Registration No.__________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 5 TO FORM 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES
OF SMALL BUSINESS ISSUER
UNDER SECTION 12(B) OR (G) OF
THE SECURITIES EXCHANGE ACT OF 1934
--------------------
ALADDIN SYSTEMS HOLDINGS, INC.
(Name of Small Business Issuer in its Charter)
NEVADA 86-0866757
(State or Other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)
165 WESTRIDGE DRIVE, WATSONVILLE, CALIFORNIA 95076
(Address of Principal Executive Offices and Zip Code)
Issuer's Telephone Number: (831) 761-6200
Securities to be registered pursuant to Section 12(b) of the Act:
Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.001 per share
<PAGE>
1
<PAGE>
ALADDIN SYSTEMS HOLDINGS, INC.
FORM 10-SB
Table of Contents
Part I
Item 1 Description of Business............................................ 3
Item 2 Management's Discussion and Analysis or Plan of Operations......... 18
Item 3 Description of Properties.......................................... 27
Item 4 Security Ownership of Certain Beneficial Owners and Management..... 27
Item 5 Directors, Executive Officers, Promoters and Control Persons....... 29
Item 6 Executive Compensation............................................. 32
Item 7 Certain Relationships and Related Transactions .................... 38
Item 8 Description of Registrant's Securities to be Registered............ 39
Part II
Item 1 Market Price of and Dividends on the Registrant's Common Equity
And Related Stock Stockholder Matters.............................. 44
Item 2 Legal Proceedings.................................................. 44
Item 3 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure............................................. 45
Item 4 Recent Sales of Unregistered Securities............................ 45
Item 5 Indemnification of Directors and Officers.......................... 48
Part F/S
Financial Tables and Exhibits...................................... F-1
2
<PAGE>
INFORMATION REQUIRED IN REGISTRATION STATEMENT
"Aladdin", "StuffIt" "DropStuff" "Expander", "MacTicker",
"InstallerMaker", "StuffIt Deluxe""Spring Cleaning", "ShrinkWrap",
"InstallerMaker", and "PrivateFile" are trademarks and service marks of Aladdin
Systems Holdings, Inc. All other trademarks, service marks or tradenames
referred to in this Registration Statement on Form 10-SB ("Registration
Statement") are the property of their respective owners. Except as otherwise
required by the context, all references in this Registration Statement to (a)
"we," "us," "our" or "Aladdin" refer to the consolidated operations of Aladdin
Systems Holdings, Inc., a Nevada corporation, and its wholly-owned subsidiary,
Aladdin Systems, Inc., a Delaware corporation, (b) "you" refers to prospective
investors in our common stock and other readers of this Registration Statement,
(c) the "Web" refers to the World Wide Web, and (d) the "site" refer to our Web
site ("www.aladdinsys.com").
ITEM 1. DESCRIPTION OF BUSINESS
BACKGROUND
Aladdin is a developer and publisher of software products for the
Macintosh and Windows software markets. Aladdin's subsidiary, Aladdin Systems,
Inc. was formed in January, 1989 to publish software for the Macintosh computer.
In May, 1989, Aladdin entered into a publishing agreement to publish two
software products for the Macintosh computer developed by Raymond Lau, the
StuffIt data compression software product and the Shortcut desktop productivity
application. In August, 1989, Aladdin commenced sales of its first product,
Shortcut. The May, 1989 publishing agreement granted to Aladdin the right to
publish and enhance the StuffIt and Shortcut products in exchange for a royalty
payment equal to fifteen percent (15%) of Aladdin's net revenue from the sales
and licensing of the software.
Since 1990, Aladdin Systems has refined, expanded and improved the StuffIt
software and today publishes several different products based upon StuffIt for
both the Macintosh and Windows markets. We also publish several other popular
software applications including Spring Cleaning, a software uninstaller package
for the Macintosh; Private File, a file encryption application for both the
Macintosh and Windows markets; Aladdin Flashback, a version control application
for both the Macintosh and Windows markets which saves older versions of
documents as newer ones are created; DragStrip, a quick launch application for
both the Macintosh and Windows markets; and MacTicker, an automatically updated
stock ticker for the Macintosh which accesses data over the Internet without the
need for separate Web
3
<PAGE>
browser software. We sell these products to consumers through distributors and
resellers, as well as directly from our Web site (www.aladdinsys.com).
In addition to products for the consumer market, we also develop and
market products to other software developers. Our InstallerMaker software
simplifies the installation of software products for Macintosh computers and our
StuffIt Engine product for the Macintosh and Windows markets provides developers
with the ability to include compression features in their own products. In
addition, we publish ShrinkWrap, a disk image product which is used by software
developers.
Recent Reorganization
In October, 1999, Aladdin Systems, Inc. entered into a reorganization with
a non-operating public company, Foreplay Golf & Travel Tours, Inc., a Nevada
corporation incorporated on March 26, 1997 ("FGT"). Under the reorganization
agreement (the "Reorganization Agreement"), the Aladdin Systems stockholders
received 1.580827 (the "Exchange Ratio") shares of FGT Common Stock in exchange
for each share of Aladdin Systems, Inc. Common Stock. The Exchange Ratio is
subject to adjustment after closing, pursuant to the terms of the Reorganization
Agreement, to adjust for options issued to employees of Aladdin Systems which
had expired prior to the closing. As part of the reorganization, Aladdin Systems
became a wholly-owned subsidiary of FGT, all of the executive officers and
directors of FGT resigned and certain executive officers and directors of
Aladdin Systems became the executive officers and directors of FGT which then
changed its name to Aladdin Systems Holdings, Inc. The Board of Directors and
shareholders of Aladdin Systems elected to enter into the reorganization with
FGT as a way to facilitate raising capital for expansion purposes. In connection
with assisting Aladdin Systems in the negotiations with FGT, Aladdin Systems
paid a fee to Baytree Capital, LLC upon the closing the transaction in the
amount of $30,000 and issued to Baytree Capital, LLC 50,000 shares of Aladdin
Systems Holdings, Inc. Immediately prior to the Reorganization, FGT conducted a
private placement of 1,000,000 shares of Common stock for total cash
consideration of $1,000,000.
Headquarters
All of our business is currently conducted through Aladdin Systems, and
our principal executive offices are located at 165 Westridge, Watsonville, CA.
Our telephone number at this address is (831) 761-6200.
GENERAL
Aladdin Systems Holdings, Inc., a Nevada corporation (the "Company"),
through its Aladdin Systems, Inc. subsidiary, develops and publishes computer
software that enhances the transmission, access, and organization of information
for businesses and home-based personal computer users. Our strategy is to
produce products that are easy
4
<PAGE>
to use and allow users to utilize them in a fashion that is transparent in
operation, and minimally intrusive to the user. We achieve transparency by
designing our products to provide users with additional features with only a
minimal amount of additional user interaction. For example, StuffIt Deluxe users
can access the contents of StuffIt archives in the same double-click method that
they use to open a normal file.
Our software products are all labeled under the "Aladdin Systems" name and
are either developed internally by our own staff of software developers or are
acquired from third party developers in exchange for royalty payments pursuant
to publishing agreements. The publishing agreements we enter into either assign
to us all rights in the software or give us a perpetual right to modify and
publish the software, in exchange for a royalty ranging from 5% to 15% of our
net revenue from the sales and licensing of such software. We attempt to
negotiate maximum amounts of royalties that are to be paid to the developer of
the product.
Whether we create a product or acquire it from a developer, we assume all
costs associated with publishing it, including the costs of producing
documentation, packaging, marketing, advertising and distribution as well as the
costs of technical support for the products.
OUR PRODUCTS
Our products are divided into two different product groups serving two
different markets: consumers and software developers. While many of our products
are used by both groups, most of our developer products are licensed directly
rather than sold through the retail software distribution channel. Our products
are divided between these two market segments as follows:
Consumer Products:
StuffIt Deluxe (Macintosh)
DropStuff (Windows and Macintosh)
Expander (Windows and Macintosh)
StuffIt Lite (Macintosh)
Spring Cleaning (Macintosh)
Private File (Windows and Macintosh)
Aladdin FlashBack (Windows and Macintosh)
DragStrip (Windows and Macintosh)
MacTicker (Macintosh)
Developer Products
StuffIt Engine (Windows and Macintosh)
StuffIt InstallerMaker (Macintosh)
5
<PAGE>
StuffIt Product Line (Windows and Macintosh Platforms)
Our flagship product line is based upon Aladdin's data compression
technology: StuffIt Deluxe, DropStuff, Expander, StuffIt Lite and the StuffIt
Engine. StuffIt software is used to compress and expand data. The software
allows users to compress files, directories, hard drives or other media for
faster transmission over computer networks, including the Internet, and for
archival purposes. Because files encoded in the StuffIt format are compressed,
they are smaller than ordinary files which allows StuffIt files to be
transmitted faster than non-compressed files over computer networks including
the Internet regardless of the method of transmission - modem, DSL, cable modem,
etc.
Aladdin Systems commenced publishing StuffIt in 1989 when it acquired the
publishing rights to the product from Raymond Lau, then a 17-year old high
school student. Prior to that time, StuffIt was being published by Mr. Lau as
"shareware", a form of software distribution which encourages the free
distribution of the software and requests that the user send payment on the
"honor system." Pursuant to the 1989 publishing agreement with Raymond Lau,
Aladdin assumed the publishing of StuffIt in exchange for royalty payments to
Mr. Lau. In 1995, we purchased all rights to StuffIt from Raymond Lau. Since we
first published StuffIt in 1989, Aladdin has continually improved and updated
the product. StuffIt was originally designed to run only on Macintosh computers.
In 1995, Aladdin started to publish versions of certain StuffIt products for
Microsoft Windows-based computers. The Windows versions of our StuffIt products
(DropStuff, Expander and the StuffIt Engine) all operate on Windows 98, Windows
NT and the new Windows 2000 operating system.
In November, 1998, we shipped our newest version of StuffIt. This new
version incorporated two major changes: a new compression algorithm that on
average compresses files to be 20% smaller than earlier versions of StuffIt, and
a new file format designed to make StuffIt work equally as well under the
Microsoft Windows operating system as it does on the Macintosh. From 1996 to
August, 1999, Aladdin has sold 537,966 copies of StuffIt (all products
combined).
StuffIt has been adopted as a worldwide compression standard for the
Macintosh computer by Apple Computer and America Online. In 1990, America Online
adopted StuffIt as their standard for compressing Macintosh files utilizing
StuffIt to automatically compress files for transmission. StuffIt products have
been shipped over 10 million users worldwide over the last two years, including
eight million copies distributed by Apple Computer shipped pre-loaded on Apple
Computer's products. While originally Apple Computer paid us for the right to
distribute StuffIt products, currently, Aladdin receives no compensation
therefor.
6
<PAGE>
The StuffIt product line is divided into five different software products,
StuffIt Deluxe, DropStuff, Expander, the StuffIt Engine and StuffIt Lite,
designed for multiple computing platforms, and distributed through a worldwide
multi-channel distribution network. The StuffIt products are each protected by
copyright law.
StuffIt Deluxe (Macintosh) - StuffIt Deluxe is a full featured product
offering a complete compression and expansion solution to users. StuffIt Deluxe
is sold commercially through Aladdin's physical and electronic worldwide
distribution network of distributors, resellers, mail order houses, Web-based
retailers, and through our Web site (www.aladdinsys.com). StuffIt Deluxe was
first released for commercial sale in 1990. A localized kanji version is
distributed by our Japanese distributor. StuffIt Deluxe sells for a suggested
retail price of $129.95.
DropStuff (Windows and Macintosh) - DropStuff allows users to quickly and
easily compress a file by simply moving the file's icon directly over the
DropStuff icon on the user's desktop. DropStuff is distributed as shareware.
Shareware is generally recognized in the software industry as being on the
"honor system" with the software freely distributed at no charge pursuant to a
license agreement which requires payment as a condition of continued use after
30 days. We expect that the vast majority of shareware users will not register
the software or pay the license fee. However, we believe that on a historical
basis, the distribution of DropStuff as shareware has benefited Aladdin through
an increase in the number of users of our StuffIt compression standard as well
as increasing Aladdin's goodwill in the computer industry. In 1999, we started
distributing DropStuff (both Macintosh and Windows versions) through e-commerce
retailers as a commercial product. DropStuff is currently distributed by Apple
Computer as part of the Mac OS. We receive no compensation from Apple Computer
therefor. DropStuff sells for a suggested retail price of $20.00 for the Windows
version and $30.00 for the MacOS version.
Expander (Windows and Macintosh) - StuffIt Expander for the Macintosh and
Aladdin Expander for Windows are corresponding products which automatically
decompress files that are compressed into the StuffIt format. These products do
not compress files themselves. Expander is distributed as freeware in order to
encourage the wide distribution of files in StuffIt format and to seed the
market for our commercial products. Despite being distributed free of charge,
Expander is protected by copyright law and its use is subject to a license
agreement. In addition to decoding files in StuffIt format, Expander also
decodes files in other popular compression and encoding formats, including Zip,
Binhex, Base64 (MIME) and TAR, further increasing its popularity and usefulness.
We have entered into agreements allowing distribution of StuffIt Expander with
third parties such as Apple Computer, Netscape, IDG Communications and Connectix
Corporation. Generally, we receive no revenue from such agreements. We also
distribute Expander from our Web site (www.aladdinsys.com).
7
<PAGE>
StuffIt Engine (Windows and Macintosh) - The StuffIt Engine is licensed
directly to software developers who wish to incorporate Aladdin's compression
technology into their software. We have licensed the StuffIt Engine to third
parties such as American Online and DataViz. Since the StuffIt Engine is
licensed on a negotiated basis, we do not have a suggested retail price for the
product.
StuffIt Lite (Macintosh) - StuffIt Lite is a shareware compression product
designed to provide basic compression and expansion capabilities. The software
is only distributed electronically and is available for download through
multiple sources. StuffIt Lite is still distributed as shareware and is
primarily distributed via our Web site (www.aladdinsys.com). The suggested
shareware fee for StuffIt Lite is $30.00.
Spring Cleaning (Macintosh)
Spring Cleaning is a software uninstaller product for the Macintosh market
which removes unwanted and unused software and related files from a user's
computer. Released in November 1996, it has sold over 370,000 copies. Spring
Cleaning is published by Aladdin pursuant to a publishing agreement with The
Excelsior Group which grants to Aladdin perpetual rights to publish the product
and to create updates and derivative products. Spring Cleaning is sold
commercially through Aladdin's physical and electronic worldwide distribution
network of distributors, resellers, mail order houses, Web retailers, and
through our Web site (www.aladdinsys.com). Localized kanji and French language
versions of the product are distributed by our Japanese and French distributors.
Spring Cleaning is protected by copyright law. Spring Cleaning sells for a
suggested retail price of $49.95.
Private File (Windows and Macintosh)
Private File incorporates StuffIt compression technology into a data
security software product designed to send secure information over computer
networks including the Internet. Private File was released in 1997. The product
faces competition from many sources, with Network Associates and Symantec being
the market leader. Private File is sold commercially through both retail
software distribution channels and via our Web site (www.aladdinsys.com).
Private File is protected by copyright law. Private File sells for a suggested
retail price of $49.95.
