phases involved in the
Remediation process. In Phase One, SmartCode scans a client's code and
automatically identifies the areas for Remediation. Once this is completed,
Phase Two is triggered, which involves the manual verification of the Phase One
results. Phase Three involves an automatic process that inserts code that
corrects the Y2K Problem. Phase Four involves another manual verification of the
output of Phase Three. Finally, Phase Five involves an automated quality check
to insure that the client's modified code is syntactically correct. The entire
process, depending upon the size of the client's applications and the computer
language(s) present, can take from three to eight weeks for completion.
Once the Company has completed its Remediation, the remediated software
is returned to the client. The client generally has sixty (60) days to test the
code to identify any Y2K issues, which the Company will then correct free of
charge. The Company prides itself on the fact that its error rate at the current
time is approximately 2.7 errors per 1,000,000 lines of code, which the Company
believes is substantially lower than the prevailing market average. The
Company's low error rate serves to attract customers because they believe
Alydaar's process reduces testing time and costs. The Company believes that it
can further improve on its error rate through additional stringent quality
controls.
The standard contract employed by the Company generally requires
payment of an initial percentage of the contract price after receipt and count
of the client's code, a further percentage upon delivery of the code back to the
client and a remaining small percentage at the end of the testing period. At the
inception, the Client is quoted a price for each LOC which can vary as a result
of the number of LOC and the complexity of the undertaking.
In addition to normal Remediation services, the Company also provides
auditing services. The auditing services involve a review by the Company,
through SmartCode, of a client's software which has been remediated either
internally or by a third party. Many companies that have performed internal
Remediation are beginning to question the accuracy of their own Remediation and
are now looking for third-party validation. The Company believes that confirming
the accuracy of already remediated software will become a significant source of
revenues in the future.
For the year ended December 31, 1997, the Company performed services
under 41 contracts, many with major corporations. Some of Alydaar's clients
included E.I. Dupont DeNemours & Co., 3M Corporation, British Airways PLC, AER
Lingus, Ltd., Nabisco, Inc., R.J. Reynolds Tobacco Company, and Smith Barney,
Inc.
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Marketing
Over the last few years, computer-dependent companies and the
government have generally been slow to address the Y2K Problem for a variety of
reasons. To date there has been a general lack of awareness of the pending
problem, an unwillingness to admit that a potential problem exists or an
unwillingness to immediately address the problem because of the high costs that
must be taken as an expense in the year in which the costs are incurred, which
could materially affect a company's earnings. As a result, many companies and
governments have failed to budget for an expenditure that could be substantial.
Many companies and governments are just now beginning to address the Y2K
Problem.
The Company currently conducts direct sales through sales offices
located throughout the United States and Europe with a staff of 25 salespeople.
The salespeople receive both a base salary and a commission. Names of potential
corporate clients are obtained through a variety of sources, including master
databases which the Company has purchased from various sources. The Company also
markets its services through advertising in major trade magazines, attendance at
various trade shows and telemarketing.
The Company has recently introduced a sales promotion whereby the
Company demonstrates SmartCode's Remediation capabilities by remediating 10,000
LOC at no charge to a prospective client. In this way, the Company introduces
its services to prospective clients to determine if their software requires
Remediation or to provide a free check on the accuracy of any previous
Remediation performed by the prospective client or a third party. This new
program has generated interest in Alydaar's services and resulted in new
contracts.
The scalability of the Company's Remediation process enables it to
service clients with as little as 1,000,000 LOC or clients with 100 million or
more LOC within the same time period. The Company currently targets companies
with more than $500 million or more in revenues or companies or governmental
agencies which have a Y2K budget of $1,000,000 or more. While the Company has
been successful in obtaining contracts following this marketing strategy, there
can be no assurance that the Company will be successful in the future. (See
"Risk Factors - Uncertainty of Current and Future Demand for Y2K Solutions".)
In addition to direct marketing, the Company has entered into business
arrangements with several other computer software service providers under which
those providers recommend Alydaar for code Remediation services. In return the
providers receive either a discount to Alydaar's list prices or a commission.
In October 1997, Alydaar entered into a one-year agreement with
Compuware Corporation ("Compuware"). The agreement calls for Alydaar to perform
Remediation services as a subcontractor for Compuware's customers. Compuware is
a major provider
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of Y2K testing products and services with at least 11,000 customers worldwide.
Under the arrangement, Alydaar will receive a percentage of its normally quoted
list prices for such services. The Company has already received several
significant contracts through Compuware's recommendation and believes that this
relationship will produce significant revenues in the future.
The Company also markets its services internationally through its
wholly owned subsidiary, Alydaar International Ltd. ("Alydaar International"),
which the Company acquired in July 1997. Prior to the acquisition, Alydaar
International marketed the Company's services through an exclusive arrangement
which permitted the use of the name "Alydaar" for the United Kingdom and certain
other designated European countries. The subsidiary was acquired by an exchange
of stock and the issuance of warrants and was accounted for as a purchase
transaction. (See "Financial Information - Footnotes to Audited Financial
Statements").
To further expand its international business, the Company has also
entered into marketing alliances with computer services organizations to market
Alydaar's services in countries not covered by the Company's direct sales. These
countries include South Africa, Australia, New Zealand, Monaco (for Poland),
Switzerland, Norway, Sweden and Denmark. These alliances generally provide for
the companies to market Alydaar's Y2K services to their customers and receive a
commission or discount to list prices.
The Company also intends to target European financial institutions and
other affected businesses for an automated solution to the conversion of
software for the change of the various European currencies to the "Euro" which
is anticipated to begin by January 1, 1999. The Gartner Group Inc. estimates
that the changeover to the "Euro" will cost $150 Billion to $400 Billion to
upgrade existing computer systems for financial institutions, other businesses
and governments. There can be no assurance that the Company will be able to
effectively penetrate this market since at the present time the Company is still
in the process of developing a SmartCode tool for the conversions and as such
may not be successful. In addition, competitors may be much further advanced in
their development of an effective solution and may be able to introduce their
solution earlier than Alydaar can.
Competition
The Company is confronted with two distinct levels of competition:
other companies that compete directly with Alydaar by offering other types of
Remediation and software services and those companies which use their internal
technical staff to complete Remediation.
On the first level, the Company presently competes with companies which
are much better established, more widely known, have been offering computer
software services for a much longer period and have far greater resources than
the Company. Some of the Companies are International Business Machine, Inc.,
Computer Associates International Inc., Computer Horizons, Inc. and Keane, Inc.
In addition, within the last six months, there
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has been a proliferation of new companies claiming to have Remediation
capabilities. The Company does not believe that these new emerging companies
pose a significant competitive threat to the Company's success because they
appear inadequately staffed, and, as yet, have no proven track record. However,
there is always the possibility that some of these companies could be successful
and therefore could pose competition for the Company.
The second level of competition arises from the fact that many large
businesses plan to do their own Remediation by using their own personnel and
licensing of Remediation "tools" which are marketed by certain vendors such as
Viasoft, Inc. and Peritus Software Services, Inc. While this poses significant
competition, the Company believes that as its services and reputation become
better known in the marketplace, companies that are now considering in-house
Remediation may decide to use the Company's services. In addition, the Company
believes that companies using internal staff who are not familiar with the Y2K
Problem might fail in their efforts, which might create opportunities for the
Company to provide its services. The Company believes that it can successfully
demonstrate that its Y2K approach is a more cost-efficient and time expedient
solution, especially when the Company's error rate demonstrates that the
customer could possibly eliminate or minimize unit testing.
Personnel
As of December 31, 1997 the Company had 260 employees. Additionally,
the Company had 43 contract programmers working at its site. The contract
programmers were supplied by independent agencies and Alydaar has the option to
hire these programmers as full-time Alydaar employees after a six-month period
of time. Of the workforce, 178 individuals are engaged in production, 62 in
research and development, 25 in sales, and the balance of 38 in administration
and systems support.
The Company recognizes that it may require more employees as business
increases. To date, the Company has been successful in recruiting qualified
personnel principally within the Southeastern United States and, as such, the
Company believes for the near future it will be able to satisfy its requirements
from this labor pool. (See "Risk Factors - Dependence on Key Personnel.")
Patents, Trademarks and Intellectual Property
The Company holds registered trademarks in the United States for
Alydaar(R) and SmartCode(R) and has filed for protection of these trademarks in
Europe.
In addition, Alydaar relies on a combination of copyright, trade secret
and trademark laws, and contractual provisions to establish and protect its
rights to its proprietary technology. The Company protects the source code
version of its products as a trade secret and as an unpublished copyrighted
work. In addition, the Company has adopted stringent internal security measures.
Despite these precautions, it may be possible for
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unauthorized parties to copy certain portions of the Company's software or
reverse engineer or obtain and use information that the Company regards as
proprietary. The Company has no patents and existing copyright and trade secret
laws offer only limited protection. (See "Risk Factors - Inability to Protect
Proprietary Rights".)
Future Plans and Strategy
The Company recognizes that the life cycle of the Y2K business is
limited. While computer industry experts, such as the Gartner Group, Inc.,
estimate that the Y2K business will continue at least through the year 2003
because the limited amount of time remaining before January 1, 2000 is forcing
companies and governmental authorities to focus their immediate efforts on
remediating only their "mission critical" systems, the Company anticipates that
there will be a decline in the volume of Y2K business after the year 2000.
Therefore, in view of the short life-cycle, the Company has developed an
agressive acquisition strategy to acquire companies which are engaged in the
business of providing a broad range of computer services and products to
position the Company for continued growth after the year 2000. At the present
time, the Company is engaged in preliminary discussions with several acquisition
candidates. The Company believes that the current general trend is for large
companies to retain independent contractors to manage and to take responsibility
for day-to-day operations of their Information Technology departments, which is
known as "Outsourcing" or "Systems Integration." The Company intends to position
itself as an outsourcer or systems integrator through its acquisition strategy
and also by leveraging existing client relationships. Utilizing SmartCode, the
Company believes that it can automate many of the outsourcing processes and
tasks, and, as a result, achieve a significant competitive advantage and
increased profit margins from outsourcing. However, there can be no assurance
that the Company will be successful in its acquisition strategy or penetrating
other markets. Moreover, such acquisition strategy will be dependent upon the
ability of the Company to raise sufficient additional capital through internal
cash flow or debt or equity offerings. There can be no assurance that the
Company will be successful in raising such additional capital. (See "Risk
Factors - Future Acquisitions" and "Risk Factors - Technological Changes" and
"Dependence on Acquisitions.")
In addition, the Company currently has approximately 60 of its
employees engaged in research and development activities, including the further
adaptation of SmartCode to offer additional software re-engineering services,
such as conversion of the European currencies into the "Euro" as described
above; conversion of financial institutions' software for the mandated
conversions from fractions to decimals for stock transactions; and to offer
sophisticated language translation services such as converting software code
from COBOL 68 to COBOL 370.
Risk Factors
This Annual Report on Form 10-K contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities
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Exchange Act of 1934. Actual results could differ materially from those
projected in the forward-looking statements as a result of the risk factors set
forth below and elsewhere in this Annual Report on Form 10-K. In evaluating the
Company's business, prospective investors should carefully consider the
following factors in addition to the other information presented in this Annual
Report.
- Continuing Losses
For each year from December 31, 1994 to December 31, 1997, the
Company's financial statements have reflected operating losses, and as of
December 31, 1997, the Company has an accumulated deficit of $14,094,107. There
can be no assurance that the Company will ever achieve an operating
profitability on a quarterly basis, or if achieved, whether the Company will be
able to sustain an operating profitability in the future.
- Possible Fluctuation of Operating Results
The Company has experienced fluctuations in revenues. These
fluctuations are due, in part, to the fact that the Company only began to
generate significant revenues in the second quarter of 1997, when it began to
receive deliveries of LOC for Y2K Remediation services. The timing of completion
of customer engagements, especially at or near the end of any accounting period,
could cause variations in operating results from period to period and could
result in quarterly losses. In addition, the Company has experienced, and
expects to experience in the future, delays arising from the inability of
clients to extract and correctly package software from their mainframe systems.
These delays could result in variations in operating results during quarterly
and year-end periods. Finally, variations in operating results may occur as a
result of a number of other factors such as employee hiring, demand for the
Company's services, competitive conditions in the industry, foreign currency
exchange rates, changes in pricing policies by the Company or its competitors,
and the amount expended for research and development.
- Intense Competition
The market for the Company's Y2K services is intensely competitive at
two different levels: Remediation performed in-house and Y2K Remediation
software and services offered by direct competitors of the Company, many of whom
are better established and have far greater resources than the Company.
Likewise, the solutions for Y2K Remediation are characterized by rapid change in
technology and user needs and the frequent introduction of new products. (See
"Description of Business - Competition.")
- Uncertainty of Current and Future Demand for Y2K Solutions
The Company is currently focusing all of its efforts on the marketing
and sale of its Y2K services. Although the Company believes that the market for
solutions to the Y2K Problem will grow significantly as the year 2000
approaches, there can be no assurance that this market will develop to the
extent anticipated by the Company. In addition,
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organizations affected by the Y2K Problem may not be willing or able to allocate
the financial or other resources required to address the problem in a timely
manner. Many organizations may attempt to resolve the problem internally rather
than purchase tools and services from outside firms such as the Company. Due to
these factors, development of the market for the Y2K Problem is uncertain and
unpredictable. If the market fails to increase, or increases more slowly than
anticipated, the Company's business, operating results and financial condition
could be materially and adversely affected. Furthermore, the demand for Y2K
products and solutions is likely to diminish rapidly after the year 2000. As a
result, the Company could experience a significant decline in revenues, unless
it is able to leverage customer relationships and knowledge of customer systems
derived from Y2K services to market other products and services beyond the year
2000. There can be no assurance that the Company will be able to replace
revenues related to Y2K services and solutions after the year 2000. (See
"Business - Future Plans and Strategy.")
- Dependence on Acquisitions
In order for the Company to sustain its growth and viability after the
year 2000, the Company intends to acquire companies which offer a broader range
of computer services and products. There can be no assurance that the Company
will be able to complete any such acquisitions. Moreover, the Company will
require additional capital to finance such acquisitions and there can be no
assurance that the Company will be successful in raising additional capital.
(See "Business - Future Plans and Strategy.")
- Inability to Protect Proprietary Rights
The Company regards its software products and solutions as proprietary
and attempts to protect them under a combination of copyright, trade secret and
trademark laws as well as by contractual restrictions on employees and third
parties. Despite these precautions, it may be possible for unauthorized parties
to copy the Company's software or to reverse engineer or otherwise obtain and
use information the Company regards as proprietary. The Company has no patents,
and existing trade secret and copyright laws provide only limited protection.
Certain provisions of the client agreements generally used by the Company,
including provisions protecting against unauthorized use, copying, transfer and
disclosure, may be unenforceable under the laws of certain jurisdictions, and
the Company is required to negotiate limits on these provisions from time to
time. In addition, the laws of some foreign countries do not protect the
Company's proprietary rights to the same extent as do the laws of the United
States. There can be no assurance that the steps taken by the Company will be
adequate to deter misappropriation of proprietary information or that the
Company will be able to detect unauthorized use and take appropriate steps to
enforce its intellectual property rights.
Significant and protracted litigation may be necessary to protect the
Company's intellectual property rights, to determine the scope of the
proprietary rights of others or to defend against claims for infringement.
Although the Company is not currently involved in any litigation with respect to
intellectual property rights, infringement claims against
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software developers are likely to increase as the number of functionally similar
products in the market increases. There can be no assurance that third-party
claims, with or without merit, alleging infringement will not be asserted
against the Company in the future. Such assertions can be time consuming and
expensive to defend and could require the Company to cease the use and sale of
infringing products and services, to incur significant litigation costs and
expenses and to develop or acquire non-infringing technology or to obtain
licenses to the alleged infringing technology. If an infringement claim against
the Company were successful, there can be no assurance that the Company would be
able to develop or acquire alternative technologies or to obtain such licenses
on commercially acceptable terms. (See "Business - Patents, Trademarks and
Intellectual Property.")
- Dependence on Major Customers
During fiscal 1997, 3M Corporation, Science Applications International
Corporation (SAIC) and GE Capital Global Consumer Finance LTD accounted for 14%,
12% and 9% of the Company's revenues, respectively. The Company believes that
these customers may require additional Remediation services for other divisions
in the future, but these companies are not obligated to use the Company's
services exclusively. As such, the Company may not receive future work orders
from those customers, which could affect the Company's future revenues. However,
at the present time, the Company's customer base has broadened. Therefore, the
dependence on these large customers is decreasing, but the loss of these
relationships could affect Alydaar's future strategy after the year 2000.
- Risks from International Operations
Approximately 32% of the Company's total consolidated revenues for the
year ended December 31, 1997 were attributable to international sales. The
Company believes that international business will account for a significant
portion of its revenues in the future. International operations are subject to a
number of risks, including possible exchange rate fluctuations and difficulty in
enforcing agreements and collecting accounts receivable. The Company intends to
mitigate its exchange rate risk by requiring payment in US dollars. In addition,
the laws of certain countries do not protect the Company's products and
intellectual property rights to the same extent as do the laws of the United
States. There can be no assurance that the factors described above will not have
an adverse effect on the Company's future international revenues and,
consequently, on the Company's business, results of operations and financial
condition. (See "Management's Discussion and Analysis of Consolidated Financial
Condition and Results of Operations" and "Business - Sales, Marketing and
Distribution.")
