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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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XX Annual report pursuant to Section 13 or 15(d) of the Securities
---- Exchange Act of 1934 [FEE REQUIRED] for the fiscal year ended March 31,
1996 or
---- Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [NO FEE REQUIRED] for the transition period from
___________ to ___________
Commission File Number 1-10139
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THE SOFTWARE DEVELOPER'S COMPANY, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 04-2911320
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
245 WINTER STREET
WALTHAM, MASSACHUSETTS 02154
(Address of principal executive offices) (Zip Code)
(617) 890-1700
(Registrant's Telephone Number)
Securities registered pursuant to Section 12(b) of Act:
NAME OF EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
- ------------------- -------------------
COMMON STOCK, $.01 PAR VALUE BOSTON STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act: NONE
-------------------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such other shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. XX Yes No
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K [ ].
The aggregate market value of voting Common Stock held by non-affiliates of the
Registrant was approximately $25,982,073 based on the closing sale price of the
Registrant's Common Stock on June 10, 1996 as reported by the Nasdaq
Over-the-Counter Interdealer Automated Quotation System ($4.875 per share).
As of June 10, 1996, there were 8,420,367 shares of Common Stock outstanding.
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PART I
ITEM 1. BUSINESS
THE COMPANY
At March 31, 1996 the Company was a recognized national and
international direct marketer and distributor of PC-based specialty software and
hardware to technical and professional PC users. The Company offered a total of
over 8,000 brand-name products through targeted mailings of its three catalogs.
Through its corporate sales group, the Company resold catalog product lines to
medium and large-sized companies. Additionally, the Company addressed the
marketing needs of the developers and publishers of the products it distributed
by providing advertising and promotional services. Software Developer's Company,
GmbH, a wholly-owned subsidiary in Dortmund, Germany, provided similar products
and services to dealers and end users in Germany. The Company distributed
third-party products operating on DOS, Windows, Windows/NT, OS/2, Unix and Apple
operating systems and provided an extensive offering of specialized add-on
hardware for these computers.
The other portion of the Company's business is built around Internet
Security Corporation ("ISC"), a business acquired in November 1995. ISC is a
reseller of leading-edge network security products and services for companies
doing business on the Internet and Intranets. ISC provides products and services
in the four major technology areas used for securing networks: firewall access
control, authentication, encryption and security management. ISC also offers
comprehensive consulting services including risk analysis and security audits,
implementation of enterprise security systems, customized integration of
security systems, on-site training, and post-sales technical support.
The Company is headquartered at 245 Winter Street, Waltham,
Massachusetts, 02154 and its general telephone number is (617) 890-1700.
BUSINESS STRATEGY - CATALOG OPERATION
At March 31, 1996 the Company served business customers in the software
development, networking, engineering and scientific, and professional multimedia
marketplaces by offering a comprehensive range of third-party products. The
breadth of specialized products offered by each of its catalogs established the
Company as a single, credible source for computing solutions required by its
customers. This strategy allowed the Company to provide for all of the specialty
software and hardware needs of its customers, while avoiding direct competition
with larger resellers serving the general computing market.
The Company's corporate sales group targeted mid-size to large
commercial, governmental and educational accounts. Leveraging off of initial
sales made through the catalogs, this group focused on establishing
relationships with customers and becoming their primary source for software and
specialty hardware. It provided corporate customers with a high level of
services including in-depth technical support, training, product sourcing and
volume discounts. The Company's marketing services organization, SDC
Communications, offered marketing and promotional services to software
developers and manufacturers to assist them in launching new products,
generating sales leads, and increasing market visibility. Its principal role was
creating advertisements and publishing all of the Company's catalogs. However,
it also developed and circulated direct mail campaigns and specialty catalogs,
and provided trade show assistance to software developers and manufacturers.
2
CATALOG OPERATIONS AND PUBLICATIONS
As of March 31, 1996, the Company produced two targeted catalogs, each
focused on specialized segments of the PC market. Four editions of each catalog
were published per year with a total annual circulation of approximately 3
million. The Company typically added 250-300 new and updated products into its
catalogs each quarter. Catalog product sales accounted for 91% of the total
sales of the Company in fiscal 1996 and 88% in fiscal 1995.
The Programmer's SuperShop (TPS) catalog, offered software development
tools, utilities, databases, languages and business productivity applications to
software developers and business professionals. Sales from TPS represented
approximately 89% of the Company's total sales in fiscal 1996 and 80% in fiscal
1995.
Personal Computing Tools SuperShop (PCT) offered engineers and
scientists specialty hardware and software products that fill specific
networking and data analysis needs. The PCT catalog featured products for data
acquisition, motion control and data communications, data communications,
networking solutions for LAN (local area network) expansion, LAN management and
administration, as well as remote computing. Sales of PCT's products constituted
approximately 3% of the Company's total sales in fiscal 1996 and 8% in fiscal
1995.
Each of the Company's catalogs were printed with photographs, detailed
product specifications, and comparisons of the manufacturer's suggested list
prices with the Company's discount prices. In large part, the catalogs were
designed and produced in-house by the Company's marketing communications staff,
allowing for significant production cost savings.
MARKETS AND CUSTOMERS - CATALOG OPERATIONS
The Company selectively mailed its catalogs and marketing programs to
attract new customers and stimulate additional purchases from existing
customers. Its mailing list for catalogs and brochures included approximately
120,000 customers who had previously purchased from the Company. The Company
obtained additional names for mailings from various sources, including
manufacturers, suppliers, distributors and industry magazine publishers.
The Company's catalog customers were principally located throughout the
United States, however, the Company also targeted customers in Canada. The
Company's wholly-owned subsidiary in Germany distributed software to dealers and
end users primarily in Germany. Additionally, the Company distributed software
products through resellers on a non-exclusive basis in several foreign
countries, including England, France, Holland, Sweden, Japan and Korea. Total
export sales, including sales from the German subsidiary, accounted for
approximately 10% of fiscal 1996 and 12% of fiscal 1995 revenues.
Through The Programmer's SuperShop, the Company targeted an audience of
software developers, programmers, information systems professionals, documenters
and testing personnel in both large and small organizations. These professionals
often seek a single supplier who can provide a solution to their needs for
PC-based software products, technical support and marketing information.
Personal Computing Tools SuperShop (PCT) targeted a marketplace of engineers,
scientists and technical professionals. PCT had built a customer base serving a
wide variety of businesses including systems integrators, Fortune 500 companies,
and academic and government institutions.
3
MARKETING AND SALES - CATALOG OPERATIONS
Inbound Telemarketing. The Company employed catalog telemarketing
representatives who assisted customers in purchasing decisions and processed
product orders resulting from catalog mailings. Telemarketing representatives
also responded to inquiries regarding order status, product pricing and product
availability. Through the Company's order information system, telemarketers
quickly accessed customer records which detail past purchases as well as billing
information.
Corporate Sales. The Company's dedicated corporate targeted mid-size to
large commercial, governmental and educational accounts. This group performed
outbound business-to-business telesales in an effort to further penetrate the
account. This group focused on build long-term relationships with its business
customers through frequent contact.
Customer Service. The Company believes that providing prompt, efficient
customer service is critical to success. Telemarketing representatives responded
to various inquiries such as order status or the Company's return policy.
Technical Support. The Company's dedicated pre-sales technical support
staff assisted customers in making appropriate product selections based on
technical criteria. Technical support personnel assisted customers in maximizing
the benefits from products purchased from the Company.
PRODUCTS AND MERCHANDISING - CATALOG OPERATION
The Company offered a total of over 8,000 microcomputer products
through its catalog operations, including software for stand-alone and networked
PC's, specialty hardware, peripherals, accessories, and multimedia products.
Software. The Company sold a broad range of PC-related software
products from larger, well known vendors to numerous new technology vendors.
Brands offered by the Company included the product offerings of Adobe Systems,
Borland International, Computer Associates, IBM, Intel, Macromedia, Microsoft,
Oracle, Powersoft and Symantec. General product categories included software
development tools, utilities, databases, languages, business productivity
applications, presentation, authoring, animation, and LAN operating systems,
administration and management tools.
Hardware, peripherals and networking. The Company offered a large
selection of hardware items including peripherals, components and LAN products.
Product categories offered included data communications, data acquisition and
control, networking hubs and routers, video capture and playback, and high
capacity storage devices. Brands sold in this category included AT&T Paradyne,
Eastman Kodak, Ikegami Electronics USA, Nikon, Panasonic, Pioneer Electronics,
Sony, Supra, US Robotics, Zoom Telephonics and 3 COM.
No single product distributed by the Company accounted for more than 2%
of the Company's revenues in the 1996, 1995 and 1994 fiscal years.
4
PURCHASING
Management believes that effective purchasing enables the Company to
obtain favorable product pricing, allowing it to provide customers with name
brand products at competitive prices. The Company purchased approximately 40% of
its products directly from manufacturers and the balance from distributors.
Purchases from Ingram Micro, a wholesaler of microcomputer software products,
accounted for approximately 27% of total purchases in fiscal 1996. The Company
does not consider itself dependent on Ingram Micro as a single source supplier
and believes it can purchase products from other competing wholesalers under
similar terms. The Company has not experienced any material difficulties or
delays in acquiring any of the products which it distributes.
COMPETITION
The market for the catalog distribution of technically-oriented
software and hardware is highly competitive and is characterized by rapid
changes in technology and user needs. In fiscal 1996, the Company's catalog
operation competed in the marketing and sales of its existing products with a
variety of software publishers, specialty hardware manufacturers, dealers and
distributors. Its catalog operation's competitors vary in size and scope. Direct
marketing competitors include other niche catalogers, such as Programmer's
Paradise and ProVantage Corporation in the technical software marketplace, and
Micro Warehouse, CDW Computer Centers and BlackBox who offer a broad range of
hardware and software, including technical software. In addition, the catalog
operation competed with corporate resellers including Corporate Software,
Software Spectrum and Softmart, all of whom focus on providing corporate level
services primarily for business application products. Many of these large
retailers have substantially greater financial and marketing resources.
PRODUCT RESEARCH AND DEVELOPMENT
In fiscal 1996 the Company did not engage in any product research and
development as its activities were limited to marketing and distributing
third-party software and hardware products.
PROPRIETARY RIGHTS
The Company depends upon a combination of trademark laws, license
agreements, nondisclosure and other contractual provisions to protect its
distribution rights. In addition, the Company attempts to protect its
proprietary information and those of its vendors through confidentiality
agreements with employees and others. Despite these precautions, it may be
possible for unauthorized third parties to obtain information that the Company
regards as proprietary.
5
Management believes that, due to the rapid pace of innovation within
the high-tech industry, factors such as technical and creative skills of its
personnel and ongoing reliable services and support are more important in
establishing and maintaining a leadership position within the industry than are
the various forms of legal protections.
The Company does not hold any proprietary copyrights or trade secrets
or exclusive distribution agreements for its catalog operations.
EMPLOYEES
As of March 31, 1996, the Company had approximately 102 employees,
including 72 in marketing and sales, 13 in purchasing, shipping and receiving,
and 17 in administration and accounting. None of the Company's employees is
represented by a labor union. The Company has not experienced work stoppages and
believes that its employee relations are good.
INTERNET SECURITY CORPORATION - NETWORK SECURITY OPERATIONS
The other portion of the Company's business, network security products
and services, is built around Internet Security Corporation ("ISC"), a business
acquired in November 1995. ISC was founded in June 1994 as a non-exclusive
distributor of CheckPoint Software Technologies Ltd.'s ("CheckPoint") FireWall-1
access control product for network security applications. ISC established a
preferred financial relationship with CheckPoint, allowing it to pursue both
large end-user accounts and other resellers. ISC currently has over 350
customers, including Fortune 1000 companies, telecommunication companies, major
banks and large insurance companies. ISC has been able to increase its customer
base by combining CheckPoint's FireWall-1 product with post-sales support
services, including training and customer support.
More recently, ISC has established a consulting service organization to
provide assistance to customers with problems of enterprise security. New
services include assistance in the developing of enterprise-wide security
policies, auditing existing security schemes, performing threat assessments and
evaluating network topologies.
INDUSTRY BACKGROUND OF NETWORK SECURITY APPLICATIONS: Enterprise computing has
been evolving over the last three decades from host-based systems towards
distributed network computing. During the 1980s, the ease-of-use and low cost of
personal computers and the development of personal productivity software had led
to rapid growth in the number of personal computer users throughout
organizations. These organizations increasingly began to connect their personal
computers into local area networks ("LANs") in order to share files within work
groups. Many enterprise applications continued to operate on separate mainframe
or minicomputers. In the mid-1990s, specialized internetworking products have
made it easier for organization to connect their disparate LANs, both local in a
single facility, and through wide area networks ("WANs") in geographically
dispersed locations. Organizations are also increasingly integrating their LANs
with their minicomputers and mainframes, thus enabling users to communicate,
exchange information and share computing resources within and between
organizations. Many of these organizations are seeking to develop client/server
implementations of their enterprise applications to more fully exploit their
distributed networks. These new enterprise networks require a comprehensive set
of network products that can integrate a large number of users and heterogeneous
computing resources into a consistent, manageable and secure computing
environment.
6
Computer and network security has historically been the focus of
businesses engaged in security-conscious industries such as banking,
telecommunications, aerospace and defense. As a result of the increase in the
number of users having direct and remote access to enterprise networks and
corporate data, unauthorized access to information resources has become a
growing and costly problem for businesses. Sensitive data that requires
protection from unauthorized use include financial results, medical records,
personnel files, customer files, research and development projects, marketing
plans and other business information. Unauthorized access to this data may go
undetected by the computer user or system administrator, especially if the
information is not altered by the unauthorized party. Companies are vulnerable
not only to unauthorized access to information resources by suppliers, customers
and other third parties, but also to abuse by employees within their own
organizations.
COMPUTER AND NETWORK SECURITY: There are several different categories of
products for protection of information resources on a computer system or network
which can be grouped into four classes: User Identification and Authentication;
Privilege Definition; Encryption; and Audit.
User Identification and Authentication is the first line of defense to
prevent unauthorized users from accessing computer and network resources.
Products that fall into this category are designed to authenticate the identity
of authorized users. Thus, even users who log onto a network from a node on the
network must also identify themselves by typing in a password of some sort. The
popular systems today are relatively cost-effective and offer greater security
than a simple personal identification number (PIN).