ShrinkWrap (Macintosh)
ShrinkWrap is used by developers and consumers to create disk image files,
allowing the users to create exact copies of their hard disk, floppies, or CD
ROMs. ShrinkWrap was released in 1997. ShrinkWrap's only competition is Disk
Copy from Apple Computer. ShrinkWrap is distributed directly from Aladdin via
our Web site and by other Web-based retailers in a time-locked "trialware"
format which allows unrestricted use of the software for a period of thirty days
and then disables itself,
8
<PAGE>
unless the user enters an activation code received after the license fee is
paid. A localized kanji version is distributed by our Japanese distributor.
ShrinkWrap sells for a suggested retail price of $30.00.
Aladdin FlashBack (Windows and Macintosh)
Aladdin FlashBack is a version control product designed to allow users to
restore versions of documents regardless of the application being used, and
protect them from data loss and accidental overwriting. Aladdin Flashback has no
competition in the Macintosh market and several competitors in the Windows
market, including Lost & Found from PowerQuest. None of the competitive products
are dominant in the market for such products. Aladdin Flashback was released in
1997 and is sold commercially through Aladdin's physical and electronic
worldwide distribution network of distributors, resellers, mail order houses,
Web-based retailers and through our Web site (www.aladdinsys.com). Localized
kanji, German and French language versions of the product are also distributed
by our Japanese, German and French distributors, respectively. Aladdin FlashBack
sells for a suggested retail price of $69.95.
StuffIt InstallerMaker (Macintosh)
StuffIt InstallerMaker, first published in 1991, is a product used by
software developers to create custom installers for the distribution of software
and is licensed by us directly to developers. StuffIt InstallerMaker
incorporates Aladdin's e-commerce technology which enables a developer to
disable their software after a certain period of time unless the user enters an
authorization code. InstallerMaker's licensee's include Apple Computer, Lexmark,
The Learning Company and RealNetworks. Aladdin licenses StuffIt InstallerMaker
at a variable license fee, depending upon usage, ranging from free to
$10,000.00.
DragStrip (Windows and Macintosh)
In March, 1999, Aladdin started publishing DragStrip pursuant to a
software publishing agreement with Poppybank Software which granted Aladdin
exclusive, perpetual rights to publish the software and create derivatives
thereof in exchange for a royalty payment DragStrip allows users to launch,
find, organize, and access applications and documents quickly and efficiently,
allowing users to become better organized. DragStrip is sold commercially
through Aladdin's physical and electronic worldwide distribution network of
resellers, mail order houses, Web-based retailers and through our Web site
(www.aladdinsys.com). DragStrip sells for a suggested retail price of $19.95.
MacTicker (Macintosh)
9
<PAGE>
In July, 1999, we acquired the rights to MacTicker from Galleon Software,
Inc. MacTicker represents a new kind of product for Aladdin. MacTicker is a
browser-less Internet client software which displays a moving stock ticker
across a user's computer screen. The acquisition agreement for the MacTicker
product assigned to Aladdin all right, title and interest in the software in
exchange for a royalty payment which terminates after five years. The stock
quote information is continually fed to the software from a Web site. Currently,
we charge for the MacTicker software and provide 15 minute delayed stock quotes
free of charge. While several Web site currently offer stock market tickers, we
believe that MacTicker will appear to a portion of the market which would prefer
not to have to access a Web site to receive stock quotes. Since we commenced
sales of MacTicker, over 16,000 users have downloaded the trial version from our
web site. MacTicker sells for a suggested retail price of $29.95. We believe
that a market for products like MacTicker will exist since they are easier to
use then similar offerings provided by certain financial Web sites, in some
cases, free of charge, and contains additional functionality not found on these
Web site based competitors. We are currently exploring alternative revenue
models for MacTicker including charging a subscription fee for real time stock
quotes and OEM arrangements with brokerage houses and financial Web sites, as
well as additional kinds of information which can be provided to users. We have
not yet determined if such alternative revenue models will be viable and if
implemented, whether such alternative revenue models will succeed.
OUR SALES AND DISTRIBUTION METHODS
Our products are sold and distributed via a variety of business models and
distribution methods.
Sales Models
Freeware - Certain of our products are distributed to users free of charge
as "freeware". We distribute freeware products in order to seed the market for
our commercial products. Despite being distributed free of charge, our freeware
software is protected by Copyright law and a license agreement. Currently our
only freeware product is Expander.
Shareware - Certain of our products are distributed to users as
"shareware". Shareware software is distributed to users free of charge and the
user has a period of time to use the software (on average 15 days) and decide if
they like the software prior to paying the license fee. Payment of the shareware
license fee is made on honor system. While we expect most users not to pay the
shareware fee, we believe that our shareware products help seed the market for
our commercial products. Our shareware products are DropStuff and StuffIt Lite.
Our shareware products are distributed over our web site and through
distribution alliances with companies such as Apple Computer and America Online.
10
<PAGE>
Trialware - Certain of our products are distributed as "trialware".
Trialware products are a fully functional version of the software. However,
unlike shareware, our trialware products automatically deactivate after a set
period time unless the user has obtained an activation code by paying for the
software. Selling products as Trialware is not a marketing scheme which is
mutually exclusive with retail sales. We may from time to time release trialware
versions of our products which are also sold through retail channels.
Retail software - Most of our products are distributed to users through
established retail software distribution channels which include sales to
resellers through distributors, direct mail sales and sales of products via our
Web site.
Licensed software - Our StuffIt InstallerMaker software is licensed
directly to other software developers based upon a sliding scale license fee
schedule.
ROYALTY PAYMENTS
Pursuant to the publishing agreements we have made total royalty payments
to developers in 1999, 1998 and 1997 totaling $241,291, $226,511 and $201,220,
respectively.
OUR RESALE OF THIRD PARTY PRODUCTS
In addition to publishing our own products, we utilize our resources and
customer list to act as a reseller of software products published by other
software companies. Historically, we resold limited numbers of third-party
products through "bundling" offers with our products which were distributed via
direct mail efforts. We are now focusing on offering third party products for
sale via our Web site, primarily through a download model, where the customer
receives the product downloaded directly to their computer after credit card
information is entered and verified.
From 1996 through 1998, our revenue from the resale of third-party
products decreased dramatically as we reduced the amount of direct mail
marketing we conducted. During 1999, third-party product sales have been
primarily conducted through our Web site and 1999 revenues for third-party
products sales increased to $818,194 through December 31, 1999 from $148,363 for
the year ended December 31, 1998. Our resale agreements run for periods from 90
days to one year and all are non-exclusive. We receive a percentage of the net
sales ranging from 3% to 70%.
As of the date hereof, we are currently acting as a reseller for the
following products:
Eudora from Qualcomm,
11
<PAGE>
Norton Anti-Virus for Macintosh from Symantec,
Virtual PC from Connectix
Voice Express Standard from Learner & Hauspie
SOFTWARE PRODUCT REVENUES
The following table shows our net revenue from software products for the
last three complete years divided into three categories showing the revenue from
our consumer software products, our developer software products and third party
products which we resold.
================================================================================
1999 1998 1997
- --------------------------------------------------------------------------------
Consumer $ 8,519,691 $ 6,707,281 $ 5,775,838
Developer 759,776 1,146,874 1,274,241
Third Party Products 818,194 148,363 224,835
=========== =========== ===========
Total Revenues $10,097,661 $ 8,002,518 $ 7,274,914
- --------------------------------------------------------------------------------
PRODUCT SUPPORT
We believe that customer and technical support is an important part of the
Company's overall performance and success. As of August 30, 1999, we had five
full-time employees involved in technical support services, available to all
customers by electronic mail, via our Web site, telephone, or fax. Support
services include explaining how the customer's computer works, how the
customer's other software works in relation to our products, solving problems
with software operation and suggesting solutions to business and personal
computing issues. We offer product support free of charge to registered users of
our products.
DISTRIBUTION AND MARKETING; MAJOR CUSTOMERS
Our products are marketed through independent distributors in the United
States and Canada, through numerous resellers and mail order companies and
distributors in other countries, directly to corporate and educational accounts
under site licensing agreements, and directly to end-users through direct
marketing campaigns and our Web site (www.aladdinsys.com).
Of our total net revenues for 1999, approximately 21% was through
independent, domestic distributors pursuant to nonexclusive distribution
agreements. Sales to one
12
<PAGE>
such distributor, Ingram Micro, accounted for nearly 14% of total net revenues
in 1999. Domestic distributors purchase product at a discount from suggested
list prices.
Of our total net revenues for 1999, approximately 12% was through
independent, international distributors. Several of these distributors are
limited by contract to distribution within a specified geographic area. We
currently provide translations of certain products in Japanese, German and
French languages. Sales to such distributors, Act2 (Japan), and Softline (United
Kingdom), accounted for approximately 6%, and 1%, of total net revenues in 1999,
respectively. International distributors generally require a somewhat larger
discount in return for various advertising, customer service, and customer
registration duties performed by them in connection with the software. This
discount normally ranges from 40% to 60% off of the suggested retail price of
the products. The Asian economic crisis has affected our sales in the Asian
marketplace and caused our distributor in Singapore went bankrupt. In addition,
our sales in Australia have dropped because of the overall Asian economic
condition. Neither the bankruptcy of our Singapore distributor nor the decrease
in Australian sales has had a material adverse affect on the overall sales of
the Company.
We give our distributors industry-standard rights of return for stock
balancing and for defective products, and replacement rights when products are
upgraded to new versions. A reserve for returns has been recorded and was
$181,659 and $37,368 at December 31, 1999 and 1998, respectively. Returns
exchanged for product upgrades and new version releases do not have a material
impact on the financial statements because of Aladdin's low cost to replace such
returns. Historically, product returns from end users have not been significant.
Of the Company's total net revenues for 1999, approximately 8% was a
result of sales of our developer products, as compared to 14% in 1998. The
decrease was a result of an increase in sales of our consumer products as a
proportion of overall sales and the loss of several large customers who did not
renew their licenses for our developer products.
PRODUCT DEVELOPMENT AND UPGRADES
The personal computer software industry continues to undergo rapid
technological change, requiring a continuous high level of enhancement of
existing products and development of new products. We intend to continue the
enhancement of our existing products and to develop additional products which we
believe will be marketable to our existing customer base and new customers and
which will extend our current products to new computing platforms.
We regularly upgrade our existing products to add new features in response
to customer requests for additional features and to match or exceed features
contained in competing products. Historically, 10 % to 50% of the registered
users of a software
13
<PAGE>
product have purchased the upgraded version of the same product. Most product
upgrades are developed by our internal development staff. However, upgrades on
certain products which we publish are developed by the original developer of the
product, pursuant to the terms of the specific software publishing agreement.
We additionally plan and develop new products to compliment our product
line. We have announced several new products which are not yet available for
sale. They are: Aladdin Expander for the Linux operating system and a product
called "DropZip" for Windows which will compress files into the "Zip"
compression format.
As of August 31, 1999, eighteen (18) employees were engaged full time in
product development. During years 1998, 1997, and 1996, we spent approximately
$1,500,000, $1,470,000 and $960,000, respectively, on product research and
development and enhancement activities, representing approximately 18.8%, 20.2%,
and 15.6%, respectively, of net revenues in each of these periods.
Our future financial performance will depend in part on the successful
development, completion, and introduction of such new software products, and on
such enhanced versions of existing products, and customer acceptance of those
products. In the future, there is no assurance that we will not encounter
difficulties that could delay or prevent the successful development of, or
marketing of, new products and/or enhancements of existing products. There also
can be no assurance that such products will yield positive results or that such
results can be obtained on a timely basis or without the expenditure of
substantial funds.
COMPETITION
The personal computer software market is highly competitive and has been
subject to rapid change, which is expected to continue. Various different
competitors exists for our different products. For our flagship StuffIt product
line for the Macintosh, we believe that our long history of publishing
compression software for the Macintosh, the goodwill associated with our
"Aladdin" and "StuffIt" brands, our large installed base of users as well as our
strategic relationships with Apple Computer and America Online makes StuffIt for
the Macintosh the leading product in its category. However, our attempts to
extend the StuffIt line of products to the Windows market will face strong
competition from the many Windows-based compression products with implement the
"Zip" compression standard. There are several major and many minor companies
currently publishing "zip" products which will directly compete with our StuffIt
products for the Windows market.
In addition, certain computer manufacturers may devote significant
resources to creating software, directly competitive with products of Aladdin,
for inclusion with their computers and computer systems without additional
charge to consumers, specifically, Apple Computer provides a file encryption
technology in its Mac OS 9
14
<PAGE>
operating system and Microsoft includes a compression utility in its Windows 98
and Windows NT operating systems.
Our competitors include many independent software vendors that have
financial, marketing, and technological resources far in excess of those of
ours. Some of these include Apple, Symantec, Microsoft, Network Associates,
PowerQuest, and MindVision.
Aladdin's software products are marketed primarily through the retail
channel. All of these products face competing products offering many similar
features. Aladdin believes that the principal competitive factors in the market
include product features and functions, ease of understanding and operating the
software, product reliability, price/performance characteristics, name
recognition, and availability and quality of support and training services.
Price competition could become an increasing factor in the personal computer
software market, which could, in turn, be expected to increase pressures on
profit margins in the future.
As the Internet and e-commerce becomes an increasing important channel for
the distribution and sales of software products, we plan to increase our efforts
to sell both our products and the third-party products we resell direct to
consumers via our Web site (www.aladdinsys.com). In order to accomplish this, we
may need to invest money, effort and other resources into our Web efforts which
may divert attention and resources from our traditional sales channels. In
addition, we may be competing against existing and new companies that have
financial, marketing, and technological resources far in excess of Aladdin's. In
the event that we are not able to successfully compete against such companies it
could have a material adverse effect upon our business, results of operations
and financial condition.
PRODUCT PROTECTION
We regard the protection of our copyrights, service marks, trademarks,
trade dress and trade secrets as critical to our future success and rely on a
combination of copyright, trademark, service mark and trade secret laws and
contractual restrictions to establish and protect our proprietary rights in
products and services. Software products are generally protected against copying
pursuant to the Copyright Act and license agreements. In addition, many software
companies implement schemes designed to reduce unauthorized copying by requiring
that users enter a unique registration code to activate the software. Where
applicable, some companies also seek for patent protection for specific
technologies embodied in their products.
We regard our software as proprietary and attempt to protect it with
copyrights, trade secret laws, and internal nondisclosure safeguards, as well as
restrictions on disclosure and transferability that are incorporated into our
software license agreements. Our copyrights run for a period of 75 years from
the first creation of the
15
<PAGE>
work in accordance with the provisions of the Copyright Act. None of our
products lack the necessary copyright or trademark protection. Aladdin licenses
its software products to customers rather than transferring title. Despite these
restrictions, it may be possible for competitors or users to copy aspects of the
Aladdin's products or to obtain information which Aladdin regards as trade
secrets. Computer software generally can be patented only with difficulty, and
existing copyright laws afford only limited practical protection. On a regular
basis, we evaluate our development efforts to determine if patent protection
would be applicable. To date, we have not pursued patent protection for any of
our products.
Our products require that a product registration number be entered in
order to be activated. We believe that this system helps to reduce unauthorized
copying of our products. The range of product registration numbers distributed
is changed from time to time in order to further deter copying of the software.
However, because of the rapid pace of technological change in its industry, we
believe that such protections are less significant than factors such as frequent
product enhancements, and the timeliness and quality of Aladdin support
services. Policing unauthorized use of such a broadly disseminated product as
computer software is difficult, and software piracy can be expected to be a
persistent problem for the packaged software industry. These problems may be
particularly acute in international markets. We do not have specific information
regarding how unauthorized copying affects our sales in either the United States
or foreign markets.