- Dependence on Key Personnel
The Company's success will depend, in part, upon the retention of key
senior management and technical personnel. At the present time the Company does
not have employment agreements with its key personnel, nor does it maintain key
man life insurance on any of these persons. Further, the Company's success will
also depend in part on its
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ability to hire and retain skilled technical personnel. Although the Company
believes it will be able to hire such skilled technical personnel, an inability
to do so could materially adversely affect the Company's ability to deliver and
enhance its services.
- Ability to Manage Change and Rapid Growth
The Company expects its business to continue to undergo rapid growth
and expansion. If the Company experiences such rapid growth and expansion, the
Company's profitability will depend on, among other things, its ability to
manage a larger number of personnel and to handle those problems normally
associated with rapid growth.
- Possible Volatility of Stock Price
The Company's stock price has been highly volatile since it first
started trading. The Company believes that factors such as awareness of the Y2K
Problem, quarterly fluctuations in results of operations, announcements of new
acquisitions by competitors, change in revenue or earnings estimates by
securities analysts or other factors may cause the market price of the Company's
stock to continue to fluctuate, perhaps substantially. In addition, stock prices
for many technology companies fluctuate widely for reasons that may be unrelated
to operating results. Due to market and securities analysts' expectations of
continued growth and the higher price/earnings ratio at which the Company's
stock may trade, any shortfall in meeting such expectations may have a rapid and
significant adverse effect on the trading price of the Company's stock.
Fluctuations in the market price of the Company's stock may, in turn, adversely
affect the Company's ability to complete any targeted acquisitions, its access
to capital and financing and its ability to attract and retain qualified
personnel. (See "Market for the Company's Common Stock.")
- Influence by Existing Shareholder
Mr. Gruder, the Chief Executive Officer and President, is presently the
beneficial owner of approximately 40% of the outstanding shares of the Company's
Common Stock. As such, Mr. Gruder is in a position to influence the election of
directors and generally to direct the affairs of the Company.
- Unlikely to Declare Dividends
The Company has never declared or paid cash dividends on its capital
stock and does not anticipate paying any cash dividends in the foreseeable
future. The Company currently anticipates that it will retain future earnings,
if any, to fund the development and growth of its business.
- Forward-Looking Statements and Associated Risks
This Annual Report on Form 10-K contains certain forward-looking
statements, including (i) the potential size of and anticipated growth in the
Y2K compliance market; (ii)
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anticipated trends in the Company's financial condition and results of
operations (including expected changes in the Company's gross margin and
general, administrative and selling expenses); (iii) the Company's business
strategy for growth in its business for Y2K compliance, and (iv) the Company's
ability to distinguish itself from its current and future competitors. These
forward-looking statements are based largely on the Company's current
expectations and are subject to a number of risks and uncertainties. In addition
to the other risks described elsewhere in the "Risk Factors" discussion,
important factors to consider in evaluating such forward-looking statements
include (i) the shortage of reliable market data regarding the market for Y2K
solutions; (ii) changes in external competitive market factors which might
impact trends in the Company's results of operations; (iii) unanticipated
working capital or other cash requirements; (iv) changes in the computer
hardware and software industries and the Y2K solutions market; and (v) various
competitive factors that may prevent the Company from competing successfully in
the marketplace. In light of these risks and uncertainties, many of which are
described in greater detail elsewhere in this "Risk Factors" discussion, actual
results could differ materially from the forward-looking statements contained in
this Annual Report on Form 10-K.
Item 2. Properties
The Company presently leases office space to house its operations under
four different leases in two office complexes, one located at 2101 Rexford Road,
Charlotte, North Carolina and the other located at 2201 Water Ridge Parkway,
Charlotte, North Carolina. The leases at 2101 Rexford Road all expire between
August 31, 1998 and November 15, 1998. The Company has made arrangements to
extend these leases through January 31, 1999. The lease at 2201 Water Ridge
Parkway expires October 31, 2000. The Company intends to relocate to one central
location by January 31, 1999 and is currently in negotiations to sublet the 2201
Water Ridge Parkway facilities after February 1, 1999. The Company is currently
paying a total annual rent under all of these leases of $799,276.00.
In addition, the Company leases space for twelve sales offices located
throughout the United States and in England. The following is a description of
the leases and annual rent:
12
<PAGE>
Location Expires 1 Annual Rent
-------- ------- -----------
1. Atlanta, GA 6-30-98 $ 7,800.00
2. Denver, CO 7-31-98 $ 16,800.00
3. Detroit, MI 9-14-98 $ 10,908.00
4. Los Angeles, CA Month to Month $ 11,340.00
5. Minneapolis, MN 8-30-98 $ 13,800.00
6. Oakbrook Terrace, IL 7-31-98 $ 14,376.00
7. Reston, VA 9-14-98 $ 17,160.00
8. Salem, NH 9-30-98 $ 6,000.00
9. San Francisco, CA 8-31-98 $ 16,800.00
10. Tampa, FL 7-31-98 $ 9,276.00
11. Surrey, UK 7-6-2000 $ 87,244.00
-----------
Total $211,504.00
- -------------------
1 All of these leases, with the exception of the Surrey, UK, lease,
expire in 1998. It is the Company's intention to renew these leases for a fixed
period or continue the leases on a month-to-month basis.
Item 3. Litigation
During the year ended December 31, 1997, there were two lawsuits
pending against the Company's Chief Executive Officer, Robert F. Gruder
("Gruder") and the Company: Robert Colby v. Robert Gruder et al., Index No. CV
96 02542045, Superior Court (Conn.), Judicial District of New Haven at Meriden
(the "Colby Lawsuit") and Andrew Kaplan et al. v. Robert F. Gruder et al., Index
No. CV 96 03343085, Superior Court (Conn.), Judicial District of Fairfield at
Bridgeport (the "Kaplan Lawsuit").Thomas J. Dudchik, Senior Vice President of
the Company, is also named as a defendant in the Kaplan lawsuit.
The Colby Lawsuit involved allegations that Mr. Gruder promised to
provide Colby with shares of stock in Alydaar as reimbursement for a prior
investment in GEM Technologies, Inc. ("GEM"), a company founded by Mr. Gruder
and of which he was the principal shareholder. This matter was settled by Mr.
Gruder on July 25, 1997, and the Company was released from any further
liability. In connection with this lawsuit, Mr. Gruder had entered into an
agreement to indemnify and hold harmless the Company from any liability. The
agreement also provided that the Company would bear Mr. Gruder's and its own
legal expenses, which the Company paid. (See "Certain Relationships and Related
Transactions.")
13
<PAGE>
The Kaplan Lawsuit involves allegations by a group of former creditors
of GEM of breach of contract and misrepresentations. The plaintiffs claim they
were fraudulently induced to invest in GEM; that GEM wrongfully transferred
assets to Alydaar and Alydaar promoted products based on technology
misappropriated from GEM. The plaintiffs are seeking unspecified damages, but
claim they are entitled to damages equal to a nine percent interest in GEM, and
as such, some interest in Alydaar. This matter is expected to go to trial in
April 1998. Both Mr. Gruder and the Company intend to vigorously defend this
action and believe they have meritorious defenses to the action. Mr. Gruder has
agreed to indemnify and hold harmless the Company in the event of a judgement
against the Company. The Company has agreed to bear all costs of the litigation
for itself and Mr. Gruder. Company's litigation counsel is of the opinion that
in view of Mr. Gruder's agreement to indemnify the Company, the likelihood of a
materially adverse outcome against the Company is remote. (See "Certain
Relationships and Related Transactions.")
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to shareholders during the year ended
December 31, 1997.
PART II
Item 5. Market for Registrant's Common Equity and Related Stock Matters
The Company's Common Stock trades on the NASDAQ National Market
("National Market") under the symbol "ALYD." The Common Stock was admitted to
trading on the National Market on December 3, 1997. Prior to that and from 1982
through December 2, 1997, the Common Stock traded on the Bulletin Board first as
Enertronix and then as Alydaar.
The following tables set forth the high and low bid prices for the
Common Stock on the Bulletin Board and the high and low sales price on the
National Market for the years ended December 31, 1996 and 1997.
14
<PAGE>
For Year Ended December 31, 1996
High Bid Low Bid
1st Quarter Ended March 31, 1996 $13.75 $ 1.125
2nd Quarter Ended June 30, 1996 $31.50 $10.375
3rd Quarter Ended September 30, 1996 $19.75 $10.25
4th Quarter Ended December 31, 1996 $16.125 $10.375
For Year Ended December 31, 1997
High Bid Low Bid
1st Quarter Ended March 31, 1997 $12.187 $ 9.25
2nd Quarter Ended June 30, 1997 $22.125 $ 8.00
3rd Quarter Ended September 30, 1997 $32.125 $19.00
Period Ended November 30, 1997 $22.50 $11.437
Period Ended December 31, 1997 1 $19.25 $14.125
- ---------------------
1 The Company's Common Stock was admitted to trading on the National
Market on December 3, 1997, and as such, the price reflects the high and low
sales for the month of December, 1997.
The tables set forth above were for periods as reported by the National
Association of Securities Dealers Corporate composite feed and NASDAQ. The
figures represent inter-dealer prices, without retail mark-up, mark-down or
commissions and may not necessarily represent actual transactions.
As of December 15, 1997, the approximate number of beneficial holders
of the Common Stock of the Company was approximately 6,300, based on information
received from the Company's transfer agent and those brokerage firms who hold
securities for customers in "street name."
The Company has not paid any cash dividends since its inception. By
reason of its present financial status and contemplated future financial
requirements, the Company does not anticipate paying any cash dividends in the
foreseeable future. It is anticipated that earnings will be used to finance the
Company's growth. (See "Risk Factors - Unlikely to Declare Dividends.")
15
<PAGE>
Item 6. Selected Financial Data
<TABLE>
<CAPTION>
Years Ending December 31st
-----------------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Revenues $10,736,237 $37,500 $229,400 $160,400 $30,000
Payroll and Related Costs $13,800,797 $3,598,307 $443,741 $235,593 $92,990
Net (Loss) from Operations ($7,797,167) ($5,132,845) ($580,148) ($304,466) ($196,730)
Net (Loss) from Operations
Per Common Share ($.51) ($.41) ($.05) ($.03) ($.02)
Total Assets $18,866,474 $2,869,292 $133,195 $160,011 $24,723
Long Term Obligations $101,230 -0- -0- -0- -0-
Cash Dividends -0- -0- -0- -0- -0-
</TABLE>
Prior to 1994, the operations of the Company were primarily related to
research and development of computer language translation services: converting
one computer language to another. Between 1994 and 1996, the Company directed
its efforts to adapting SmartCode as an automated solution to the Y2K Problem.
As such, the financial data is not truly indicative of future operating results.
The Company only began to generate revenues from its Y2K Problem solution
commencing with the second quarter of calendar 1997.
Item 7. Management's Discussion and Analysis of Consolidated Financial Condition
and Results of Operations
The following discussion should be read in conjunction with the
"Selected Financial Data" and the other financial data appearing elsewhere in
this Report. This Report on Form 10-K contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Actual results could differ materially from
those projected in the forward-looking statements contained in Management's
Discussion and Analysis and elsewhere in this Annual Report.
Results of Operations
- Revenues
Net revenues earned for the year ended December 31, 1997 ("1997") and
December 31, 1996 ("1996") approximated $10,736,000 and $38,000, respectively.
The Company was essentially a research and development company during 1996 and
through the first quarter, 1997. The Company began to generate revenues in the
second quarter,
16
<PAGE>
1997, from its proprietary, internally developed software solution for the Y2K
Problem. During 1996, the Company's revenues decreased from $229,000 in 1995 to
$38,000, because the Company's strategy changed during 1995, from marketing its
language translation services to focusing all available resources on research
and development of an automated factory solution for the Y2K Problem. Revenues
earned during 1995 were from the completion of contracts awarded during 1994 for
computer language translation projects.
- Operating Expenses
Operating expenses also experienced major increases from $5,199,000 in
1996 to over $19,218,000 in 1997, a 270% increase. The change from a research
and development company in 1996 to an operating company in 1997 caused this
dramatic increase in operating expenses. Also, Alydaar International, Ltd.
("Alydaar International"), as a result of the Company's acquisition, added
$1,161,000 to operating expenses during 1997 for its cost of operations during
the last half of 1997. Payroll and related benefit costs increased from
$3,598,000 in 1996 to $13,800,000 in 1997, a 284% increase, as the Company added
new personnel (from 194 people at December 31, 1996 to over 300 people at
December 31, 1997) to meet the increase in sales volume. As such, the Company
absorbed a full-year cost of the 1996 increase in personnel from 30 people at
June 30, 1996 to 194 at December 31, 1996. Occupancy costs also increased by
approximately $781,000 from 1996 to 1997, as the Company expanded its operating
facilities (or "factory") capacity and opened over a dozen regional sales
offices in the USA and UK during 1997. Advertising and promotion expenditures
increased from approximately $215,000 in 1996 to $832,000 in 1997. This increase
was due to increased marketing efforts by the Company's sales force via print,
direct mail and telemarketing efforts and over $208,000 worth of demonstrations
in 1997. Depreciation and amortization expense increased by $488,000, due in
large part to the amortization of $6,719,000 of goodwill, which was recorded at
the time of acquisition of Alydaar International, and the increase in the amount
of property and equipment of $1,839,000. Bad debt expense was $311,000 in 1997,
compared to no bad debt write-off or provision for losses in 1996. Other
operating expenses increased $1,619,000 in 1997, due mostly to the significant
increase in personnel, marketing and selling activities and expanded square
footage occupied in 1997 versus 1996. Categories showing significant increases
included travel, meals and entertainment expenses, which increased from $219,000
in 1996 to $747,000 in 1997; telephone expenses increased by $138,000 in 1997
from 1996 due to a significant increase in sales and marketing efforts during
1997 and increase in sales force from one person in 1996 to 22 people from
August 1997 through the end of the year; office supplies and related expenses
increased to $122,000 from $31,000 in 1996 due to increased personnel;
professional fees, which increased $348,000 primarily due to legal fees incurred
by the Company to defend against two civil actions filed against the Company in
late 1996; computer supplies and related expenses increased $79,000; sales
office expenses, including telephone, copying and similar expenses increased
$57,000; and other administrative and operating expenses, including postage and
employee training costs, increased by $378,000.
17
<PAGE>
Operating expenses increased from December 31, 1995 ("1995") to
December 31, 1996 ("1996") by $4,396,000. Substantially all of this increase was
caused by the Company's change in its business focus to provide a Y2K automated
factory solution. Payroll and related costs increased by $3,154,000 in 1996, a
710% increase, as the Company added new personnel (from 10 to 194 people)
required to staff its operating facility in Charlotte, North Carolina. Occupancy
costs increased by $287,000 in 1996, a 859% increase, as additional space was
obtained as the Company began its facility expansion efforts. Advertising
expenses increased by $127,000, a 44% increase, as the Company embarked upon its
print advertising campaign for Y2K solution. Other operating expenses increased
$500,000, a 232% increase, due principally to the increase in number of square
feet occupied and number of personnel.
- Net Loss
Net loss increased to $7,797,000 from $5,132,000 in 1996, a 52%
increase, from 1996 to 1997, due to the Company's increased expenditures to
increase its capacity during 1997. The Company experienced significantly slower
flow of code from its customers than had been anticipated, particularly during
the first three quarters of 1997, resulting in the loss from operations due to
significant idle "factory" capacity. The increase in net loss from $580,000 in
1995 to $5,132,000 in 1996, a 785% increase, was due primarily to the Company's
decision to add approximately 150 people during the last half of 1996 and to
increase space occupied from 3,100 square feet to approximately 30,000 square
feet during the first half of 1996.
Liquidity and Capital Resources
At December 31, 1997, the Company had working capital of $6,466,000 as
compared to negative working capital of ($1,727,000) at December 31, 1996. The
change from 1996 to 1997 was due primarily to an increase in accounts receivable
of approximately $4,963,000 and an increase in costs and estimated earnings in
excess of billings of approximately $1,298,000, which resulted from revenues
primarily generated during the second half of 1997 of approximately $8,500,000.
Cash increased to $1,527,000 from $379,000 at the end of 1996.
The sources of cash were primarily sales of stocks and exercises of
warrants and options, which provided $16,985,000, and loans from shareholders,
net of repayments of $900,000, of $463,000. The uses of cash were primarily to
fund net cash operating requirements of $14,291,000, purchase of equipment of
$1,664,000 and a loan to Alydaar International of $300,000, which was made prior
to acquisition.
As of March 31, 1998, the Company is negotiating with a major financial
institution to obtain a $5,000,000 revolving line of credit facility, which
would be secured by its accounts receivable. The Company expects to complete the
negotiations and to sign an agreement for the facility by the end of April 1998.
Borrowings under the facility would be used for working capital requirements.
18
<PAGE>
Based on its current operating plan, the Company believes that its cash
on hand and its cash flow from operations will be sufficient to meet its working
capital requirements at least during the next twelve months.