The next line of defense is Privilege Definition, which manages and
controls access to network data and prevents users from taking unauthorized
actions. While routers provide a basic level of privilege control, they do not
provide a sufficiently high level of security. Firewalls, such as CheckPoint's
FireWall-1 product, are the most widely deployed solution in this category.
Their software architecture allows users to monitor traffic into and out of the
network and to deny access to all or specified domains within the enterprise.
The next level, Encryption, is the means by which network data is scrambled and
unscrambled both at the client and server level using a secret key. It protects
the data while it is being transmitted or stored by using IP Packet
cryptography. Finally, at the top of the hierarchy are products for Audit, which
monitor and record user activity on a network. This enables administrators to
determine if the system has been compromised and the source of the unauthorized
entry.
SALES AND MARKETING: ISC markets CheckPoint's FireWall-1 domestically directly
through a telemarketing and telesales organization and indirectly through other
resellers. The CheckPoint FireWall-1 product is used by customers to manage and
control access to network services and prevent users on a network from taking
unauthorized action or entry on the network. ISC's telesales organization is
divided into three territories in the United States. Its sales strategy involves
qualifying prospects initially and determining their information security
requirements, and strategic consultative selling once customers are identified.
ISC primarily markets the CheckPoint FireWall-1 product and offers consulting
services for network security solutions to large, corporate customers that
desire to connect their corporate network to a public network such as the
Internet. A customer's decision to use CheckPoint's FireWall-1 product may
involve a substantial financial commitment including license costs, maintenance
fees, consulting fees and training, and in many cases the cost of a computer
system to implement network security. To date, the desire to connect securely to
the Internet as expeditiously as possible has minimized the length of the sales
cycle. ISC has recently announced a major account program to be staffed with two
field sales representatives. On-site meetings will be conducted with accounts
that have substantial product and service requirements.
7
ISC recently created an indirect distribution channel of approximately
20 value added resellers to distribute the CheckPoint FireWall-1 product. These
value added resellers account for approximately 25% of the license revenue
achieved by ISC. ISC conducts its own marketing programs intended to position
and promote FireWall-1 and its services. Marketing activities include direct
mail, Internet marketing, advertising, public relations and trade shows, as well
as directing ISC's participation in industry programs and forums. ISC also
benefits from the marketing programs conducted by CheckPoint. Many of
Checkpoint's activities result in the generation of qualified leads, some of
which are provided to ISC.
SERVICES: ISC believes that a customer's decision to purchase CheckPoint's
FireWall-1 software from ISC is based, in part, on the services provided by ISC
that help to quickly and effectively install and implement a firewall network
security system, educate the customer's staff, and support its ongoing
operations. New services recently added assist the customer in developing,
implementing and testing its security policies. As of May 31, 1996, ISC had 7
employees providing customer support, consulting and training services.
CUSTOMER SUPPORT: Support for clients is based out of ISC's corporate
headquarters in Waltham, Massachusetts, with hotline access between the hours of
8:30 a.m. and 5:30 p.m. Eastern Time. Annual maintenance contracts are generally
purchased for the first year of a customer's use of CheckPoint's FireWall-1
product and are renewable on an annual basis. Maintenance fees are typically
equal to 20% of the list price for the product.
CONSULTING SERVICES: ISC's consulting services organization was formally
launched in April, 1996. In response to the growing need to protect information
resources on the network, ISC provides fee-based, on-site consulting services.
The consulting services group offers standardized fixed price consulting
packages that can provide an evaluation of existing security systems, identify
short-comings in the networks and suggest corrective action. ISC offers
companies the following services: developing enterprise wide security policies;
auditing existing security; performing assessment to determine security
vulnerability; and providing customization and integration support.
CUSTOMERS: As of March 31, 1996, ISC had licensed CheckPoint's FireWall-1 to
approximately 350 customers. ISC's customers represent a broad cross-section of
industries including banking, insurance, telecommunications, technology and
consumer products.
DISTRIBUTION AGREEMENTS: ISC has signed a three-year, non-exclusive distribution
agreement with CheckPoint whereby it has the right to sell, on a non-exclusive
basis, all of the current and future products by CheckPoint within the United
States and Germany. ISC maintains the right to distribute these products through
its direct sales organization or through resellers. ISC must achieve certain
financial targets each year to maintain its current discount level from
CheckPoint. As of March 31, 1996, ISC satisfied these targets.
COMPETITION: The market for network security products is also highly competitive
and subject to rapid technological change. The Company believes that competition
in this market is likely to intensify as a result of the increasing demand for
security products. The Company currently experiences competition form a number
of sources including competitors of CheckPoint Software Technologies Ltd.'s
FireWall-1 access control product such as Raptor Systems, Inc., Trusted
Information Systems, Inc. (TIS), Border Network Technologies, Inc., as well as
other resellers of Checkpoint's FireWall-1 product such as Sun Microsystems. As
the Company's network security product offerings expand to other segments of the
security marketplace, the Company will likely incur additional competition.
Current and potential competitors have established or may in the future
establish cooperative relationships among themselves or with third parties to
increase the availability of their products to the marketplace. Accordingly, it
is possible that new competitors or alliances may emerge and rapidly acquire
significant market share. Many of the Company's current and potential
competitors have significantly greater financial, marketing, technical and other
competitive resources than the Company.
ITEM 2. PROPERTIES
At March 31, 1996, the Company leased approximately 25,000 square feet
of office and warehouse space in Pembroke, Massachusetts. The six-month lease
requires average monthly rent payments of $21,500 and expires on September 30,
1996. At June 1, 1996 the Company moved its headquarters and its ISC facility to
Waltham, Massachusetts, leasing 5,760 square feet with monthly payments of
$7,920.
The Company believes that its existing facilities are adequate for its
current needs and that additional space is available at competitive rates should
the Company need to expand. The Company believes that suitable alternative space
will also be available in the future on commercially reasonably terms following
the expiration of the Company's leases.
8
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is involved in litigation relating to
claims arising out of its operations in the normal course of business. The
Company is not presently a party to any legal proceedings, the adverse outcome
of which, in management's opinion, would have a material adverse effect on the
Company's results of operations or financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 16, 1996, the Company entered into an Agreement of Purchase and
Sale of Assets with Programmer's Paradise, Inc. (the "Agreement") to sell
substantilly all of its operating assets relating to its catalog operations,
"The Programmer's SuperShop," its Web Site relating to its catalog operations,
its corporate sales group, inbound and outbound telemarketing operations,
reseller operations, and the operations of its German subsidiary, Software
Developer's Company GmbH.
On June 4, 1996, the Board of Directors caused to be distributed to
stockholders of record as of May 24, 1996, a Notice and Consent Solicitation
Statement for action to be taken by Written Consent in Lieu of a Meeting of
Stockholders. As of the record date, there were issued and outstanding 8,405,017
shares of Common Stock and 628,330 shares of Series C Preferred Stock, each
share entitled to one vote per share, in connection with the approval of the
proposal put forth in the Consent Solicitation Statement.
In connection with the solicitation, stockholders acted upon the
proposal to authorize and approve the proposed sale of certain assets of the
Company to Programmer's Paradise, Inc. pursuant to the terms and conditions of
the Agreement to authorize such further action by the Company's Board of
Directors and proper officers as may in their discretion be necessary or
desirable to carry out the intents and purposes of the Agreement; and in
furtherance of the disposition contemplated by the Agreement, to authorize and
approve an amendment to the Company's Certificate of Incorporation to change the
Company's name to Netegrity, Inc.
Pursuant to the terms of the Agreement the Company agreed to sell to
Programmer's Paradise, Inc. (the "Purchaser") substantially all of its operating
assets, comprised of all of the operating assets relating to its business of The
Programmer's SuperShop ("TPS") catalog, its TPS Web Site, its corporate sales
group, its German subsidiary, Software Developer's Company GmbH ("SDC Germany"),
and SDC Communications (collectively, the "Target Business") for a consideration
of $11,000,000 in cash, subject to certain adjustments and purchase price
reductions based on revenues and tangible net assets as of the Closing. The
aggregate purchase price consists of payment of $10,000,000 in immediately
available funds and the deposit of $1,000,000 under an escrow arrangement.
TPS offers software development tools, utilities, databases, languages
and business productivity applications to software developers and business
professionals. Also included in the purchased assets of the Target Business are
all advertising and promotional operations of SDC Communications and its service
and support operations relating to the TPS catalog business and the German
operations. The assets of the Target Business also include all tradenames,
trademarks and copyrights, mailing lists and customer databases, computer
programs used internally or externally in the business, rights under reseller
contracts with software manufacturers and distributors, all inventory relating
to the TPS catalog and the Target Business, capital equipment and computer
systems relating to the Target Business, all accounts receivable and unfilled
sales and purchase orders relating to the Target Business, and all deferred
charges and prepaid items, advance payments and prepayments for backlog orders
relating to the Target Business.
9
As of March 31, 1996 and 1995 the assets of the Target Business
constituted approximately 58% and 65%, respectively, of the Company's total
assets and operating assets. The operating assets of the Target Business could
be construed to constitute substantially all of the Company's assets from a
historical revenue and book value perspective.
The aggregate purchase price of $11,000,000 assumes that the Company
will transfer to the Purchaser as of the Closing tangible net assets of the
Target Business that equal $1,500,000. These net assets are comprised primarily
of accounts receivable, inventory, equipment, and other assets related to the
TPS catalog operation. In addition to the assets transferred, the Purchaser also
agreed to assume certain liabilities, including accounts payable and other
accrued expenses relating to the TPS catalog business. The Purchaser also agreed
to assume a capitalized lease obligation of the Company for a computer system
relating to the TPS catalog business. The following liabilities are specifically
excluded from the transfer of assets relating to the Target Business: all
employee-related expenses except those specifically assumed; brokerage or
finder's fees; stockholder obligations; secured debt; taxes; product liability
and warranty claims; leases of real property and certain operating leases of
personal property; and shutdown costs associated with the Company's German
operations, except that the Purchaser agrees to pay one-half of the German
subsidiary shutdown costs up to $85,000.
The purchase price is also adjusted for declines in revenues
forecasted prior to the closing and set forth in a transition plan agreed to by
the parties. If, during the thirty days preceding the closing date, the actual
revenues from operations of the Target Business are no more than 12% less than
the Company's projected revenues for this period reflected on the transition
plan, the purchase price shall not be reduced. If, however, such revenues are
greater than 12% and up to 17% less than that reflected on the transition plan,
the purchase price is reduced by $1,000,000. If such revenues are greater than
17% and up to 27% less than that reflected on the transition plan, the purchase
price is reduced by $2,000,000. If such revenues are greater than 27% and up to
32% less than that reflected on the transition plan, the purchase price is
reduced by $4,000,000. If such revenues are greater than 32% and up to 42% less
than that reflected on the transition plan, the purchase price is reduced by
$6,000,000. Finally, if such revenues are more than 42% less than that reflected
on the transition plan, the purchase price is reduced by $8,000,000.
On June 14, 1996, the Company received sufficient shareholder consent
(58% of the outstanding shares of all classes of stock) necessary to approve the
transaction. The transaction is currently scheduled to close at the end of June,
1996.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock is traded principally on the Nasdaq SmallCap
MarketSM tier of the Nasdaq Stock MarketSM under the symbol "SDEV" and is also
traded on the Boston Stock Exchange under the symbol "SDC." The following table
sets forth the range of quarterly high and low bid quotations for the Company's
Common Stock as reported by Nasdaq. The quotations represent interdealer
quotations without adjustment for retail markups, markdowns or commissions, and
may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
FISCAL 1995 QUOTATIONS HIGH TRADE LOW TRADE
<S> <C> <C>
First Quarter (4/1/94-6/30/94) $0.875 $0.50
Second Quarter (7/1/94-9/30/94) $0.375 $0.25
Third Quarter (10/1/94-12/31/94) $0.75 $0.375
Fourth Quarter (1/1/95-3/31/95) $1.687 $0.375
FISCAL 1996 QUOTATIONS HIGH TRADE LOW TRADE
First Quarter (4/1/95-6/30/95) $2.00 $1.00
Second Quarter (7/1/95-9/30/95) $2.375 $0.938
Third Quarter (10/1/95-12/31/95) $3.25 $1.563
Fourth Quarter (1/1/96-3/31/96) $1.938 $1.25
10
FISCAL 1997 QUOTATIONS HIGH TRADE LOW TRADE
April 1, 1996 - May 31, 1996 $4.75 $1.563
</TABLE>
As of June 10, 1996, there were 147 holders of record and approximately
1,000 beneficial owners of the Company's 8,420,367 shares of Common Stock
outstanding. The Company estimates that approximately 850 shareholders hold
securities in street name. The Company does not know the actual number of
beneficial owners who may be the underlying holders of such shares. Also as of
June 10, 1996, there were 14 holders of record of the 628,330 outstanding shares
of Series C Preferred Stock. The holders of the Series C Preferred Stock vote
with the holders of Common Stock on all matters.
ITEM 6. SELECTED FINANCIAL DATA
(in thousands, except per share data)
STATEMENT OF OPERATIONS DATA
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MARCH 31,
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues $56,107 $40,849 $30,893 $34,463 $36,816
Income (loss) from continuing
operations before taxes 154 196 (270) (1,481) (1,262)
Income (loss) from
continuing operations 129 196 (270) (1,481) (1,190)
Net income (loss) from
discontinued operation --- --- --- 510 (6,663)
------- ------ ------- ------ ------
Net income (loss) $ 129 $ 196 $ (270) $ (971) $(7,852)
====== ====== ====== ====== ======
Per share amounts:
From continuing operations $0.01 $0.02 $(0.07) $(1.04) $(0.75)
From discontinued operation --- --- --- 0.23 (3.26)
----- ------- ----- ---- ----
Net income (loss) per share $0.01 $0.02 $(0.07) $(0.81) $(4.01)
==== ==== ==== ==== ====
Weighted average common
shares outstanding 8,835 8,710 4,833 2,227 2,041
BALANCE SHEET DATA
AS OF MARCH 31,
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Working capital (deficit) $ 401 $ 651 $ 280 $ (196) $ (649)
Total assets 10,456 9,170 7,127 6,929 9,449
Long-term liabilities 187 300 385 153 3,891
Stockholders' equity (deficit) 1,903 1,950 1,701 451 (1,792)
</TABLE>
11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The Private Securities Litigation Reform Act of 1995 contains certain safe
harbors regarding forward-looking statements. In that context, the discussion in
this Item contains forward-looking statements which involve certain degrees of
risk and uncertainties, including statements relating to liquidity and capital
resources. Except for the historical information contained herein, the matters
discussed in this section are such forward-looking statements that involve risks
and uncertainties, including the impact of competitive pricing within the
software industry, the effect any reaction to such competitive pressures has on
current inventory valuations, the need for and effect of any business
restructuring, the presence of competitors with greater financial resources,
capacity and supply constraints or difficulties, and the Company's continuing
need for improved profitability and liquidity.