Although we do not believe that we infringe the proprietary rights of
third parties, there can be no assurance that third parties will not claim
infringement by us with respect to past, current or future technologies. We
expect that participants in our markets will be increasingly subject to
infringement claims as the number of software and competitors in our industry
segment grows. Any such claim, whether meritorious or not, could be
time-consuming, result in costly litigation, cause software upgrade delays or
require us to enter into royalty or licensing agreements. Such royalty or
licensing agreements might not be available on terms acceptable to us or at all,
as a result, any such claim could have a material adverse effect upon our
business, results of operations and financial condition.
Since we produce computer software products and are not engaged in
hardware manufacturing, we did not spend any material amounts on compliance with
environmental laws.
GOVERNMENTAL REGULATION
Our company, operations and products and services are all subject to
regulations set forth by various federal, state and local regulatory agencies
including export regulations on compression methods promulgated by the United
States Department of Commerce. We take measures to ensure our compliance with
all such regulations as
16
<PAGE>
promulgated by these agencies from time to time. The cost of compliance with all
such regulations is minimal.
As the Web-based portion of our business expands, we may be subject to any
existing or future governmental regulation associated with the Internet. There
are currently few laws and regulations directly applicable to the Internet. It
is possible that a number of laws and regulations may be adopted with respect to
the Internet covering issues such as user privacy, pricing, content, copyrights,
distribution, antitrust and characteristics and quality of products and
services. The growth of the market for online commerce may prompt calls for more
stringent consumer protection laws that may impose additional burdens on those
companies conducting business online. Federal and state tax authorities in a
number of states are currently reviewing the appropriate tax treatment of
companies engaged in online commerce, and new state tax regulations may subject
us to additional state sales and income taxes.
Our current policy regarding the collection, transfer, use and sale of
personal information from our customers is disclosed on our Web site. It is our
current policy not to sell, trade or rent customer email addresses to third
parties; however, we do utilize customer email addresses to send advertisements
for our own products and third party products to our customers.
Several states have also proposed legislation that would limit the uses of
personal user information gathered online or require online services to
establish privacy policies. The Federal Trade Commission has also initiated
action against at least one online service regarding the manner in which
personal information is collected from users and provided to third parties.
Changes to existing laws or the passage of new laws intended to address these
issues, including some recently proposed changes, could create uncertainty in
the marketplace that could reduce demand for our products or increase the cost
of doing business as a result of litigation costs or increased product marketing
costs, or could in some other manner have a material adverse effect on our
business, results of operations and financial condition.
In addition, because our products are accessible worldwide and we
facilitate sales of goods to users worldwide, other jurisdictions may claim that
we are required to qualify to do business as a foreign corporation in a
particular state or foreign country. Our failure to qualify as a foreign
corporation in a jurisdiction where it is required to do so could subject us to
taxes and penalties for the failure to qualify and could result in our inability
to enforce contracts in such jurisdictions. Any such new legislation or
regulation, or the application of laws or regulations from jurisdictions whose
laws do not currently apply to our business, could have a material adverse
effect on our business, results of operations and financial condition.
EMPLOYEES
17
<PAGE>
As of August 31, 1999, we had 46 full time employees, including 19 in
Marketing, Sales and Support; 7 in Administration; 18 in Research and
Development; and 2 in Shipping and Production. Although talented and qualified
employees are difficult to find in the current tight job market, we have
experienced relative success in attracting and retaining highly motivated and
talented employees.
We believe that the future success of the Company will depend in part on
our continued ability to attract, integrate, retain and motivate highly
qualified technical and managerial personnel, and upon the continued service of
our senior management and key technical personnel. The competition for qualified
personnel in our industry and graphical location is intense, and there can be no
assurance that we will be successful in attracting, integrating, retaining and
motivating a sufficient number of qualified personnel to conduct our business in
the future. From time to time, we also employ independent contractors to support
our research and development, marketing, sales and support and administrative
organizations. We have never had a work stoppage, and no employees are
represented under collective bargaining agreements. We consider our relations
with our employees to be good.
SUBSIDIARIES
We have two subsidiaries, Aladdin Systems, Inc., a California corporation
and Transaction Services, Inc. ("TSI"), a California corporation, which was
incorporation in 1997 and is a wholly-owned subsidiary of Aladdin Systems. TSI
was formed in order to provide technology and services to other software
publishers which allows such companies to make trial versions of their software
available. Information about Aladdin Systems and its products is set forth in
detail above. Currently, TSI transacts only non-material amounts of business.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
The following discussion of our financial condition and results of
operations should be read in conjunction with our consolidated financial
statements and notes thereto appearing elsewhere in this registration statement.
The matters discussed in this registration statement contain
forward-looking statements that involve risks and uncertainties. Our actual
results could differ materially from those discussed herein. Factors that could
cause or contribute to such differences are discussed in this section and
elsewhere in this registration statement.
SELECTED FINANCIAL DATA
18
<PAGE>
The following table contains certain selected financial data of the
Company and is qualified by the more detailed financial statements and the notes
thereto provided in this Registration Statement. The financial data as of and
for the years ended December 31, 1998 and 1997, have been derived from the
Company's financial statements, which statements were audited by Hutchinson &
Bloodgood, LLP. The financial data as of September 30, 1999 and for the
nine-month periods ended September 30, 1999 and 1998, has been derived from the
Company's unaudited financial statements. The financial data shown represents
the historical operating results of our subsidiary, Aladdin Systems, Inc. as the
accounting acquirer under the rules of reverse acquisition accounting.
Statement of Operations Data
Fiscal Year Ended
- ---------------------------------------------------------------------
December 31,
- -------------------------------------------------------------------
------------- -------------
- --------------------------------------------------------------------------------
1999 1998
- -----------------------------------------------------------------------------
--------- --------- -------- ------
- --------------------------------------------------------------------------------
Revenues $10,097,661 $8,002,518
- -----------------------------------------------------------------------------
Net Income (loss) 975,625 $580,183
- -----------------------------------------------------------------------------
Net Income (loss) per share to
- ------------------------------
Shareholders:
- --------------
Basic $0.11 $0.07
- -----------------------------------------------------------------------------
Diluted (with options) $0.11 $0.07
- -----------------------------------------------------------------------------
Balance Sheet Data
- ------------------
December 31,
- ------------------------------------------------------------------
------------- -------------
- -----------------------------------------------------------------------------
1999 1998
- --------------------------------------------------------------------------------
--------- --------- -------- ------
- --------------------------------------------------------------------------------
Current Assets $2,793,016 $1,206,306
- -----------------------------------------------------------------------------
Total Assets $3,528,995 $2,063,700
- -----------------------------------------------------------------------------
Current Liabilities $1,267,042 $1,468,712
- -----------------------------------------------------------------------------
Long Term Debt $100,435 $340,145
- -----------------------------------------------------------------------------
Total Liabilities $1,367,477 $1,808,857
- -----------------------------------------------------------------------------
Shareholders Equity $2,161,518 $254,843
- -----------------------------------------------------------------------------
19
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion of our financial condition and results of
operations should be read in conjunction with our consolidated financial
statements and notes thereto appearing elsewhere in this Registration Statement.
The matters discussed in this Registration Statement contain forward-looking
statements that involve risks and uncertainties. Our actual results could differ
materially from those discussed herein. Factors that could cause or contribute
to such differences include, but are not limited to, those discussed below in
"Factors Affecting Our Business, Operating Results, and Financial Condition" as
well as those discussed in this section and elsewhere in this Registration
Statement. The following information represents the results of the operations of
our subsidiary, Aladdin Systems, Inc. and assumes that Aladdin Systems, Inc. was
the "accounting acquirer" of Aladdin Systems Holdings, Inc. under reverse
acquisition accounting.
Overview
Aladdin is a developer and publisher of software products for the
Macintosh and Windows software markets. Aladdin's subsidiary, Aladdin Systems,
Inc. was formed in January, 1989 to publish software for the Macintosh computer.
In May, 1989, Aladdin entered into a publishing agreement to publish the StuffIt
file compression software product for the Macintosh computer developed by
Raymond Lau. Since 1990, Aladdin Systems has continually refined, expanded and
improved the StuffIt software and today publishes several different version of
StuffIt for both the Macintosh and Windows markets. The Company also publishes
several other software applications including Spring Cleaning, the leading
software uninstaller package for the Macintosh, Private File, a file encryption
application for both the Macintosh and Windows markets, Aladdin Flashback, a
version control application for both the Macintosh and Windows markets which
saves older versions of documents as newer ones are created, DragStrip, a quick
launch application for both the Macintosh and Windows markets and MacTicker, an
automatically updated stock ticker for the Macintosh which accesses data over
the Internet without the need for separate browser software. Aladdin sells these
products to consumers through relationships with distributors and resellers, as
well as, directly from our Web site (www.aladdinsys.com).
In addition to products for the consumer market, Aladdin also develops and
markets products to other software developers, InstallerMaker which simplifies
the installation of software products for Macintosh computers and the StuffIt
Engine which provides developers with the ability to include compression
features in their own products.
Results of Operations
20
<PAGE>
The following discussion should be read in conjunction with the consolidated
financial statements and related notes included elsewhere herein. Historical
results and percentage relationships are not necessarily indicative of the
operating results for any future period. Within this discussion and analysis,
all dollar amounts (except for per share amounts) have been rounded to the
nearest thousand.
The following table sets forth certain data derived from the consolidated
statements of operations, expressed as a percentage of net revenues for each of
the years in the two-year period ended December 31, 1999.
================================================================================
Years ended December 31,
- --------------------------------------------------------------------------------
1999 1998
Percentage of net revenues:
Net revenues 100% 100%
Cost of revenues 20% 18%
--------------------------------------
Gross profit 80% 82%
Sales and marketing 37% 44%
General and administrative 12% 11%
Research and development 16% 19%
Total operating expenses 65% 74%
--------------------------------------
Operating gain (loss) 15% 8%
Other (expense) income, net 0% (2)%
Earnings (loss) before income taxes 15% 6%
--------------------------------------
Income tax (benefit) expense 5% (1)%
--------------------------------------
Net earnings (loss) 10% 7%
================================================================================
Net Revenues
Overall revenues increased from $8,002,518 in 1998 to $10,097,661 in 1999, an
increase of 26% from 1998 to 1999. Approximately 84% of the Company's 1999
revenues were from Consumer products. These revenues are from sales of our
StuffIt products, Spring Cleaning, PrivateFile, Aladdin Flashback, DragStrip and
MacTicker software products. Revenues from sales of our Consumer products in
1998 also represented 84% of our overall sales, however, the sales of our
Consumer products in 1999 represented a larger dollar amount than in 1998 due to
an overall increase in sales, especially in the strong sales of StuffIt Deluxe
which accounted for 88% of the increase in net revenue.
21
<PAGE>
Revenues from the Company's Developer products, InstallerMaker and StuffIt
Engine, decreased 34% during 1999, but still accounted for approximately 8% of
the Company's total net revenues. Historically, these revenues have represented
decreasing percentages of the Company's overall sales as our Consumer products
have grown.
Revenues from sales over our Web site accounted for 35% of revenue in 1999 as
compared to 12% of revenue in 1998. The Company believes that sales over its Web
site will represent an increasingly important component of the Company's sales
strategy and will allow the Company to reach a large number of potential
consumers at lower costs than sales through distributors.
Cost of Revenues and Gross Margain
The Company's cost of revenues is composed primarily of: (1) the costs of
product materials such as manuals, diskettes, CD-ROMS, and packaging; (2)
amortization of capitalized purchased software; (3) royalties paid to outside
developers on certain software products; and (4) amortization of capitalized
manufacturing expenses.
Cost of revenues, as a percentage of net revenues increased to 20% in 1999 from
18% in 1998. The change, on a percentage basis, was due to a write-off of
certain prepaid royalties which we deemed would not be earned.
As a result of the increase in the cost of revenues, as a percentage of net
revenues, our gross margins fell to 80% from 82%.
Sales and Marketing
Sales and marketing expenses increased to $3,773,226 in 1999 from $3,520,106
during 1998. This 7% increase in sales and marketing expenses resulted in the
26% increase in sales we experienced during 1999.
General and Administrative
General and administrative expenses are composed principally of salaries of
administrative personnel, fees for professional services and facilities
expenses. These expenses increased $256,064 or 28% during 1999 compared to 1998.
The increase in these expenses was related to the costs of professional services
associated with the reverse acquisition which took place in October, 1999.
Research and Development
Research and development expenses were $1,630,585, and $1,506,798 in 1999 and
1998. These expenses were 16% and 19% of net revenues. Salaries and benefits and
overhead increased by $58,295 and $21,892, respectively, in 1999 compared to
1998 due to the
22
<PAGE>
increased number of employees in research and development. Due to the current
high demand for software engineers and other technical specialists, the Company
anticipates having to both increase wages of existing research and development
personnel as well as having to pay higher salaries to new employees. Such
additional expense for payroll and benefits may have the effect of increasing
our research and development expenses in upcoming fiscal quarters.
Income Taxes
The Company's effective income tax rate for fiscal 1999 was 33.1% and there was
an income tax benefit for fiscal year 1998 of 16.4%. As of the end of fiscal
1999, all operating loss carryforward available to the Company have been
utilized. In 1998, the Company had a tax benefit due to utilizing previously
unrecognized net operating loss carry forwards.
Liquidity and Capital Resources
Net cash provided by operating activities during 1999 was $817,010 an increase
of $174,436 compared to net cash provided by operating activities of $642,574 in
1998. The increase is due primarily to an increase in net income generated by
increased sales.
Net cash used in investing activities in 1999 was $259,723 an increase of
$233,304 compared to net cash used in investing activities of $26,419 in 1998,
reflecting an increase in cash used for equipment and software product
acquisition.
Net cash provided by financing activities in 1999 was $445,553 as compared to
$607,380 used in 1998 reflecting the net proceeds from the sale of common stock
in a private placement during October, 1999, offset by payments on bank
borrowings and other long term debt.
Our capital requirements are dependent on several factors, including market
acceptance of our software and services, timely updating of the Company's
existing software product, developing new software products or acquiring the
rights to existing software products from third parties, the resources devoted
to marketing and selling the Company's services and brand promotions and other
factors. At December 31, 1999, the Company had cash and cash equivalents
totaling $1,063,404, resulting principally from the sale of common stock in a
private placement during October, 1999.
During 1997, certain Stockholders, the Company's former President, a key
employee, and a relative of a stockholder lent the Company a total of $225,062,
in the form of demand notes with interest payable monthly at 8.92%. These notes
contain a conversion feature where they can be converted into common stock in
part or whole at any time for $1.10 per share. The notes are payable upon thirty
(30) days notice by the holder.
23
<PAGE>
During 1999, the Company paid $54,000 against these notes resulting in a balance
remaining of $160,062 as of December 31, 1999.
We believe that our current cash and cash equivalents will be sufficient to meet
our anticipated cash needs for working capital and capital expenditures through
2000. If cash generated from operations is insufficient to satisfy our liquidity
requirements, we may seek to sell additional equity or debt securities or to
obtain a credit facility. The sale of additional equity or convertible debt
securities could result in additional dilution to our stockholders. The
incurrence of indebtedness would result in an increase in our fixed obligations
and could result in borrowing covenants that would restrict our operations.