Foreign Operations
On July 1, 1997 (the third quarter), the Company acquired 100% of the
outstanding shares of Alydaar International, Ltd. ("Alydaar International") in
exchange for 791,652 shares of the Company's Common Stock and the issuance of
207,152 Warrants plus the forgiveness of debt. This acquisition was accounted
for as a purchase transaction. Accordingly, 100% of the revenues earned and
expenses incurred by Alydaar International since the acquisition date, are
included in the Consolidated Statement of Operations. From July through December
31, 1997, Alydaar International contracted sales accounted for approximately 30%
of the total consolidated revenues recorded for the full year of 1997. The
amount of sales made during the period which were subject to currency exchange
rate adjustment was not significant. It is anticipated that the amount of future
contracts generated by Alydaar requiring payment in foreign currencies will be
immaterial in amount. Therefore, the currency exchange rate adjustment risk is
expected to be insignificant.
The Company does not view other risks inherent in international
operations, such as political and regulatory, contractual enforceability,
economic instability, etc., to have a material effect upon its foreign
operations because its target customers are large, established companies which
are domiciled in European Union countries or other countries which have stable
governments and economies.
Impact of Inflation
The Company believes that inflation will not have a material impact
upon its future operating results.
Item 8. Financial Statements and Supplementary Data
The financial statements and supplementary data commence on page F-1.
Item 9. Changes and Disagreements with Accountants on Accounting and Financial
Disclosure
Not applicable.
19
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant and Compliance with
Section 16(a)
Directors and Executive Officers Age Position
Robert F. Gruder 39 Chief Executive Officer, President
and Chairman of the Board
V. Hollis Scott 51 Chief Financial Officer, Secretary
and Director
Frank G. Milligan 57 Chief Operating Officer
Thomas J. Dudchik 38 Senior Vice President and Director
James F. Helm 56 Chief Information Officer
J. Alex McMillan 65 Director
John McCarthy 58 Director
Directors are elected to serve until the next annual meeting of
shareholders of the Company or until their successors are elected and qualified.
The Board of Directors held three meetings during the calendar year 1997 and
also met informally and acted by written consent during the year. Officers serve
at the discretion of the Board of Directors subject to any contracts of
employment. At the present time there are no contracts.
Robert F. Gruder has served as Chief Executive Officer, President and
Chairman of the Board of Directors since 1989, when the Company was first
acquired. Prior to his association with the Company and for three years, Mr.
Gruder served as president of GEM Technologies, Inc. ("GEM"), a company which
was engaged in developing a computer language compiler. GEM filed for bankruptcy
in 1992 pursuant to Chapter 7 of the Bankruptcy Code. Mr. Gruder was the
principal stockholder of GEM. Prior to Mr. Gruder's association with GEM, he was
employed at three different banks. Mr. Gruder is a graduate of American
University and holds a BS degree in finance.
V. Hollis Scott has served as Chief Financial Officer, Secretary and
Director since January 1996. Prior to January 1996 and from November 1988, Mr.
Scott served as Senior Vice President and Treasurer of the Cato Corporation, a
publicly held 600-store ladies' apparel retailer. Before 1988, he held senior
financial management positions with a cable television operator and with a
department store chain. Prior to that, he was employed with Ernst & Young. Mr.
Scott is a graduate of the University of Virginia and is a licensed certified
public accountant.
20
<PAGE>
Frank G. Milligan joined the Company as Chief Operating Officer in
December 1996. Between 1963 and December 1996, Mr. Milligan was employed by IBM.
He served as a senior manager with various management responsibilities in
development and systems integration and general business management. Mr.
Milligan attended the University of Tennessee, where he received BS and MS
degrees in electrical engineering.
Thomas J. Dudchik joined the Company as Senior Vice President in February
1996. He is responsible for all national and international marketing and
investor relations. Prior to joining the Company, Mr. Dudchik served as Deputy
Chief of Staff for Connecticut Governor Lowell P. Weicker, Jr. from January 1993
through January 1995. As part of his responsibilities, Mr. Dudchik administered
the State of Connecticut's $10 billion annual budget for the 26 major state
agencies, covering 50,000 state employees. From February 1991 through December
1992, Mr. Dudchik served as Deputy Commissioner of the Connecticut Department of
Environmental Protection. From February 1995 through January 1996 he operated an
advertising and sales promotion business. Mr. Dudchik received a BA degree from
Trinity College.
James F. Helm joined the Company in April 1996. Mr. Helm serves as
Chief Information Officer for Information Technology. Prior to joining the
Company, Mr. Helm acted as an independent consultant to various companies
between 1994 and 1996. Prior to that, he was employed by Formula Consultants,
Inc. from June 1992 to May 1994 in various management positions and acted as
consultant to that company from February through May of 1992. From 1969 to
October 1991, Mr. Helm held various management positions with Unisys Corporation
("Unisys"). His last position with Unisys was Vice President of Customer
Services.
J. Alex McMillan was elected a Director of the Company effective March
19, 1997. Mr. McMillan is currently employed with The McMillan Group, merchant
bankers and consultants. Between April 1, 1997 through December 31, 1997, Mr.
McMillan was retained by the Company to act as an independent consultant to
assist the Company in developing government contracts. (See "Certain
Relationships and Related Transactions".) From 1985 through 1994 Mr. McMillan
served in the US House of Representatives, representing the 9th Congressional
District for the State of North Carolina. While a member of Congress, Mr.
McMillan served on various committees, including Energy and Commerce, Budget,
Bank and Small Business. From 1976 through 1983, Mr. McMillan was President and
Chief Executive Officer of Harris Teeter Supermarkets, Inc., a regional chain of
supermarkets owned by the Ruddick Corporation. Mr. McMillan currently serves as
a Director of Interstate/Johnson Lane, Inc., and Scottish Bank of Charlotte,
North Carolina, both publicly held companies. Mr. McMillan holds an MBA from the
Darden School, University of Virginia.
John McCarthy was appointed to serve as a Director in August 1997. For
approximately 31 years, Mr. McCarthy has been employed in the brokerage business
in the data processing area. He has held management positions in various
brokerage firms.
21
<PAGE>
From 1993 until December 1997, he was employed with Smith Barney & Co. as Senior
Vice President and Year 2000 Project Director.
Messrs. McMillan, McCarthy and Scott currently serve on the Company's
Audit Committee, which committee is charged with, among other things, the review
with the Company's auditors of the general scope of the Company's annual audit;
a review of the annual audit and the auditor's report on the adequacy of
internal controls and other findings; review of the auditor's management letter;
and the implementation of any corrective measures, if so required.
Messrs. McMillan, McCarthy and Gruder currently serve on the Company's
Compensation Committee, which committee is charged with the review of officers'
compensation, bonuses and the granting of stock options.
The Company's outside directors, upon their appointment to the Board,
were given an award of 15,000 warrants each. The warrants are only exercisable
one year from the date of the grant at the fair market price of the Company's
Common Stock on the date of grant. The options will expire in 2007. The outside
directors do not receive any compensation for their attendance at meetings.
Based solely on review of the copies of such forms furnished to the
Company or written representations that no forms 5 were required, the Company
believes that during the year ended December 31, 1997 all Section 16(a) filing
requirements applicable to its officers, directors and greater than ten-percent
beneficial owners were complied with.
Item 11. Executive Compensation
The following tables set forth information with respect to compensation
paid by the Company for the services to the Company during the three years ended
December 31, 1997 by the Company's Chief Executive Officer. No other officer
receives compensation in excess of $100,000.
22
<PAGE>
<TABLE>
SUMMARY COMPENSATION TABLE
<CAPTION>
Long Term Compensation
Annual Compensation Awards Payouts
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Re-
Other stricted Securities
Annual Stock Underlying LTIP All Other
Compen- Awarded Options/ Payouts Compen-
Name and Principal Position Year Salary($) Bonus($) sation ($) ($) SARs (#) ($) sation ($)
- --------------------------- ---- --------- -------- ---------- ----- -------- ----- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Robert F. Gruder 1997 60,000 -0- -0- -0- 2,000 1 -0- -0-
Chief Executive Officer 1996 60,000 -0- -0- -0- -0- -0- -0-
1995 60,000 -0- -0- -0- -0- -0- -0-
<FN>
- -------------------
1 Mr. Gruder was granted 2,000 incentive stock options under the 1994
Plan on April 24, 1997. The options are exercisable at $8.80 per share. 1,000
options vest on April 24, 1998 and 1,000 options vest on October 24, 1998. The
options expire on April 24, 2002.
</FN>
</TABLE>
The senior executive officers do not currently receive any other
personal benefits. The Company offers health insurance to all of its employees.
The Company also has a 401(k) program, but during the year 1997, the Company
made no contributions.
<TABLE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
- -----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Potential Realizable Value at
Assumed Annual Rates of
Stock Price Appreciation for
Individual Grants Option Term
(a) (b) (c) (d) (e) (f) (g)
Number of % of Total
Securities Options/
Underlying SARs
Options/ Granted to
SARs Employees in Exercise
Name Granted (#) Fiscal Year Price ($/Sh) Expiration Date 5% ($) 10% ($)
- ---- ----------- ----------- ------------ --------------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Robert F. Gruder 2,000 1 0.2% 8.80 4/24/02 2,820 8,160
<FN>
- -------------------
1 The exercise price for the options granted to Mr. Gruder was
established at 110% of fair market value on date of grant. 1,000 of these
options will vest on April 24, 1998, and 1,000 will vest on October 24, 1999.
</FN>
</TABLE>
23
<PAGE>
<TABLE>
AGGREGATED OPTION/SAR EXERCISE IN LAST FISCAL YEAR
AND FY-ENDED OPTION/SAR VALUES
<CAPTION>
Value of
Number of Unexercised
Unexercised In-the-Money
Options/SARs Options/SARs
Shares at FY-End (#) at FY-End ($)
Acquired on Value Realized Exercisable/ Exercisable/
Name Exercise (#) ($) Unexercisable Unexercisable
- ---- ------------ ----- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Not Applicable
</TABLE>
Employment Agreements
At the present time none of the Company's senior executive officers
have employment agreements with the Company. Once the Company is in a sounder
financial condition to pay salaries actually commensurate with each officer's
position and the services he renders to the Company, employment agreements will
be negotiated.
Stock Option Plans
In 1994, the Company adopted the Omnibus Stock Plan (the "1994 Plan")
for the benefit of its employees. The 1994 Plan covered the issuance of 375,000
options to purchase shares of the Company's Common Stock. The 1994 Plan was
subsequently amended in December 1996 by the Board of Directors to increase the
number of options from 375,000 to 1,000,000. This increase requires ratification
by shareholders, which the Company intends to present to shareholders at its
forthcoming annual meeting now scheduled for May 22, 1998. On October 20, 1997,
the Board of Directors also approved an increase of the number of shares subject
to the 1994 Plan to 2,000,000, which the Company also intends to present to
shareholders for their approval at the next annual meeting. The award of options
in excess of 375,000 under the Plan are therefore subject to shareholder
approval. The 1994 Plan provides for the issuance of options and/or stock
appreciation rights. The 1994 Plan permits the issuance of either incentive
stock options or non-qualified stock options. In case of incentive stock options
(as defined under Section 422 of the Internal Revenue Code), the exercise price
can be no less than fair market value on the date of grant. In the case of
non-qualified stock options, the exercise price may be less than then fair
market value. To date no options have been granted at less than fair market
value at date of grant. The 1994 Plan is administered by the Compensation
Committee. All employees and directors are entitled to participate in the 1994
Plan, except that no members of the Committee may participate. As of December
31, 1997, there were 977,400 options outstanding. The Company has adopted a
policy of offering options to all full-time employees, which enables the Company
to attract and retain skilled and dedicated personnel. All of the outstanding
options expire at various times between December 2005 and 2007 with exercise
prices ranging from $1.19 per share to $27.88 per share.
24
<PAGE>
During the year ended December 31, 1997 the Board of Directors approved
the adoption of the 1997 Employee Stock Purchase Plan (the "Purchase Plan").
Shareholders of the Company will be requested to ratify the adoption of the
Purchase Plan at the Company's Annual Meeting of Shareholders. The Purchase Plan
would permit employees of the Company to purchase shares of the Company's Common
Stock through payroll deductions at six-month intervals as specified in the
Purchase Plan at a 15% discount from market. The Purchase Plan is to be
administered by members of the Board who are ineligible to participate in the
Purchase Plan. An employee electing to participate can have up to 10% of his
weekly salary withheld for the purchase of stock. A participant who is not
subject to Section 16(b) of the Exchange Act may withdraw shares at any time
after the shares have been purchased and credited to the participant's account.
The Purchase Plan is intended to qualify under Section 423 of the Internal
Revenue Code of 1986, as amended (the "Code"), and as such, the Purchase Plan
requires approval of the stockholders. If participants wish to avoid a tax on
the purchase of Common Stock under the Purchase Plan, the participant must meet
certain holding period requirements as required by the Code. The aggregate
amount of purchases by any employee may not exceed $25,000 per year. A total of
200,000 shares have been reserved by the Company under the Purchase Plan.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information regarding the beneficial
ownership of the Company's Common Stock as of December 31, 1997 by (i) each
person who is known by the Company to own beneficially more than 5% of the
Company's outstanding Common Stock; (ii) each of the Company's officers and
directors and (iii) all officers and directors of the Company as a group:
25
<PAGE>
Name and Address Amount and Nature Percent of Class
Robert F. Gruder 7,030,325 38.8%
c/o Alydaar Software Corporation
2101 West Rexford Road
Charlotte, NC 28211
V. Hollis Scott 186,667 1 1.0%
c/o Alydaar Software Corporation
2101 West Rexford Road
Charlotte, NC 28211
Thomas J. Dudchik 226,166 2 1.3%
c/o Alydaar Software Corporation
2101 West Rexford Road
Charlotte, NC 28211
Frank G. Milligan 30,000 3 *
c/o Alydaar Software Corporation
2101 West Rexford Road
Charlotte, NC 28211
James F. Helm 20,250 4 *
c/o Alydaar Software Corporation
2101 West Rexford Road
Charlotte, NC 28211
J. Alex McMillan (Director) 27,840 5 *
3801 Barnwood Drive
Charlotte, NC 28211
John McCarthy (Director) -0- *
4 Glenwood Circle
East Windsor, NJ 08520-2304
All officers and directors
as a group (9 persons) 7,576,248 42.5%
- --------
1 Includes 100,000 shares issuable upon exercise of options which vest on
April 24, 1998.
2 Includes 200,000 shares issuable upon exercise of options. Of these,
50,000 options vest on April 24, 1998.
3 Includes 10,000 shares issuable upon exercise of options and an
additional 20,000 shares issuable upon exercise of options, which options vest
on April 24, 1998.
4 Includes 10,000 shares issuable upon exercise of options and an
additional 10,000 shares issuable upon exercise of options, which options vest
on April 24, 1998.
5 Includes 15,000 shares issuable upon exercise of warrants and warrants to
purchase 7,840 shares owned by a company which Mr. McMillan controls.
* Represents less than 1% ownership.
26
<PAGE>
Item 13. Certain Relationships and Related Transactions
In connection with the litigation referred to in Item 3, "Legal
Proceedings," Mr. Robert Gruder, President and Chief Executive Officer of the
Company, entered into agreements with the Company to indemnify the Company
against any liability resulting from a final unappealable judgment. The Colby
Lawsuit was settled by Mr. Gruder in 1997, and the Company was released from all
liability. Pursuant to the agreement with Mr. Gruder, the Company paid all his
legal expenses. Mr. Gruder has also entered into an agreement to indemnify the
Company from all liability in connection with the Kaplan Lawsuit, which is now
scheduled for trial in April 1998. In consideration of the agreement to
indemnify the Company, the Company agreed to pay Mr. Gruder's legal fees and
expenses in defending the Kaplan Lawsuit.
Between April 1, 1997 and December 31, 1997, The McMillan Group, owned
by Mr. Alex McMillan, who is a Director of the Company, was retained by the
Company to act as an independent consultant to assist the Company in developing
government contracts.
(See "Directors and Executive Officers of the Registrant.")
Robert F. Gruder, Chairman and Chief Executive Officer, has made
advances to the Company from time to time to assist the Company in its working
capital requirements. As of January 1, 1997, $500,000 of principal and $3,550 of
interest were owed by the Company to Mr. Gruder. During 1997, Mr. Gruder
advanced an additional $1,100,000 to the Company, and during the year the
Company repaid Mr. Gruder $800,000, leaving a balance due Mr. Gruder at year end
of $800,000 of principal and accrued interest at 10.5% per annum of $27,868. The
advances are evidenced by promissory notes payable on demand.
Just before December 31, 1997, V. Hollis Scott, Chief Financial Officer
of the Company, advanced the Company $166,700 with interest at 10.5% per annum.
The loan is evidenced by a promissory note payable on demand.
PART IV
Item 14. Exhibits, List and Reports on Form 8-K
(a) 1. Financial Statements and Schedules
The financial statements and schedules appearing after the
Index to Exhibits are filed as part of this Annual Report.
2. Exhibits
The exhibits listed on the Index to Exhibits following the
Signature Page are filed as part of this Annual Report by
incorporation by reference from the filings indicated in the
footnotes to the Index
27
<PAGE>
(b) On September 14, 1997, the Company filed a report on Form 8-K reporting
the sale of 150,000 shares of the Company's Common Stock for an
aggregate consideration of $2,250,000 pursuant to Regulation S
promulgated under the Act. The report included Item 7 - Financial
Statements and Exhibits and Item 9 - Sale of Equity Securities Pursuant
to Regulation S.