OVERVIEW
The Company's revenues are generated by marketing and distributing
specialty PC-based software and hardware to technical and professional PC users
through its catalog operations of The Programmer's SuperShop (TPS), Personal
Computing Tools SuperShop (PCT), and New Media SuperShop (NMS). In addition, SDC
provides marketing services to third-party manufacturers, developers and
publishers of the products the Company distributes. Marketing services are
designed to generate sales leads, increase market visibility and assist in the
launch of new products. Through the newly acquired Internet Security Corporation
(ISC), the Company provides product integration and consulting support services
in the area of network security to companies doing business on the Internet.
The following discussion relates to the Company's continuing operations
except where noted.
The following information should be read in conjunction with the
consolidated financial statements and notes thereto:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MARCH 31,
% to Net Revenues % Change
--------------------------- ---------------
1996 1995 1994 96 v. 95 95 v. 94
---- ---- ---- -------- --------
<S> <C> <C> <C> <C> <C>
Net revenues:
Product sales 91% 88% 86% 3% 2%
Marketing services 9% 12% 14% (3%) (2%)
---- --- ---
Combined 100% 100% 100%
Gross Margins:
Product sales 18% 19% 22% (1%) (3%)
Marketing services 38% 36% 26% 2% 10%
-- -- -- - --
Combined 20% 21% 22% (1%) (1%)
Selling, general and administrative expenses 19% 20% 23% (1%) (3%)
Net income (loss) --- --- (1%) --- 1%
</TABLE>
12
FISCAL 1996 VS. FISCAL 1995
REVENUES: Total net revenues increased 37%, or $15,258,000, to $56,107,000 in
fiscal 1996 from $40,849,000 in fiscal 1995. Product revenues increased 42% to
$51,301,000 in fiscal 1996 from $36,116,000 in fiscal 1995. The increase in
product revenues resulted from a combination of the growth in the development
tools marketplace in the first half of the fiscal year, significant growth in
the Company's corporate sales group and the addition of ISC's revenues.
Marketing services revenues increased by $73,000, or 2%, to $4,806,000 in
fiscal 1996 from $4,733,000 in fiscal 1995. Revenue obtained from developers of
client/server tools products contributed to an increase in both catalog
advertising pages and promotional marketing programs in TPS.
GROSS MARGIN: Total gross margin increased by $2,389,000, or 28%, to $11,062,000
in fiscal 1996 as compared to $8,673,000 in fiscal 1995 as a result of sales
growth in both product sales and marketing services. Product sales gross margin
increased by $2,250,000, or 32%, to $9,212,000 in fiscal 1996 from $6,962,000 in
fiscal 1995 as a result of the growth provided by the corporate sales group and
the impact of ISC which yields higher margins. Total gross margin from product
revenue as a percent of revenue decreased to 18% in fiscal 1996 from 19% in
fiscal 1995.
Gross margin from marketing services revenue increased by $139,000, or 8%,
to $1,850,000 in fiscal 1996 from $1,711,000 in fiscal 1995. This growth was
attributable to the increase in promotional marketing programs developed and
executed by SDCC. In addition, increased advertising revenues yielded higher
gross margins in the TPS catalog.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE: Selling, general and administrative
("SG&A") expenses increased by $2,527,000, or 31%, to $10,758,000 in fiscal 1996
from $8,231,000 in fiscal 1995. This increase was a result of expenses related
to the hiring of additional sales reps to execute the Company's corporate sales
initiative and the addition of ISC into the Company's operation. SG&A as a
percent of revenue declined from 20% in fiscal 1995 to 19% in fiscal 1996,
reflecting the ability to leverage existing operations to grow revenue.
INTEREST EXPENSE: Net interest expenses decreased by $54,000, or 25%, to
$163,000 in fiscal 1996 from $217,000 in 1995. The decrease was primarily due to
lower borrowing levels comparable to fiscal 1995 and the approximate $20,000 of
interest income provided by ISC.
FISCAL 1995 VS. FISCAL 1994
REVENUES: Total net revenues increased 32%, or $9,955,000, to $40,849,000 in
fiscal 1995 from $30,894,000 in fiscal 1994. Product revenues increased 36% to
$36,116,000 in fiscal 1995 from $26,586,000 in fiscal 1994. The increase in
product revenues resulted from a combination of the growth in the development
tools marketplace, the Company's significant growth in its corporate sales
group, and the full-year impact of the acquisition of Personal Computing Tools.
In fiscal 1995, a new generation of development products, termed client/server
tools, gained widespread acceptance. Corporate Sales showed significant growth
in its first full year of operations by successfully establishing service
relationships and generating incremental revenue from a growing group of
accounts.
Marketing services revenues increased by $425,000, or 10%, to $4,733,000
in fiscal 1995 from $4,308,000 in fiscal 1994. Revenue obtained from developers
of client/server tools products contributed to an increase in both catalog
advertising pages and promotional marketing programs in TPS. The introduction of
the New Media SuperShop catalog in February 1995, funded by advertising revenue,
also contributed to this increase.
13
GROSS MARGIN: Total gross margin increased by $1,786,000, or 26%, to $8,673,000
in fiscal 1995 as compared to $6,887,000 in fiscal 1994 as a result of margin
growth in both product sales and marketing services. Product gross margin
increased 20% to $6,962,000 in fiscal 1995 from $5,788,000 in fiscal 1994 as a
result of the growth provided by the corporate sales group and the full year
impact of the acquisition of PCT. Somewhat offsetting this increase, total gross
margin from product revenue as a percent of revenue decreased to 19% in fiscal
1995 from 22% in fiscal 1994 as a result of industry-wide competitive pricing
pressures and the increase in sales of higher volume, lower margin products to
larger corporations.
Gross margin from marketing services revenue increased 56% to $1,711,000
in fiscal 1995 from $1,099,000 in fiscal 1994. This growth was attributable to
the increase in promotional marketing programs developed and executed by SDCC.
In addition, increased advertising revenues yielded higher gross margins in the
TPS catalog.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE: Selling, general and
administrative ("SG&A") expenses increased by $1,239,000 or 18%, to $8,231,000
in fiscal 1995 from $6,992,000 in fiscal 1994. This increase was a result of
expenses related to the hiring of additional sales reps to execute the Company's
corporate sales initiative. SG&A as a percent of revenue declined from 23% in
fiscal 1994 to 20% in fiscal 1995, reflecting the ability to leverage existing
operations to grow revenue.
INTEREST EXPENSE: Net interest expenses increased to $217,000 in fiscal 1995
from $149,000 in 1994 primarily as a result of an increase in the prime interest
lending rate during this period.
LIQUIDITY AND CAPITAL RESOURCES
(in thousands, except ratios)
<TABLE>
<CAPTION>
AS OF MARCH 31,
1996 1995
---- ----
<S> <C> <C>
Cash and cash equivalents $1,410 $672
Working capital (deficit) 401 651
Current ratio 1.05 1.09
FOR THE YEAR ENDED MARCH 31,
1996 1995
---- ----
Net cash provided by (used for) continuing
operating activities $1,968 $864
Net cash provided by (used for) discontinued
operating activities --- (68)
Net cash used for investing activities (240) (253)
Net cash used for financing activities (989) (195)
</TABLE>
The Company's net cash flow for continuing operations increased in fiscal
1996 to $1,968,000 from $864,000 in fiscal 1995. The Company was granted
increases in credit lines extended by its major suppliers, resulting in an
increase in accounts payable of $264,000, or 6%, to $4,631,000 in fiscal 1996
compared to $4,367,000 in fiscal 1995.
As a result of improved inventory management, the Company's inventories
decreased to $1,293,000 in fiscal 1996 from $1,696,000 in fiscal 1995, a
decrease of 24%, which is well below the increase in product sales of 42%.
14
Accounts receivable-trade, before allowances for doubtful accounts,
increased by $909,000, or 18%, to $5,950,000 at March 31, 1996 from $5,041,000
at March 31, 1995. This increase was a direct result of the revenue growth in
fiscal 1996. Overall, the collection period increased to 27 days at March 31,
1996 from 26 days at March 31, 1995.
The Company has a $2,000,000 secured bank line of credit under which
borrowings bear interest at the bank's prime rate plus 2.5%. The line is subject
to renewal on July 31, 1996. Available borrowings under the line are based on
60% of eligible accounts receivable. Covenants under the line of credit require
the Company to maintain certain net worth and financial ratios. As of March 31,
1996, the Company was in compliance with the covenants relating to its line of
credit. At March 31, 1996, $723,000 was outstanding under the line of credit.
Working capital decreased to $401,000 at March 31, 1996 from $651,000 at
March 31, 1995.
The Company anticipates that its existing cash resources, cash flow
from operations and the continued availability of its bank line of credit will
be sufficient to fund its operations through March 31, 1997, provided it meets
its operating plan and remains in compliance with its credit agreement. The
Company's ability to finance its operations will depend on its ability to
renegotiate its bank line of credit for a continued availability of borrowing
thereunder. There can be no assurance that the Company will be successful in
renegotiating its line of credit or that the bank will permit continued
borrowings under its line of credit. If the Company is unsuccessful in
renegotiating its line of credit with the bank, it will need to seek alternative
financing for working capital. Future capital requirements will depend on many
factors, including cash flow from continuing operations, competition from larger
catalog distributors and market developments, and the Company's ability to
distribute products and marketing services successfully. To the extent cash flow
from operations is insufficient to fund the Company's activities, it may be
necessary to raise additional funds through equity or debt financing. The
Company is exploring additional sources of capital; however, there are currently
no firm commitments at this time. Additional debt financings will result in
higher interest charges. Additional equity financings will result in dilution of
stockholders' interests. The Company's ability to generate cash from operations
depends upon, among other things, revenue growth, improvements in operating
productivity, its credit and payment terms with vendors and collections of
accounts receivable. The Company's ability to borrow under this facility is
dependent upon satisfying certain financial covenants, among other things, and
there can be no assurances that the Company will remain in compliance. If such
sources of cash prove insufficient, the Company will be required to make changes
in its operations or to seek additional debt or equity financing. There can be
no assurances that cash generated from operations and borrowings under its
credit facility will be sufficient to meet its operating requirements, or if
required, that additional debt or equity financing will be available on terms
acceptable to the Company. The Company currently anticipates that its available
cash, expected cash flows from operations, and its borrowing capacity will be
sufficient to fund operations through fiscal year 1997.
INFLATION: To date, management believes that inflation has not had a material
impact on operations.
ENVIRONMENTAL LIABILITY: The Company has no known environmental violations and
assessments.
ACCOUNTING FOR INCOME TAXES: Effective April 1, 1993, the Company changed its
method of accounting for income taxes from the deferred method to the liability
method required by FASB Statement No. 109, "Accounting for Income Taxes." The
effect of the adoption of this statement had no impact on the operating results,
components of the income tax expense, or the financial position of the Company.
POST-RETIREMENT BENEFITS OTHER THAN PENSIONS: The Company does not offer
post-employment benefits to its retirees and as a result, is unaffected by
Statement of Financial Accounting Standards No. 106 or No. 112 issued in
December 1990 and November 1992, respectively.
15
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's consolidated financial statements and the related auditors'
reports are presented in the following pages. The consolidated financial
statements filed in this Item 8 are as follows:
Report of Independent Auditors
Consolidated Balance Sheets - March 31, 1996 and 1995
Consolidated Statements of Operations for the years ended March 31, 1996,
1995 and 1994
Consolidated Statements of Stockholders' Equity for the years ended March
31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the years ended March 31, 1996,
1995 and 1994
Notes to Consolidated Financial Statements
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
16
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
The Software Developer's Company, Inc.
We have audited the accompanying consolidated balance sheets of The Software
Developer's Company, Inc. as of March 31, 1996 and 1995 and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended March 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
The Software Developer's Company, Inc. as of March 31, 1996 and 1995, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended March 31, 1996 in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND, L.L.P.
Boston, Massachusetts
May 15, 1996
17
THE SOFTWARE DEVELOPER'S COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, March 31,
1996 1995
ASSETS (Note C) --------- ---------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 1,410,445 $ 672,386
Accounts receivable--trade, net of allowance for doubtful
accounts of $274,272 and $347,432 in 1996 and
1995, respectively 5,676,239 4,693,728
Accounts receivable--product, net of valuation reserve
of $73,714 and $60,745 in 1996 and 1995, respectively 83,237 99,977
Inventory 1,292,961 1,695,993
Other current assets 303,429 409,138
----------- ----------
TOTAL CURRENT ASSETS 8,766,311 7,571,222
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, NET (Note B) 745,268 540,971
INTANGIBLE ASSETS, NET, INCLUDING GOODWILL (Note H) 834,266 968,280
OTHER ASSETS 109,900 89,696
----------- ----------
TOTAL ASSETS $10,455,745 $9,170,169
========== =========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
18
THE SOFTWARE DEVELOPER'S COMPANY, INC.
CONSOLIDATED BALANCE SHEETS (CONT.)