There can be no assurance that financing will be available in amounts or on
terms acceptable to us, if at all. If financing is not available when required
or is not available on acceptable terms, we may be unable to develop or enhance
our products or services. In addition, we may be unable to take advantage of
business opportunities or respond to competitive pressures. Any of these events
could have a material and adverse effect on our business, results of operations
and financial condition.
Risks and Uncertainty
As part of our plan to expand our business, during the first quarter of 2000,
the Company acquired Trexar Technologies, Inc., and committed to increased
expenditures to hire additional technical personnel, develop and acquire new
products and to increase marketing expenses for our new and existing products.
The Company anticipates that these expenditures may result in operating expenses
in excess of our revenues for the first two quarters of 2000 and may result in a
net loss for those two quarters. We believe that the merger with Trexar
Technologies, Inc., and our investments in additional personnel and marketing
expenses are important parts of our plan to create long term growth and
profitability of the Company and we expect that we will return to profitability
by the fourth quarter of 2000. If we are not successful in increasing long term
growth through these actions, it could have a material, adverse affect on the
Company.
The preceding statements under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" which are not historical facts
are forward-looking statements. These forward-looking statements involve risks
and uncertainties that could render them materially different, including, but
not limited to, the risk that new products and product upgrades may not be
available on a timely basis, the risk that such products and upgrades may not
achieve market acceptance, the risk that competitors will develop similar
products and reach the market first, and the risk that the Company would not be
able to fund its working capital needs from cash flow.
Impact of the Year 2000
24
<PAGE>
Many currently installed computer systems and software products are coded
to accept or recognize only two digit entries in the date code field. These
systems may recognize a date using "00" as the year 1900 rather than the year
2000. As a result, computer systems and/or software used by many companies and
governmental agencies may need to be upgraded to comply with Year 2000
requirements or risk system failure or miscalculations causing disruptions of
normal business activities.
State of Readiness. The two third-party vendors upon which we materially
rely are Hurricane Electric Internet Services, Inc., which hosts our Web site on
their equipment and provides our connection to the Internet and DigitalRiver,
Inc., which hosts the downloading of software from our Web site. We have sought
confirmation from both Hurricane Electric Internet Services, Inc. and
DigitalRiver, Inc., that their systems are Year 2000 compliant and both
Hurricane Electric Internet Services, Inc. and DigitalRiver, Inc. have confirmed
that their systems are Year 2000 compliant. We have conducted an internal
assessment of all material information technology and non-information technology
systems at our headquarters. We have determined that all such systems are Year
2000 complaint and in some cases, have upgraded software in order to assure Year
2000 compliance. As of the date hereof, we believe that all material information
technology and non-information technology systems at our headquarters are Year
2000. The cost of upgrading software packages has been not significant.
Our Products. We have conducted an internal assessment on all our
products, and have determined that our products are all Year 2000 compliant.
With regard to Year 2000 compliance, our products fall into one of two
categories, that is, products which are "not sensitive" to Year 2000 compliance
issues since they do not use, process or store any date information and those
products which do utilize date information. Our products which are "sensitive"
to date information do not rely upon a two-digit field to represent the year and
thus, will not have problems processing dates after January 1, 1999. We have
tested all such products and determined that all versions of our products which
have been released for sale since January 1, 1998 are Year 2000 compliant. The
following table shows which of our products are "not sensitive" to date
information and which products are "sensitive" and have been tested for Year
2000 compliance.
DropStuff for Mac not sensitive
DropStuff for Windows not sensitive
StuffIt Expander not sensitive
Expander/Windows not sensitive
Private File Mac/Windows not sensitive
InstallerMaker Year 2000 compliant
Spring Cleaning not sensitive
StuffIt Deluxe not sensitive
StuffIt Lite not sensitive
25
<PAGE>
StuffIt Engine not sensitive
Aladdin FlashBack Year 2000 compliant
ShrinkWrap Year 2000 compliant
Costs. To date, we have not incurred any material costs in identifying or
evaluating Year 2000 compliance issues. Most of our expenses have related to,
and are expected to continue to relate to, the upgrades or replacements, when
necessary, of software or hardware, as well as costs associated with time spent
by employees in the evaluation process and Year 2000 compliance matters
generally. We believe that the total expenses will not exceed $5,000. These
expenses are included in our capital expenditures budget and are not expected to
be material to our financial position or results of operations. Any addition,
unanticipated expenses, however, if higher than anticipated, could have a
material and adverse effect on our business, results of operations and financial
condition.
Risks. There can be no assurance that we will not discover Year 2000
compliance problems in our systems that will require substantial revisions or
replacements. In the event that the operational facilities that support our
business, or our Web-hosting facilities, are not Year 2000 compliant, we may be
unable to deliver goods or services to our customers and portions of our Web
site may become unavailable. In addition, there can be no assurance that
third-party software, hardware or services incorporated into our material
systems will not need to be revised or replaced, which could be time-consuming
and expensive. Our inability to fix or replace third-party software, hardware or
services on a timely basis could result in lost revenues, increased operating
costs and other business interruptions, any of which could have a material and
adverse effect on our business, results of operations and financial condition.
Moreover, the failure to adequately address Year 2000 compliance issues in our
software, hardware or systems could result in claims of mismanagement,
misrepresentation or breach of contract and related litigation, which could be
costly and time-consuming to defend.
In addition, there can be no assurance that governmental agencies, utility
companies, Internet access companies and others outside our control will be Year
2000-compliant. The failure by these entities to be Year 2000-compliant could
result in a systemic failure beyond our control, including, for example, a
prolonged Internet, telecommunications or electrical failure, which could also
prevent us from delivering our services to our users, decrease the use of the
Internet or prevent users from accessing our services, any of which would have a
material and adverse effect on our business, results of operations and financial
condition.
Contingency Plan. In the event of a failure by any of our third party
vendors to fail to operate effectively after December 31, 1999, users may not be
able to access our Web site and may not be able to download copies of our retail
and shareware software.
26
<PAGE>
Our contingency plans in the event of such a situations calls for timely
replacement of any of our material third party vendors who fail to operate
effectively after the Year 2000.
If our present efforts to address the Year 2000 compliance issues
discussed above are not successful, or if distributors, suppliers and other
third parties with which we conduct business do not successfully address such
issues, our users could seek alternate suppliers of our products and services.
Any material Year 2000 problem could require us to incur significant
unanticipated expenses to remedy and could divert our management's time and
attention, either of which could have a material and adverse effect on our
business, operating results and financial condition.
This is a Year 2000 readiness disclosure statement within the meaning of
the Year 2000 Information and Readiness Disclosure Act (P.L. 105-271).
Effects of Inflation
Due to relatively low levels of inflation in 1997 and 1998, inflation has
not had a significant effect on our results of operations since inception.
ITEM 3. DESCRIPTION OF PROPERTIES
Our executive offices, comprising approximately 12,000 square feet, are
located at 165 Westridge Drive, Watsonville, California 95076. Our subsidiaries,
Aladdin Systems, Inc. and Transactions Services, Inc. are housed in the same
location. These facilities are leased pursuant to a lease expiring in the year
2001. The monthly rent is $13,719. Our leased space is currently adequate for
our needs.
We maintain substantially all of our computer systems at our offices. See
"Part 1, Item 1. Business--Operations and Systems." Our operations are dependent
in part on our ability to protect our computer systems against physical damage
from fire, floods, earthquakes, power loss, telecommunications failures,
break-ins or other similar events. Furthermore, despite our implementation of
network security measures, our servers are also vulnerable to computer viruses,
break-ins and similar disruptive problems. The occurrence of any of these events
could result in interruptions, delays or cessations in service to our users
which could have a material adverse effect on our business, results of
operations and financial condition.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
27
<PAGE>
The following table sets forth, as of October 31, 1999, the ownership of
our common stock by (i) each of our directors and executive officers; (ii) all
of our executive officers and directors as a group; and (iii) all persons known
by us to beneficially own more than 5% of our common stock.
Unless otherwise indicated in the footnotes to the table, (1) the
following individuals have sole voting and sole investment control with respect
to the shares they beneficially own and (2) the address of each beneficial owner
listed below is c/o 165 Westridge Drive, Watsonville, CA 95076.
NAME AND ADDRESS AMOUNT AND NATURE PERCENT OF
OF BENEFICIAL OWNER OF BENEFICIAL OWNERSHIP CLASS (1)
Jon Kahn 1,686,098 18.07%
David Schargel 1,601,571 17.17%
Darryl Lovato (3) 1,633,300 17.51%
Brad Peppard (4) 31,605 0.34%
Benna Lovato 1,633,300 17.51%
Paul Goodman -- --
All directors and executive
officers as a group (6 Persons) 6,585,874 70.60%
- --------------------------------------------------------- ------------- -----
- ----------------------------------------------------- ------------
OTHER 5% STOCKHOLDERS (1):
- -------------- ------------------------------------------------ ------------
Marco Gonzalez 680,680 7.44%
All directors,
executive officers and 5%
stockholders as a group 7,266,554 78.94%
(1) Calculated pursuant to Rule 13d-3(d) of the Exchange Act. Under Rule
13d-3(d), shares not outstanding which are subject to options, warrants, rights
or conversion
28
<PAGE>
privileges exercisable within 60 days are deemed outstanding for the purpose of
calculating the number and percentage owned by such person, but are not deemed
outstanding for the purpose of calculating the percentage owned by each other
person listed.
(2) Includes 119,020 shares of Common Stock subject to options that are
exercisable within 60 days of the date hereof.
(3) Includes 124,299 shares of Common Stock subject to options that are
exercisable within 60 days of the date hereof.
(4) Includes 31,606 shares of Common Stock subject to options that are
exercisable within 60 days of the date hereof.
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The following table sets forth the names and positions of our directors
and executive officers:
NAME AGE POSITION
- - --------------------- --- -------------------------------------
Jonathan Kahn 41 Chairman, Chief Executive Officer,
Treasurer and Director
- - --------------------- --- -------------------------------------
Darryl Lovato (1) 33 President, Chief Technology Officer
and Director
- - --------------------- --- -------------------------------------
David Schargel (2)(3) 34 Director
- - --------------------- --- -------------------------------------
Paul Goodman (2)(3) 40 Director
- - --------------------- --- -------------------------------------
Brad Peppard (2)(3) 43 Director
- - --------------------- --- -------------------------------------
Benna Lovato (1) 33 Secretary
- - --------------------- --- -------------------------------------
(1) Darryl Lovato and Benna Lovato are married
(2) Member of the Compensation Committee
(3) Member of the Audit Committee
The following sets forth biographical information concerning our directors
and executive officers for at least the past five years:
29
<PAGE>
JONATHAN KAHN is currently Chairman and CEO of Aladdin. Mr. Kahn is one of
the original founders of Aladdin Systems and has served as a Director since
1988. Prior to becoming CEO in 1997, he served as President, and Vice President
of Sales. Mr. Kahn has extensive expertise in software industry sales,
marketing, business development and licensing arrangements. Mr. Kahn is a
graduate of the University of Rhode Island with a B.A. in Economics.
BRAD PEPPARD has been President of Lime Tree Productions, Inc., a boutique
consulting firm providing marketing and research consulting services to high
tech companies. Mr. Peppard served as Vice President of Marketing at Aladdin
Systems from 1996 through 1998. In 1998, Mr. Peppard became a Director of
Aladdin. Prior to joining Aladdin, Mr. Peppard was responsible for worldwide
marketing at Quarterdeck Office Systems, during which time the company grew from
$20 million to $120 million in revenue. Prior to 1993, he was also Vice
President of Marketing at Software Publishing Corporation, a pioneer in both
high-tech direct marketing and Internet electronic marketing, Mr. Peppard was
President and founder of SoftMail Corporation, one of the leading direct
marketing agencies in the country, as well as president of Monogram Software.
Mr. Peppard has an MBA from Stanford University and a B.A. from Amherst College.
DARRYL LOVATO has been President and Chief Technology Officer of Aladdin
since 1997. Mr. Lovato is a co-founder of Aladdin Systems and has been
responsible for overseeing the Company's technical operations and leading
research on new technologies and products. Mr. Lovato has served as a Director
since the company's founding in 1988. Prior to holding his current title, Mr.
Lovato was Aladdin's Vice President and Chief Technology Officer. Prior to
co-founding Aladdin, Mr. Lovato worked at Apple Computer as a Senior Software
Engineer. Mr. Lovato has over fifteen-years of software programming and
development experience.
DAVID SCHARGEL is the Chairman and President of Aportis Technologies
Corp., a leader in software for carryable and wearable computers (focusing on
Palm Pilot and Window CE computers), which he founded in 1997. Mr. Schargel is
one of the co-founders of Aladdin and served as its President from 1988 to 1994.
Mr. Schargel has served as a Director since 1988. From 1994 through 1997, he
performed various executive roles at Aladdin. Prior to co-founding Aladdin, Mr.
Schargel was Vice President at Olduvai Corporation, a publisher of software for
the Macintosh computer and also had served as Technical Editor at MacUser
Magazine. Mr. Schargel has extensive experience in software product management
and marketing.
PAUL GOODMAN since 1987 has been a partner in the New York City law firm
of Elias, Goodman Shanks & Zizmor, LLP where he concentrates on representing
software and Web companies in a wide range of business and financing
transactions. He has represented Aladdin since its inception. In addition to a
Juris Doctor degree, Mr. Goodman hold a BA and MA degree in Computer Science,
was a former member of
30
<PAGE>
the Computer Science faculty of Queens College, is the author of five books on
microcomputer programming and is the editor and publisher of WebLegalGuide.com,
a legal resource for companies involved in the Web industry.
BOARD OF DIRECTORS
All directors hold office until the next annual meeting of shareholders
following their election or until their successors have been elected and
qualified. Executive officers are appointed by and serve at the pleasure of the
Board of Directors. We may adopt provisions in our By-laws and/or Articles of
Incorporation to divide the board of directors into more than one class and to
elect each class for a certain term. These provisions may have the effect of
discouraging takeover attempts or delaying or preventing a change of control of
Aladdin.
BOARD COMMITTEES
The Compensation Committee of the Board of Directors determines the
salaries and incentive compensation of our officers and provides recommendations
for the salaries and incentive compensation of our other employees. The
compensation committee also administers our Stock Option Plan. The current
members of the Compensation Committee are Messrs. Peppard, Schargel and Goodman.
See "Compensation Committee Interlocks and Insider Participation."
The Audit Committee of the Board of Directors reviews, acts on and reports
to the Board of Directors with respect to various auditing and accounting
matters, including the selection of our independent auditors, the scope of the
annual audits, fees to be paid to the auditors, the performance of our
independent auditors and our accounting practices. The current members of the
audit committee are Messrs. Kahn, Goodman and Schargel.
The Finance Committee of the Board of Directors reviews, acts on and
reports to the Board of Directors with respect to various financing matters. The
current members of the audit committee are Messrs. Kahn, Goodman and Schargel.
The Board of Directors does not have a nominating committee.