28
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d), the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ALYDAAR SOFTWARE CORPORATION
By: /s/ Robert F. Gruder
Robert F. Gruder, Chief Executive Officer,
President and Chairman
Dated: April 3, 1998
Pursuant to the requirements of the Securities Exchange Act of
1934, this Report has been signed below on April 3, 1998, by the following
persons on behalf of Registrant and in the capacities indicated.
/s/ Robert F. Gruder
Robert F. Gruder, Chief Executive Officer,
President and Chairman
/s/ Frank G. Milligan
Frank G. Milligan, Chief Operating Officer
/s/ V. Hollis Scott
V. Hollis Scott, Chief Financial Officer,
Secretary and Director
/s/ Thomas J. Dudchik
Thomas J. Dudchik, Senior Vice
President and Director
/s/ James F. Helm
James F. Helm, Chief Information Officer
/s/ J. Alex McMillan
J. Alex McMillan, Director
/s/ John McCarthy
John McCarthy, Director
29
<PAGE>
INDEX TO EXHIBITS
3.1(a) Articles of Incorporation of Daar, Inc. 1
3.1(b) Articles of Merger of Alydaar Software Corporation into Daar, Inc. 1
3.1(c) Plan of Merger 1
3.2 Amended and Restated By-Laws of Alydaar Software Corporation 1
10.2 Omnibus Stock Option Plan 1
10.3 Amendments to Omnibus Stock Plan *
10.4 Standard Continuing Service Agreement *
10.5 Indemnification Agreement by Robert H. Gruder *
10.6 1997 Employee Stock Purchase Plan *
10.7 Purchase Contract of Alydaar International, Ltd. *
10.8 Subcontractor Agreement between Alydaar and Compuware
Corporation (filed separately with the Securities and Exchange
Commission and "Confidential Treatment" requested)
16.1 Letter re: change in accountant 1
27 Financial Data Schedule *
- ------------------
* Filed herewith
1 Incorporated by reference from the Company's Registration of
Securities on Form 10 pursuant to Section 12(b) or (g) of the Securities
Exchange Act of 1934 filed with the Commission
30
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Independent auditors' report F-2
Consolidated balance sheets F-3
Consolidated statements of operations F-4
Consolidated statement of stockholders' equity (deficiency) F-5
Consolidated statements of cash flows F-6
Notes to consolidated financial statements F-7 - F-15
F-1
<PAGE>
Independent Auditors' Report
Board of Directors and Stockholders
Alydaar Software Corporation and Subsidiary
Charlotte, North Carolina
We have audited the consolidated balance sheets of Alydaar Software Corporation
and Subsidiary as of December 31, 1997 and 1996, and the related consolidated
statements of operations, stock holders' equity (deficiency) and cash flows for
each of the three years in the period ended December 31, 1997. 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 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 financial position of Alydaar Software
Corporation and Subsidiary as of December 31, 1997 and 1996 and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
HOLTZ RUBENSTEIN & CO., LLP
/s/ Holtz Rubenstein & Co., LLP
Melville, New York
March 6, 1998
F-2
<PAGE>
<TABLE>
ALYDAAR SOFTWARE CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<CAPTION>
December 31,
ASSETS 1997 1996
------ -------------- ---------
<S> <C> <C> <C> <C> <C> <C>
CURRENT ASSETS:
Cash $ 1,526,924 $ 379,382
Accounts receivable, net allowance for doubtful
accounts of $115,000 and $0, respectively 5,150,617 187,500
Costs and estimated earnings in
excess of billings 1,297,986 -
Prepaid expenses 249,801 6,903
Other receivable (Note 3) 435,000 490,000
Deferred tax asset (Note 11) 600,000 -
Loan to stockholder 51,256 51,256
-------------- -------------
Total current assets 9,311,584 1,115,041
PROPERTY AND EQUIPMENT, net (Note 4) 2,919,077 1,694,029
GOODWILL, net of accumulated amortization
of $223,800 (Note 2) 6,494,783 -
OTHER ASSETS 141,030 60,222
-------------- -------------
$ 18,866,474 $ 2,869,292
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,005,923 $ 2,028,566
Accrued sales commissions 205,000 -
Accrued payroll 145,000 17,400
Other current liabilities 451,638 138,469
Billings in excess of costs and estimated
earnings on contracts in progress 49,497 150,000
Current portion of capital lease obligations 21,869 -
Loans payable, stockholders (Note 5) 966,700 507,530
-------------- -------------
Total current liabilities 2,845,627 2,841,965
-------------- -------------
CAPITAL LEASE OBLIGATION 101,230 -
-------------- ------------
COMMITMENTS AND CONTINGENCIES (Note 9)
STOCKHOLDERS' EQUITY: (Notes 2, 5 and 6)
Common stock, $0.001 par value, 20,000,000 shares
authorized; 17,808,728 and 13,983,282 shares issued 17,809 13,983
Additional paid-in capital 30,113,284 6,311,079
Deficit (14,094,107) (6,296,940)
Foreign currency translation adjustment (26,924) -
-------------- ------------
16,010,062 28,122
Less: treasury stock, at cost (445) (795)
receivable from warrant exercise (90,000) -
-------------- ------------
Total stockholders' equity 15,919,617 27,327
-------------- -------------
$ 18,866,474 $ 2,869,292
============== =============
</TABLE>
See notes to consolidated financial statements
F-3
<PAGE>
<TABLE>
ALYDAAR SOFTWARE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
Years Ended
December 31,
------------------------------------
1997 1996 1995
--------------- --------------- --------
<S> <C> <C> <C> <C>
REVENUES (Note 8) $ 10,736,237 $ 37,500 $ 229,400
--------------- --------------- ------------
EXPENSES: (Notes 6 and 9)
Payroll and related costs 13,800,797 3,598,307 443,741
Rent and occupancy 1,102,050 320,707 33,421
Advertising and promotion 832,270 215,453 87,716
Depreciation and amortization 837,897 349,655 23,203
Bad debt expense 310,833 - -
Other operating expenses 2,333,821 714,648 215,367
--------------- --------------- ------------
19,217,668 5,198,770 803,448
--------------- --------------- ------------
Loss from operations (8,481,431) (5,161,270) (574,048)
--------------- --------------- ------------
OTHER INCOME (EXPENSES):
Interest expense (54,171) (3,550) (7,700)
Interest income 14,454 6,812 1,600
Other income 123,981 25,163 -
--------------- --------------- -----------
84,264 28,425 (6,100)
--------------- --------------- ------------
LOSS BEFORE TAX BENEFIT INCOME (8,397,167) (5,132,845) (580,148)
INCOME TAX BENEFIT (Note 11) (600,000) - -
--------------- --------------- -----------
NET LOSS $ (7,797,167) $ (5,132,845) $ (580,148)
=============== =============== ============
NET LOSS PER SHARE $(.51) $(.41) $(.05)
===== ===== =====
WEIGHTED AVERAGE COMMON
AND COMMON EQUIVALENT
SHARES OUTSTANDING 15,387,125 12,394,056 10,894,254
========== ========== ==========
</TABLE>
See notes to consolidated financial statements
F-4
<PAGE>
<TABLE>
ALYDAAR SOFTWARE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS'
EQUITY (DEFICIENCY)
(Notes 2, 5 and 6)
<CAPTION>
Foreign Receivable Total
Common Stock Additional Currency from Stockholders'
Shares Paid-in Subscribed Translation Treasury Stock Warrant (Deficiency)
Outstanding Amount Capital Deficit Stock Adjustment Shares Amount Exercise Equity
----------- -------- ----------- ------------ --------- -------- -------- -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1995 10,932,613 $10,933 $ 1,129,644 $ (583,947)(450,000) $ - - $ - $ - $ 106,630
Issuance of common shares 654,760 654 352,726 - - - - - - 353,380
Conversion of subscribed
stock to treasury stock - - - - 450,000 - (900,000)(450,000) - -
Retirement of treasury stock (400,000) (400) (199,600) - - - 400,000 200,000 - -
Net loss - - - (580,148) - - - - - (580,148)
----------- ------- ----------- ------------ -------- ------- --------- -------- -------- ---------
Balance, December 31, 1995 11,187,373 11,187 1,282,770 (1,164,095) - - (500,000)(250,000) - (120,138)
Issuance of common shares 2,385,909 2,386 5,076,014 - - - - - - 5,078,400
Issuance of common shares
as treasury stock 900,000 900 (900) - - - (900,000) (900) - (900)
Shares issued to employees
from exercise of
stock options 10,000 10 202,695 - - - 105,000 105 - 202,810
Retirement of treasury stock (500,000) (500) (249,500) - - - 500,000 250,000 - -
Net loss - - - (5,132,845) - - - - - (5,132,845)
----------- -------- ----------- ------------ -------- ------- -------- -------- -------- ----------
Balance, December 31, 1996 13,983,282 13,983 6,311,079 (6,296,940) - - (795,000) (795) - 27,327
Issuance of common shares
for cash, net 1,703,500 1,704 12,986,118 - - - - - - 12,987,822
Issuance of securities for
services 45,000 45 367,455 - - - - - - 367,500
Issuance of securities in
connection with
business acquisition 791,652 792 6,358,208 - - - - - - 6,359,000
Shares issued from exercise
of stock options/warrants 1,235,294 1,235 4,086,494 - - - 350,000 350 (90,000) 3,998,079
Conversion of debt for equity 50,000 50 3,930 - - - - - - 3,980
Translation adjustments - - - - - (26,924) - - - (26,924)
Net loss - - - (7,797,167) - - - - (7,797,167)
---------- ------- ----------- ------------- -------- --------- --------- ------- -------- -----------
Balance, December 31, 1997 17,808,728 $17,809 $30,113,284 $(14,094,107) - $(26,924) (445,000) $ (445) $(90,000) $15,919,617
========== ======= =========== ============= ======== ========= ========= ======= ========= ===========
</TABLE>
See notes to consolidated financial statements
F-5
<PAGE>
<TABLE>
ALYDAAR SOFTWARE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Years Ended
December 31,
---------------------------------
1997 1996 1995
---------------- -------------- --------
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (7,797,167 $ (5,132,845 $ (580,148)
---------------- -------------- -------------
Adjustments to reconcile net loss to net cash
used in operating activities:
Stock based compensation 330,500 252,810 -
Allowance for doubtful accounts 115,000 - -
Depreciation and amortization 837,897 349,655 23,203
Deferred tax benefit (600,000) - -
(Increase) decrease in assets:
Accounts receivable (4,963,962) (37,500) 91,650
Costs and estimated earnings
in excess of billings (1,297,986) - -
Prepaid expenses (66,719) (2,760) (4,143)
(Increase) decrease in liabilities:
Accounts payable (1,202,354) 1,986,654 19,161
Accrued sales commissions 205,000 - -
Accrued payroll 127,600 7,702 4,557
Other current liabilities 191,494 (59,274) 176,254
Billings in excess of costs
and estimated earnings (170,495) - -
---------------- -------------- -----------
Total adjustments (6,494,025) 2,497,287 310,682
---------------- -------------- ------------
Net cash used in operating activities (14,291,192) (2,635,558) (269,466)
---------------- -------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment (1,664,080) (1,988,666) (33,821)
Increase in other assets (80,808) (52,516) (4,896)
Net cash received from acquisition of subsidiary 1,450 - -
Decrease in other receivables 55,000 - -
Loans receivable (300,000) - -
---------------- -------------- -----------
Net cash used in investing activities (1,988,438) (2,041,182) (38,717)
---------------- -------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuances of stock 16,985,201 4,537,500 353,380
Advances to stockholders - (10,183) (40,893)
Loans from stockholders 1,363,150 503,370 -
Repayments of stockholders' loans (900,000) - (20)
Repayments of capital lease obligations (21,179) - -
---------------- -------------- -----------
Net cash provided by financing activities 17,427,172 5,030,687 312,467
---------------- -------------- ------------
NET INCREASE IN CASH 1,147,542 353,947 4,284
CASH AND CASH EQUIVALENTS,
beginning of year 379,382 25,435 21,151
---------------- -------------- ------------
CASH AND CASH EQUIVALENTS, end of year $ 1,526,924 $ 379,382 $ 25,435
================ ============== ============
</TABLE>
See notes to consolidated financial statements
F-6
<PAGE>
ALYDAAR SOFTWARE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1997
1. Summary of Significant Accounting Policies:
a. Description of business
The Company designs and markets software language translation and
systems migration services.
b. Principles of consolidation
On July 1, 1997, the Company acquired a 100% interest in Alydaar
International, Limited ("International"). Accordingly, the Company's
consolidated financial statements include the accounts of International from the
date of acquisition. All significant intercompany transactions and accounts have
been eliminated as part of the consolidation of the financial information.
c. Cash and cash equivalents
For purposes of the cash flow statement, the Company considers all
highly liquid debt instruments purchased with a maturity of three months or less
to be cash and/or cash equivalents.
d. Depreciation and amortization
Depreciation is computed using the straight-line method over the
estimated useful lives of the related assets. Amortization of leasehold
improvements is computed using the straight-line method over the estimated
useful lives of the related assets or the remaining term of the lease, whichever
is shorter. Maintenance and repairs of property and equipment are charged to
operations and major improvements are capitalized. Upon retirement, sale or
other disposition of property and equipment, the cost and accumulated
depreciation are eliminated from the accounts and gain or loss is included in
operations.
Goodwill is amortized using the straight-line method over the period
estimated to be benefited (15 years).
e. Revenue recognition
During 1997, the Company reported revenues from contracts on the
percentage-of- completion method for financial reporting purposes, in accordance
with The American Institute of Certified Public Accountants Statement of
Position (SOP) 97-2, "Software Revenue Recognition". Revenues under these
contracts are recognized based on the proportion of contract costs incurred to
total estimated contract costs. Contract costs include all direct labor related
to contract performance. Provisions for estimated losses on uncompleted
contracts are made in the period in which such losses are determined.
Prior to January 1, 1997, the Company used the accrual method of
accounting, wherein revenue was recognized when the contract tasks were
completed and accepted by the customers.
This change had no effect on prior years, and accordingly, pro forma
results for prior years are not applicable.
F-7
<PAGE>
1. Summary of Significant Accounting Policies: (Cont'd)
f. Income taxes
Deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities,
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse.
g. Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
h. Foreign currencies
Assets and liabilities recorded in foreign currencies on the books of
the foreign subsidiary are translated at the exchange rate on the balance sheet
date. Translation adjustments resulting from this process are charged or
credited to equity. Revenues, costs and expenses are translated at average rates
of exchange prevailing during the year.
i. Research and development
Research and development costs are expensed as incurred.
j. Advertising costs
Advertising costs are expensed as incurred. Advertising expense
approximated $624,000, $215,000 and $88,000 in 1997, 1996 and 1995,
respectively.
k. Loss per share
In 1997, the Company adopted Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" (SFAS No. 128). This Statement
establishes standards for computing and presenting earnings (loss) per share
(EPS). SFAS No. 128 requires dual presentation of basic and diluted EPS. Basic
EPS excludes dilution and is computed by dividing net income available to common
stockholders by the weighted average number of common shares outstanding for the
period. Diluted EPS reflects the potential dilution that could occur if stock
options or convertible securities were exercised or converted into common stock.
The Company's adoption of SFAS No. 128 did not materially change current and
prior years' EPS.
Basic and diluted loss per share amounts were equivalent for the
years ended December 31, 1997, 1996 and 1995.
l. Reclassifications
Certain items in the 1995 and 1996 financial statements have been
reclassified to conform to the 1997 classifications.
F-8
<PAGE>
1. Summary of Significant Accounting Policies: (Cont'd)
m. New accounting standards
In June 1997, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 130, "Reporting Comprehensive Income," which establishes
standards for reporting and display of comprehensive income, its components and
accumulated balances. Comprehensive income is defined to include all changes in
equity except those resulting from investments by owners and distribution to
owners. Among other disclosures, SFAS No. 130 requires that all items that are
required to be recognized under current accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements.
In addition, in June 1997, the FASB issued SFAS No. 131, "Disclosures
About Segments of an Enterprise and Related Information," which establishes
standards for reporting information about operating segments. It also
establishes standards for disclosures regarding products and services,
geographic areas and major customers.
Both of these new standards are effective for periods beginning after
December 15, 1997 and require comparative information for earlier years to be
restated. The implementation of these new standards will not affect the
Company's results of operations and financial position, but may have an impact
on future financial statement disclosures.
2. Business Combination:
On July 1, 1997, the Company acquired 100% of the capital stock of
International. The purchase price approximated $6,720,000, which consisted of
791,652 shares of common stock (valued at $6,115,000), options to acquire
207,152 shares of the Company's common stock for $15 per share (valued at
$244,000) and the forgiveness of debt. The Company had no equity interest in
International prior to the acquisition. The transaction was accounted for as a
purchase. The Company recorded approximately $6,720,000 of goodwill in
connection with the acquisition.
50,000 of the shares of common stock issued in connection with this
transaction were granted to an officer of the Company, who was also a
stockholder of International.
Pro forma consolidated information, assuming the transaction had taken
place as of January 1, 1996, is as follows:
Year Ended
December 31,
1997 1996
Revenue $ 10,817,237 $ 37,500
============= =============
Net loss $ (9,571,130) $ (5,580,845)
============= =============
Net loss per share $(.61) $(.42)
===== =====
Weighted average number
of shares outstanding 15,782,951 13,185,708
========== ==========
3. Other Receivables:
Other receivables consist of amounts owed the Company for shares of
common stock issued in connection with warrant exercises which were collected
subsequent to year end.