<TABLE>
<CAPTION>
March 31, March 31,
1996 1995
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable--trade $ 4,631,213 $4,367,025
Line of credit (Note C) 723,470 1,423,470
Other accrued expenses 2,029,303 658,425
Accrued payroll 498,769 297,468
Customer advances 69,480 124,689
Notes payable - related party (Note C) 300,000 22,092
Current portion of capitalized lease obligations (Note D) 112,730 27,011
---------- ----------
TOTAL CURRENT LIABILITIES 8,364,965 6,920,180
LONG-TERM DEBT-RELATED PARTY (Note C) --- 300,000
LONG-TERM CAPITAL LEASE OBLIGATION (Note D) 187,417 ---
COMMITMENTS AND CONTINGENCIES (Note D) --- ---
STOCKHOLDERS' EQUITY (Notes F and G)
Preferred stock, $.01 par value, authorized 25,000,000 shares:
Series C voting, non-cumulative, (628,330 and 905,968
shares in fiscal 1996 and 1995, respectively) issued and
outstanding (liquidation preference of $2.00 per share) 6,283 9,060
Common Stock, voting, $.01 par value, authorized 25,000,000
shares; issued 8,197,887, outstanding 8,172,786 shares
(7,787,437 and 7,762,336 in 1995) 81,979 77,875
Additional paid-in capital 10,024,710 9,944,908
Cumulative translation adjustment 21,569 22,242
Cumulative deficit (8,147,521) (8,020,439)
---------- ---------
1,987,020 2,033,646
Less treasury stock at cost, 25,101 shares (83,657) (83,657)
------------ -----------
TOTAL STOCKHOLDERS' EQUITY 1,903,363 1,949,989
---------- ---------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $10,455,745 $9,170,169
========== =========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
19
THE SOFTWARE DEVELOPER'S COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended March 31,
1996 1995 1994
------------- ------------- --------------
<S> <C> <C> <C>
Net revenues:
Product sales $51,301,158 $36,116,191 $26,585,817
Marketing services 4,805,488 4,733,290 4,307,855
----------- ----------- -----------
56,106,646 40,849,481 30,893,672
---------- ---------- ----------
Costs and expenses:
Cost of products sold 42,088,936 29,153,709 20,798,098
Cost of marketing services 2,955,924 3,022,666 3,209,115
Selling, general and administrative 10,757,890 8,230,850 6,991,821
---------- ----------- ----------
55,802,750 40,407,225 30,999,034
---------- ---------- ----------
Income (loss) from operations before interest and taxes 303,896 442,256 (105,362)
Interest expense, net - third party 126,887 181,251 104,076
Interest expense, net - related party 36,000 36,000 45,000
Provision for taxes 25,200 --- ---
Other (income) expense (13,109) 29,324 15,753
------------ ----------- -----------
NET INCOME (LOSS) $ 128,918 $ 195,681 $ (270,191)
=========== =========== ==========
EARNINGS (LOSS) PER SHARE $0.01 $0.02 $(0.07)
==== ==== ====
Weighted average shares outstanding 8,835,000 8,594,000 4,883,000
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
20
THE SOFTWARE DEVELOPER'S COMPANY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Series C Additional
Preferred Common Paid-in Cumulative Translation Treasury Stockholders'
Stock Stock Capital Deficit Adjustment Stock Equity
----- ----- ------- ------- ---------- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT MARCH 31, 1994 $9,060 $77,834 $9,941,748 $(8,216,120) $(28,075) $(83,657) $1,700,790
===== ====== ========= ========= ====== ====== =========
Net income --- --- --- 195,681 --- --- 195,681
Issuance of Common Stock
(4,045 shares) --- 41 3,160 --- --- --- 3,201
Translation adjustment --- --- --- --- 50,317 --- 50,317
------- --------- ------------- ------------ ------ -------- ---------
BALANCE AT MARCH 31, 1995 $9,060 $77,875 $9,944,908 $(8,020,439) $22,242 $(83,657) $1,949,989
===== ====== ========= ========= ====== ====== =========
Net Income --- --- --- 128,918 --- --- 128,918
Conversion of Preferred Stock
(277,638 shares) - Series C (2,777) 2,777 --- --- --- --- ---
Issuance of Common Stock
(410,450 shares) --- 1,327 79,802 --- --- --- 81,129
Translation adjustment --- --- --- --- (673) --- (673)
Distributions --- --- --- (256,000) --- --- (256,000)
------- --------- -------------- ---------- ---------- --------- --------
BALANCE AT MARCH 31, 1996 $6,283 $81,979 $10,024,710 $(8,147,521) $21,569 $(83,657) $1,903,363
===== ====== ========== ========= ====== ====== =========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
21
THE SOFTWARE DEVELOPER'S COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended March 31,
1996 1995 1994
----------- ----------- --------
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income (loss) from continuing operations $ 128,918 $ 195,681 $ (270,191)
Adjustments to reconcile net income (loss) to
net cash used for operating activities:
Sale of marketing services for product (867,603) (1,235,590) (1,435,469)
Depreciation and amortization 456,293 473,732 444,823
Provision for losses on inventory 267,030 57,480 61,622
Provision for doubtful accounts receivable 722,415 340,751 380,160
Change in operating assets and liabilities:
Accounts receivable (905,580) (1,940,632) 479,977
Inventory 403,032 944,502 (121,574)
Other current assets 106,709 (17,067) 82,032
Other assets (138,387) (14,250) (22,242)
Accounts payable 278,077 1,928,242 (729,585)
Accrued payroll 201,301 158,823 (37,280)
Other accrued expenses 1,370,878 110,991 (586,419)
Customer Advances (55,209) (138,171) 34,998
---------- --------- -----------
Total adjustments 1,838,956 668,811 (1,448,957)
--------- ---------- ---------
Net cash provided by (used for)
continuing operating activities 1,967,874 864,492 (1,719,148)
Net cash (used for) provided by
discontinued operating activities --- (68,216) 627,581
--------------- ---------- ----------
Net cash provided by (used for)
operating activities $1,967,874 $ 796,276 $(1,091,567)
--------- ---------- ---------
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
22
THE SOFTWARE DEVELOPER'S COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT.)
<TABLE>
<CAPTION>
Years Ended March 31,
1996 1995 1994
----------- ----------- --------
INVESTING ACTIVITIES
<S> <C> <C> <C>
Capital expenditures for equipment and
leasehold improvements $ (239,824) $ (252,835) $ (227,443)
Business acquired in purchase transaction, net
of cash acquired --- --- 8,228
------------- ------------ -----------
Net cash used for investing activities $ (239,824) $ (252,835) $ (219,215)
--------- ---------- ----------
FINANCING ACTIVITIES
Net payments on line of credit (700,000) (1,401,000) (150,500)
Principal debt payments (22,092) (200,000) (121,171)
Principal payments under capital leases (44,711) (42,695) (39,324)
Proceeds from line of credit --- 1,423,470 ---
Net proceeds from debt --- 19,592 200,000
Dividends paid --- --- (49,678)
Distributions to ISC shareholder (231,000) --- ---
Net proceeds from issuance of stock 8,485 5,701 781,193
----------- ----------- -------
Net cash (used for) provided by
financing activities $ (989,318) $ (194,932) $ 620,520
--------- ---------- ----------
Effect of exchange rate changes on cash (673) 50,317 (24,946)
------------- ---------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 738,059 398,826 (715,208)
Cash and cash equivalents at beginning of year 672,386 273,560 988,768
---------- ---------- ----------
CASH AND CASH EQUIVALENTS AT
END OF YEAR $1,410,445 $ 672,386 $ 273,560
========= ========== ==========
Supplemental Disclosures of Cash Flow Information
Interest paid $ 162,887 $ 217,251 $ 208,974
Supplemental Disclosure of Non-Cash Activities
Non-cash distributions to ISC shareholder $ 25,000 --- ---
Property purchased under capitalized leases $ 317,847 --- ---
Collection of products in satisfaction of accounts
receivable-product $ 693,273 $1,203,640 $1,341,735
========= ========= =========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
23
THE SOFTWARE DEVELOPER'S COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A -- NATURE OF THE BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION: The Company currently operates in one industry
segment. It distributes and markets specialty software and hardware and provides
marketing services to third-party software publishers. The financial statements
include the accounts and operations of the Company and its wholly-owned
subsidiaries, Software Developer's Company, GmbH and Internet Security
Corporation ("ISC"). The fiscal 1995 and 1994 financial statements presented
herein have been restated to reflect the financial results of the ISC
acquisition which has been accounted for as a pooling (also see Note I).
The financial statements of the Company also include the accounts and
operations of Personal Computing Tools (PCT), of which the Company acquired 94%
of the outstanding capital stock on June 29, 1993. The 6% equity interest in PCT
not acquired by the Company would be shown as minority interest in the fiscal
1996 and fiscal 1995 consolidated balance sheets and the fiscal 1996, 1995 and
1994 statements of operations, respectively. As of March 31, 1996, the Company
did not report minority interest because PCT incurred net losses that preclude
reporting minority interest (see Note H). All intercompany amounts and
transactions of all subsidiaries have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS: Cash and cash equivalents include time deposits with
a maturity of three months or less at the date of purchase.
CONCENTRATION OF CREDIT RISK: Financial instruments that potentially subject the
Company to concentration of credit risk consist primarily of cash and cash
equivalents and trade receivables. The Company restricts investment of temporary
cash investments to financial institutions with high credit standing. Credit
risk on trade receivables is minimal as a result of the large and diverse nature
of the Company's customer base.
REVENUE RECOGNITION: The Company's revenues from continuing operations are
primarily generated from the sale of "off-the-shelf" computer software and
specialty hardware to end-users and other resellers in both foreign and domestic
markets and the sale of advertising space within its own marketing programs such
as "The Programmer's SuperShop" catalog. The Company also resells advertising
space in third-party publications.
Revenues from software and hardware sales are recognized at the time of
shipment. These revenues are reflected as net product sales in the accompanying
Consolidated Statements of Operations and their related costs are reflected as
cost of products sold.
Net revenues from marketing services such as advertising in its
publications, direct mail and trade show promotions are reflected as net
marketing services income in the Consolidated Statements of Operations when the
services are substantially completed and their related costs are reflected as
cost of marketing services income.
Value received for marketing services may be in the form of cash or an
equivalent value of products for inventory. The inventory received as
consideration is sold through The Programmer's SuperShop. The amount owed the
Company in the form of inventory is reflected as accounts receivable - product
in the Consolidated Balance Sheets.
24
The Company also resells advertising space in other vendors' publications
and those proceeds are recognized upon distribution of the publication and the
proceeds are offset against advertising costs and are reflected in Selling,
General and Administrative expenses in the Consolidated Statements of
Operations.
The Company's ISC subsidiary generates revenue from licensing the
rights to use software products developed by Checkpoint Software to end users
and resellers. ISC also generates revenues from consulting and training services
performed for license customers and from support and software update rights
(i.e., maintenance).
Revenues from perpetual software license agreements are recognized as
revenue upon delivery of the software as long as there are no significant
post-delivery obligations.
Revenues for maintenance are recognized ratably over the term of the
support period. If maintenance is included in a license agreement, such amounts
are unbundled from the license fee at their fair market value based on the value
established by independent sale of such maintenance to customers. Consulting
revenues are primarily related to implementation services performed under
separate service arrangements related to the installation of ISC's software
products. Such services do not include customization or modification of the
underlying software code. If included in a license agreement, such services are
unbundled at their fair market value based on the value established by the
independent sale of such services to customers. Revenues from consulting and
training services are recognized as the services are performed.
ACCOUNTS RECEIVABLE - PRODUCT: The Company provides marketing services to
third-party software publishers which is paid in cash or product that the
Company resells in the normal course of business. Until these products are
received into inventory, they are carried as accounts receivable - product.
These receivables are valued at the equivalent value of marketing services
income. The Company evaluates the marketability of these products by comparing
recent sales history and forecasted sales levels to the balances in accounts
receivable - product, resulting in periodic adjustments to the carrying value of
accounts receivable - product or the resultant inventory balance.
INVENTORIES: Inventories are stated at the lower of cost (first-in, first-out)
or market and consists of products held for sale.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS: Equipment and leasehold improvements are
stated at cost, less accumulated depreciation and amortization. Depreciation is
provided using an accelerated method over an estimated useful life of five
years. Amortization of leasehold improvements is provided using the
straight-line method over the lives of the respective leases or the useful lives
of the improvements, whichever is shorter.
Maintenance and repairs are charged to operations as incurred. Renewals
and betterments which materially extend the life of assets are capitalized and
depreciated. Upon disposal, the asset cost and related accumulated depreciation
are removed from their respective accounts. Any resulting gain or loss is
reflected in earnings.
INTANGIBLE ASSETS: Intangible assets consist of goodwill, customer lists and
non-compete agreements arising from a business acquisition (see Note H). The
values assigned to intangible assets, based in part on independent appraisals,
are being amortized on a straight-line basis.
Goodwill representing the purchase price over the estimated fair value of
the net assets of the acquired business is being amortized over a fifteen-year
period. Other intangible assets are being amortized over a five-year period.
25
CUSTOMER ADVANCES: Prepayments made by customers are included as customer
advances and recorded as sales when shipments are made.
INCOME TAXES: The Company adopted Statement of Financial Accounting Standards
No. 109 "Accounting for Income Taxes" (SFAS 109) in fiscal 1994.
The adoption of SFAS 109 changes the Company's method of accounting for
income taxes from the deferred method (APB 11) to an asset and liability method.
Previously, the Company deferred the tax effects of timing differences between
financial reporting and taxable income. The asset and liability method requires
the recognition of deferred tax liabilities and assets for the expected future
tax consequences of temporary differences between tax bases and financial
reporting bases of other assets and liabilities.
MARKETING EXPENSES: Marketing expenses are charged to Selling, General &
Administrative expenses as incurred.
SUPPORT SERVICES: In conjunction with the sale of "off the shelf" products, the
Company provides, free of charge, pre-sale telephone technical support and
vendor supplied product literature. The Company provides only minimum levels of
post-sales support to its customers, as the manufacturers of the software
generally provide post-sales support to end-users. The costs, which are not
material, relating to these services are expensed as incurred and included in
Selling, General & Administrative expenses.
EARNINGS (LOSS) PER SHARE: Income per share of common stock is based upon the
weighted average number of common shares outstanding excluding the effects of
certain options and warrants, which are deemed to be anti-dilutive. Included in
the calculation of weighted average shares is the 465,838 shares issued for the
merger with Internet Security Corp. (see footnote J). The amount of the assumed
dividend was $0 for fiscal 1996 and 1995, and $50,000 for fiscal 1994.
EXPORT SALES: The Company generates revenues through the sale of products both
domestically and overseas. Export sales generated revenues of approximately
$1,694,000, $2,097,000 and $2,842,000 during fiscal 1996, 1995 and 1994,
respectively.