DIRECTORS' COMPENSATION
Directors who are also employees of Aladdin receive no compensation for
serving on the Board of Directors. With respect to directors who are not
employees ("Non-Employee Directors"), we intend to reimburse such directors for
all travel and other expenses incurred in connection with attending meetings of
the Board of Directors and any committees of the Board. Non-Employee Directors
are also eligible to receive and have received grants of non-qualified stock
options under our Stock Option
31
<PAGE>
Plan, and we intend to establish a Non-Employee Director Stock Option Plan which
will provide for initial option grants of a fixed number of shares of our common
stock to Non-Employee Directors and successive annual option grants to such
Non-Employee Directors covering an additional fixed number of shares to provide
us with an effective way to recruit and retain qualified individuals to serve as
members of the Board of Directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
We did not have a Compensation Committee or other committee of the Board
of Directors performing similar functions during the fiscal years ending
December 31, 1997 and 1998. Messrs. Kahn and Lovato are each officers of Aladdin
and, as members of the Board of Directors, participated in deliberations of the
Board of Directors relating to the compensation of our executive officers. The
Board of Directors established a Compensation Committee as of October, 1999. See
"Board Committees."
ITEM 6. EXECUTIVE COMPENSATION
COMPENSATION SUMMARY
The following table sets forth the compensation awarded or paid to, or
earned by, our Chief Executive Officer and all our other executive officers who
earned in excess of $100,000 in salary and bonus (collectively the "Named
Executives") for services rendered to us during the year ended December 31,
1998:
32
<PAGE>
SUMMARY COMPENSATION TABLE (1)(2)
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------------ -------------------------
SALARY ($) OTHER ($) NUMBER OF SECURITIES
UNDERLYING OPTIONS (#)(3)
NAME AND
PRINCIPAL
POSITION
Jonathan Kahn, CEO
1998 $126,526 0 89,286
1997 $111,065 $6,000 (4) 188,844
1996 $79,717 $106,232 (4) 0
Darryl Lovato,
President and Chief
Technology Officer
1998 $126,526 0 89,286
1997 $111,065 $17,339 (4) 188,844
1996 $75,327 $103,178 (4) 0
(1) Information set forth herein includes services rendered by the named
executives while employed by Aladdin Systems prior to the reorganization and by
Aladdin following the Reorganization.
(2) The columns for "Bonus", "Other Annual Compensation", "Restricted
Stock Awards", "LTP Payouts" and "All other Compensation" have been omitted
because there is no compensation required to be reported.
(3) Represents options granted to such executives during 1998 by Aladdin
Systems, Inc. prior to the Reorganization, expressed as converted to options to
purchase the shares of Registrant (adjusted to reflect the 1.580827 conversion
factor applied upon the Reorganization). Subject to the terms of the
Reorganization Agreement, the conversion factor applied to the options is
subject to certain adjustments as set forth in Part 1, Item 1 "Description of
Business".
(4) Represents distributions made to such named executives in connection
with their ownership of stock in Aladdin Systems, Inc.
The following table sets forth certain information concerning options
granted to the named executives during 1998.
33
<PAGE>
OPTION GRANTS DURING YEAR ENDED DECEMBER 31, 1998 (1)
Number of % of Total Exercise Expiration
Securities Options Price Per Date(5)
Underlying Granted to Share
Options Employee ($/SH)(4)
Granted (2) In 1998 (3)
NAME
Jonathan
Kahn 89,286 33.9% 1.21 October, 2007
Darryl
Lovato 89,286 33.9% 1.21 October, 2007
(1) No SARs were granted to the Named Executives during 1998.
(2) Each option represents the right to purchase one share of our common
stock (adjusted to reflect the 1.580827 conversion factor applied upon the
Reorganization). Subject to the terms of the Reorganization Agreement, the
conversion factor applied to the options is subject to certain adjustments as
set forth in Part 1, Item 1 "Description of Business.
(3) In 1998, we granted officers, employees and consultants options to
purchase an aggregate of 263,602 shares of our common stock (adjusted to reflect
the 1.580827 conversion factor applied upon the Reorganization). Subject to the
terms of the Reorganization Agreement, the conversion factor applied to the
options is subject to certain adjustments as set forth in Part 1, Item 1
"Description of Business.
(4) The fair market value of our common stock on the date of grant for
each of the listed options, as determined by our board of directors, was $1.10
per share (adjusted to reflect the 1.580827 conversion factor applied upon the
Reorganization). Subject to the terms of the Reorganization Agreement, the
conversion factor applied to the options is subject to certain adjustments as
set forth in Part 1, Item 1 "Description of Business".
(5) Options may terminate before their expiration dates if the optionee's
status as an employee or consultant is terminated or upon the optionee's death
or disability.
OPTION EXERCISES AND YEAR-END OPTION VALUES
The following table sets forth certain information with respect to the
named executives concerning exercisable and unexercisable stock options held by
them as of
34
<PAGE>
December 31, 1998. None of these executive officers exercised options to
purchase common stock in 1998.
AGGREGATE OPTION EXERCISES IN 1998 AND YEAR END OPTION VALUES (1)
Name Number of Unexercised Value of Unexercised In-the-
Options at Year End(#) Money Options at Year End (2)
--------------------------- -----------------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- --------------
Jonathan Kahn 136,509 141,716 $150,159 $155,887
Darryl Lovato 131,766 141,716 $144,942 $155,887
(1) No SARs were owned or exercised by any of the Named Executives during
1998.
(2) Based on a per share fair market value of our common stock equal to
$1.10 per share, the fair market value as determined by our Board of Directors
at December 31, 1998 (adjusted to reflect the 1.580827 conversion factor applied
upon the Reorganization). Subject to the terms of the Reorganization Agreement,
the conversion factor applied to the options is subject to certain adjustments
as set forth in Part 1, Item 1 "Description of Business".
EMPLOYMENT AGREEMENTS AND TERMINATION OF EMPLOYMENT AND CHANGE OF CONTROL
ARRANGEMENTS
On October 25, 1999 we entered into an employment agreement with Jonathan
Kahn (the "Kahn Employment Agreement"). Under the Kahn Employment Agreement,
Jonathan Kahn is to serve as our Chief Executive Officer and perform such duties
as may be reasonably assigned to him by the Board of Directors. The Kahn
Employment Agreement provides for an annual base salary of $150,000.00. The Kahn
Employment Agreement also provides that Jonathan Kahn is to receive options to
purchase shares of our Common stock in an amount as to be determined, from time
to time, by the Board of Directors of the Company, and that he is eligible to
receive vacation in accordance with the Company's policies. He is also eligible
to participate in the health, life insurance, medical, retirement and other
benefit programs which we may offer from time to time.
The term of the Kahn Employment Agreement lasts until September 30, 2002
unless terminated pursuant to the terms thereof. We may terminate the Kahn
Employment Agreement only for cause. The term "cause" is defined in the Kahn
35
<PAGE>
Employment Agreement as: (i) the willful neglect of duties reasonably assigned
by the Board of Directors; (ii) material breach of the agreement; or (iii)
willful gross misconduct. If Jonathan Kahn is terminated without cause or in the
event of a change of control of the Company, defined as a change in control of
at least 40% of the voting equal to: (i) the base salary; (ii) bonus
compensation; (iii) vested options to purchase Common stock; (iv) health
insurance; and (v) any unused vacation time. The change of control provision in
the employment agreement was not triggered by the recent Reorganization with
Foreplay Golf Travel & Tours, Inc. If Jonathan Kahn resigns from his position
for good cause, including a substantial reduction in his position, duties or a
material breach of the agreement by us, he is to be deemed terminated without
cause and is eligible to receive severance.
On October 25, 1999 we entered into an employment agreement with Darryl
Lovato (the "Lovato Employment Agreement"). Under the Lovato Employment
Agreement, Darryl Lovato is to serve as our President and Chief Technology
Officer and perform such duties as may be reasonably assigned to him by the
Board of Directors. The Lovato Employment Agreement provides for an annual base
salary of $150,000.00. The Lovato Employment Agreement also provides that Darryl
Lovato is to receive options to purchase shares of our Common stock, in an
amount as to be determined, from time to time, by the Board of Directors of the
Company, and that he is eligible to receive vacation in accordance with the
Company's policies. He is also eligible to participate in the health, life
insurance, medical, retirement and other benefit programs which we may offer
from time to time.
The term of the Lovato Employment Agreement lasts until September 30, 2002
unless terminated pursuant to the terms thereof. We may terminate the Lovato
Employment Agreement only for cause. The term "cause" is defined in the Lovato
Employment Agreement as: (i) the willful neglect of duties reasonably assigned
by the Board of Directors; (ii) material breach of the agreement; or (iii)
willful gross misconduct. If Darryl Lovato is terminated without cause or in the
event of a change of control of the Company, defined as a change in control of
at least 40% of the voting shares of the Company, he is to receive severance pay
through September 30, 2002 equal to: (i) the base salary; (ii) bonus
compensation; (iii) vested options to purchase Common stock; (iv) health
insurance; and (v) any unused vacation time. The change of control provision in
the employment agreement was not triggered by the recent Reorganization with
Foreplay Golf Travel & Tours, Inc. If Darryl Lovato resigns from his position
for good cause, including a substantial reduction in his position, duties or a
material breach of the agreement by us, he is to be deemed terminated without
cause and is eligible to receive severance.
EMPLOYEE BENEFIT PLANS
Stock Option Plan
36
<PAGE>
Our Stock Option Plan (the "Plan") was adopted by the Board of Directors,
and ratified and approved by our stockholders, as of the closing of the
Reorganization. The following description of our Stock Option Plan is a summary
and qualified in its entirety by the text of the plan, which is filed as an
exhibit to this Registration Statement.
The purpose of the Plan is to enhance our profitability and stockholder
value by enabling us to offer stock based incentives to employees, directors and
consultants. The Plan authorizes the grant of options to purchase shares of
common stock to employees, directors and consultants of Aladdin and its
affiliates. Under the Plan, we may grant incentive stock options within the
meaning of Section 422 of the Internal Revenue Code of 1986 and non-qualified
stock options. Incentive stock options may only be granted our employees.
The number of shares available for options under the Plan is 3,000,000.
The Plan is administered by the Compensation Committee of the board. Subject to
the provisions of the Plan, the Compensation Committee has authority to
determine the employees, directors and consultants of Aladdin who are to be
awarded options and the terms of such awards, including the number of shares
subject to such option, the fair market value of the common stock subject to
options, the exercise price per share and other terms.
Incentive stock options must have an exercise price equal to at least 100%
(110% if the grant is to a stockholder holding more than 10% of our voting
stock) of the fair market value of a share on the date of the award and
generally cannot have a duration of more than 10 years (five years if the grant
is to a stockholder holding more than 5% of our voting stock). Terms and
conditions of awards are set forth in written agreements between Aladdin and the
respective option holders. Awards under the Plan may not be made after the tenth
anniversary of the date of its adoption but awards granted before that date may
extend beyond that date.
If the employment with Aladdin of the holder of an incentive stock option
is terminated for any reason other than as a result of the holder's death or
disability or for "cause" as defined in the Plan, the holder may exercise the
option, to the extent exercisable on the date of termination of employment,
until the earlier of the option's specified expiration date and 30 days after
the date of termination. If an option holder dies or becomes disabled, both
incentive and non-qualified stock options may generally be exercised, to the
extent exercisable on the date of death or disability, by the option holder or
the option holder's survivors until the earlier of the option's specified
termination date and one year after the date of death or disability.
As of October 31, 1999, 12,086 shares had been issued as the result of the
exercise of options previously granted under the Plan, 1,669,239 shares were
subject to outstanding options and 1,330,761 shares were available for future
grants. The exercise
37
<PAGE>
prices of the outstanding options ranged from $1.10 to approximately $1.90. The
options under the Plan vest over varying lengths of time pursuant to various
option agreements that we have entered into with the grantees of such options.
We have not registered the Plan, or the shares subject to issuance
thereunder, pursuant to the Securities Act. Absent registration, such shares,
when issued upon exercise of options, would be "restricted securities" as that
term is defined in Rule 144 under the Securities Act.
Optionees have no rights as stockholders with respect to shares subject to
options prior to the issuance of shares pursuant to the exercise thereof.
Options issued to employees under the Plan shall expire no later than ten years
after the date of grant. An option becomes exercisable at such time and for such
amounts as determined at the discretion of the Board of Directors or the
Compensation Committee at the time of the grant of the option. An optionee may
exercise a part of the option from the date that part first becomes exercisable
until the option expires. The purchase price for shares to be issued to an
employee upon his exercise of an option is determined by the Board of Directors
or the Compensation Committee on the date the option is granted. The purchase
price is payable in full in cash, by promissory note, by net exercise or by
delivery of shares of our Common stock when the option is exercised.
The Plan provides for adjustment as to the number and kinds of shares
covered by the outstanding options and the option price therefor to give effect
to any stock dividend, stock split, stock combination or other reorganization of
or by Aladdin.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
STOCK OPTION PLAN. In 1997, Jonathan Kahn and Darryl Lovato received
options to purchase up to 119,500 and 119,938 shares of Common Stock,
respectively, with exercise prices of $1.87 to $1.91 per share and $1.74 to
$1.91 per share, respectively. These options vest in 48 monthly installments.
In 1998, Jonathan Kahn and Darryl Lovato each received options to purchase
up to 56,500 shares of Common Stock, respectively, with exercise prices of $1.91
per share. These options vest in 48 monthly installments.
In 1999, Brad Peppard received options to purchase up to 20,000 shares of
Common Stock, with exercise prices of $2.50 per share. These options vest in 48
monthly installments.
The foregoing number of shares for which options have been granted prior
to the Reorganization represents shares of Aladdin Systems Common Stock and are
not
38
<PAGE>
shown as adjusted to reflect the 1.580287 for 1 conversion ratio applied to
shares of Aladdin Systems Common Stock at the time of the reorganization
REORGANIZATION. In October, 1999, Aladdin Systems, Inc. entered into the
Reorganization with a non-operating public company, Foreplay Golf & Travel
Tours, Inc., a Nevada corporation incorporated on March 26, 1997 ("FGT"). Under
the Reorganization Agreement, the Aladdin Systems stockholders received 1.580287
shares of FGT Common Stock in exchange for each of their shares of Aladdin
Systems, Inc. Common Stock . Additionally, the holders of options to purchase
shares of Common stock of Aladdin Systems, Inc. terminated their options and
received options to purchase shares of Common Stock of FGT. As a result of the
Reorganization, Aladdin Systems, Inc. became a wholly-owned subsidiary of FGT.
FGT adopted the Aladdin Systems, Inc. Stock Option Plan. An aggregate of
7,441,628 shares of Common Stock and options to purchase an aggregate of
1,669,239 shares of Common Stock were issued to the former Aladdin Systems, Inc.
stockholders and option holders, respectively, in the Reorganization and the
Aladdin Systems, Inc. stockholders owned approximately 81.4% of FGT immediately
after the Reorganization. As part of the Reorganization, all of the executive
officers and directors of FGT resigned and the executive officers and directors
of Aladdin Systems became the executive officers and directors of FGT which
changed its name to Aladdin Systems Holdings, Inc.
BAYTREE CAPITAL ASSOCIATES, LLC. In July, 1999 Aladdin Systems, Inc.
entered into an agreement with Baytree Capital Associates, LLC which we assumed
after the Reorganization. Under the agreement, Baytree provided financial
consulting and assistance to Aladdin Systems, Inc. which included the
identification of a merger candidate and the assistance with the Reorganization.
For their services, Baytree received 50,000 shares of our Common Stock and was
paid $20,000 plus $10,000 in non-accountable expense reimbursement. In addition,
Baytree has been granted an 18 month right of first refusal with respect to any
subsequent financings.