F-9
<PAGE>
4. Property and Equipment:
Property and equipment, at cost, consists of the following:
December 31,
1997 1996
Equipment and furniture $ 3,221,535 $ 1,813,377
Software 359,076 251,105
Transportation equipment 144,278 -
Leasehold improvements 190,108 10,706
------------- -------------
3,914,997 2,075,188
Less accumulated depreciation 995,920 381,159
------------- -------------
$ 2,919,077 $ 1,694,029
============= =============
5. Loans Payable, Stockholders:
Loans payable, stockholders represent loans from certain corporate
officers/stockholders. The loans are due on demand and bear interest at 10 1/2%
and 4 1/2% in 1997 and 1996, respectively.
One of the loans, which originated in 1992, provided for the conversion
of the loan to common stock at a conversion rate approximating the fair market
value of the common stock ($.08 per share) at the time the loan was made. In
1997, this loan was converted into 50,000 shares of common stock.
6. Stockholders' Equity (Deficiency):
a. Capital stock
During 1997, the Company issued 1,703,500 shares of common stock under
Regulation S offerings for net proceeds of $12,988,000. The Company also issued
1,585,294 shares of common stock (including 350,000 shares distributed from
treasury) for net proceeds of $4,088,000 in connection with the exercise of
warrants and options.
In 1997, the Company issued an aggregate of 45,000 shares of common
stock to an officer and a third party as compensation for services provided. The
value of the shares ($222,500, based upon the stock's trading value on the date
of grant) has been charged to operations.
In December 1996, the Company issued 109,909 shares of common stock in
exchange for 65,000 Class A Warrants and 65,000 Class B Warrants.
In December 1996, the Company issued 370,000 shares of common stock
for net proceeds of $65,000 and a receivable of $490,000 in connection with the
exercise of 370,000 Class A Warrants.
In December 1996 the Company placed 500,000 shares for anticipated net
proceeds of $3,500,000, but the transaction was not completed by December 31,
1996. In December 1996, the Company issued 155,000 of the 500,000 shares of
common stock for net proceeds of $1,041,445. The net proceeds reflect a fee of
4% and other fees charged by the underwriter
F-10
<PAGE>
6. Stockholders' Equity (Deficiency): (Cont'd)
a. Capital stock (Cont'd)
In October 1996, the Company issued 1,000,000 shares in exchange for
$850,000, 565,000 of Class A Warrants and 935,000 of Class B Warrants and the
forgiveness of certain demand registration rights previously granted to this
warrantholder.
In July 1996, the Company issued 150,000 shares of common stock for
net proceeds of $1,048,800. In August 1996, the Company issued 25,000 shares to
the purchaser of the 150,000 shares, thereby reducing the proceeds to the
Company by $1 per share as a penalty for failing to comply with a condition of
the stock placement agreement.
In February 1996, the Company granted an employee 20,000 shares of
common stock and recorded compensation of $40,000.
In January 1996, the Company retired all of the outstanding treasury
shares, that were obtained when a stock subscriber defaulted on his obligation.
Subsequently the Company issued 900,000 shares into treasury at par value to
fulfill obligations under employee stock grants and stock options. Distributions
of 350,000 and 105,000 shares were made from treasury to employees in connection
with the exercise of stock options in 1997 and 1996, respectively.
During 1994, the Company accepted non-recourse notes totaling $450,000
for 900,000 shares of subscribed stock. In 1995, the notes expired without
repayment. The Company reclaimed the shares from escrow, retired 400,000 of
those shares in 1995 and retired the balance during 1996.
b. Stock option plan
During 1994, the Company's Board of Directors approved an omnibus
stock option plan to benefit certain key employees. Under this plan (as
amended), the Company may issue up to 1,000,000 shares of stock and/or stock
options through the year 2004. The options become exerciseable at various
periods of time from thirty days to two years from the date of grant.
The Company has granted employees options at various exercise prices
that reflected the fair value of stock on the date of grant. The Company has
elected to follow Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations in accounting for its
employee stock options. Therefore, no compensation cost has been recognized. If
the Company accounted for its stock options under the fair value method of SFAS
No. 123, "Accounting for Stock-Based Compensation", the Company's net loss and
loss per share would have been increased to the pro forma amounts indicated
below:
Years Ended
December 31,
1997 1996 1995
-------------- -------------- ---------
Net loss:
As reported $(7,797,167) $(5,132,845) $(580,148)
Proforma (9,155,167) (5,482,845) (880,148)
Loss per share:
As reported $(.51) $(.41) $(.05)
Proforma $(.59) $(.44) $(.08)
F-11
<PAGE>
6. Stockholders' Equity (Deficiency): (Cont'd)
b. Stock option plan (Cont'd)
The fair value of each option is estimated on the date of the grant
using the Black-Scholes option pricing model with the following assumptions used
for grants:
Years Ended
December 31,
1997 1996 1995
------------- ------------- --------
Dividend yield -0- -0- -0-
Expected volatility 86.51% 71.00% 71.00%
Risk free interest rate 5.5% 6.875% 6.875%
Expected lives 3 years 3 years 3 years
The following table summarizes the status of stock options outstanding
under the Company's option plan:
<TABLE>
<CAPTION>
Weighted Weighted
Number Average Average
of Exercise Fair
Shares Price Value
<S> <C> <C> <C>
Granted 390,000 1.49 .77
Exercised - -
Cancelled and expired - -
------------ ----
Outstanding, December 31, 1995 390,000 1.49
Granted 295,000 2.23 1.16
Exercised (115,000) 1.75
Cancelled and expired - -
------------ ----
Outstanding, December 31, 1996 570,000 1.82
Granted 907,900 11.06 6.42
Exercised (440,000) 1.83
Cancelled and expired (60,500) 12.38
------------ -------
Outstanding, December 31, 1997 977,400 $ 9.78
============ =======
</TABLE>
The weighted average remaining contractual life of options outstanding
as of December 31, 1997 is 9.27 years.
The Company contributed the capital in 1996 for the exercise of the
115,000 options and recorded approximately $212,800 as compensation expense.
c. Warrants
In June 1997, the Company issued 207,152 warrants in connection with
its acquisition of International. The warrants had an exercise price of $15 per
share and were exercisable for a six-month period. During 1997, 113,152 of the
warrants were exercised and the remaining 94,000 were cancelled. The fair value
of the warrants using the Black-Scholes option pricing model ($244,000) was
included as a component of the purchase price.
The Company issued 10,000 warrants to an underwriter in each of the
years ended December 31, 1997 and 1996. The warrants have exercise prices
ranging from $11.25 per share to $14.55 per share. These warrants are
outstanding as of December 31, 1997.
During 1997, the Company issued an aggregate of 30,000 warrants, with
exercise prices ranging from $9.75-$11.75 per share, to two directors. The fair
value of the warrants is being charged to operations over the vesting period of
the options. These warrants are outstanding as of December 31, 1997.
F-12
<PAGE>
6. Stockholders' Equity (Deficiency): (Cont'd)
c. Warrants (Cont'd)
During 1994 and 1995, the Company issued an aggregate of 1,425,000
Class A and 300,000 Class B warrants in connection with the sale of securities.
The exercise prices of the Class A and Class B Warrants were $1.50 and $2.00,
respectively. During 1997, 425,000 Class A and 300,000 Class B Warrants were
exercised. During 1996, 435,000 Class A and 65,000 Class B Warrants were
exercised, and 565,000 Class A and 935,000 Class B Warrants were retired. As of
December 31, 1997, there are no Class A or Class B Warrants outstanding.
In 1995, the Company issued an aggregate of 307,142 warrants to third
parties in consideration for services provided in connection with various equity
offerings. The warrants had exercise prices ranging from $1 to $1.75, and were
exercised in 1997.
d. Employee stock purchase plan
In August 1997, the Company adopted an Employee Stock Purchase Plan
(the "Purchase Plan") to provide eligible employees an opportunity to purchase
shares of its common stock through payroll deductions. Semi-annually,
participant account balances are used to purchase shares of stock at 85% of the
lesser of the fair market value at (i) the beginning or (ii) the end of the
semi-annual offering period.
The fair market value of shares that may be purchased by any
participant during any calendar year may not exceed $25,000. A total of 200,000
shares are available for purchase under the Purchase Plan. No shares had been
issued under the Purchase Plan as of December 31, 1997.
7. Supplementary Cash Flow Information:
Cash paid for interest expense for the years ended December 31, 1997,
1996 and 1995 was $22,200, $-0- and $2,000, respectively.
During 1997, the Company incurred capital lease obligations approximating
$144,000 for the acquisition of various property and equipment. Further, the
Company issued stock and/or options to various parties in consideration for
services provided.
8. Concentration of Credit Risk:
The Company maintained bank balances, which at times exceeded the
federally insured limit of $100,000.
Sales to two customers approximated 14% and 12% of net revenues for 1997.
One customer accounted for 100% and 75% of net revenues for 1996 and 1995,
respectively.
Sales to foreign customers, located principally in Europe, approximated
32% of net sales for 1997.
9. Commitments and Contingency:
a. Leases
The Company leases office space under various operating leases. Rent
expense under these leases approximated $916,000, $257,000 and $35,000 in 1997,
1996 and 1995, respectively. Future minimum lease payments under these operating
leases are:
F-13
<PAGE>
9. Commitments and Contingency: (Cont'd)
a. Leases (Cont'd)
Year Ending
December 31, Amount
1998 $ 958,000
1999 544,400
2000 408,300
b. Litigation
The Company is a defendant in a lawsuit which relates to GEM
Technologies, Inc. (GEM) a former affiliated company of Alydaar Software
Corporation. Twenty purported noteholders or shareholders of GEM filed a
complaint against certain officers, GEM and the Company alleging that the
defendants fraudulently induced the plaintiffs into entering a note purchase
agreement with GEM and fraudulently transferred the property of GEM to the
Company. The plaintiffs have sought actual damages, punitive damages, attorney
fees and injunctive relief relative to the property allegedly transferred to the
Company.
Although no estimate of loss or range of loss, if any, can be determined
at this time, the Company intends to vigorously defend the allegations made in
this complaint. In addition, the Company's President has agreed to indemnify the
Company against any liability resulting from a final and unappealable judgment
or settlement in this action.
10. Fair Value of Financial Instruments:
The methods and assumptions used to estimate the fair value of the
following classes of financial instruments were:
Current Assets and Current Liabilities: The carrying amount of cash,
current receivables and payables and certain other short-term financial
instruments approximate their fair value.
Capital Lease Obligations: The carrying amount of capital lease
obligations, based on the Company's incremental borrowing rates for
similar types of borrowing arrangements, approximate their fair value.
The carrying amount and the fair value of the Company's financial
instruments are as follows:
<TABLE>
<CAPTION>
December 31,
1997 1996
------------------------------ -----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
<S> <C> <C> <C> <C>
Cash $ 1,526,900 $ 1,526,900 $ 379,400 $ 379,400
Accounts receivable and other
receivable 5,585,600 5,585,600 677,500 677,500
Loan to stockholder 51,300 51,300 51,300 51,300
Accounts payable and accrued
expenses 1,807,600 1,807,600 2,184,400 2,184,400
Note payable, stockholder 966,700 966,700 507,500 507,500
Capital lease obligations 123,100 123,100 - -
</TABLE>
F-14
<PAGE>
11. Income Taxes:
The income tax benefit for 1997 represents the estimated benefit of net
operating losses, net of a valuation allowance. No benefit was recognized in
1996 or 1995 as the Company had a 100% valuation allowance
The components of the net deferred tax asset are as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------
1997 1996 1995
-------------- -------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforward $ 5,358,000 $ 2,280,000 $ 229,000
Investment in subsidiary 382,000 - -
Other 44,000 - -
Deferred tax liabilities:
Depreciation method of
property and equipment (12,000) (128,000) -
Allowance for realization of assets (5,172,000) (2,152,000) (229,000)
-------------- -------------- ------------
$ 600,000 $ - $ -
============== ============== ===========
</TABLE>
A reconciliation between the actual income tax expense and income taxes
computed by applying the statutory federal income tax rate to income before
taxes is as follows:
<TABLE>
<CAPTION>
Years Ended
December 31,
--------------------------------------------------
1997 1996 1995
-------------- -------------- -------------
<S> <C> <C> <C> <C>
Computed income tax benefit at 34% $(2,855,000) $(1,745,167) $(197,250)
Addition to allowance for realization
of deferred tax asset net operating
loss carryforward 2,255,000 1,745,167 197,250
-------------- -------------- ------------
$ 600,000 $ - $ -
============== ============== ===========
</TABLE>
As of December 31, 1997, the Company had net operating loss carryforwards
("NOLs") of approximately $13,395,000 available through December 31, 2012 to
offset future taxable income. However, under Section 382 of the Internal Revenue
Code, a greater than 50% change in ownership, as defined, restricts the annual
utilization of available NOLs to a prescribed amount. Accordingly, future
utilization of the NOLs may be limited.
12. Retirement Plan:
In August 1997, the Company adopted a salary reduction plan under Section
401(k) of the Internal Revenue Code. Participation in the Plan is voluntary, and
any qualified employees may elect to contribute up to 10% of earnings. The
Company may, at its discretion, match a percentage of an employee's elected
deferrals. The Company did not make a contribution to the Plan in 1997.
F-15
Exhibit 10.3
ADDENDUM
TO
ALYDAAR SOFTWARE CORPORATION
OMNIBUS STOCK OPTION PLAN
THIS ADDENDUM is effective as of the 20th day of December, 1996 to the
ALYDAAR SOFTWARE CORPORATION OMNIBUS STOCK OPTION PLAN ("Plan") pursuant to the
minutes of the Special Meeting of the Board of Directors, dated December 20,
1996. The provisions of this Addendum are hereby made a part of the Plan. Should
a conflict exist among the provisions of the Plan, the Exhibits thereto and this
Addendum, the provision of this Addendum shall control. Any terms in capital
letters not defined in this Addendum shall have the meaning set forth in the
Plan.
1. Article V, Section 5.1 (General) is amended so that the number of Shares for
which Awards may be granted under the Plan is increased to from three hundred
seventy five thousand (375,000) to one million (1,000,000).
By: /s/ V. Hollis Scott
Print Name: V. Hollis Scott
Title: Secretary, Alydaar Software Corporation
Ex. 10.3 - 1
<PAGE>
ADDENDUM
TO
ALYDAAR SOFTWARE CORPORATION
OMNIBUS STOCK OPTION PLAN
THIS ADDENDUM is effective as of the 20th day of October, 1997 to the
ALYDAAR SOFTWARE CORPORATION OMNIBUS STOCK OPTION PLAN ("Plan") pursuant to the
minutes of the Special Meeting of the Board of Directors, dated May 15, 1997.
The provisions of this Addendum are hereby made a part of the Plan. Should a
conflict exist among the provisions of the Plan, the Exhibits thereto and this
Addendum, the provision of this Addendum shall control. Any terms in capital
letters not defined in this Addendum shall have the meaning set forth in the
Plan.
1. Article V, Section 5.1 (General) is amended so that the number of Shares for
which Awards may be granted under the Plan is increased to from one million
(1,000,000) to two million (2,000,000).
By: /s/ V. Hollis Scott
Print Name: V. Hollis Scott
Title: Secretary, Alydaar Software Corporation
Ex. 10.3 - 2
Exhibit 10.4
CONTINUING SERVICES AGREEMENT
This Continuing Services Agreement ("Agreement") is entered into and made
effective as of this ___ day of __________, 1998 ("Effective Date"),
between_________________, a _____________ corporation, having its principal
place of business at _________________________________________________
("Company"), and Alydaar Software Corporation, a North Carolina corporation
having its principal place of business at 2101 Rexford Rd., Suite 250 West,
Charlotte, North Carolina 28211 ("Alydaar"). In consideration of the terms and
conditions contained in this Agreement, the delivery and sufficiency of which is
acknowledged by both parties, Company and Alydaar agree as follows:
1. DEFINITIONS.
1.1 "Software" means the computer software owned or licensed by a
party, including: (a) the human-readable or machine-readable uncompiled
set of instructions for the Software together with any logic diagrams,
programmers' comments, flow charts, binary object codes, and source codes
listings; and (b) all modifications, revisions, copies, derivative works,
inventions, discoveries, patentable or copyrightable matter, concepts,
expertise, techniques, patents, copyrights, trade secrets and other
related legal rights of the foregoing items.
1.2 "Work Order" means the document or documents incorporating the
terms of this Agreement, and specifying the Services to be performed by
Alydaar and the time frame and price for performing them. A Work Order
shall be substantially in the form of one of the examples set forth in
Exhibit B to this Agreement, provided however, that a Work Order (1) must
be in writing and (2) is not effective unless and until executed by both
parties.
2. SERVICES.
2.1 Service Description. The purpose of this Agreement is to set forth
the terms and conditions under which Alydaar will provide the services
agreed to by the parties in the applicable Work Order and as further
described in the applicable Exhibits ("Services"). The Services may be
for remediation of the Company's Software as set forth in Exhibit A.1
and B.1 ("Remediation Services") or for audit or assessment of the
Company's Software as set forth in Exhibit A.2 and B.2 ("Audit
Services").