FOREIGN CURRENCY TRANSLATION: The functional currency of the Company's only
foreign subsidiary is the local currency. Balance sheet accounts of the
Company's foreign subsidiary are translated into U.S. dollars at current
exchange rates. Income statement items are translated at the average rates
during the year. Net translation gains or losses are recorded directly to a
separate component of stockholders' equity. Foreign currency transaction gains
and losses are included in the determination of fiscal 1996, 1995 and 1994
income, respectively.
POST-RETIREMENT BENEFITS OTHER THAN PENSIONS: The Company does not offer
post-employment benefits to its retirees and as a result, is unaffected by
Statement of Financial Accounting Standards No. 106 or 112 issued in December
1990 and November 1992, respectively.
401K PLAN: Since fiscal year 1991, the Company has maintained a 401K Plan for
its employees. The Plan is intended as a retirement and tax deferred savings
vehicle. All employees of the Company whose customary employment is for more
than 20 hours per week are eligible to participate in the 401K Plan. Employees
make their contributions through biweekly payroll deductions which are invested
in any combination of several investment funds. The Company has no matching
contribution obligation and made no contribution to this Plan in either fiscal
1996, 1995 or 1994.
26
FAIR VALUE OF FINANCIAL INSTRUMENTS: Statement of Financial Accounting Standards
No. 107, "Disclosures About Fair Value of Financial Instruments," requires the
Company to disclose estimated fair values for its financial instruments,
exclusive of leases, for which it is practicable to estimate fair value.
For financial instruments including cash, accounts receivable and
payable, and accrued expenses, working capital line of credit and term loan with
a related party due within one year, it is assumed that the carrying amount
approximates fair value due to their short maturities.
RISKS AND UNCERTAINTIES: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amount of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amount of revenues and expenses during
the reported period. Actual results could differ from those estimates.
NOTE B -- EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are stated at cost and consist of the
following:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Computer equipment $1,757,049 $1,251,372
Leasehold improvements 581,336 559,892
Furniture and fixtures 330,070 299,520
Vehicle --- 25,000
--------------- -----------
2,668,455 2,135,784
Less accumulated depreciation and
amortization (1,923,187) (1,594,813)
--------- ---------
$ 745,268 $ 540,971
========== ==========
</TABLE>
The depreciation expense recognized for the fiscal years ended March 31,
1996, 1995 and 1994 was $328,374, $340,389 and $345,076, respectively.
NOTE C -- BORROWINGS
During March 1995, the Company entered into a working capital line of
credit (the "Line") with Silicon Valley Bank. Under the agreement, the Company
may borrow up to a maximum of $2,000,000 based upon the availability of eligible
accounts receivable. The Line bears interest at Prime plus 2.5%. Prime was 8.25%
at March 31, 1996. The Line is collateralized by all assets of the Company and
it expires in July, 1996. The Line requires the Company, among other things, to
maintain certain minimum levels of earnings, net worth and certain financial
ratios.
On October 19, 1993, the Company exchanged and extended a term loan with
Stephen L. Watson, the Company's Chairman of the Board of Directors. The note is
collateralized by all assets of the Company. The note was due and payable in
December 1993 with interest payable monthly at 16% per annum. The principal of
$300,000 was extended to December 1996, with interest accruing at 12% per annum,
interest payable monthly in arrears. In any month which the Company does not
make a profit, the interest will be deferred and paid to the extent of profits
in the following months without compounding unpaid interest. The note is
subordinated to any commercial bank or other financial institution debt up to
$4,000,000.
27
NOTE D -- COMMITMENTS AND CONTINGENCIES
The Company leases office space and equipment under leases classified as
operating leases. Rent expense amounted to $585,469 in fiscal 1996, $653,872 in
fiscal 1995, and $787,143 in fiscal 1994. During fiscal 1996, the Company
entered into a capital lease for computer software and hardware totaling
$317,847. Total payments on the capitalized lease were $19,243 in fiscal 1996.
Total accumulated amortization on the capitalized lease was $28,066 in fiscal
1996. Future minimum lease payments under all noncancelable capital and
operating leases as of March 31, 1996 are as follows:
<TABLE>
<CAPTION>
Capital Operating
Year ending March 31, Leases Leases
------ ------
<S> <C> <C>
1997 $115,457 $288,291
1998 115,457 40,062
1999 96,214 9,960
2000 --- 2,080
------------ ---------
$327,128 $340,393
=======
Less amount representing interest $ 26,981
Present value of net minimum lease payments $300,147
=======
</TABLE>
There are no material outstanding legal proceedings.
NOTE E -- INCOME TAXES
As discussed in Note A, the Company adopted SFAS 109 in fiscal 1994. SFAS
109 requires the recognition of deferred tax assets and liabilities for the
future tax consequences attributable to the differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. In addition, the new accounting standard requires the
recognition of future tax benefits, such as net operating loss carryforwards, to
the extent that realization of such benefits is more likely than not.
The cumulative effect of initial adoption on prior years' retained
earnings was not significant. Additionally, the effect of the adoption of SFAS
109 upon income before taxes for fiscal 1994 was not significant.
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Current tax expense:
Federal $ 6,200 --- ---
State 19,000 --- ---
------ ------- -----
Deferred tax expense (benefit):
Federal --- --- ---
State --- --- ---
--------- ------- -----
Total $25,200 --- ---
====== ======= =====
</TABLE>
28
Significant components of the deferred tax assets are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net operating loss carryforward $2,809,833 $3,004,321 $2,928,907
Accruals and reserves 258,662 180,012 457,400
Research and development tax credits 154,238 86,600 86,600
Depreciation 65,524 184,573 165,800
Other, net --- 10,060 58,600
Valuation allowance (3,288,257) (3,465,566) (3,697,307)
--------- --------- ---------
$ --- $ --- $ ---
============== ============= =============
</TABLE>
The provision for income taxes differs from the federal statutory rate of
34% as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Federal provision (benefit) at 34% $43,832 $ 66,532 $(91,865)
State income taxes 19,000 --- ---
Alternative minimum tax-Federal 6,200 --- ---
Meals and entertainment 6,913 3,826 ---
Foreign loss, not benefitted 8,431 77,233 35,900
Goodwill 45,219 45,222 ---
Net operating losses (NOL) - not benefitted --- --- 38,739
Utilization of previously unrecognized NOL (75,787) (192,813) ---
S-Corporation income not subject to tax (28,608) --- ---
Other --- --- 17,226
--------- ---------- ------
$25,200 $ --- $ ---
========= ========== ==========
</TABLE>
Due to the uncertainty surrounding the realization of tax benefits in
future tax returns, the net deferred tax assets at March 31, 1996, 1995 and 1994
have been offset by a valuation allowance.
At March 31, 1996, the Company has available for Federal income tax
purposes net operating tax loss carryforwards of approximately $6,975,000 that
are available to offset future taxable income at various dates through fiscal
2011. Certain provisions in the Internal Revenue Code may limit the net
operating loss available for use in any given year in the event of any
significant change of ownership.
NOTE F -- CAPITAL STOCK AND CAPITAL STOCK WARRANTS
COMMON STOCK: On January 13, 1993 the Company completed a private placement of
537,898 shares of Common Stock for net proceeds of approximately $992,173.
29
On June 29, 1993 the Company acquired 94% of the outstanding capital
stock of Personal Computing Tools, Inc. (PCT) of Campbell, California in
exchange for 392,996 shares of the Company's Common Stock. This agreement became
effective on June 29, 1993 and was accounted for under the purchase method of
accounting. If the actual selling price of the Company's Common Stock failed to
average less than two dollars ($2.00) per share (adjusted for stock splits or
stock dividends or other similar events) for any consecutive thirty-day period
within eighteen months of the June 29, 1993 closing date, additional shares of
the Company's Common Stock would have been issued to the PCT selling
stockholders (on a pro-rata basis) such that the total aggregate number of
shares of the Company's Common Stock to be issued to the PCT selling
stockholders (including the initial shares) would be the number of shares
calculated by dividing $850,000 by the average actual selling price per share of
the Company's Common Stock during the thirty-day period immediately prior to the
completion of eighteen months from the June 29, 1993 closing date.
The actual selling price of the Company's Common Stock did fail to
average less than two dollars ($2.00) per share for a consecutive thirty-day
period within the eighteen-month period ended December 29, 1994. Per the terms
of the Agreement, the amount of additional shares that would have been issued
equaled 575,000 shares. On June 26, 1995 the Company and representatives of the
former PCT shareholders signed a Stock Issuance and Settlement Agreement whereby
only an additional 79,460 shares of Common Stock would be issued.
SERIES C PREFERRED STOCK: On October 19, 1993, the Company completed a private
placement of Series C Preferred Stock and a recapitalization transaction.
Private investors purchased 905,968 shares of Series C Preferred Stock at a
price of $1.00 per share, resulting in net proceeds of approximately $781,000.
The Series C Preferred Stock is convertible into Common Stock on a one-for-one
basis and votes with the Common Stock on the same basis. The Series C Preferred
Stock contains a number of features including a fixed liquidation preference of
$2.00 per share, anti-dilution rights and two (2) Board of Director positions.
The Company used the net proceeds from the private placement for working capital
and general corporate purposes.
The recapitalization transaction involved the exchange of all of the
Company's Series A Preferred Stock and Series B Senior Preferred Stock for
4,288,890 shares of Common Stock, increasing the total number of shares of
Common Stock outstanding to 7,292,453. This recapitalization removed the
liquidation preference, including cumulative dividends, payable to the preferred
holders of approximately $7,000,000. In the recapitalization, holders of the
Company's previously existing preferred stock exchanged their shares for Common
Stock, terminating all prior agreements, but retaining certain registration
rights.
Included in the aggregate of 905,968 shares of Series C Preferred Stock
issued by the Company were 26,877 shares of Series C Preferred Stock issued in
complete satisfaction of a $25,000 note payable plus $1,877 of accrued interest
to Trinity Ventures I, L.P. The note was acquired in the Company's prior
purchase of the capital stock of Personal Computing Tools, Inc.
During fiscal 1996, 277,638 shares of Series C Preferred Stock were
converted into 277,638 shares of Common Stock.
WARRANTS: In fiscal 1987, warrants to purchase 31,500 shares of Common Stock
exercisable at $2.57 were issued and expire June 30, 1997.
During fiscal 1991, the Company issued warrants to purchase 300,000
shares of Common Stock at $4.00 per share. These warrants expire June 30, 1997.
At March 31, 1996, the Company has reserved 331,500 shares of Common Stock
for the issuance upon exercise of these warrants.
30
NOTE G -- STOCK OPTION PLANS
The Company has stock option plans as described hereunder. Options are
granted at fair market value at the date of grant being the average of the
closing bid and asked prices of the Common Stock on the day preceding the date
of grant.
1986 NONSTATUTORY STOCK OPTION PLAN: The 1986 Nonstatutory Stock Option Plan
provides for the issuance of options to purchase shares of Common Stock, up to
an aggregate of 52,500 shares which are reserved for issuance. Options can be
granted to employees, consultants or others as approved by the Board of
Directors. These options have exercise prices of 100% of the fair market value
of Common Stock on the date of grant. The options terminate for employees with
respect to all shares of stock not previously purchased within 30 days upon the
date of termination of the employee's employment or for non-employees at the end
of ten years from the date of grant.
1987 STOCK PLAN: The 1987 Stock Plan reserves for issuance 750,000 shares of
Common Stock for the benefit of all employees as authorized by the Board of
Directors. Incentive stock options may be granted to employees and officers, and
non-qualified options may be granted to directors, officers, employees and
consultants of the Company under the 1987 Stock Plan. The exercise price is set
at 100% of the fair market value of Common Stock on the date of grant. The
aggregate fair market value of shares issuable under the 1987 Stock Plan due to
the exercising of incentive stock options by an employee or officer may not
exceed $100,000 in any calendar year.
1988 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN: The 1988 Non-Employee Director
Stock Option Plan ("1988 Director Plan") offers options to members of the Board
of Directors who are neither employees nor officers of the Company in
appreciation of their service. The 1988 Director Plan is administered by the
Compensation Committee of the Company.
This plan authorizes the grant of options for 70,000 shares of Common
Stock. Each newly elected non-employee director will automatically receive an
option to purchase 8,750 shares. The exercise price per share of options granted
under the 1988 Director Plan is 100% of the fair market value of Common Stock on
the date of grant. The options shall expire six years from the date of the
option grant. They terminate thirty days (or one hundred and eighty days if due
to disability or death) following the date on which the optionee ceases to be a
member of the Board of Directors. They are exercisable in installments, with 20%
becoming exercisable on each anniversary of the date of grant.
1990 EMPLOYEE STOCK PURCHASE PLAN: The 1990 Employee Stock Purchase Plan ("Stock
Purchase Plan") is intended as an incentive to, and to encourage stock ownership
by, all eligible employees of the Company and participating subsidiaries and to
encourage them to remain in the employ of the Company. Substantially all
employees of the Company and any participating subsidiary who have completed six
months of employment with the Company or any subsidiary and whose customary
employment is for more than 20 hours per week and more than five months per
calendar year are eligible to participate in the Stock Purchase Plan.
The Stock Purchase Plan presently authorizes the issuance of 100,000
shares of Common Stock (subject to adjustment for capital changes) pursuant to
the exercise of nontransferable options granted to participating employees.
During fiscal 1996, 1995 and 1994, 1,216, 4,045, and 2,325, shares,
respectively, of the Company's Common Stock were issued under the Stock Purchase
Plan.
31
1991 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN: The 1991 Non-Employee Director
Stock Option Plan authorizes the grant of options for up to 70,000 shares of
Common Stock. This plan is identical to the 1988 Director Plan, except that
options shall expire ten years from the date of the option grant. On May 15,
1991, each of the non-employee directors was granted options to purchase 8,750
shares of Common Stock. After May 15, 1991, each new director also received an
option to purchase 8,750 shares of Common Stock.
1993 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN: The 1993 Non-Employee Director
Stock Option Plan authorizes the grant of options of up to 60,000 shares of
Common Stock. This plan is identical to the 1988 and 1991 Director Plans, except
the options shall expire ten years from the date of the option grant and options
are granted after the performance of services. On each of April 1, 1993 (fiscal
year 1994), April 1, 1994 (fiscal year 1995), and April 1, 1995 (fiscal year
1996) each of the non-employee directors was granted 3,500 shares of Common
Stock.