ITEM 8. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED
The descriptions in this Item and in other sections of this Registration
Statement of our securities and various provisions of our Articles of
Incorporation and our Bylaws are summaries. Since this is a summary, statements
contained in this Registration Statement relating to such provisions may not
contain all information relevant to investors. Reference is hereby made to the
Articles of Incorporation and Bylaws, copies of which have been filed with the
SEC as exhibits to this Registration Statement, and provisions of applicable
law.
Our authorized capital stock consists of 50,000,000 shares of common
stock, par value $.001 per share, and 1,000,000 shares of Preferred Stock, par
value $.001. As of October 31, 1999, 9,141,628 shares of our common stock were
issued and outstanding
39
<PAGE>
and 3,000,000 shares of common stock were reserved for issuance upon exercise of
options issuable under our stock option plan. Only our common stock is being
registered under the Exchange Act pursuant to this Registration Statement. As of
August 30, 1999, no shares of our Preferred Stock were issued and outstanding.
Description of Common Stock
The holders of our common stock are entitled to equal dividends and
distributions per share with respect to the common stock when, as and if
declared by the Board of Directors from funds legally available therefor. No
holder of any shares of our common stock has a preemptive right to subscribe for
any of our securities, nor are any common shares subject to redemption or
convertible into other of our securities. Upon liquidation, dissolution or
winding up of Aladdin, and after payment of creditors and preferred
stockholders, if any, the assets will be divided pro-rata on a share-for-share
basis among the holders of the shares of common stock. All shares of common
stock now outstanding are fully paid, validly issued and non-assessable.
Each share of common stock is entitled to one vote with respect to the
election of any director or any other matter upon which shareholders are
required or permitted to vote. Holders of the common stock do not have
cumulative voting rights, so the holders of more than 50% of the combined shares
voting for the election of directors may elect all of the directors if they
choose to do so, and, in that event, the holders of the remaining shares will
not be able to elect any members to the Board of Directors.
40
<PAGE>
Anti-Takeover Effects of Various Provisions of Nevada Law and Our Articles of
Incorporation and Bylaws
We are incorporated under the laws of the State of Nevada and are
therefore subject to various provisions of the Nevada corporation laws which may
have the effect of delaying or deterring a change in the control or management
of Aladdin.
Nevada's "Combination with Interested Stockholders Statute," Nevada
Revised Statutes 78.411-78.444, which applies to Nevada corporations like us
having at least 200 stockholders, prohibits an "interested stockholder" from
entering into a "combination" with the corporation, unless certain conditions
are met. A "combination" includes (a) any merger with an "interested
stockholder," or any other corporation which is or after the merger would be, an
affiliate or associate of the interested stockholder, (b) any sale, lease,
exchange, mortgage, pledge, transfer or other disposition of assets, in one
transaction or a series of transactions, to an "interested stockholder," having
(i) an aggregate market value equal to 5% or more of the aggregate market value
of the corporation's assets, (ii) an aggregate market value equal to 5% or more
of the aggregate market value of all outstanding shares of the corporation, or
(iii) representing 10% or more of the earning power or net income of the
corporation, (c) any issuance or transfer of shares of the corporation or its
subsidiaries, to the "interested stockholder," having an aggregate market value
equal to 5% or more of the aggregate market value of all the outstanding shares
of the corporation, (d) the adoption of any plan or proposal for the liquidation
or dissolution of the corporation proposed by the "interested stockholder," (e)
certain transactions which would have the effect of increasing the proportionate
share of outstanding shares of the corporation owned by the "interested
stockholder," or (f) the receipt of benefits, except proportionately as a
stockholder, of any loans, advances or other financial benefits by an
"interested stockholder." An "interested stockholder" is a person who (i)
directly or indirectly owns 10% or more of the voting power of the outstanding
voting shares of the corporation or (ii) an affiliate or associate of the
corporation which at any time within three years before the date in question was
the beneficial owner, directly or indirectly, of 10% or more of the voting power
of the then outstanding shares of the corporation.
A corporation to which the statute applies may not engage in a
"combination" within three years after the interested stockholder acquired its
shares, unless the combination or the interested stockholder's acquisition of
shares was approved by the Board of Directors before the interested stockholder
acquired the shares. If this approval was not obtained, then after the
three-year period expires, the combination may be consummated if all the
requirements in the Articles of Incorporation are met and either (a)(i) the
Board of Directors of the corporation approves, prior to such person becoming an
"interested stockholder," the combination or the purchase of shares by the
"interested stockholder" or (ii) the combination is approved by the affirmative
vote of holders of a majority of voting power not beneficially owned by the
"interested stockholder" at a meeting called no earlier than three years after
the date the "interested
41
<PAGE>
stockholder" became such or (b) the aggregate amount of cash and the market
value of consideration other than cash to be received by holders of common
shares and holders of any other class or series of shares meets the minimum
requirements set forth in Sections 78.411 through 78.443, inclusive, and prior
to the consummation of the combination, except in limited circumstances, the
"interested stockholder" will not have become the beneficial owner of additional
voting shares of the corporation.
Nevada's "Control Share Acquisition Statute," Nevada Revised Statute
(S)78.378-78.379, prohibits an acquirer, under certain circumstances, from
voting shares of a target corporation's stock after crossing certain threshold
ownership percentages, unless the acquirer obtains the approval of the target
corporation's stockholders. The Control Share Acquisition Statute only applies
to Nevada corporations with at least 200 stockholders, including at least 100
record stockholders who are Nevada residents, and which do business directly or
indirectly in Nevada. While we do not currently exceed these thresholds, we may
well do so in the near future. In addition, although we do not presently "do
business" in Nevada within the meaning of the Control Share Acquisition Statute,
we may do so in the future. Therefore, it is likely that the Control Share
Acquisition Statute will apply to us in the future. The statute specifies three
thresholds: at least one-fifth but less than one-third, at least one-third but
less than a majority, and a majority or more, of all the outstanding voting
power. Once an acquirer crosses one of the above thresholds, shares which it
acquired in the transaction taking it over the threshold or within ninety days
become "Control Shares" which are deprived of the right to vote until a majority
of the disinterested stockholders restore that right. A special stockholders'
meeting may be called at the request of the acquirer to consider the voting
rights of the acquiror's shares no more than 50 days (unless the acquirer agrees
to a later date) after the delivery by the acquirer to the corporation of an
information statement which sets forth the range of voting power that the
acquirer has acquired or proposes to acquire and certain other information
concerning the acquirer and the proposed control share acquisition. If no such
request for a stockholders' meeting is made, consideration of the voting rights
of the acquiror's shares must be taken at the next special or annual
stockholders' meeting. If the stockholders fail to restore voting rights to the
acquirer or if the acquirer fails to timely deliver an information statement to
the corporation, then the corporation may, if so provided in its articles of
incorporation or bylaws, call certain of the acquiror's shares for redemption.
Our Articles of Incorporation and Bylaws do not currently permit us to call an
acquiror's shares for redemption under these circumstances. The Control Share
Acquisition Statute also provides that the stockholders who do not vote in favor
of restoring voting rights to the Control Shares may demand payment for the
"fair value" of their shares (which is generally equal to the highest price paid
in the transaction subjecting the stockholder to the statute).
Certain provisions of our Bylaws which are summarized below may affect
potential changes in control of Aladdin. The Board of Directors believes that
these provisions are in the best interests of stockholders because they will
encourage a
42
<PAGE>
potential acquirer to negotiate with the Board of Directors, which will be able
to consider the interests of all stockholders in a change in control situation.
However, the cumulative effect of these terms maybe to make it more difficult to
acquire and exercise control of Aladdin and to make changes in management more
difficult.
The Bylaws provide the number of directors of Aladdin shall be established
by the Board of Directors, but shall be no less than one. Between stockholder
meetings, the Board may appoint new directors to fill vacancies or newly created
directorships. A director may be removed from office by the affirmative vote of
66-2/3% of the combined voting power of the then outstanding shares of stock
entitled to vote generally in the election of directors.
The Bylaws further provide that stockholder action may be taken at a
meeting of stockholders and may be effected by a consent in writing if such
consent is signed all of the holders of common stock.
We are not aware of any proposed takeover attempt or any proposed attempt
to acquire a large block of our common stock.
The provisions described above may have the effect of delaying or
deterring a change in the control or management of Aladdin.
Application of California GCL
Although we are incorporated in Nevada, our headquarters is in the State
of California. Section 2115 of the California GCL ("Section 2115") provides that
certain provisions of the California GCL shall be applicable to a corporation
organized under the laws of another state to the exclusion of the law of the
state in which it is incorporated, if the corporation meets certain tests
regarding the business done in California and the number of its California
stockholders.
An entity such as us can be subject to Section 2115 if the average of the
property factor, payroll factor and sales factor deemed to be in California
during its latest full income year is more than 50 percent and more than
one-half of its outstanding voting securities are held of record by persons
having addresses in California. Section 2115 does not apply to corporations with
outstanding securities listed on the New York or American Stock Exchange, or
with outstanding securities designated as qualified for trading as a national
market security on NASDAQ, if such corporation has at least 800 beneficial
holders of its equity securities. Since the average of our property factor,
payroll factor and sales factor deemed to be in California during our latest
fiscal year was almost 100%, and over 75% of our outstanding voting securities
are held of record by persons having addresses in California, and our securities
do not currently qualify as a national market security on NASDAQ, we are subject
to Section 2115.
43
<PAGE>
During the period that we are subject to Section 2115, the provisions of
the California GCL regarding the following matters are made applicable to the
exclusion of the law of the State of Nevada: (i) general provisions and
definitions; (ii) annual election of directors; (iii) removal of directors
without cause; (iv) removal of directors by court proceedings; (v) filling of
director vacancies where less than a majority in office were elected by the
stockholders; (vi) directors' standard of care; (vii) liability of directors for
unlawful distributions; (viii) indemnification of directors, officers and
others; (ix) limitations on corporate distributions of cash or property; (x)
liability of a stockholder who receives an unlawful distribution; (xi)
requirements for annual stockholders meetings; (xii) stockholders' right to
cumulate votes at any election of directors; (xiii) supermajority vote
requirements; (xiv) limitations on sales of assets; (xv) limitations on mergers;
(xvi) reorganizations; (xvii) dissenters' rights in connection with
reorganizations; (xviii) required records and papers; (xix) actions by the
California Attorney General; and (xx) rights of inspection.
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
No shares of our common stock have previously been registered with the
SEC. Our common stock has been trading on the National Association of Security
Dealers Over-The-Counter Market Bulletin Board ("OTCBB") since June 10, 1998
first under the symbol "FLGA" and after October 25, 1999 had traded under the
symbol "ALHIE". There has never been an active trading market for the securities
of this Company.
As of September 30, 1999 there were approximately 50 holders of record of
our common stock, which figure does not take into account those stockholders
whose certificates are held in the name of broker-dealers or other nominees.
Dividend Policy
We do not anticipate that we will pay cash dividends or make distributions
in the foreseeable future. We currently intend to retain and invest future
earnings to finance our operations.
Transfer Agent
Our transfer agent for our common stock is Pacific Stock Transfer, 5844
South Pecos Road, Suite D, Las Vegas, Nevada 89120.
ITEM 2. LEGAL PROCEEDINGS
44
<PAGE>
There is presently one pending legal proceedings to which we are a party.
In James E. Grimes Company, Inc. v. Aladdin Systems, Inc., Superior Court of the
State of California, Sacramento County, Case No, 99AS02616, James E. Grimes
Company, Inc. ("Grimes") has alleged that Aladdin is indebted to Grimes in the
amount of $122,047.14 for goods and services allegedly provided to Aladdin by
Grimes. We have answered the Complaint and we believe that Grimes's claims are
without merit and intend to defend our position vigorously. Notwithstanding the
foregoing, Aladdin has agreed to settle such litigation for the amount of
$75,000.00 rather then incur the potential costs of defending this litigation.
Subsequent to the commencement of this action by Grimes in May, 1999, Grimes
filed for bankruptcy and the settlement of the action is subject to the approval
of the bankruptcy court. As a condition of the settlement, Aladdin shall receive
a full release of all potential claims that Grimes may have against Aladdin.
To the best of our knowledge, there are presently no other legal
proceedings to which we or any of our subsidiaries is a party or to which any of
our property is subject and, to the best of its knowledge, no such actions
against us are contemplated or threatened.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES
Set forth in chronological order is information regarding shares of common
stock issued and options and warrants and other convertible securities granted
by us during the past three years. Also included is the consideration, if any,
received by us for such shares and options and information relating to the
section of the Securities Act, or rule of the SEC under which exemption from
registration was claimed.
Transactions described in Items (1) through (5) below refer to the
securities of Aladdin Systems, Inc., a Delaware corporation which was the
predecessor entity of the filer of this Registration Statement, and transactions
described in Items (6) through (9) below refer to the securities of Aladdin
Systems Holdings, Inc., a Nevada corporation which is the filer of this
Registration Statement.
Unless otherwise indicated, information in this Item 10 regarding shares
of our Common Stock reflect the 1.580287 for 1 conversion ratio applied to
shares of Aladdin Systems, Inc. Common Stock at the time of the reorganization.
The conversion ratio is subject to certain adjustments as set forth in Part 1,
Item 1 "Description of Business".
45
<PAGE>
(1) In 1997, we issued options to purchase up to 1,400,595 shares of
Common Stock 20 employees and 5 directors of the Company with an exercise price
of $1.70 to $1.74 per share pursuant to the Company's Stock Option Plan. These
issuances were made in reliance on Section 4(2) of the Securities Act and/or
Rule 701 promulgated under the Securities Act and were made without general
solicitation or advertising. The purchasers were sophisticated investors with
access to all relevant information necessary to evaluate these investments, and
who represented to the Company that the shares were being acquired for
investment.
(2) In 1998, we issued options to purchase up to 245,900 shares of Common
Stock to 24 employees of the Company with an exercise price of $1.74 to $1.91
per share pursuant to the Company's Stock Option Plan. These issuances were made
in reliance on Section 4(2) of the Securities Act and/or Rule 701 promulgated
under the Securities Act and were made without general solicitation or
advertising. The purchasers were sophisticated investors with access to all
relevant information necessary to evaluate these investments, and who
represented to the Company that the shares were being acquired for investment.
(3) In from January 1, 1999 through October 24, 1999, we issued options to
purchase up to 168,850 shares of Common Stock to 15 employees and 1 consultant
of the Company with an exercise price of $2.50 to $3.00 per share pursuant to
the Company's Stock Option Plan. These issuances were made in reliance on
Section 4(2) of the Securities Act and/or Rule 701 promulgated under the
Securities Act and were made without general solicitation or advertising. The
purchasers were sophisticated investors with access to all relevant information
necessary to evaluate these investments, and who represented to the Company that
the shares were being acquired for investment.
(4) In 1998, we issued to Jonathan Kahn 3,204 shares of Common Stock in
exchange for converting an outstanding promissory note from the Company to
Jonathan Kahn in the amount of $6,327. The issuances were made in reliance on
Section 4(2) of the Securities Act of 1933 and/or Regulation D promulgated under
the Securities Act of 1933 and were made without general solicitation or
advertising. The purchaser was a sophisticated investors with access to all
relevant information necessary to evaluate these investments, and who
represented to the Company that the shares were being acquired for investment.