2.2 Compiler Requirements. Company shall forward the written or
electronic results of its compilation, including the compiler settings,
of the Company's Software to Alydaar at the time Company sends the
Company's Software to Alydaar for Services. If the Company fails to
forward the written results of the compilation and settings, Alydaar
will perform the compilation and forward Alydaar's compilation results
and settings in writing to the Company for confirmation ("Compilation
Notice"). If the Company fails to confirm their agreement with
Alydaar's compilation results and settings in writing to Alydaar within
ten (10) days of the Compilation Notice: (a) Alydaar will perform the
Services on the Company's Software and in relation to Remediation
Services, return the Company's Software to Company compiled as set
forth in the Compilation Notice; (b) Company hereby waives any claim
that Alydaar did not perform the Service correctly as a result of
Alydaar's compilation of the Company's Software; and (c) Company
acknowledges that Alydaar shall have no liability for failures related
to Alydaar's compilation of the Company's Software.
Ex. 10.4 - 1
<PAGE>
3. TERM AND AGREEMENT TERMINATION.
3.1 Term. The term of this Agreement begins on the Effective Date and
shall continue through _____________("Initial Term"), unless terminated
earlier as permitted by this Agreement. The Agreement shall be renewed
automatically for additional one (1) year terms after the Initial Term
("Renewal Terms"), unless either party gives at least ninety (90) day's
prior written notice of termination to the other party. Notwithstanding
termination or expiration of this Agreement, the parties agree that
each party's rights and obligations under a mutually executed Work
Order shall (a) continue and survive the termination or expiration of
this Agreement and (b) continue to be subject to the terms and
conditions of the Work Order and Agreement through completion of such
Work Order.
3.2 Default. If either party shall commit a material breach of any term
or condition of this Agreement, and if said party shall fail to cure,
or make substantial progress to cure, any such breach within forty-five
(45) days after written notice of such breach is given by the
non-breaching party, then the non-breaching party shall be entitled,
after giving written notice hereunder, to terminate this Agreement.
Upon a breach of the license restrictions or confidentiality relating
to a party's Software, the breaching party shall immediately return to
the other party all tangible portions of the Software delivered or
disclosed, together with all copies thereof at any time, except such
programs and documentation or copies thereof as the breaching party
shall then warrant in writing as having been destroyed.
4. WORK ORDERS.
4.1 Issuance. The Company and any corporation, partnership,
proprietorship or other entity in which the Company now or hereafter owns
or controls, directly or indirectly, more than fifty percent (50%) of the
stock or other interests having the right to vote or appoint directors
("Subsidiary") may, from time to time, issue Work Orders to Alydaar under
this Agreement requesting Alydaar to provide Services. Should Alydaar
accept a written Work Order from the Company or its Subsidiaries, it shall
do so by executing and returning the Work Order to the Company or its
Subsidiary, as applicable. Each Work Order accepted by Alydaar shall be
completed in accordance with the provisions of the Work Order and the
Agreement. In the event Alydaar accepts a Work Order from a Subsidiary, all
references in the Agreement to "Company" shall also be deemed to include
"Subsidiary". Any material alteration, deletion or addition to Services in
any Work Order or a change in any provision(s) of any Work Order shall be
effective only mutually agreed to by the parties in writing.
Notwithstanding the foregoing, in the event Company's or Subsidiary's
project manager submits the Company's Software to Alydaar for performance
of the Services and Alydaar performs the Services for such Company Software
without a Work Order, the parties hereby agree that the terms and
conditions set forth in this Agreement shall govern such transaction.
4.2 Term of Work Order. The term of any Work Order shall begin on the
date the Work Order is accepted and shall continue through the date on
which all Services specified in the Work Order have been completed and
Alydaar has been paid in full. Each Work Order shall be deemed to
incorporate all of the provisions of this Agreement.
5. PAYMENT.
Ex. 10.4 - 2
<PAGE>
5.1 Payment Terms. Subject to the provisions of this Agreement, Alydaar
shall charge and Company shall pay Alydaar the rates and fees specified
in Exhibit C or any Work Order in accordance with the payment schedule
set forth in Exhibit C.
5.2 Payment of Invoices. Unless otherwise stipulated herein, Company
shall pay all invoices within thirty (30) days of the postmark date of
the invoice, or on the specified due date(s), if any specific due
date(s) for payments are stipulated herein. Alydaar reserves the right
to charge and collect a service fee equal to the lesser of (a) one and
one half percent (1-1/2%) per month or, (b) the highest interest rate
legally permitted for all amounts not paid on the due date. The Company
will also reimburse Alydaar for all collection expenses, including
reasonable attorneys' fees and court costs, for delinquent amounts. If
Company legitimately disputes any invoice amount, then Company shall
(a) pay to Alydaar the undisputed amount of the invoice, (b) provide to
Alydaar a detailed written description of the disputed amount and the
basis for the Company's dispute with such amount; and (c) cooperate
with Alydaar in promptly resolving disputed invoices. If any of
Alydaar's undisputed invoices remain unpaid for more than thirty (30)
days after the postmark date, Alydaar shall, in addition to pursuing
any other remedies it may have, be entitled to cease performing all
Services under any Work Order then in effect. Invoices shall be sent to
the following Company individual at the following
address:_________________________________________________________
____________________________.
5.3 Taxes. Except for taxes based on Alydaar's net income, Company is
responsible for and shall pay, or reimburse Alydaar, for all fees,
assessments, duties and taxes (including, but not limited to, sales or
use taxes) which may now or later be paid or payable because of the
Agreement or the performance of any Services under the Agreement.
5.4 Additional Services. Other than for Services set forth in the Work
Order, Alydaar shall invoice Company, as expenses are incurred, for any
technical support or assistance requested by Company and provided by
Alydaar at Alydaar's then current standard rates. Alydaar shall charge
Company for all reasonable travel and living expenses incurred under
this Agreement.
6. DELIVERY, TESTING AND WAIVER. This Section 6 shall only apply in relation to
Remediation Services provided by Alydaar. Alydaar will deliver the Company's
Software to Company in accordance with the schedule and other requirements set
forth in the applicable Work Order. Following receipt of the Company's
Software, the Company shall have thirty (30) days ("Test Period") (a) to verify
that the Company's Software performs materially in accordance with all
specifications set forth in the applicable Work Order, and (b) to notify
Alydaar in writing of any failure to perform materially in accordance with such
specifications (such failure being referred to herein as a "Non-Compliance").
Upon Alydaar's timely receipt of a notice of Non-Compliance, Alydaar shall work
diligently to correct such Non-Compliance at no charge to the Company, provided
that Company did not cause such Non-Compliance. In the event Alydaar has
received a notice of NonCompliance before the end of the Test Period, the Test
Period shall continue on a day-by- day basis until each item of Non-Compliance
has been corrected by Alydaar and Company has had the longer of the remainder
of the Test Period, fourteen (14) days or some other mutually agreeable time
period to test such corrected item of Non-Compliance so noted. Should the
Company not provide Alydaar with written notice of NonCompliance during the
Test Period or within the time frames set forth above for corrected
Non-Compliance, the Test Period shall be deemed to be completed and the Company
shall be barred from asserting any claim or defense of any nature against
Alydaar, including but not limited to claims for reimbursement of payments made
by the Company and defenses to a claim by Alydaar for payments due from the
Company.
Ex. 10.4 - 3
<PAGE>
7. OWNERSHIP AND LICENSES
7.1 Ownership and License of Company's Software. Title and ownership to
the Company's Software provided by the Company or any Subsidiary to
Alydaar shall remain and belong to and be vested in the Company or such
Subsidiary, as applicable. Company and Subsidiary hereby grant Alydaar
a non-exclusive, non-transferable, royalty free license for the term of
this Agreement to use the Company and Subsidiary Software only for the
purposes of performing the Services.
7.2 Ownership of Alydaar's Software. Title and ownership to Alydaar's
Software and other proprietary information, including the SMARTCODE(R)
Software and process and any derivative works, shall remain and belong
to and be vested in Alydaar. Alydaar reserves all rights in Alydaar's
Software and its proprietary information not expressly granted to
Company in the Agreement.
7.3 License of Certain Alydaar Software. This Section 7.3 shall only
apply if Remediation Services are provided by Alydaar. As a result of
the Remediation Services, executable instructions and comments of
Alydaar's Software will be imbedded in the Company's Software
("Imbedded Software"). For the fees set forth in any Work Order,
Alydaar hereby conveys a perpetual, royalty free, non-exclusive,
non-transferable, restricted use license for the Imbedded Software to
Company. Company may maintain the Imbedded Software, provided all
changes, derivative works, modifications or improvements made or
developed with regard to the Imbedded Software shall remain the
property of Alydaar. The Imbedded Software may not be: (a) replicated,
used, distributed, copied or transferred other than where installed in
the Company's Software remediated by Alydaar, except for a reasonable
number of back-up copies, provided all proprietary, confidential and
copyright notices, markings or legends which appear on any item
included in Alydaar's Software are placed upon each such copy or
duplication; (b) rented, leased or provided for use in remote computer
services by Company for a third party; (c) changed by Company to remove
from any item included in Alydaar's Software any proprietary,
confidential or copyright notices, markings or legends placed thereon
by Alydaar; or (d) accessed except by only those employees and agents
of Company who need access thereto in order to use, implement, test,
audit, or modify the Imbedded Software. Prior to providing access to
the Imbedded Software to such sanctioned persons, Company shall take
appropriate action by instruction or agreement with the employees or
agents having access to the Imbedded Software to fulfill the Company's
obligations under this Agreement. Neither party shall knowingly
transfer, directly or indirectly, the other's Software, technical data
or the direct product of such data, to any destination subject to
export restrictions under United States law, unless prior written
authorization is obtained from the other party.
8. REPRESENTATIONS, WARRANTIES, INDEMNIFICATION AND DAMAGE
LIMITATION
8.1 Alydaar Representations and Warranties. Alydaar warrants that it
either owns or has the right to license all property included in its
Software.
8.2 Company Representations and Warranties. Company warrants that
it either owns or has the right to license all property included in
its Software.
8.3 Disclaimer of Other Warranties. THE FOREGOING SPECIFIED
WARRANTIES AND CONDITIONS ARE THE COMPANY'S AND ALYDAAR'S
SOLE WARRANTIES AND CONDITIONS UNDER THE TERMS OF THIS
AGREEMENT. THE PARTIES MAKES NO OTHER WARRANTY OR CONDITION
Ex. 10.4 - 4
<PAGE>
OF ANY KIND WHATSOEVER, EXPRESS OR IMPLIED, AND ALL IMPLIED
WARRANTIES AND CONDITIONS, INCLUDING THOSE OF
MERCHANTABILITY, NON-INFRINGEMENT AND FITNESS FOR A
PARTICULAR PURPOSE, ARE HEREBY DISCLAIMED AND EXCLUDED BY
ALYDAAR AND COMPANY.
8.4 Limitation of Liability. ALYDAAR'S TOTAL AGGREGATE LIABILITY TO
COMPANY FOR ALL LOSSES OR DAMAGES, DIRECT OR INDIRECT, FOR ANY CAUSE
WHATSOEVER ARISING UNDER OR IN ANY WAY CONNECTED WITH THIS AGREEMENT,
INCLUDING IF ANY REMEDY IS FOUND TO FAIL OF ITS ESSENTIAL PURPOSE, AND
REGARDLESS OF THE FORM OF ACTION SHALL NOT EXCEED THE FEES PAID BY
COMPANY TO ALYDAAR IN THE TWELVE (12) MONTHS IMMEDIATELY PRECEDING THE
DATE OF THE LOSS OR DAMAGE.
8.5 Disclaimer of Damages. IN NO EVENT SHALL ALYDAAR BE LIABLE TO
COMPANY OR ANY THIRD PARTY FOR LOST PROFITS, CONSEQUENTIAL, EXEMPLARY,
SPECIAL, INCIDENTAL, OR PUNITIVE DAMAGES, ARISING FROM OR RELATED IN
ANY WAY TO THIS AGREEMENT REGARDLESS OF TYPE OF CLAIM, WHETHER IN
CONTRACT, TORT, STRICT LIABILITY OR OTHER LEGAL OR EQUITABLE THEORY,
WHETHER OR NOT ALYDAAR HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH
DAMAGES.
8.6 Indemnification. Each party agrees to indemnify, defend and hold
harmless the other from and against any claim asserted or suit or
proceeding brought against the other party ("Indemnified Party")
alleging that (a) any Software infringes a patent, trademark, copyright
or trade secret of a third-party and (b) a breach of Sections 8.1 or
8.2 has occurred, provided the indemnifying party ("Indemnifying
Party") is given prompt written notice of, and full and complete
authority, information and assistance in the defense of, such claim,
suit or proceeding. The Indemnifying Party shall not be responsible for
the cost of any settlement of any such claim, suit or proceeding made
by the Indemnified Party without the written consent of the
Indemnifying Party. The Indemnifying Party shall not be liable to the
Indemnified Party under the terms of this Section or otherwise if any
infringement or claim is based upon the use of any Software in
violation of the license granted under this Agreement, or in
combination with any software or customization performed by the
Indemnifying Party for the Indemnified Party based upon the Indemnified
Party's ideas, designs, or specifications.
9. CONFIDENTIALITY. The parties acknowledge that in the course of the Service
being performed under this Agreement, both parties will become familiar with
proprietary information of the other concerning the other's Software, business
affairs, property, methods of operation, processing system or other information,
("Confidential Information"). Each party shall (a) not disclose the other
party's Confidential Information without such party's written consent and (b)
maintain the confidentiality of this Agreement and of any Confidential
Information using at least the degree of care and security as each uses to
maintain the confidentiality of its own Confidential Information. Information
shall not be considered confidential under this Section that: (i) is publicly
known prior to or after disclosure hereunder other than through acts or
omissions attributable to the recipient or its employees or representatives;
(ii) as demonstrated by prior written records, is already known to the recipient
at the time of disclosure hereunder; (iii) is disclosed in good faith to the
recipient by a third party having a lawful right to do so; or (iv) is the
subject of written consent of the party which supplied such information
authorizing disclosure. The parties acknowledge that their disclosure of any of
the other party's Confidential Information without the other's prior written
consent, may give rise to continuing irreparable injury to the non-disclosing
party, that, therefore, will be inadequately compensable in damages at
Ex. 10.4 - 5
<PAGE>
law. Accordingly, the non-disclosing party shall be entitled to seek immediate
injunctive relief against the breach or threatened breach by the disclosing
party of any of the foregoing undertakings, in addition to any other legal
remedies which may be available.
10. APPLICABLE LAW. The validity, interpretation and construction of this
Agreement, and any issue relating to the enforcement of this Agreement, shall be
governed by the laws of the state of North Carolina, without reference to its
principles of conflicts of law.
11. NOTICES. All notices required or permitted to be given under this Agreement,
shall be in writing and deemed to be properly given upon the date first actually
received by the intended recipient through one of the following methods: (a)
delivery in person, (b) facsimile with confirmation, provided that any notice
sent by facsimile shall also be sent by one at the other methods set forth in
this Section 11, (c) the United States mail with first class postage prepaid, or
(d) private, prepaid courier. All notices to be given under this Agreement shall
be given as set forth below:
Company Alydaar
..................................... Alydaar Software Corporation
Attn: ............................ Attn: Chief Operating Officer or
President
Copy: ........................... Copy: General Counsel
............................ 2101 Rexford Rd., Suite 250 West
............................ Charlotte, NC 28211
Phone: ............................ Phone: (704) 365-2324 ext. 2005
Fax: .......................... Fax: (704) 365-5175
12. SURVIVORSHIP. The provisions of Sections 3.2, 5, 7, 8.3, 8.4, 8.5, 8.6,
9-16, and 19-21 of this Agreement shall survive any expiration or termination of
this Agreement or any Work Order.
13. ASSIGNMENT. Either party shall be entitled to assign this Agreement in whole
or in part without the prior written consent of the other party. Subject to all
of the terms and conditions hereof, this Agreement inures to the benefit of and
is binding upon the parties hereto and their successors and assigns. Alydaar
reserves the right to subcontract, in whole or in part, performance of the
Services set forth herein, provided that Alydaar shall remain responsible for
the provision and performance of such Services by its subcontractor(s).
14. MODIFICATIONS. Any alteration, deletion or addition to any of the terms of
this Agreement shall only be effective if made in writing and duly executed by
the Company and Alydaar.
15. NO WAIVER. No delay or omission on the part of either party in exercising
any right hereunder or under any Work Order shall operate as a waiver of such
right or any other right under this Agreement or the applicable Work Order,
provided that nothing in this Section shall void or extend any time limit set
forth in this Agreement or any applicable Work Order with respect to the taking
of any action by Alydaar.
16. NON-RECRUITMENT OF EMPLOYEES. Alydaar and Company recognize and acknowledge
that employees who are engaged in electronic data processing activities possess
special, unique and extraordinary technical talents which are in great demand in
the present economy and further recognize and acknowledge that each party has
incurred substantial expense in recruiting and training such employees and would
incur even greater expense if required to replace any such employee. Therefore,
both parties agree not to recruit or employ, either directly or indirectly, a
present employee of the other party during the term of this Agreement and one
(1) year after without the other party's prior written consent.