1994 STOCK PLAN: The 1994 Stock Plan is authorized to grant up to 1,500,000
options to purchase shares of Common Stock as incentives to officers, directors,
employees and consultants of the Company, as approved by the Board of Directors.
The options have an exercise price of 100% of the fair market value of Common
Stock on the date of the grant and vest over periods as determined by the Board
of Directors. At March 31, 1996, 1,077,500 options have been granted under the
plan.
1994 NON-EMPLOYEE DIRECTOR PLAN: The 1994 Non-Employee Director Plan authorizes
the grant of up to 105,000 shares to directors who are not employees or officers
of the Company as an inducement to obtain and retain the services of qualified
persons. Each director who is neither an officer nor employee of the Company was
automatically granted an option to purchase 17,500 shares of the Company's
Common Stock at an exercise price equal to 100% of the fair market value of the
Company's Common Stock on the date of grant. Options vest ratably over five
years from the date of grant and expire ten years from the date of grant. During
fiscal 1994, each of the six (6) qualified directors received an option to
purchase 17,500 shares of the Company's Common Stock.
Information as to the Company's stock options is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Options outstanding at beginning of year 1,389,404 768,330 583,575
Option activity during the year:
Granted 417,500 845,052 435,000
Exercised (75,450) --- ---
Cancelled (207,600) (223,978) (250,245)
---------- ---------- -------
Options outstanding at end of year 1,523,854 1,389,404 768,330
========= ========= =======
Price range of outstanding options $0.50-8.13 $0.50-8.13 $1.00-8.13
========= ========= =========
Price range of options exercised $0.50-1.25 --- ---
========= ============ ==========
Options exercisable at end of year 852,636 717,495 431,563
========= ========= =========
Options available for grant at end of year 1,083,646 1,218,096 234,170
========= ========= =========
</TABLE>
32
NOTE H -- ACQUISITION
On June 29, 1993, the Company acquired 94% of the outstanding capital
stock of Personal Computing Tools, Inc. ("PCT"). PCT, a California corporation,
is a catalog distributor of PC-based specialty hardware and software products
for engineers, scientists and technical professionals. This acquisition has been
recorded using the purchase method of accounting.
In August 1993, the Company integrated the California operations of PCT
into the Company's Massachusetts operations and added PCT's catalog to its line
of direct marketing activities. The results of operations since the acquisition
of PCT have been included in the Company's Consolidated Statements of
Operations. The six percent equity interest in PCT not acquired by the Company
would be shown as minority interest in the fiscal 1996 Consolidated Statement of
Operations and balance sheet. However, as of March 31, 1996, the Company
reported no minority interest because PCT incurred net operating losses that
preclude reporting minority interest.
Intangibles recognized in the transaction consisted of customer lists of
$248,000 and non-compete agreements of $150,000. The intangibles will be
amortized using the straight-line method over a five-year period. Goodwill
recognized in the transaction of $803,000 is being amortized using the
straight-line method over a fifteen-year period. The Company recognized
amortization expense of $134,014, $133,344 and $99,747 for fiscal years ended
March 31, 1996, 1995 and 1994, respectively, and had $367,105 and $233,091 in
accumulated amortization as of March 31, 1996 and 1995, respectively.
The Company evaluates the value of intangible assets on an ongoing basis
relying on a number of factors including operating results, business plans,
budgets and economic projections. In addition, the Company's evaluation
considers non-financial data such as market trends, customer relationships,
buying patterns and product development cycles.
The following unaudited pro forma summary presents the Consolidated
Results of Operations (in thousands, except per share data) as if this
acquisition had occurred at the beginning of fiscal year ended March 31, 1994
and does not purport to be indicative of what would have occurred had the
acquisition been made as of that date.
<TABLE>
<CAPTION>
For the year ended
March 31, 1994
<S> <C>
Net sales $31,687
=======
Net income (loss) $ 30
=======
Net loss per common share $(0.00)
=======
</TABLE>
NOTE I -- POOLING OF INTERESTS
On November 16, 1995, the Company ("SDC") acquired 100% of the
outstanding capital stock of Internet Security Corporation ("ISC") in exchange
for 465,838 shares of the Company's Common Stock. ISC, a Massachusetts
corporation, markets and distributes certain software products and services
under distribution and reseller agreements with third party software companies.
A Form 8-K was duly filed with the Securities and Exchange Commission on
November 30, 1995, a Form 8-KA was subsequently filed on January 30, 1996.
33
Prior to the consummation of the transaction, ISC made an allowable
distribution of $256,000 to its sole shareholder. The distribution consisted of
cash of $231,000 and a vehicle with a net book value of $25,000. ISC was a
Subchapter S Corporation prior to the consummation of the transaction and,
therefore did not pay U.S. Federal income taxes. ISC will be included in the
Company's U.S. federal income tax return effective November 16, 1995, and
therefore, a corresponding charge to income tax expense was recorded to reflect
the anticipated tax due on net income generated from the date of consummation
through March 31, 1996.
The acquisition was accounted for as a "pooling of interest" transaction
and, accordingly, prior financial results of SDC have been restated to reflect
the consolidation of ISC herewith. Selected financial information for each
company, stated separately is shown below:
<TABLE>
<CAPTION>
For the nine months ended For the years ended
December 31, 1995 March 31, March 31,
(Unaudited) 1996 1995
------------------------------- ---- ----
<S> <C> <C> <C>
Net Revenues:
SDC $39,961,517 $52,381,889 $39,697,735
ISC 2,395,846 3,724,757 1,151,746(1)
------------ ----------- -----------
$42,357,363 $56,106,646 $40,849,481
Net Income (Loss):
SDC (26,022) (240,475) 74,353
ISC 187,982 369,393 121,328(1)
----------- ----------- -----------
$ 161,960 $ 128,918 $ 195,681
(1) Reflects ISC's activity from the date of inception (June 15, 1994) through March 31, 1995.
</TABLE>
ISC had prepared financial statements on a calendar year basis. The
results reported for ISC have been restated to conform with the Company's fiscal
year.
NOTE J -- SUBSEQUENT EVENT - ASSET SALE
On May 16, 1996 the Company entered into an agreement for the Sale of
Certain Assets (the "Agreement") with Programmer's Paradise, Inc. (the "Buyer").
The Agreement requires the Buyer to pay the Company $11,000,000 in return for
substantially all of the operating assets relating to The Programmer's SuperShop
catalog, its Worldwide Web site, its corporate sales group, its German
subsidiary and its SDC Communications business unit (the "business segment").
This transaction is subject to shareholder consent.
The Agreement contains provisions for a "Break-up Fee," tangible net
asset requirements and revenue maintenance requirements that could result in a
potential adjustment to the purchase price, based upon the occurrence of certain
events, as defined in the Agreement.
The net revenues and net loss from the business segment that is
proposed to be sold were approximately $52,000,000 and $240,000, respectively
for fiscal 1996.
34
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the directors and executive officers of
the Company, their ages, and the positions currently held by such person with
the Company as of June 30, 1996.
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Barry N. Bycoff 47 President, Chief Executive Officer and Director
Aaron Kleiner 49 Director
Gustav H. Koven III 53 Director
Michael L. Mark 50 Director
Milton J. Pappas 67 Director
Ralph B. Wagner 62 Director
Stephen L. Watson 54 Chairman of the Board
James O'Connor, Jr. 34 Vice President, Chief Financial Officer and Treasurer
Joseph C. Burke 44 Vice President, Catalog Sales & Marketing
Richard J. Kosinski 41 President - Internet Security Corporation
</TABLE>
OCCUPATIONS AND BIOGRAPHIES OF DIRECTORS
BARRY N. BYCOFF was appointed President and Chief Executive Officer and
a Director of the Company in April 1993. From December 1991 to December 1992,
during his tenure at MapInfo Corporation, a provider of desktop mapping
software, he held positions as Chief Operating Officer, Senior Vice President of
Sales and Marketing, and Director. From January 1984 to October 1991, he
successfully ran a number of business units for Prime Computer Inc., a
manufacturer of mainframe and minicomputer systems, holding such positions as
Vice President-Marketing in the Computer Systems Business Unit, Vice
President-General Purpose Product Line, Vice President-Prime Information
Business Group, Director-Finance and Administration/Worldwide Sales and
Director-Corporate Planning and Analysis. Prior to that, Mr. Bycoff held various
management positions at Gillette Company from November 1973 to December 1983.
35
STEPHEN L. WATSON is currently Chairman of the Board and has served as
a Director of the Company since March 1986. He is also currently Chairman and
co-founder of ScanCenters of America, a document imaging and conversion services
company. Mr. Watson previously served as President and Chief Operating Officer
of the Company from March 1991 to April 1993 and served as Chief Executive
Officer from May 1991 until April 1993. From June 1989 to March 1991 he was a
private investor. From July 1988 to June 1989, he was President of California
Micro Solutions, Inc., a franchisee of Computerland Corporation, a retailer of
personal computer systems. From April 1987 to July 1988, he was Senior Vice
President of Computerland Corporation, a retailer of personal computer software
and hardware systems. From July 1984 to April 1987, he was a private investor.
From 1979 to July 1984, he was President of Computer Centers of New England, a
retailer of personal computer systems. From 1970 to 1979, Mr. Watson was
employed in various management positions at Digital Equipment Corporation, a
manufacturer of mainframe and minicomputer systems. Mr. Watson is a director of
several privately-held companies.
AARON KLEINER has been a Director of the Company since July 1988. He is
currently Vice Chairman and Chief Financial Officer of Kurzweil
Technologies,Inc., a firm specializing in the disposition of patents and
technical assets and Vice Chairman of Kurzweil Educational Systems, Inc., a
systems developer for assistance in reading education. From 1982 to 1995 he was
Vice Chairman of Kurzweil Applied Intelligence, Inc., a developer, manufacturer
and marketer of voice recognition technology for medical reporting applications.
He also served as Vice Chairman of Kurzweil Music Systems, Inc., a developer,
manufacturer and marketer of musical synthesizers. In 1974 he was co-founder of
Kurzweil Computer Products, a developer, manufacturer and marketer of optical
character recognition systems, which was acquired by Xerox in 1980. Mr. Kleiner
is on the board of advisors of a privately held company and is a co-founder and
past chairman of the MIT Enterprise Forum.
MILTON J. PAPPAS has been a Director of the Company since July 1990. He
serves on the Board of Directors as a representative of the holders of the
Series C Preferred Stock. Mr. Pappas is currently Chairman of Euclid Partners
Corporation (since 1983), a management company providing services to Euclid
Partners, a venture capital investment fund. From 1983 to the present, he has
been a General Partner of Euclid Partners Associates II, L.P.; Euclid Partners
Associates III, L.P.; and Euclid Partners Associates IV, L.P., general partners
to Euclid Partners II, L.P.; Euclid Partners III, L.P.; and Euclid Partners IV,
L.P., private venture capital investment funds. From 1970 to 1986, he was a
General Partner of Euclid Partners, a private venture capital firm. Mr. Pappas
is also a director of Therion Corporation and Sys-Tech Solutions, Inc. and is
admitted to the Ohio Bar.
RALPH B. WAGNER became a Director of the Company in September 1992. He
is a Director and co-founder of Keyfile Corporation, a manufacturer and marketer
of document image software products for use on personal computers. Mr. Wagner is
a principal of Wagner Resources, a consulting and investment firm. Since 1983,
Mr. Wagner has served as a director of several private companies including Alpha
Software, a developer, manufacturer and marketer of software programs, and Pure
Speech, a software developer specializing in speech recognition.
GUSTAV H. KOVEN III became a Director of the Company in August 1993. He
serves on the Board of Directors as a representative of the holders of the
Series C Preferred Stock. Since April 1990, he has been a General Partner of
Edison Partners, L.P., which is the general partner of Edison Venture Fund,
L.P., and since October 1990, a General Partner of Edison Partners II, L.P.,
which is the general partner of Edison Venture Fund II, L.P. and Edison Venture
Fund II-PA, L.P. (together with Edison Venture Fund, L.P., the "Edison Funds"),
private venture capital investment firms. Since January 1994, Mr. Koven has been
a General Partner of Edison Partners III, L.P., which is the general partner of
Edison Venture Fund III, L.P. From 1985 until he joined Edison, Mr. Koven was
President of Chase Manhattan Capital Corporation, a venture capital subsidiary
of the bank. From 1980 to 1985 he was Vice President in Corporate Development
and Vice President in Corporate Planning at The Chase Manhattan Bank. Before
joining Chase, he held marketing and corporate development positions at Union
Carbide. Mr. Koven serves as a director of ECCS, Inc., a publicly-held provider
of systems integration services and mass storage products for networked
computers, and five other private companies.
36
MICHAEL L. MARK became a director of the Company in October 1994. He is
President of Refined Reports, Inc., an electronic publishing software
development company he founded in 1990. Prior to that, he served as Vice
President, System Integration at Interleaf, Inc., an electronic publishing
software developer, and was Vice President and co-founder of Cadmus Computer
Corporation, a workstation manufacturer. Mr. Mark also serves as a director of
Progress Software Corporation, a manufacturer of software development tools and
two other private companies.
OCCUPATIONS AND BIOGRAPHIES OF EXECUTIVE OFFICERS
JAMES O'CONNOR, JR. was named Vice President, Chief Financial Officer
and Treasurer of the Company in September 1995. From 1992 to 1995, Mr. O'Connor
was a Senior Associate of Alvarez & Marsal, Inc. a nationally known crisis
management firm. While with Alvarez & Marsal, he acted as Chief Financial
Officer and Director of MIS of Almac's, Inc., a supermarket chain; and was an
interim management consultant to Phar-Mor, Inc., a discount drug store chain;
and Florida Steel Corporation, a mini-mill operation. Prior to that, from 1988
to 1992, he was an Independent Financial Management Consultant for turnaround
companies such as Heraeus, Inc. where he acted as Interim Chief Financial
Officer and Chief Operating Officer. From 1984 to 1988 Mr. O'Connor worked for
Peat Marwick Main & Company, an international public accounting firm.
JOSEPH C. BURKE, Vice President of Catalog Sales and Marketing, joined
the Company in January 1995 and was formerly Vice President of Operations and
Product Marketing of SDC. From 1991 to 1995, Mr. Burke was Senior Director of
Sales at VMark Software, a database management system software firm. Previous to
that, from 1985 to 1991, he held various marketing positions with Prime
Computer, such as International Director of Marketing, Director of Software
Products Marketing, Group Product Manager and Senior Product Marketing Manager.