(5) In September, 1999, we issued the aggregate amount of 5,313 shares of
Common Stock upon the exercise of options to purchase Common Stock which were
granted to employees, directors and consultants of the Company between 1997 and
1998. The issuances were made in reliance on Section 4(2) of the Securities Act
of 1933 and/or Regulation D promulgated under the Securities Act of 1933 and
were made without general solicitation or advertising. The purchasers were
sophisticated investors
46
<PAGE>
with access to all relevant information necessary to evaluate these investments,
and who represented to the Company that the shares were being acquired for
investment.
(6) In October 1999, under the terms of the Reorganization, the Company
issued the aggregate amount of 7,441,628 shares of Common Stock to the
shareholders of Aladdin Systems Holdings in exchange for their shares of Common
Stock of Aladdin Systems, Inc. The number of shares of the Company issued to the
Aladdin Systems shareholders is subject to adjustment after closing, pursuant to
the terms of the Reorganization Agreement, to adjust for options issued to
employees of Aladdin Systems which had expired prior to the closing. The
issuances were made in reliance on Section 4(2) of the Securities Act and were
made without general solicitation or advertising. The purchasers were
sophisticated investors with access to all relevant information necessary to
evaluate these investments, and who represented to the Company that the shares
were being acquired for investment.
(7) In October 1999, under the terms of the Reorganization, the holders of
options to purchase Common Stock of Aladdin Systems, Inc., exchanged their
options for options to purchase the aggregate amount of 1,669,239 shares of
Common Stock of the Company. These issuances were made in reliance on Section
4(2) of the Securities Act and/or Rule 701 promulgated under the Securities Act
and were made without general solicitation or advertising. The purchasers were
sophisticated investors with access to all relevant information necessary to
evaluate these investments, and who represented to the Company that the shares
were being acquired for investment.
(8) In October 1999, pursuant to the terms of the Reorganization Agreement
with Foreplay Golf Travel & Tours, Inc., the Company conducted a private
offering of its Common stock. Pursuant to that offering, a total of 1,000,000
shares of Common stock were sold for total cash consideration of $1,000,000. The
issuances were made in reliance on Section 4(2) of the Securities Act and/or
Regulation D promulgated under the Securities Act and were made without general
solicitation or advertising. The purchasers were sophisticated investors with
access to all relevant information necessary to evaluate these investments, and
who represented to the Company that the shares were being acquired for
investment.
(9) In October 1999, the Company issued 50,000 shares of Common stock to
Baytree Capital Associates pursuant to the terms of a Letter Agreement with
Baytree Capital Associates for financial business consulting services. The
issuance was made in reliance on Section 4(2) of the Securities Act and/or
Regulation D promulgated under the Securities Act and was made without general
solicitation or advertising. The purchaser was a sophisticated investor with
access to all relevant information necessary to evaluate the investment, and who
represented to the Company that the shares were being acquired for investment.
47
<PAGE>
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The General Corporation Law of Nevada limits the liability of officers and
directors for breach of fiduciary duty except in certain specified
circumstances, and also empowers corporations organized under Nevada Law to
indemnify officers, directors, employees and others from liability in certain
circumstances such as where the person successfully defended himself on the
merits or acted in good faith in a manner reasonably believed to be in the best
interests of the corporation.
Our Articles of Incorporation, with certain exceptions, eliminate any
personal liability of a directors or officers to us or our stockholders for
monetary damages for the breach of such person's fiduciary duty, and, therefore,
an officer or director cannot be held liable for damages to us or our
stockholders for gross negligence or lack of due care in carrying out his (or
her) fiduciary duties as a director or officer except in certain specified
instances. We may also adopt by-laws which provide for indemnification to the
full extent permitted under law which includes all liability, damages and costs
or expenses arising from or in connection with service for, employment by, or
other affiliation with us to the maximum extent and under all circumstances
permitted by law.
There is no pending litigation or proceeding involving one of our
directors, officers, employees or other agents as to which indemnification is
being sought, and we are not aware of any pending or threatened litigation that
may result in claims for indemnification by any director, officer, employee or
other agent.
We have purchased directors and officers liability insurance to defend and
indemnify directors and officers who are subject to claims made against them for
their actions and omissions as directors and officers of Aladdin. The insurance
policy provides standard directors and officers liability insurance in the
amount of $1,000,000.
We intend to enter into indemnification agreements with our directors and
officers. These agreements will provide, in general, that we shall indemnify and
hold harmless such directors and officers to the fullest extent permitted by law
against any judgments, fines, amounts paid in settlement, and expenses
(including attorneys' fees and disbursements) incurred in connection with, or in
any way arising out of, any claim, action or proceeding (whether civil or
criminal) against, or affecting, such directors and officers resulting from,
relating to or in any way arising out of, the service of such persons as our
directors and officers.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers, and controlling persons pursuant to
the foregoing provisions or otherwise, we have has been advised that in the
opinion of the SEC, such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable.
48
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized.
ALADDIN SYSTEMS HOLDINGS, INC.
(Registrant)
Date: May 8, 2000 By: /s/ Jonathan Kahn
---------------------------
Jonathan Kahn, Chief Executive
Officer and Treasurer
49
<PAGE>
PART F/S
FINANCIAL STATEMENTS
Reference is made to the Financial Statements together with the notes
thereto and the report thereon from Grant Thorton,LLP, and Hutchinson &
Bloodgood, LLP appearing on pages F-1 through F -15 of this Form 10-SB.
(A) Index to Financial Statements
Independent Auditors' Reports F-2
Aladdin Systems Holdings, Inc. Consolidated Balance Sheet
as of December 31, 1999 and 1998 F-4
Aladdin Systems Holdings, Inc. Consolidated Statements of Earnings
as of December 31, 1999 and 1998 F-5
Aladdin Systems Holdings, Inc. Consolidated Statements
Of Stockholders' Equity as of December 31, 1999 and 1998 F-6
Aladdin Systems Holdings, Inc. Statements of Cash Flow
as of December 31, 1999 and 1998 F-7
Notes to Financial Statements F-8
F-1
<PAGE>
Independent Auditors' Report on the Financial Statements
Board of Directors and Stockholders
Aladdin Systems Holdings, Inc.
We have audited the accompanying consolidated balance sheet of Aladdin Systems
Holdings, Inc., and Subsidiary (the "Company") as of December 31, 1999, and the
related consolidated statements of earnings, stockholders' equity and cash flows
for the year then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of the Company as of
December 31, 1999, and the consolidated results of its operations and its
consolidated cash flows for the year then ended, in conformity with accounting
principles generally accepted in the United States.
/s/ Grant Thornton LLP
San Jose, California
March 7, 2000
F-2
<PAGE>
Independent Auditors' Report on the Financial Statements
To the Board of Directors
Aladdin Systems, Inc.
Watsonville, California
We have audited the accompanying consolidated balance sheet of Aladdin Systems
Holdings, Inc. and subsidiary, as of December 31, 1998 and the related
consolidated statement of earnings, stockholders' equity, and cash flows for the
year then ended. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly in all material respects, the financial position of Aladdin Systems
Holdings, Inc. and subsidiary as of December 31, 1998, and the results of their
operations and their cash flows for the year then ended, in conformity with
generally accepted accounting principles.
/s/ Hutchinson and Bloodgood LLP
Watsonville, CA
March 29, 1999
except for the second paragraph
of Note 1, the date of which is
October 12, 1999
F-3
<PAGE>
Aladdin Systems Holdings, Inc. and Subsidiary
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
December 31,
------------
1999 1998
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $1,063,404 $ 60,564
Accounts receivable (net of allowance of $181,659 and $37,368) 1,352,291 729,942
Inventories 103,903 70,491
Prepaid expenses 125,732 326,576
Deposits 147,686 18,733
---------- ----------
Total current assets 2,793,016 1,206,306
Capitalized software, net 157,823 155,078
Property and equipment, net 483,787 438,757
Deferred income taxes 94,369 263,559
---------- ----------
$3,528,995 $2,063,700
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 377,271 $ 320,644
Factoring line outstanding -- 160,888
Accounts payable 554,344 792,280
Accrued expenses and other liabilities 266,151 193,300
Income tax payable 69,276 1,600
---------- ----------
Total current liabilities 1,267,042 1,468,712
Long-term debt 100,435 340,145
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value; 1,000,000 shares authorized;
none issued and outstanding -- --
Common stock, $.001 par value; 50,000,000 shares authorized;
9,328,578 and 8,278,578 issued and outstanding
in 1999 and 1998, respectively 9,329 8,279
Paid-in capital 1,078,021 148,021
Retained earnings 1,074,168 98,543
---------- ----------
Total stockholders' equity 2,161,518 254,843
---------- ----------
$3,528,995 $2,063,700
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
Aladdin Systems Holdings, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1999 1998
---- ----
<S> <C> <C>
Sales $ 10,097,661 $ 8,002,518
Cost of sales 2,023,979 1,405,496
------------ ------------
Gross profit 8,073,682 6,597,022
Operating expenses:
Marketing, sales and support 3,773,266 3,520,106
Research and development 1,630,585 1,506,798
General and administrative 1,163,624 907,560
------------ ------------
Total operating expenses 6,567,475 5,934,464
------------ ------------
Income from operations 1,506,207 662,558
Other income (expense):
Interest expense (58,950) (175,490)
Other 11,685 11,346
------------ ------------
Net income before income tax 1,458,942 498,414
Income tax expense (benefit) 483,317 (81,769)
------------ ------------
Net income $ 975,625 $ 580,183
============ ============
Earnings per share - basic $ 0.11 $ 0.07
============ ============
Earnings per share - diluted $ 0.11 $ 0.07
============ ============
Shares used in computing basic earnings per share 8,497,328 8,275,873
============ ============
Shares used in computing diluted earnings per share 8,831,048 8,668,142
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
Aladdin Systems Holdings, Inc. and Subsidiary
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock
------------ Paid-in Retained
Shares Amount Capital Earnings Total
------ ------ ------- -------- -----
(Deficit)
---------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1998 8,273,167 $ 8,273 $ 141,727 $ (481,640) $ (331,640)
Issuance of common stock for cash 5,411 6 6,294 -- 6,300
Net income -- -- -- 580,183 580,183
----------- ----------- ----------- ----------- -----------
Balance at December 31, 1998 8,278,578 8,279 148,021 98,543 254,843
Issuance of common stock in private
placement
(net of issuance costs of $68,950) 1,050,000 1,050 930,000 -- 931,050
Net income -- -- -- 975,625 975,625
----------- ----------- ----------- ----------- -----------
Balance at December 31, 1999 9,328,578 $ 9,329 $ 1,078,021 $ 1,074,168 $ 2,161,518
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
Aladdin Systems Holdings, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 975,625 $ 580,183
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 353,474 367,808
Deferred income taxes 169,190 (83,369)
Changes in operating assets and liabilities:
Accounts receivable (622,349) 7,000
Inventories (33,412) 14,194
Prepaid expenses 200,844 7,737
Deposits (128,953) --
Accounts payable (237,936) (176,074)
Accrued expenses and other liabilities 72,851 (74,905)
Income tax payable 67,676 --
----------- -----------
Net cash provided by operating activities 817,010 642,574
Cash flows from investing activities:
Acquisition of property and equipment (111,764) (21,419)
Acquisition of software rights (147,959) (5,000)
----------- -----------
Net cash used in investing activities (259,723) (26,419)
Cash flows from financing activities:
Net proceeds from issuance of common stock 931,050 6,300
Repayment of bank borrowings (160,888) (263,286)
Repayment of long-term debt (324,609) (350,394)
----------- -----------
Net cash provided by (used in) financing activities 445,553 (607,380)
----------- -----------
Net increase in cash and cash equivalents 1,002,840 8,775
Cash and cash equivalents at beginning of period 60,564 51,789
----------- -----------
Cash and cash equivalents at end of period $ 1,063,404 $ 60,564
=========== ===========
Cash paid during the period for:
Interest $ 68,185 $ 165,242
=========== ===========
Income taxes $ 247,500 $ 1,600
=========== ===========
</TABLE>
Noncash Transactions:
During 1999, the Company acquired assets under a capital lease in the amount of
$106,000.
During 1999, the Company issued 50,000 shares of common stock as a commission in
connection with the issuance of 1,000,000 shares of common stock.
During 1999, the Company acquired software rights in exchange for a note payable
in the amount of $35,000.
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
Aladdin Systems Holdings, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Aladdin Systems Holding, Inc. ("Holdings") and its wholly owned subsidiary
(collectively the "Company"), develop, publish, and distribute computer software
for the Macintosh and Windows software market. In addition, the Company develops
and markets products to other software developers. Products are marketed through
independent distributors in the United States and Canada, through resellers and
mail order companies in other countries, directly to corporate accounts under
site licensing agreements, and directly to end-users through direct marketing
and the Internet.
Reverse Acquisition
In October 1999, Holdings, (formerly Foreplay Golf and Travel Tours, Inc.)
acquired Aladdin Systems, Inc. ("Systems") through an exchange of common stock.
Each share of Systems common stock was converted to 1.61997 shares of Holdings
common stock. The acquisition was accounted for as a reverse acquisition whereby
Systems was deemed to be the "accounting acquirer" using the guidance in Staff
Accounting Bulletin No. 97. The historical financial statements prior to the
acquisition are that of Systems. The balances of common stock and additional
paid-in-capital reflect the recapitalization of the Company as if the
acquisition had occurred at the beginning of 1998.
Principles of Consolidation
The consolidated financial statements include the accounts of Holdings and its
wholly owned subsidiary, Systems. All significant intercompany transactions and
balances are eliminated in consolidation. Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with a maturity of
three months or less to be cash equivalents.
Inventories
Inventories are valued at the lower of cost or market and are accounted for on
the first-in, first-out basis. Management performs periodic assessments to
determine the existence of obsolete, slow moving and non-salable inventories,
and records necessary provisions to reduce such inventories to net realizable
value.
Property and Equipment
Property and equipment are stated at cost. Capital leases are recorded at the
present value of the minimum lease payments at the date of acquisition.
Depreciation is computed on a accelerated basis over the estimated useful lives
of the assets or lease term, whichever is shorter.
Revenue recognition
F-8
<PAGE>
Revenues and accounts receivable are principally derived from sales to
distributors and resellers of the Company's products. These revenues are
recognized net of reserves for returns and rebates. Return reserves are based on
management's estimate of inventory at distributors or resellers that is in
excess of levels appropriate for that channel and is likely to be returned. The
Company recognizes revenue, net of estimated returns and rebates, upon shipment
or delivery of the product, when no significant obligations remain and
collectability is probable. Certain of the Company's sales are made to customers
under agreements permitting rights of return for stock balancing.
Research and development
Research and development costs are charged to operations when incurred.
Capitalized Software
Costs incurred in the initial design phase of software development are expensed
as incurred as research and development. Once the point of technological
feasibility is reached, direct production costs are capitalized. The Company
ceases capitalizing computer software costs when the product is available for
general release to customers. Costs associated with acquired completed software
are capitalized. Total capitalized software development costs at December 31,
1999 and 1998 were $1,065,347 and $882,388 respectively, less accumulated
amortization of $907,524 and $727,310, respectively.
The Company amortizes capitalized software development costs on a
product-by-product basis. The amortization for each product is the greater of
the amount computed using (a) the ratio of current gross revenues to the total
of current and anticipated future gross revenues for the product or (b) 60
months. In addition, the Company evaluates the net realizable value of each
software product at each balance sheet date and records write-downs to net
realizable value for any products for which the carrying value is in excess of
the estimated net realizable value. Total amortization expense for capitalized
software, all of which was charged to cost of sales, was $196,101 and $171,978
in fiscal years 1999 and 1998, respectively.