Ex. 10.4 - 6
<PAGE>
17. RELATIONSHIP BETWEEN THE PARTIES. Alydaar and Company are independent
principals in all relationships and actions under and contemplated by this
Agreement. This Agreement shall not be construed to create any employment,
partnership, joint venture, or agency relationship between the parties.
18. PUBLICATION PERMISSION. Each party's execution of this Agreement shall
signify its approval for the other party to release non-confidential information
including the party's name, location and business relationship in standard news
releases, provided the parties mutually agree to the wording of such release
prior to its publication.
19. FORCE MAJEURE. Neither party shall be held responsible for any act, failure,
event, or circumstance addressed herein if such act, failure, event, or
circumstance is caused by conditions beyond such party's reasonable control,
whether such event was foreseeable or not.
20. LIMITATIONS OF ACTIONS. No claim or action concerning, related to, or
arising out of this Agreement or any breach of or default under this Agreement,
may be commenced by either party more then one year after the occurrence of any
such breach or default.
21. ENTIRE AGREEMENT. This Agreement, together with all Exhibits, Attachments
and Schedules hereto, constitutes the entire agreement and understanding between
Alydaar and Company concerning the subject matter hereof, and cancels,
terminates and supersedes all prior written and oral understandings, agreements,
proposals, promises and representations of the parties respecting any and all
subject matter contained herein.
IN WITNESS HEREOF, the parties have caused this Agreement to be executed by
their duly authorized representatives.
Alydaar Software Corporation ....................................
- ----------------------------
By: ......................... By: ...........................
Name:............................. Name:...............................
Title: ......................... Title: ...........................
Ex. 10.4 - 7
<PAGE>
EXHIBIT A
Exhibit A.1-Services Description for Remediation Services
Exhibit A.2-Services Description for Audit Services
Ex. 10.4 - 8
<PAGE>
EXHIBIT A.1
SERVICES DESCRIPTION FOR REMEDIATION SERVICES
1.0 SCOPE: This document describes the remediation Services Alydaar will provide
for Company using the windowing technique in order to attempt to render the
Company's Software Year 2000 compliant. Except as set forth in any Work Order,
Remediation Services do not include remediation of production JCL, programming
of external date routines for data ordering, database analysis and conversion
activity or bridging for date variables associated with database calls. In
addition, this document contains the packaging responsibilities for the
Company's Software.
2.0 PACKAGING: It is the responsibility of Alydaar to provide the Company with
written packaging guidelines for the transfer of the Company's Software to
Alydaar. Alydaar's Services are dependent upon the Company packaging the
Company's Software code in accordance with the packaging guidelines. Alydaar's
Client Manager assigned to Company will provide any phone assistance needed to
help or clarify specific issues.
3.0 ALYDAAR SERVICES
Alydaar will perform the following services:
Supply a rules questionnaire along with a list of packaging
requirements in order that the remediation can begin. Upon receipt
of a completed rules questionnaire and correctly packaged Company
Software along with a related letter of transmittal, the project
activities will begin.
Resources are assigned and a contact list is delivered to Company.
An initial compile is completed on the Company's
Software. Inventory and Line Count Reports are generated and
delivered to the Company. The initial line count will be for
all programming modules received. This line count is broken
down into executable, commented, and blank lines.
Alydaar will perform an initial application level evaluation on the
Company's Software code to search for special remediation cases.
These issues may include hard-coded 19's, year-related 88 levels,
report writer variables, and Company-inserted century
determination. From this assessment Alydaar will generate a
Evaluation and Issues Document identifying issues that require
Company feedback. In response to the Evaluation and Issues
Document, Company needs to provide all resolutions in order for
the remediation to proceed. The resolution of issues identified in
Evaluation and Issues Document becomes the requirements for
Company.
Next,the Company's Software will be submitted to the SMARTCODE(R)
process and date variables will be examined for possible Year 2000
problems. A date is nominated if it is not century compliant and
is used during a critical operation that will cause the Company's
Software to fail in the Year 2000 and beyond. Alydaar will
remediate the Company's Software when these nominated variables
are used. All other solutions will be applied as a result of the
Company's response to the Evaluation and Issues Document.
When all modifications are completed Alydaar will perform a second
compile. Upon completion Alydaar will generate the Final Report to
accompany the remediated Company's Software and Alydaar Software
library modules.
Ex. 10.4 - 9
<PAGE>
EXHIBIT A.2
SERVICES DESCRIPTION FOR AUDIT SERVICES
1.0 SCOPE: This document describes the services Alydaar will provide for
Company. Alydaar will use the SmartCode software in order to audit but not
remediate the Company's Software for Year 2000 compliance. In addition, this
document contains the packaging responsibilities for the Company's Software.
2.0 PACKAGING: It is the responsibility of Alydaar to provide the Company with
written packaging guidelines for the transfer of the Company's Software to
Alydaar. Alydaar's Services are dependent upon the Company packaging the
Company's Software code in accordance with the packaging guidelines. Alydaar's
Client Manager assigned to Company will provide any phone assistance needed to
help or clarify specific issues.
3.0 ALYDAAR SERVICES
Alydaar will perform the following services:
Supply a rules questionnaire along with a list of packaging
requirements in order that the audit can begin. Upon receipt of a
completed rules questionnaire and correctly packaged Company
Software along with a related letter of transmittal, the project
activities will begin.
Resources are assigned and a contact list is delivered to Company.
An initial compile is completed on the Company's Software.
Alydaar will perform one of three (3) types of audits.
Each type of audit will be performed using the SmartCode
software. The SmartCode software will search for failure
points within the Company's Software which will cause the
Company's Software not to be Year 2000 compliant, such as
hard-coded 19's, year-related 88 levels, report writer
variables, and Company-inserted century determinations.
The three (3) types of audits are as follows
1) Option 1. In this audit Alydaar searches for Year 2000
failures on a file by file basis. Upon the first instance of
Alydaar finding a Year 2000 failure in a file, all audit
activity on that file will cease. Alydaar will then go to the
next file to search for Year 2000 failures. Alydaar does not
perform any database assessment. From this audit Alydaar will
generate a final report identifying which files passed or
failed the audit. 2) Option 2. In this audit Alydaar performs
a line by line audit of every Year 2000 failure point in an
Company's Software. Alydaar does not perform any database
assessment. From this audit Alydaar will generate a final
report identifying each location of a Year 2000 point of
failure within Company's Software. 3) Option 3. In this audit
Alydaar performs a line by line audit of every Year 2000
failure point in Company's Software and including a database
assessment for failure points. From this audit Alydaar will
generate a final report identifying each location of a Year
2000 point of failure within Company's Software and the
database.
A Final Audit Report is sent to the Company. The Final Audit Report
contains separate Inventory and Line Count Reports and the audit
results. The Line Count Report will be for all programming modules
audited. This line count is broken down into executable,
commented, and blank lines.
Ex. 10.4 - 10
<PAGE>
EXHIBIT B
SAMPLE WORK ORDER
Exhibit B.1-Sample Work Order for Remediation Services
Exhibit B.2-Sample Work Order for Audit Services
Ex. 10.4 - 11
<PAGE>
EXHIBIT B.1
SAMPLE WORK ORDER (REMEDIATION)
This Work Order Number _ _, dated ________________, is issued pursuant to the
Continuing Services Agreement ("Agreement") between Alydaar Software Corporation
("Alydaar") and __________________________________ ("Company") and when duly
executed by authorized representatives of each party is incorporated as an
addendum thereunder. Should a conflict exist among the provisions of the
Agreement, Exhibits thereto and this Work Order, the provisions of this Work
Order shall control.
ALYDAAR DELIVERABLES
Rules questionnaire and packaging requirements;
Initial Inventory and Line Count Reports;
Evaluation and Issues Document;
Final Project Plan;
Request for Company approval of remediation specifications;
Final Report; and
Remediated Company Software files and required Alydaar Software library modules.
FEES AND PAYMENT
Remediation price per Language/per Line of Code:
Language:______________ Price per LOC:_$________________ Estimated number of
Lines of Code ("LOC") of each Language:
Language:______________ # of LOC:_________________
Estimated Total Remediation Fee:_____________________. Payable in accordance
with the payment schedule set forth in the Agreement or as set forth below.
PROJECT MILESTONES
1. Receive all components of the correctly packaged Company Software.
2. Alydaar resources are assigned.
3. Initial Inventory and Line Count Reports delivered.
4. All required Company Software received.
5. Initial compile complete and final project plan schedule created.
6. Receive resolutions to the findings of the Evaluation and Issues Document.
7. Return of remediated Company Software and delivery of the Final Report.
ASSUMPTIONS
The schedule for the Project Milestones shall be determined in a Final Project
Plan delivered as set forth in item 5 above.
The Remediation Services will be performed by Alydaar at Alydaar's location
using the windowing remediation technique in accordance with the
description of services set forth in the Agreement and this Work Order.
The final number of Lines of Code and any additional languages not set forth
above will be set forth in the Inventory and Line Count Reports. This final
Line of Code number will be multiplied by the price per LOC to arrive at
the final Total Remediation Fee. Prices per LOC for languages not set forth
above will require mutual agreement as to price per LOC prior to remediated
code being returned to Company.
Alydaar Software Corporation ....................................
By: ............................ By:.................................
Name:................................ Name:...............................
Title: ............................ Title:..............................
Ex. 10.4 - 12
<PAGE>
EXHIBIT B.2 SAMPLE WORK ORDER (AUDITS)
This Work Order Number _ _, dated , is issued pursuant to the Continuing
Services Agreement ("Agreement") between Alydaar Software Corporation
("Alydaar") and ("Company") and when duly executed by authorized representatives
of each party is incorporated as an addendum thereunder. Should a conflict exist
among the provisions of the Agreement, Exhibits thereto and this Work Order,
the provisions of this Work Order shall control.
ALYDAAR DELIVERABLES
Evaluation and Issues Document;
Final Project Plan;
Final Audit Report containing the following:
Audit results;
Listing of Company Software modules audited; and
Line of Code counts broken down into comments, executables, and blank
lines.
FEES AND PAYMENT
Audit Option (Check One)
Option 1: ____________
Option 2: ____________
Option 3: ____________
Audit price per Language/per Line of Code:
Language: # of LOC:
Estimated number of Lines of Code of each Language:
Language: # of LOC:
Estimated Total Audit Fee: $ . Payable in accordance with the payment schedule
set forth in the Agreement or as set forth below.
PROJECT MILESTONES
1. Receive all components of the correctly packaged Company Software.
2. Alydaar resources are assigned.
3. All required Company Software received.
4. Initial compile complete and final project plan schedule created. 5. Delivery
of Evaluation and Issues Document 6. Responses to Evaluation and Issues Document
7. Delivery of Final Audit Report
ASSUMPTIONS
The schedule for the Project Milestones shall be determined in the Final
Project Plan. The Audit Services will be performed by Alydaar at Alydaar's
location in accordance with the description of services set forth in the
Agreement and this Work Order. The final number of Lines of Code will be set
forth in the Final Audit Report. This final Line of Code number will be
multiplied by the price per LOC to arrive at the final Total Audit Fee. Prices
per LOC for languages not set forth above will require mutual agreement as to
price per LOC prior to audited code being returned to Company.
Alydaar Software Corporation ....................................
By: ............................ By:.................................
Name:................................ Name:...............................
Title: ............................ Title:..............................
Ex. 10.4 - 13
<PAGE>
EXHIBIT C
FEES AND PAYMENTS
1. Remediation Services. The fees and payments set forth in this Section are for
the Remediation Services. A "Line of Code" is defined as a segment of
non-comment code delineated by carriage returns (blank lines and comments are
not counted for inventory or pricing purposes). The payment schedule for such
remediated Company Software shall be as follows:
Sixtypercent (60%) of the total billable amount for remediating a Logical
Working Unit ("LWU") of Company's Software is due upon Alydaar's receipt of
such LWU.
Thirty percent (30%) of the total billable amount for remediating a LWU is due
upon delivery of the remediated LWU to Company.
Ten percent (10%) of the total billable amount for remediating a LWU is due
upon the earlier of: (a) the end of the Test Period in accordance with
Section 6 of the Agreement for such LWU; or (b) thirty (30) days following
delivery of the remediated LWU to Company.
PRICING TO BE DETERMINED
2. Audit Services: The fees and payment set forth in this Section are for the
Audit Services. The fees for Audit Services are based on the Lines of Code
received by Alydaar and invoiced 80% upon delivery of the Company's Software to
Alydaar and 20% upon return of the Final Audit Report to Company.
PRICING TO BE DETERMINED
Ex. 10.4 - 14
Exhibit 10.5
A G R E E M E N T
Agreement entered into by and between Robert Gruder ("Gruder") and
Alydaar Software Corporation (the "Company") this 10th day of April, 1997.
W I T N E S S E T H
WHEREAS, there are two actions pending against the Company and Gruder
in Superior Court of Connecticut (the "Actions") entitled respectively,
Andrew Kaplan, et al v. Robert G. Gruder, Thomas J.
Dudchik, GEM Technologies, Inc., a Connecticut Corporation,
Alydaar Software Corporation, a North Carolina Corporation
f/k/a DAAR, Inc., and Enertronix, Inc., a Utah Corporation
a/k/a GEM Technologies, Inc.
and
Alydaar Software Corporation (Fairfield, CV 96 0334
3085))and Robert Colby v. Robert Gruder, Robert Gruder d/b/a
GEM Technologies, a Connecticut Corporation, Alydaar
Corporation, a North Carolina Corporation (New Haven, CV 96
0254 2045); and
WHEREAS, the plaintiffs in the Actions demand certain relief against
the Company and Gruder, including the delivery to them of shares of common stock
("Common Stock") of the Company; and
WHEREAS, the Company and Gruder deny any liability in connection with
such Actions and intend to defend the actions vigorously, and
WHEREAS, the Company and Gruder have reached an agreement with respect
to the defense of the Actions and the satisfaction of a judgment, if any,
requiring the delivery of Common Stock to the plaintiffs;
NOW, THEREFORE, it is agreed as follows:
1. The Company and Gruder shall cooperate in the vigorous defense of
the Actions and shall, together with Tom Dudchik, jointly retain Willkie Farr &
Gallagher to represent both the Company and Gruder in the defense of the
Actions, together with such counsel authorized to practice in Connecticut as may
be necessary.
2. Gruder shall indemnify and hold harmless the Company with respect to
any liability resulting from a final and unappealable judgment in the Actions,
including, but not limited to, any liability to deliver shares of common stock
of the Company in satisfaction of any judgment or any settlement of the Actions
which he approves. In this connection Gruder represents and warrants that he
currently owns 7,231,400 shares of common stock of the Company free and clear of
any liens, charges or encumbrances and his liabilities do not exceed $500,000.
3. The Company shall pay all of the legal fees and expenses incurred in
connection with the defense of the Actions, including without limitation any
legal fees and expenses that Gruder or Dudchik might otherwise become obligated
to pay with respect to the defense of the Actions.
Ex. 10.5 - 1
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed as of the date first above written.
Alydaar Software Corporation
/s/ Robert Gruder By: /s/ V. Hollis Scott
Robert Gruder
Ex. 10.5 - 2
Exhibit 10.6
ALYDAAR SOFTWARE CORPORATION
1997 EMPLOYEE STOCK PURCHASE PLAN
PLAN DOCUMENT
1.0 Purpose of Plan
The purpose of the Alydaar Software Corporation 1997 Employee Stock Purchase
Plan (hereinafter "ESPP" or "Plan") is to provide employees of Alydaar Software
Corporation (the "Company") with an opportunity to participate in the
accumulation and potential appreciation of the Common Stock, par value .001 per
share ("Common Stock"), of the Company. The Company intends for the ESPP to
comply with the provisions of Section 423 of the Code, as in effect on July 1,
1997.
2.0 Definitions
2.1 Board: The Board of Directors of the Company. Members of
the Board shall not be eligible to participate in the Plan.
2.2 Code: Internal Revenue Code of 1986, as amended.
2.3 Compensation: W-2 compensation plus salary reductions from the
Company's 401(k) or any plan under Section 125 of the Code, less any income
related to relocation, one time or annual performance bonuses and other stock
plans.
2.4 Designated Enrollment Period: The period 30 days before the
beginning of each Offering Period, except the initial Designated Enrollment
Period shall commence on July 17, 1997 and end on August 4, 1997.
2.5 Eligible Employees: All active employees, who are customarily
employed by the Company for more than 20 hours per week and more than five
months per calendar year and who have reached the age required to enter into
enforceable contracts in the employees state of residence. An employee of the
Company or lineal descendants of the employee is not an "Eligible Employee" if
such employee owns stock aggregating five (5) percent or more of the total
combined voting power or value of all classes of stock of the Company.
3.0 Effective Date
The ESPP shall become effective on August 4, 1997, provided that (a) the Plan
must be approved by the Company's shareholders within twelve months of the date
of its adoption by the Company; (b) the Plan must be approved by the Board; and
(c) there must be a successful filing of a registration statement with the
Securities and Exchange Commission pertaining to the Common Stock to be issued
under the Plan. Rights of Eligible Employees are conditional such events
occurring.
4.0 Administration
4.1 The ESPP shall be administered by the Board. Members of the Board
receive no additional compensation for administering the ESPP.