From 1983 to 1985 he was founder and publisher of Infocus, Inc., a successful
technical publishing business, and at the same time, was Senior Consulting
Manager of Software Resource, Inc., a software reseller. From 1981 to 1983, Mr.
Burke was Business Systems Manager for Axxess Information Systems, a software
development firm.
RICHARD J. KOSINSKI is co-founder and President of the Company's
subsidiary, Internet Security Corporation (ISC) since 1994. From 1989 to 1994 he
was employed by Bolt Beranek and Newman (BBN), where he served as Regional Sales
Manager for BBN's NearNet division and BBN's Communications division. From 1988
to 1989 Mr. Kosinski was Regional Sales Manager at Harris Corporation, a data
communications equipment manufacturer. Prior to that, from 1984 to 1988 he was
Regional Sales Manager at Digital Products, a data communications equipment
manufacturer. From 1977 to 1984 he was with by Hewlet-Packard Company, a
hardware and software manufacturer, having held various positions such as Major
Account Manager, Senior Sales Representative and Data Communications Systems
Engineer.
SECTION 16(A) REPORTING REQUIREMENTS
Section 16(a) of the Securities Exchange Act of 1934, as amended, (the
"Exchange Act"), requires the Company's directors, executive officers and
holders of more than 10% of the Company's Common Stock (collectively, "Reporting
Persons") to file with the Commission initial reports of ownership and reports
of changes in ownership of Common Stock of the Company. Such persons are
required by regulations of the Commission to furnish the Company with copies of
all such filings. Based on its review of the copies of such filings received by
it with respect to fiscal 1996 the Company believes that all Reporting Persons
complied with all Section 16(a) filing requirements in 1996, except as noted
below.
James O'Connor, Jr. did not file until May 1996 a Form 3 reflecting his
appointment as Chief Financial Officer in October 1995, and did not report until
May 1996 on Form 5 the grant of options to purchase 85,000 shares of Common
Stock during October 1995. Joseph Burke did not file until May 1996 a Form 3
reflecting his appointment as a Vice President in August 1995, and did not
report until May 1996 on Form 5 the purchase of 400 shares of Common Stock
during October and December 1995 and the grant of options to purchase 40,000
shares of Common Stock during February 1996.
37
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the annual and long-term compensation
for services in all capacities to the Company for the fiscal years ended March
31, 1996, 1995 and 1994, of those persons who (i) served as the Chief Executive
Officer of the Company during any part of the fiscal year ended March 31, 1996,
and (ii) the other most highly compensated executive officer of the Company at
March 31, 1996 whose annual compensation and bonus exceeded $100,000 (the "Named
Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation (1) Awards (2)
----------------------- ----------
Restricted
Stock
Name and Principal Position Year Salary($) Bonus($) (3) Options/SARs(#) Awards($)
- --------------------------- ---- --------- ------------ --------------- ---------
<S> <C> <C> <C> <C> <C>
Barry N. Bycoff 1996 $156,923 $ 0 35,000 0
Chief Executive Officer, 1995 156,770 10,000 350,000 0
President & Director 1994 138,667 7,500 150,000 0
Richard J. Kosinski 1996 $120,000 0 75,000 0
President, Internet 1995 0 0 0 0
Security Corp. 1994 0 0 0 0
(1) Excludes perquisites and other personal benefits, the aggregate annual amount of which for each officer was
less than the lesser of $50,000 or 10% of the total salary and bonus reported.
(2) The Company did not grant any restricted stock awards or stock appreciation rights ("SARs") or make any
long-term incentive plan payouts during the fiscal years ended March 31, 1996, 1995 and 1994.
(3) Includes bonus payments earned by the Named Officers in the year indicated, for services rendered in such
year, which were paid in the next subsequent year.
</TABLE>
EMPLOYMENT AGREEMENTS
In April 1993, Barry N. Bycoff joined the Company as President, Chief
Executive Officer and a director. Pursuant to the terms of his employment
agreement, Mr. Bycoff receives an annual salary of $156,923, with a bonus of up
to 40% of base salary under a bonus program to be established from time to time
by the Board of Directors. In addition, Mr. Bycoff received an option to
purchase 150,000 shares of Common Stock at an exercise price of $1.00 per share,
the fair market value on the date of grant. A total of 37,500 shares were
immediately exercisable upon grant, with the balance becoming exercisable on a
quarterly basis following the grant. As of June 10, 1996, a total of 150,000
shares have become exercisable. The Company has the right to terminate Mr.
Bycoff at any time, without cause, but must pay a severance payment, including
benefits, for a period of 13 weeks following his termination. If Mr. Bycoff is
unable to find new employment at a comparable salary and benefit level after the
end of the 13-week period, the Company is also obligated to pay Mr. Bycoff his
salary and benefits for an additional 13 weeks or until Mr. Bycoff finds new
employment, whichever occurs first.
38
In November, 1995, in connection with the acquisition of Internet
Security Corporation ("ISC") Richard J. Kosinski entered into an employment and
noncompetition agreement with the Company. During the term of the agreement, Mr.
Kosinski agrees to serve as Vice President of the Company and President of ISC.
Mr. Kosinski receives an annual salary of $120,000. Mr. Kosinski is eligible to
participate in the ISC bonus plan which allows him to choose to either receive a
cash bonus or options to purchase the Company's Common Stock. The bonus amount
is determined by the financial performance of ISC, based on revenue and pre-tax
income, as compared to forecasted targets for ISC. In connection with his
initial employment by the Company, Mr. Kosinski also received an option to
purchase 75,000 shares of Common Stock at an exercise price of $1.72 per share,
the fair market value on the date of grant. These options to purchase 75,000
shares of Common Stock have the following vesting schedule: 30% after year one,
20% after years two, three and four, and 10% after year five. The Company has
the right to terminate Mr. Kosinski at any time, without cause, but must pay a
severance payment, including benefits, for 12 months following any termination
without cause. The Company also has the right to terminate Mr. Kosinski for
inadequate performance, which is based on the failure to achieve certain pre-tax
income targets for ISC, but must pay a severance payment, including benefits,
for six (6) months following such termination. Mr. Kosinski has agreed not to
compete against the Company and its ISC subsidiary during his employment and
until the later of four (4) years from his initial employment or 12 months
following the termination of his employment.
OPTION GRANTS IN THE LAST FISCAL YEAR
The following table sets forth grants of stock options pursuant to the
Company's 1987 Amended Stock Plan and 1994 Stock Plan during the fiscal year
ended March 31, 1996 to the Named Officers which are reflected in the Summary
Compensation Table above.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Percent Potential
of Total Realizable Value at
Options/SARs Assumed Annual Rates of
Granted to Exercise or Stock Price Appreciation
Options/SARs Employees in Base Price Expiration for Option Term (1)
Granted(#) Fiscal Year ($/Share) Date 5% ($) 10% ($)
-------------- ------------- -------------- ------------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Barry N. Bycoff 35,000 8% $1.37 2005 $57,050 $90,650
Richard J. Kosinski 75,000 18% $1.72 2005 $210,270 $334,110
(1) Amounts reported in these columns represent amounts that may be realized upon exercise of the options
immediately prior to the expiration of their term assuming the specified compounded rates of appreciation (5%
and 10%) on the Company's Common Stock over the term
of the options.
</TABLE>
These numbers are calculated based on rules promulgated by the
Securities and Exchange Commission and do not reflect the Company's estimate of
future stock price growth. Actual gains, if any, on stock option exercises and
Common Stock holdings are dependent on the timing of such exercise and the
future performance of the Company's Common Stock. There can be no assurance that
the rates of appreciation assumed in this table can be achieved or that the
amounts reflected will be received by the individuals.
39
OPTION EXERCISES AND FISCAL YEAR-END VALUES
The following table sets forth information with respect to options to
purchase the Company's Common Stock granted under the 1987 Amended Stock Plan
and 1994 Stock Plan including (i) the number of shares purchased upon exercise
of options in the most recent fiscal year, (ii) the net value realized upon such
exercise, (iii) the number of unexercised options outstanding at March 31, 1996,
and (iv) the value of such unexercised options at March 31, 1996:
AGGREGATED OPTION/SAR EXERCISES IN FISCAL YEAR
ENDED MARCH 31, 1996 OPTION VALUES
<TABLE>
<CAPTION>
Number of Value of Unexercised
Unexercised Options at In-the-Money Options at
Shares March 31, 1996 (#) March 31, 1996 ($) (1)
Acquired on Value --------------------------- --------------------------
Name Exercise(#) Realized($) Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Barry N. Bycoff 0 $0.00 387,500 147,500 $629,700 $239,700
Richard Kosinski 0 $0.00 0 75,000 0 $68,250
(1) Value is based on the difference between option exercise price and the fair market value at 1996 fiscal year-end
($2.625 per share, the closing price on the Nasdaq SmallCap Market on May 8, 1996) multiplied by the number
of shares underlying the option.
</TABLE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth as of May 8, 1996 the beneficial
ownership of shares of capital stock of (i) each person known by the Company to
own beneficially more than 5% of the 8,197,887 Common Stock outstanding on that
date, (ii) the name of each director, and (iii) the name of each executive
officer identified in the Summary Compensation Table, both with respect to the
number of shares owned by each person and the percentage of the outstanding
shares represented thereby, and also sets forth such information for directors,
nominees and executive officers as a group.
<TABLE>
<CAPTION>
Name and Address of Amount and Nature of
Beneficial Owner Beneficial Ownership (1) Percent of Class
- ------------------------------- ------------------------ ----------------
<S> <C> <C>
Edison Venture Fund, L.P. (2) 1,504,780 18.0%
Edison Venture Fund II, L.P.
Edison Venture Fund II-PA, L.P.
c/o Edison Venture Funds
997 Lenox Drive, #3
Lawrenceville, NJ 08648
Euclid Partners III, L.P. (3) 650,803 7.8%
Euclid Partners Corporation
50 Rockefeller Plaza, Suite 1022
New York, NY 10020
40
Brinson Trust Company (4) 615,393 7.4%
c/o Brinson Partners, Inc.
3 National Plaza
9th Floor, Suite 114
Chicago, IL 60602
Stephen L. Watson (5) 337,000 4.0%
Aaron Kleiner (6) 22,750 *
Milton J. Pappas (7) 682,303 8.1%
c/o Euclid Partners Corporation
50 Rockefeller Plaza, Suite 1022
New York, NY 10020
Gustav H. Koven III (8) 1,524,322 18.2%
c/o Edison Venture Funds
997 Lenox Drive #3
Lawrenceville, NJ 08648
Ralph B. Wagner (9) 31,250 *
Michael L. Mark (10) 63,553 *
Barry N. Bycoff (11) 397,750 4.6%
Richard Kosinski 465,838 5.7%
Joseph C. Burke (12) 10,400 *
All executive officers and directors
as a group (10 persons) (13) 3,534,916 37.7%
- -------------------------------
* less than 1%
(1) Except as otherwise noted below, the Company believes each beneficial owner has the sole voting and
investment power with respect to all shares of Common Stock (or options, warrants or other securities
convertible into or exchangeable for Common Stock) shown as beneficially owned by him. All numbers
and percentages, except as otherwise noted, do not assume the exercise of outstanding options or
warrants. Pursuant to the rules of the Securities and Exchange Commission, shares of Common Stock
which an individual or group has a right to acquire within 60 days of June 10, 1996 pursuant to the
exercise of presently exercisable or outstanding options, warrants or conversion privileges are deemed to
be outstanding for the purpose of computing the percentage ownership of such individual or group, but
are not deemed to be outstanding for the purpose of computing the percentage ownership of any other
person or group shown in the table.
41
(2) Edison Venture Fund, L.P., Edison Venture Fund II, L.P. and Edison Venture Fund II-PA, L.P. (collectively,
the "Edison Venture Funds") hold collectively 1,333,386 shares of Common Stock. In addition, the Edison
Venture Funds collectively hold an aggregate of 171,394 shares of Series C Preferred Stock, convertible at
any time into 171,394 shares of Common Stock. The Edison Venture Funds collectively have sole voting and
investment power with respect to the 1,333,386 shares of Common Stock and 171,394 shares of Series C
Preferred Stock. Mr. Koven, a director of the Company, is also a general partner of each of the general
partners of the Edison Venture Funds and may be deemed to share beneficial ownership of the securities
held by such entities. Mr. Koven disclaims such beneficial ownership.
(3) Euclid Partners III, L.P. ("Euclid") holds 483,098 shares of Common Stock. In addition, Euclid holds
84,619 shares of Series C Preferred Stock, convertible at any time into 84,619 shares of Common Stock.
Also included in this amount are 83,086 shares of Common Stock issuable upon exercise of a warrant held by
Euclid. Mr. Pappas, a director of the Company, is the president of the sole corporate general partner of
Euclid and may be deemed the beneficial owner of the 650,803 shares beneficially owned by Euclid. Mr.
Pappas disclaims beneficial ownership of such shares.
(4) Includes 472,225 shares of Common Stock held by The First National Bank of Chicago as agent for the
Brinson Trust Company as Trustee to the Institutional Venture Capital Fund II ("Brinson") and 57,471
shares of Common Stock held by Monroe and Company for the benefit of Brinson. In addition, Brinson also
holds 85,697 shares of Series C Preferred Stock, convertible into 85,697 shares of Common Stock.
(5) Includes the presently exercisable portion (i.e., 246,500 shares) of stock options to purchase up to
267,500 shares of Common Stock. Also includes 40,500 shares of Common Stock held directly by Mr. Watson
and 50,000 shares of Series C Preferred Stock, convertible at any time into 50,000 shares of Common Stock.
(6) Includes the presently exercisable portion (i.e., 22,750 shares) of non-qualified stock options to
purchase up to 33,250 shares of Common Stock.
(7) Includes the presently exercisable portion (i.e., 31,500 shares) of non-qualified stock options to
purchase up to 42,000 shares of Common Stock. Also includes the 650,803 shares of Common Stock and Series
C Preferred Stock deemed to be owned by Euclid, of which shares Mr. Pappas may be deemed a beneficial
owner. Mr. Pappas disclaims beneficial ownership of such shares. See footnote 3.