Advertising
The Company expenses advertising costs as they are incurred. Advertising and
related promotion expenses for fiscal years 1999 and 1998 were $1,187,646 and
$1,333,626, respectively.
Income Taxes
Income taxes are computed using the asset and liability method under Statement
of Financial Accounting Standards ("SFAS") No. 109, Accounting for Income Taxes.
Deferred income tax assets and liabilities are determined based on the
differences between the financial reporting and tax bases of assets and
liabilities and are measured using the currently enacted tax rates and laws.
Stock-Based Compensation
The Company accounts for stock-based employee compensation arrangements in
accordance with the provisions of Accounting Principles Board ("APB") No. 25,
Accounting for Stock Issued to Employees, and complies with the disclosure
provisions of SFAS No. 123, Accounting for Stock-Based Compensation. Under APB
No. 25, compensation cost is recognized over the vesting period based on the
difference, if any, on the date of grant between the fair value of the Company's
stock and the amount an employee must pay to acquire the stock.
Use of Estimates
F-9
<PAGE>
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, disclosure of contingent
assets and liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reported period. Actual results
could differ from those estimates.
Segment Reporting
The Company's business is conducted in a single operating segment. The Company's
chief operating decision maker is the Chief Executive Officer who reviews a
single set of financial data that encompasses the Company's entire operations
for purposes of making operating decisions and assessing performance.
Earnings Per Share
Basic earnings per share is computed using the weighted average number of common
shares outstanding during the period. Diluted earnings per share is computed
using the weighted average number of common and common equivalent shares
outstanding during the period. Common equivalent shares consist of the
incremental common shares issuable upon conversion of convertible debt (using
the if-converted method) and shares issuable upon the exercise of stock options
and warrants (using the treasury stock method). A total of approximately
1,683,000 outstanding stock options in 1999 and 2,165,000 outstanding stock
options in 1998 have been excluded from the diluted earnings per share
calculation, as the inclusion would be anti-dilutive.
The following table reconciles the amounts used in the per share computation:
1999 1998
---- ----
Numerator
Net income $975,625 $580,183
Interest expense on convertible debt 16,878 23,148
---------- ----------
Net income used in computing diluted
earnings per share $992,503 $603,331
========== ==========
1999 1998
---- ----
Denominator
Weighted average common shares
outstanding during the period 8,497,328 8,275,873
Dilutive effect of convertible debt 333,720 392,269
---------- ----------
Shares used in computing diluted
earnings per share 8,831,048 8,668,142
========== ==========
Fair Value of Financial Instruments
The fair value of cash and cash equivalents, accounts receivable and accounts
payable approximate carrying value due to the short term nature of such
instruments. The fair value of long term obligations with third-parties
approximates carrying value based on terms available for similar instruments.
The fair value of debt with related parties is not determinable due to the terms
of the debt and no comparable market for such debt.
F-10
<PAGE>
Reclassifications
Certain 1998 information has been reclassified to conform to 1999 presentation.
NOTE 2 - PROPERTY AND EQUIPMENT
Property and equipment at December 31 consist of:
Useful lives (years) 1999 1998
-------------------- ----------- -----------
Computer equipment 5 $ 773,895 $ 685,648
Office equipment 5 160,213 55,606
Furniture and fixtures 7 246,907 246,907
Displays 5 - 7 121,306 99,921
----------- -----------
1,302,321 1,088,082
Less accumulated depreciation 818,534 649,325
----------- -----------
$ 483,787 $ 438,757
=========== ===========
NOTE 3 - BANK FACTORING AGREEMENT
The Company has an arrangement with Silicon Valley Bank (the "Bank") whereby the
Bank may advance 50% of pledged receivables, up to $1,200,000, to the Company.
The Bank acquires the receivables from the Company with full recourse. In the
event receivables are not collected within 90 days of invoice date, the Company
is obligated to pay the pledged amount upon demand. Upon receipt of the
collections, the Bank applies the payment to the Company's account. Interest is
1.25% per month on the average daily balance and an administrative fee is
charged at .50% of the face amount of the receivables. The Company had no
outstanding balance at December 31, 1999 and $160,888 at December 31, 1998.
NOTE 4 - LONG-TERM DEBT
Long-term debt at December 31, consists of:
1999 1998
-------- --------
Capital lease obligations $181,627 $164,352
Notes payable to related parties 160,062 214,062
Notes payable for software 129,517 225,877
Severance agreement 6,500 56,500
-------- --------
477,706 660,791
Less current portion 377,271 320,646
-------- --------
$100,435 $340,145
======== ========
Notes Payable to Related Parties
Notes payable to related parties are payable on demand. Interest is compounded
daily at 8.92% and is payable monthly. The notes are convertible into common
stock at the lesser of $1.74 per
F-11
<PAGE>
share or at the lowest price shares of common stock are sold or options are
granted after the date the notes were issued.
Notes Payable for Software
The Company has a note payable in relation to the acquisition of the StuffIt
program. The amount due at December 31, 1999 is $94,517. Interest is compounded
daily at 10% and is payable monthly. The notes are convertible into common stock
at the most recently granted employee option price plus $0.10 per share.
The Company also has a $35,000 note payable for the acquisition of the software
rights payable in 2000.
Severance Agreement Payable
The Company entered into an agreement with a former employee whereby the Company
would make semi-monthly payments of $1,923 until the balance is paid in full. At
December 31, 1999, the balance is $6,500.
Installments due on debt principal are as follows:
Year ending December 31,
------------------------
2000 $ 377,271
2001 33,579
2002 31,351
2003 24,559
2004 10,946
---------
$ 477,706
=========
NOTE 5 - INCOME TAXES
Income tax expense (benefit) for the years ended December 31, consist of:
1999 1998
--------- ---------
Current
Federal $ 225,176 $ --
State 91,600 1,600
--------- ---------
Total current 316,776 1,600
Deferred
Federal 157,411 (83,822)
State 11,779 453
--------- ---------
Total deferred 169,190 (83,369)
--------- ---------
$ 483,317 $ (81,769)
========= =========
The tax effect of temporary differences that give rise to significant portions
of net deferred tax assets at December 31, is presented below:
F-12
<PAGE>
1999 1998
--------- ---------
Deferred tax assets (liabilities)
Net operating loss carryforward $ $ 265,139
State taxes 26,483 (11,011)
Interest on installment sale 11,339 11,339
Severance payments 1,236 22,656
Depreciation 55,311 63,289
--------- ---------
Total 94,369 351,412
Less: valuation allowance -- (87,853)
--------- ---------
Net deferred tax asset $ 94,369 $ 263,559
========= =========
The net change in the valuation allowance was a decrease of $87,853 in 1999 and
$92,337 in 1998. The effective tax rate as a percentage of income before income
taxes differs from the statutory federal income tax rate (when applied to income
before income taxes) for the years ended December 31, as follows:
1999 1998
---- ----
Statutory federal income tax rate 34.0% 34.0%
Increase (decrease) resulting from:
State income taxes, net of federal tax benefit 5.8 5.8
Utilization of net operating loss carryforwards (0.7) (37.7)
Reduction of valuation allowance (6.0) (18.5)
---- -----
Effective tax rate 33.1% (16.4)%
==== =====
NOTE 6 - MAJOR CUSTOMERS
The Company has one major customer who accounted for $1,453,119 or 14% and
$2,011,939 or 25% of revenues in 1999 and 1998, respectively.
NOTE 7 - STOCKHOLDERS' EQUITY
Stock Options
The Aladdin Systems Holdings, Inc. 1999 Stock Option Plan (the "Plan") allows
for the issuance of incentive stock options and non-qualified stock options to
purchase shares of the Company's common stock. The Plan has authorized 3,000,000
million shares of which 1,190,491 remain available for granting at December 31,
1999. Under the Plan, incentive stock options may be granted to employees,
directors, and officers of the Company and non-qualified stock options may be
granted to consultants, employees, directors, and officers of the Company.
Options granted under the Plan are for periods not to exceed ten years, and must
be issued at prices not less than 100% of the fair market value of the stock on
the date of grant. Options granted to shareholders who own greater than 10% of
the outstanding stock are for periods not to exceed five years and must be
issued at prices not less than 110% of the fair market value of the stock on the
date of grant. Options granted under the Plan generally vest within 4 years.
Stock option activity is summarized as follows:
F-13
<PAGE>
Weighted
Average
Exercise
Shares Price
--------- -----
Balance at January 1, 1998 .................... 2,165,116 $1.06
Granted .................................. 398,351 1.12
Exercised ................................ (5,411) 1.16
Cancelled ................................ (874,631) 1.05
---------
Balance at December 31, 1998 ................ 1,683,425 1.08
Granted .................................. 347,298 2.11
Cancelled ................................ (221,214) 1.05
---------
Balance at December 31, 1999................. 1,809,509 $1.29
=========
The following table summarizes information about stock options outstanding as of
December 31, 1999:
Weighted
Weighted Average Weighted
Range of Average Remaining Average
Exercise Number Exercise Contractual Number Exercise
Price Outstanding Price Term (years) Exercisable Price
----- ----------- ----- ------------ ----------- -----
$1.05 - 1.07 1,268,345 $1.06 7.34 613,728 $1.06
$1.18 - 1.85 483,598 $1.52 4.04 144,388 $1.61
$3.00 - 4.63 65,666 $3.73 4.41 16,666 $3.25
- ------------ --------- ----- -------- ------- -----
1,809,509 774,782
========= =======
The fair value of option grants has been determined using the Black-Scholes
option pricing model with the following weighted average assumptions: expected
life of 10 years; interest rate of 6.0%, volatility of 75% (minimum value prior
to the acquisition of Systems by Holdings) and no dividend yield. The weighted
average fair value of options granted to employees was $0.08 and $0.38 for 1999
and 1998, respectively.
The following table depicts the pro forma results of operations had compensation
expense for employee options been determined based on the fair value at the
grant dates, as prescribed in SFAS No. 123.
Year Ended December 31,
-----------------------
1999 1998
---- ----
Net income
As reported .................................. $975,625 $580,183
Pro forma .................................... 664,025 290,705
Basic net income per share
As reported .................................. $0.11 $0.07
Pro forma .................................... 0.08 0.04
Diluted net income per share
As reported .................................. 0.11 0.07
F-14
<PAGE>
Pro forma .................................... 0.08 0.04
NOTE 8 - RETIREMENT PLAN
The Company has established a 401(k) retirement plan for all employees.
Employees may elect to contribute up to 15% of their gross salary not to exceed
federal tax law limitations. The Company may elect to match a portion of the
employee contributions. No matching contributions were made for the years ended
December 31, 1999 and 1998.
NOTE 9 - COMMITMENTS AND CONTINGENCIES
Leases
The Company conducts its operations from facilities that are leased under an
operating lease expiring July 31, 2001. Rent expense was $144,457 and $162,645
in 1999 and 1998, respectively.
The Company also has certain equipment under capital leases. The cost of assets
acquired under capital leases was $374,585 and $268,061 in 1999 and 1998,
respectively. Accumulated amortization on these assets at December 31, 1999 and
1998 was $261,4155 and $184,048, respectively. Amortization expense recorded on
capital leases during 1999 and 1998 was $77,407 and $70,017, respectively.
Future minimum commitments under capital leases and non-cancelable operating
leases as of December 31, 1999 are as follows:
Capital Operating
Year ending December 31, Leases Leases
- ------------------------ --------- ---------
2000 $ 94,394 $ 162,500
2001 40,515 81,250
2002 36,347 --
2003 26,903 --
2004 14,521 --
--------- ---------
Total minimum lease payment 212,680 $ 243,750
=========
Less amount representing interest 31,053
---------
$ 181,627
=========
Consulting Agreement
The Company has a consulting agreement with a software developer whereby the
Company will pay $20,000 per month for services. Payments started in July 1999
and will end in June 2000.
NOTE 10 - SUBSEQUENT EVENT (unaudited)
On March 21, 2000, the Company merged with Trexar Technologies, Inc. ("Trexar"),
a leading Windows and Macintosh software developer of Internet information
utilities. The merger will be accounted for as a pooling of interests. The
Company acquired 100% of the shares of Trexar in exchange for 449,539 shares of
common stock of the Company.
F-15
<PAGE>
PART III
ITEM 1. INDEX TO EXHIBITS
The following exhibits are filed with this Registration Statement:
Exhibit No. Exhibit Name
- ----------- -------------------------------------------------------------------
2.1 Agreement and Plan of Reorganization dated as of October 12 1999 by
and among FGT, Gary Ulmer, Aladdin Systems, Inc. and the shareholders of Aladdin
Systems, Inc.*
3.1 Articles of Incorporation of the Registrant.*
3.2 Certificate of Amendment to the Articles of Incorporation of the
Registrant.*
3.3 By-Laws of Registrant.*
4.1 Sample Stock Certificate of the Registrant.*
4.2 See Exhibit Nos 2.1 2.2, 2.3 and 2.4.*
10.1 Letter Agreement, dated July 14, 1999 by and between Bay Tree Capital
Associates, LLC and the Registrant.*
10.20 Employment Agreement dated October 25, 1999 by and between Mr.
Jonathan Kahn and the Registrant. *
10.3 Employment Agreement dated October 25, 1999 by and between Mr. Darryl
Lovato and the Registrant. *
10.4 Stock Option Plan of the Registrant. *
10.5 Form of Stock Option Agreement issued under the Stock Option Plan of
the Registrant*.
21.1 Subsidiaries of Registrant*
27.1 Financial Data Schedule
<PAGE>
*Previously filed with the SEC.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 60564
<SECURITIES> 0
<RECEIVABLES> 729942
<ALLOWANCES> 0
<INVENTORY> 70491
<CURRENT-ASSETS> 1206306
<PP&E> 1088080
<DEPRECIATION> 649323
<TOTAL-ASSETS> 2063700
<CURRENT-LIABILITIES> 1468685
<BONDS> 0
0
0
<COMMON> 47092
<OTHER-SE> 207778
<TOTAL-LIABILITY-AND-EQUITY> 2063700
<SALES> 8002518
<TOTAL-REVENUES> 8002518
<CGS> 1405496
<TOTAL-COSTS> 7339960
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 175490
<INCOME-PRETAX> 498414
<INCOME-TAX> (81,769)
<INCOME-CONTINUING> 580183
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 580184
<EPS-BASIC> .07
<EPS-DILUTED> .07
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 1,063
<SECURITIES> 0
<RECEIVABLES> 1,534
<ALLOWANCES> 182
<INVENTORY> 104
<CURRENT-ASSETS> 2,793
<PP&E> 1,302
<DEPRECIATION> 819
<TOTAL-ASSETS> 3,529
<CURRENT-LIABILITIES> 1,267
<BONDS> 0
0
0
<COMMON> 9
<OTHER-SE> 1,078
<TOTAL-LIABILITY-AND-EQUITY> 3,529
<SALES> 10,098
<TOTAL-REVENUES> 10,098
<CGS> 2,024
<TOTAL-COSTS> 8,591
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 59
<INCOME-PRETAX> 1,459
<INCOME-TAX> 483
<INCOME-CONTINUING> 976
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 976
<EPS-BASIC> .11
<EPS-DILUTED> .11
</TABLE>