4.2 Subject to the provisions of the ESPP and relevant law, the Board
shall have complete authority in its sole discretion: (i) to specify the
purchase price, subject to Section 6 hereof, of shares to be purchased under the
ESPP; (ii) to interpret the ESPP; (iii) to prescribe, amend and rescind rules
and regulations relating to the ESPP;
Ex. 10.6 - 1
<PAGE>
(iv) to amend the ESPP to conform with relevant law; and (v) to make all other
determinations and to do all other acts deemed necessary or advisable for the
administration of the ESPP. The Board determination on the foregoing matters
shall be conclusive. No member of the Board shall be liable for any action or
determination concerning the ESPP made in good faith.
5.0 Eligibility and Participation in the Plan
5.1 Offering Dates
Each Offering Period is a six-month period, commencing on either July 1
or January 1 (the "Offering Periods" or "Offering Period"), except the initial
Offering Period will commence on August 4, 1997 and will end on December 31,
1997. The Board shall have the power to change the duration and effective dates
of the Offering Periods.
5.2 Participation in the Plan
5.2.1 Enrollment
An Eligible Employee may elect to participate in the ESPP by
completing and submitting a subscription agreement approved by the Company
during the applicable Designated Enrollment Period ("Participant"). Once
enrolled, and providing that the Participant remains eligible for the ESPP as an
Eligible Employee, the Participant's participation and payroll deduction rate
will continue through ensuing Offering Periods unless the Participant cancels or
changes such participation via the designated change form.
An Eligible Employee may only enroll within the Designated Enrollment
Period. An employee who becomes eligible after a Designated Enrollment Period is
closed may enroll only during a subsequent Designated Enrollment Period.
5.2.2 Cancellation
A Participant may cancel his/her participation in the ESPP at
any time by providing such notice of cancellation in writing to the Company. If
a Participant cancels his/her participation on or before June 15 and December
15, as applicable, of each Offering Period by submitting the designated form to
the Company's Human Resources Department, payroll deductions withheld during
that Offering Period will be refunded to the Participant as soon as practicable.
If a Participant cancels his/her participation after June 15 and December 15, as
applicable, of each Offering Period, payroll deferral during the Offering Period
will be used to purchase Common Stock pursuant to Section 6.2, 6.3 and 6.4 of
the Plan and the Participant's account may be closed. No interest will be paid
on any amount refunded.
Upon such cancellation, the Participant's account may be closed
and certificates for all whole shares of Common Stock in the Participant's
account may be issued to the Participant. The Participant will receive cash from
any fractional shares and any uninvested payroll deductions in the account
except as provided above.
Upon the request of a Participant in his/her written notice of
cancellation, all (but not less than all) of the whole shares in the
Participant's account will be sold as soon as practicable at market price. The
net proceeds of the sale (the total sales price of all shares of Common Stock
sold less the costs of sale) will be distributed to the Participant. If the
Participant does not request that shares of stock in his/her account be sold,
certificates for such whole shares will be distributed to the Participant as set
forth in the previous paragraph. Fractional shares shall be paid to the
Participant in cash.
Ex. 10.6 - 2
<PAGE>
To reinstate his/her participation, the Eligible Employee must
re-enroll during any subsequent Designated Enrollment Period. However, if the
Eligible Employee is an officer subject to Section 16(b) of the Securities and
Exchange Act of 1934 ("Securities Act"), of the Company, the officer may not
re-enroll during the next enrollment period but must wait at least six months
from the date of cancellation, and thereafter may re-enroll during any
subsequent Designated Enrollment Period. Notice of a Participant's death
constitutes notice of withdrawal from the Plan. Settlement of the Participant's
account will be made pursuant to Section 8.3.
5.2.3 Changes
Changes, other than cancellation as noted in Section 5.2.2 above, may be
made only during the Designated Enrollment Periods. Such changes will be
effective at the beginning of the Offering Period following such Designated
Enrollment Period.
6.0 Number of Shares and Price
6.1 The number of shares of Common Stock available for purchase under
the ESPP shall be two hundred thousand (200,000) shares, all of which will be
available for purchase during the initial Offering Period. Shares available for
purchase during the initial Offering Period but not purchased by Participants
will be carried over to each subsequent Offering Period. The number of shares
covered by the ESPP is subject to adjustment in the event of stock split or
other transaction described in Section 9.1.
6.2 The purchase price at which shares will be sold to Participants
during each Offering Period is 85% of the lower of the fair market value at (1)
the beginning date of such Offering Period or (2) the ending date of such
Offering Period. The fair market value of the Common Stock on a given date is
the closing or last sale price on the Over the Counter Trading Market, the
NASDAQ/National Market System or any other market system on which the stock is
traded for that date ("Market(s)"). If the Offering Period begins or ends on a
day when the Market does not trade, the fair market value shall be determined by
using the closing or last sale price on the Markets for the last trading day
immediately preceding the beginning or ending day of the Offering Period. Shares
shall be purchased as soon as practicable after the end of each Offering Period.
6.3 Participants may elect to allocate from 1% to 10%, in whole
percentages, of his/her compensation, through payroll deduction, to purchase
shares through the Plan. Participants who are paid weekly must allocate a
minimum of $5.00 per pay period. Participants who are paid monthly must allocate
a minimum of $20.00 per pay period. All payroll deductions made for a
Participant are credited to his/her ESPP account and are deposited into an
interest bearing account and may be commingled with other Company funds.
Interest earned on the account balance will be used to defray the expense of
administering the Plan. If interest earned on the account balance exceeds the
expenses incurred by the Plan, the excess interest shall accrue to the benefit
of the Company to be used for general corporate purposes. The Company will pay
expenses in excess of the amount generated by the interest on the account used
to hold payroll deductions.
6.4 The number of shares purchased by each Participant at the end of
each Offering Period will be determined by dividing the purchase price as
defined in Section 6.2 above into the amount of payroll deduction withheld for
that Participant during the Offering Period, subject to ESPP limitations
detailed elsewhere in this Plan.
Ex. 10.6 - 3
<PAGE>
6.5 If the number of shares elected to be purchased by Participants
exceeds the aggregate number of shares available during the Offering Period, the
Company will reduce pro rata the number of shares available to each Participant.
Excess payroll deductions will be refunded at the end of the applicable Offering
Period to such Participants.
6.6 After purchases have been made, or after the offering date, the
Company will issue the applicable number of Common Stock shares and, as soon as
practicable after the end of such Offering Period or offering date, credit the
account of each Participant for the applicable number of shares and distribute
to each Participant a statement showing the number of shares (whole and
fractional) credited to the account of the Participant. A Participant will
receive Common Stock certificates for whole shares owned by the Participant only
upon written request to the Company. If the Participant chooses not to
participate in the next Offering Period, the Participant's cancellation will be
handled pursuant to Section 5.2.2 of the Plan.
6.7 Notwithstanding any other provisions of this ESPP, the fair market
value of shares that may be purchased by any Participant during any calendar
year, pursuant to this ESPP or any other plan maintained by the Company that
constitutes an employee stock purchase plan within the meaning of Section 423 of
the Code, determined as of the first day of the Offering Period, shall in no
event exceed $25,000. No Participant shall have the right to purchase shares
under the ESPP to the extent such purchase would cause the Participant to own
stock aggregating 5 percent or more of the total combined voting power or value
of all classes of stock of the Company or of any parent or subsidiary as
described in Section 424(d) of the Code.
6.8 A Participant may purchase shares under the ESPP only if such
Participant is an Eligible Employee on both the first day and the last business
day of such Offering Period. No Participant shall have any of the rights of a
shareholder with respect to shares purchased under the ESPP until the purchase
price for such shares has been paid and either the Participant's account has
been credited with such shares or certificates for such shares have been issued
to the Participant.
6.9 If applicable, with respect to shares purchased under the ESPP by
officers subject to Section 16(b) of the Securities Act, such persons
acknowledge that to avail themselves of the exemption from Section 16(b), such
shares must be held for a minimum period of six months from the date of purchase
to the date of disposition of the shares.
7.0 No Contract of Employment
Participation in the ESPP shall neither constitute a contract of
employment nor convey to any employee any right to continue in the employment of
the Company or to continue to be involved in any business in which the Company
may engage.
8.0 Employment Termination, Death, Disability, Retirement and
Leaves of Absence
8.1 If a Participant terminates employment for any reason, including death,
disability or retirement, or no longer meets the eligibility requirements set
forth herein for any reason other than a leave of absence as detailed in Section
8.2 below, his/her account balance representing partial shares shall be paid in
cash in accordance with the cancellation provisions in Section 5.2.2 above and a
certificate shall be issued for whole shares.
8.2 If a Participant is on an unpaid leave of absence for up to a
maximum of twelve weeks during an Offering Period, provided that she/he is an
Eligible Employee (not terminated) on the beginning and ending dates of such
Offering Period, she/he may remain
Ex. 10.6 - 4
<PAGE>
in the ESPP for that period. If the leave exceeds twelve weeks, or if the
employee is not on active status (terminated) at the beginning and ending dates
of the Offering Period, participation will be automatically cancelled and the
account balance paid in accordance with the cancellation provisions in Section
5.2.2 above.
8.3 A Participant may designate, in writing via the enrollment form, a
beneficiary. In the event of a Participant's death, his/her designated
beneficiary shall receive shares and cash for partial shares in full repayment
of the amounts deposited in the Participant's account during Offering Periods
before the current Offering Period and cash for the payroll deductions, if any,
for the current Offering Period. In the case of a married Participant who
resides in a community property state, no party other than the Participant's
spouse may be named as primary beneficiary without the written consent of the
spouse. In the absence of a designated beneficiary, the account balance of a
married Participant will be paid to the Participant's spouse, and the account
balance of an unmarried Participant will be paid to the Participant's estate.
8.4 The Board shall have the discretion to make decisions about
rights of Participants and obligations of the ESPP in situations of death,
disability, retirement, and leave of absence and all decisions of the Board
shall be final and binding on all affected parties.
9.0 Capital Changes
9.1 If the outstanding shares of Common Stock are increased,
decreased or changed into, or exchanged for, a different number or kind of
shares or securities of the Company, with or without receipt of consideration by
the Company, through reorganization, merger, recapitalization, reclassification,
stock split, stock consolidation, stock dividend, or similar event, then an
appropriate and proportionate adjustment shall be made in the number and kind of
shares or other securities which may be purchased under the ESPP.
9.2 Adjustments under Section 9.1 hereof shall be made by the Board,
whose determination as to what adjustments shall be made, and the extent
thereof, shall be final and conclusive as to all affected parties. No fractional
shares shall be issued under the Plan on account of any such adjustment but
total ownership balance (whole and fractional shares) will be considered for
such adjustments.
10.0 Recordkeeping
10.1 A recordkeeper or agent will be designated for the ESPP. All
expenses of establishing and administering the ESPP, in excess of interest
earned on the account to hold Participants' payroll deductions, will be paid by
the Company without charge to Participants.
10.2 A statement will be sent to each Participant as soon as
practicable after the end of each Offering Period. The statement will include
payroll deduction totals, fair market values at the beginning and end of the
Offering Period, purchase price, shares purchased (whole and fractional) and
shares allocated.
11.0 Restrictions on Assignment of Plan Rights
Subject to the provisions hereof, a Participant may not sell, pledge,
create a lien or otherwise assign or transfer in any way his/her right to
purchase shares under the Plan, his/her account
Ex. 10.6 - 5
<PAGE>
under the Plan, or any interest therein, or any cash or shares credited to such
account. A Participant who desires to sell, pledge or otherwise assign or
transfer shares in his/her account must request that certificates for such
shares be issued in the Participant's name as provided herein.
12.0 Consent of Participants
Each Participant shall be bound by the terms and conditions of the
ESPP as such terms and conditions may be amended from time to time.
13.0 Amendment or Termination of the Plan
The Board shall have the right to modify or terminate the ESPP in its sole
discretion at any time, including the number of share reserved under the ESPP,
as such number may be adjusted pursuant to Sections 6.1 and 9.0 hereof; reduce
the price of shares to be purchased under the ESPP below the price determined in
accordance with Section 6.0 thereof; or cause the Plan to fail to comply with
Section 423 of the Code. The ESPP shall terminate on June 30, 2007 unless it has
been previously terminated by the Board.
14.0 Taxation
Any taxes required by law to be withheld on account of the ESPP shall
be deducted and withheld accordingly. A Participant may become liable for taxes
when she/he disposes of shares acquired through this ESPP. The Company shall not
be responsible for any effect that the ESPP may have on a Participant's or
Beneficiary's taxes.
15.0 Governing Law
The interpretation and performance of this ESPP shall be governed by
the laws of the State of North Carolina.
16.0 Dividends
Dividends will be paid on all shares (whole and fractional) held in
each Participant's account under the Plan on the record dates for such
dividends. Dividend payments will be reinvested in additional shares of Common
Stock on the dividend payable date at 85%, of the fair market value determined
as the closing price or last sale price on the Market. If the dividend payable
date falls on a day when the Market does not trade, the fair market value shall
be determined by using the closing or last sale price on the last trading day
immediately preceding the dividend payable date. Shares will be purchased as
soon as practicable after the dividend payable date.
17.0 Restrictions on Resale
Shares of Common Stock for which certificates have been issued in the
Participant's name as provided herein are freely transferable and will not be
subject to specific transfer restrictions except as defined in Section 6.9 if
applicable.
Ex. 10.6 - 6
Exhibit 10.7
CHASE TECHNOLOGY PLC
57 London Road
Twickenham TWI 3RP
United Kingdom
May 29, 1997
V. Hollis Scott
Chief Financial Officer
Alydaar Software Corporation
Rexford Road, Suite 250
Charlotte, NC 28211
Dear Hollis,
As promised when we met this morning I can confirm my acceptance of
your offer to buy the outstanding Alydaar Software Europe shares as per the
offer below. I have also detailed below the shareholding and of the various
holdings who is entitled to warrants.
"I hereby offer to exchange Alydaar Software Corporation (US) shares
for all of your Alydaar Software Europe plc (UK) shares on the basis of
two Alydaar (UK) shares for one Alydaar (US) share. In addition, a
warrant certificate will be issued (to those entitled to warrants as
per the schedule below) allowing you to purchase up to the total number
of Alydaar (US) shares issued to you in this exchange offer at a price
of $15 USD per share during the period from June 1, 1997 through
November 30, 1997. If you accept my offer, please sign below and return
this letter to my attention as soon as possible. (Alydaar (UK) share
will be held in Escrow by Mr. Toshi Yamamoto until Alydaar (US) shares
are issued as per the schedule below.) I will instruct our transfer
agent to issue the shares in the names designated below under issuance
instructions, and forward the share certificates c/o Mr. Keith Shipton,
Chase Technology plc, Premier House, 52 London Road, Twickenham, TWI
3RP, United Kingdom.
This offer will expire on 31 May 1997."
Very truly yours,
/s/ Keith Shipton
Ex. 10.7 - 1
<PAGE>
ALYDAAR SOFTWARE CORPORATION
2101 Rexford Road, Suite 250 W.
Charlotte, North Carolina 28211
May 19, 1997
Keith Shipton
Chase Technology plc
57 London Road
Twickenham TWI 3RP
United Kingdom
Dear Keith:
I hereby offer to exchange Alydaar Software Corporation (US) shares
for all of your Alydaar Software Europe, plc (UK) shares on the basis of two
Alydaar (UK) shares for one Alydaar (US) share. In addition, a warrant
certificate will be issued, as a replacement for your existing warrant rights,
allowing you to purchase up to the total number of Alydaar (US) shares issued to
you in this exchange offer at a price of $15 USD per share during the period
from June 1, 1997, through November 30, 1997. You have represented to me that
you have signatory authority for a total of 1,227,000 shares of a total of
1,483,304 shares of Alydaar International common stock outstanding. This offer
is contingent upon our successfully acquiring 100% of the other 256,304 shares
outstanding. If we are successful in acquiring 100% of the shares outstanding,
the transaction will be effective as of July 1, 1997, based upon our appointed
accounting firm's review of the financial statements as of June 30, 1997.
If you accept my offer, please sign below and return this letter to
my attention as soon as possible. Your shares should be sent to my attention.
Immediately upon receipt, I will instruct our transfer agent to issue shares in
the name, which you should designate below under issuance instructions, and
forward the certificate(s) to address listed under delivery instructions. This
offer will expire on May 31, 1997.
Sincerely,
/s/ V. Hollis Scott
Ex. 10.7 - 2
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,526,924
<SECURITIES> 0
<RECEIVABLES> 5,265,617
<ALLOWANCES> 115,000
<INVENTORY> 0
<CURRENT-ASSETS> 9,311,584
<PP&E> 3,914,997
<DEPRECIATION> 995,920
<TOTAL-ASSETS> 18,866,474
<CURRENT-LIABILITIES> 2,845,627
<BONDS> 101,230
0
0
<COMMON> 17,809
<OTHER-SE> 15,901,808
<TOTAL-LIABILITY-AND-EQUITY> 18,866,474
<SALES> 10,736,237
<TOTAL-REVENUES> 10,736,237
<CGS> 0
<TOTAL-COSTS> 13,800,797
<OTHER-EXPENSES> 1,939,947
<LOSS-PROVISION> 310,833
<INTEREST-EXPENSE> 54,171
<INCOME-PRETAX> (8,397,167)
<INCOME-TAX> (600,000)
<INCOME-CONTINUING> (7,797,167)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,797,167)
<EPS-BASIC> (0.51)
<EPS-PRIMARY> 0
<EPS-DILUTED> (0.51)
</TABLE>