(8) Includes the presently exercisable portion (i.e., 19,542 shares) of non-qualified stock options to
purchase up to 37,042 shares of Common Stock. Also includes the 1,504,780 shares of Common Stock and
Series C Preferred Stock deemed to be owned by the Edison Venture Funds, of which shares Mr. Koven may be
deemed a beneficial owner. Mr. Koven disclaims beneficial ownership of such shares. See footnote 2.
(9) Includes the presently exercisable portion (i.e., 26,250 shares) of non-qualified stock options to
purchase up to 40,250 shares of Common Stock and also includes 5,000 shares of Common Stock held directly.
(10) Includes 23,193 shares of Common Stock held directly and 26,360 shares of Series C Preferred Stock,
convertible into 26,360 shares of Common Stock, and also includes the presently exercisable portion (i.e.
14,000 shares) of stock options to purchase up to 35,000 shares of Common Stock.
(11) Includes the presently exercisable portion (i.e., 387,500 shares) of stock options to purchase up to
535,000 shares of Common Stock and includes 10,000 shares of Common Stock owned by Mr. Bycoff's children.
42
(12) Includes the presently exercisable portion (i.e., 7,500 shares) of stock options to purchase up to 80,000
shares of Common Stock and also includes 2,900 shares of Common Stock owned by Mr. Burke's immediate
family.
(12) Includes 755,542 shares which all officers and current directors as a group have the right to acquire
within 60 days after June 10, 1996 upon exercise of the presently exercisable portion of outstanding stock
options held by current directors and officers. Also includes: (i) 483,098 shares of Common Stock, 84,619
shares of Series C Preferred Stock, convertible at any time into 84,619 shares of Common Stock, and 83,086
shares issuable upon exercise of warrants deemed to be owned by Euclid, of which shares Mr. Pappas, a
director, may be deemed a beneficial owner; (ii) 1,333,386 shares of Common Stock and 171,394 shares of
Series C Preferred Stock, convertible at any time into 171,394 shares of Common Stock, deemed to be owned
by the Edison Venture Funds, of which shares Mr. Koven, a director, may be deemed a beneficial owner;
(iii) 50,000 shares of Series C Preferred Stock, convertible at any time into 50,000 shares of Common
Stock, owned by Mr. Watson, a director; and (iv) 26,360 shares of Series C Preferred Stock, convertible at
any time into 26,360 shares of Common Stock, owned by Mr. Mark, a director.
</TABLE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
If, and only if, the proposed sale of certain assets of the Company to
Programmer's Paradise, Inc. (the "Transaction") is consummated, as noted avove
in Item 4, the Company may be obligated to use a portion of the proceeds of the
Transaction (up to $2,000,000) to repurchase shares of Common Stock and Series C
Preferred Stock held by the Company's largest institutional stockholders. These
stockholders are Edison Venture Fund I, L.P., Edison Venture Fund II, L.P. and
Edison Venture Fund II - PA, L.P. (collectively, the "Edison Venture Funds").
The Edison Venture Funds collectively own 1,504,780 shares of Common Stock and
Series C Preferred Stock, or approximately 17% of the 8,826,217 shares of the
Company's outstanding voting securities as of May 8, 1996. Mr. Gustav Koven, a
director of the Company, is also a general partner of each of the general
partners of the various Edison Venture Funds. Mr. Koven abstained from voting on
the decision to repurchase the shares of capital stock.
In order to avoid disruption in the trading of Common Stock in the
open market following the proposed Transaction, and to create improved stability
in stock price and trading volume, the Board of Directors agreed to enter into
separate stock, repurchase agreements with each of the Edison Venture Funds if
the Transaction is consummated. The Company has agreed to use up to
approximately $2,000,000 of the Transaction proceeds to repurchase stock held by
Edison Venture Funds. The Company's obligation to purchase these shares, and the
number of shares repurchased depends on the average of the closing price of the
Company's Common Stock during the trading period between May 16, 1996, the day
the Agreement was signed, and the last trading day prior to the closing date of
the Transaction (determined as the "Market Price").
If the Market Price during this trading period is below $1.50, the
Company must purchase, at the Market Price and at the option of the Edison
Venture Funds, up to $2,000,000 of Common Stock and Series C Preferred Stock
held by the Edison Venture Funds. If the Market Price during this trading period
is greater than $3.00, the Company is not obligated to repurchase any shares
held by the Edison Venture Funds, but, at its option, may elect to purchase
these shares at the Market Price for a maximum of $2,000,000 for the shares held
by the Edison Venture Funds. If the Market Price during this trading period is
greater than $1.50 but less than $3.00, the Company is obligated to purchase,
and each of the Edison Venture Funds is obligated to sell, their shares of
Common Stock and Series C Preferred Stock at the average of the daily closing
price of the Company's Common Stock during the period between May 16, 1996 and
the last trading day prior to the closing date of the Transaction (but limited
to the $2,000,000 purchase obligation).
43
The Company is not obligated to purchase more than $2,000,000 of
securities held by the Edison Venture Funds and the number of shares so
purchased by the Company depends on the Market Price during this trading period
between May 16, 1996 and the last trading day prior to the closing date of the
Transaction. The purchase price for shares of Common Stock to be repurchased by
the Company relating to the Series C Preferred Stock held by the Edison Venture
Funds is a minimum of $2.00 per share (that is, equal to the current liquidation
preference for the Series C Preferred Stock) but may be higher if the Market
Price during this trading period is higher than $2.00 per share.
If the Transaction is consummated, the Company is obligated to purchase
up to $2,000,000 of equity securities held by the Edison Venture Funds, unless
the Market Price for the Company's Common Stock during the applicable trading
period is greater than $3.00 per share. If any shares held by the Edison Venture
Funds are repurchased by the Company, Mr. Gustav Koven, the representative of
the Edison Venture Funds serving as a director of the Company, has agreed to
resign from the Board of Directors and not seek election to the Company's Board
of Directors in the future. Additionally, the Company also has the right to
assign its repurchase obligation described above to a third party to permit the
purchase of some or all of the shares held by the Edison Venture Funds by such
third party rather than the Company. As part of the repurchase, each of the
Edison Venture Funds have agreed to convert any shares of Series C Preferred
Stock held by them and the Company is only obligated to repurchase the shares of
Common Stock issuable upon conversion of the Series C Preferred Stock.
On November 21, 1990, the Company received a loan of $300,000 from
Watson Investments, Inc., a family-owned private investment firm of which
Stephen L. Watson was a director and treasurer. Mr. Watson is a director of the
Company and currently its Chairman of the Board. The Company issued to Watson
Investments, Inc. its Secured Subordinated Term Note, due December 1, 1993, in
the principal amount of $300,000. This note bears interest at 16% per year, with
interest payable monthly in arrears, and is secured by substantially all of the
tangible assets of the Company. In December 1991, the investment company was
dissolved, and Mr. Watson and his spouse became joint holders of the Note. On
October 19, 1993, the Company exchanged and extended the $300,000 loan. The
principal of $300,000 was extended to December 1996, with interest accruing at
12% per annum, payable quarterly in arrears. In any month which the Company does
not make a profit, the interest will be deferred and paid to the extent of
profits in the following months without compounding unpaid interest. The new
note is subordinated to any commercial bank or other financial institution debt
up to $4,000,000. The note is subordinated to indebtedness of the Company to
commercial banks and other institutional lenders, including the Company's
existing $2,000,000 line of credit facility.
On October 19, 1993 the Company completed a private placement of
Series C Preferred Stock and a recapitalization transaction. Private investors
purchased 905,968 shares of Series C Preferred stock at a price of $1.00 per
share, resulting in net proceeds of approximately $781,000. The Series C
Preferred Stock is convertible into Common Stock on a one-for-one basis (for an
aggregate of 905,968 shares) and votes with Common Stock on the same basis. The
Series C Preferred Stock contains a number of features including a fixed
liquidation preference of $2.00 per share (for an aggregate liquidation
preference of $1,812,000), anti-dilution rights and two (2) Board of Director
seats. The recapitalization transaction involved the exchange of all of the
Company's Series A Preferred Stock and Series B Senior Preferred Stock for
4,288,890 shares of Common Stock, increasing the total number of shares of
Common Stock issued and outstanding to 7,292,453. This recapitalization removed
the liquidation preference, including cumulative dividends, to the preferred
holders of approximately $7,000,000, and terminated all prior agreements with
the holders of the Series A Preferred Stock and the Series B Senior Preferred
Stock, while retaining certain registration rights.
44
As part of the transaction, the holders of the Series C Preferred Stock
entered into a Voting Agreement pursuant to which such holders agreed to vote
their shares of Series C Preferred Stock in favor of two designated
representatives to the Company's Board of Directors. The holders of the Series C
Preferred Stock have the right to elect two representatives to the Company's
Board of Directors under the Company's Restated Certificate of Incorporation, as
amended. One of the designees is the representative of Edison Venture Funds and
another is the representative of Euclid. Currently, these two designated
representatives are Gustav H. Koven III, a general partner of the general
partners of Edison Venture Funds, and Milton J. Pappas, president of the general
partner of Euclid. Edison Venture Funds acquired 171,394 shares of Series C
Preferred Stock and Euclid acquired 84,619 shares of Series C Preferred Stock as
part of the financing and recapitalization transaction.
The Board of Directors has adopted a policy that all transactions
between the Company and its officers, directors and principal stockholders or
any affiliates thereof will be on terms no less favorable to the Company than
could be obtained from unaffiliated third parties. Such transactions will also
be approved by a majority of the disinterested, outside directors. All loans to
Company officers will also be approved by a majority of the disinterested,
outside directors.
45
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K
A. THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS REPORT:
1. Financial Statements
The following financial statements are included in Item 8:
a. Report of Independent Auditors
b. Consolidated Balance Sheets - March 31, 1996 and 1995
c. Consolidated Statements of Operations for the years ended
March 31, 1996, 1995 and 1994
d. Consolidated Statements of Stockholders' Equity (Deficit)
for the years ended March 31, 1996, 1995 and 1994
e. Consolidated Statements of Cash Flows for the years ended
March 31, 1996, 1995 and 1994
f. Notes to Consolidated Financial Statements
2. Financial Statement Schedules
The following financial statement schedules are included in
Item 14(d):
a. Report of Independent Auditors
b. Schedule IV: Indebtedness of and to Related Parties -- Not
Current
c. Schedule VIII: Valuation of Qualifying Accounts and
Reserves
d. Schedule IX: Short-Term Borrowings
Schedules other than those listed above have been omitted
since they are either not required or the information is
otherwise included.
3. List of Exhibits
The following exhibits, required by Item 601 of Regulation
S-K, are filed as a part of this Annual Report on Form 10-K.
Exhibit numbers, where applicable, in the left column
correspond to those of Item 601 of Regulation S-K.
46
EXHIBIT
ITEM NO. ITEM AND REFERENCE
3.01 Restated Certificate of Incorporation, as amended, of
the Registrant (filed as Exhibit 3.01 to Registrant's
Registration Statement of Form S-18, No. 33-24446-B,
and incorporated by reference).
3.02 Certificate of Designations, Preferences and Rights of
the Series C Preferred Stock of the Registrant (filed
as Exhibit 7.03 to Report on Form 8-K filed on November
12, 1993 and incorporated by reference).
3.03 Amended By-Laws of the Registrant (filed as Exhibit
3.03 to Annual Report on Form 10- K for the fiscal year
ended March 31, 1991, and incorporated by reference).
4.01 Specimen certificate for shares of Common Stock of the
Registrant (filed as Exhibit 4.01 to the Registrant's
Registration Statement on Form S-18, No. 33-24446-B,
and incorporated by reference).
4.02 Series C Preferred Stock Purchase, Recapitalization and
Exchange Agreement among the Registrant and the persons
named therein regarding the issuance of the Series C
Preferred Stock and the retirement of the Series A
Preferred Stock and Series B Senior Preferred Stock
(filed as exhibit 7.01 to Current Report on Form 8-K
filed on November 12, 1993 and incorporated by
reference).
4.03 Voting Agreement among the Registrant and the holders
of Series C Preferred Stock (filed as Exhibit 7.02 to
Current Report on Form 8-K filed on November 12, 1993
and incorporated by reference).
10.01 1986 Nonstatutory Stock Option Plan of the Registrant
(filed as Exhibit 10.01 to the Registrant's
Registration Statement on Form S-18, No. 33-24446-B,
and incorporated by reference).
10.02 Form of Nonstatutory Stock Option Agreement under the
Registrant's 1986 Nonstatutory Stock Option Plan (filed
as Exhibit 10.02 to the Registrant's Registration
Statement on Form S-18, No. 33-24446-B, and
incorporated by reference).
10.03 1987 Amended Stock Plan of the Registrant (filed as
Exhibit 4.1 to Registration Statement on Form S-18, No.
33-24446-B, and incorporated by reference).
10.04 Form of Incentive Stock Option Agreement under the
Registrant's 1987 Amended Stock Plan (filed as Exhibit
10.04 to Annual Report on Form 10-K for the fiscal year
ended March 31, 1991, and incorporated by reference).
10.05 Form of Non-Qualified Stock Option Agreement under the
Registrant's 1987 Amended Stock Plan (filed as Exhibit
10.05 to Annual Report on Form 10-K for the fiscal year
ended March 31, 1991, and incorporated by reference).
10.06 1988 Amended Non-Employee Director Stock Option Plan
(filed as Exhibit 10.22 to Annual Report on Form 10-K
for the fiscal year ended March 31, 1990, and
incorporated by reference).
47
10.07 Form of Non-Qualified Stock Option Agreement for the
Registrant's 1988 Amended Non- Employee Director Stock
Option Plan (filed as Exhibit 10.07 to Annual Report on
Form 10-K for the fiscal year ended March 31, 1991, and
incorporated by reference).
10.08 1990 Employee Stock Purchase Plan of the Registrant
(filed as Exhibit 4.1 to Registration Statement No.
33-35225, and incorporated by reference).
10.10 1991 Director Stock Plan (filed as Exhibit 10.10 to
Annual Report on Form 10-K for the fiscal year ended
March 31, 1991, and incorporated by reference).
10.11 1993 Non-Employee Director Stock Option Plan (filed as
Exhibit 10.11 to Annual Report on Form 10-K for the
fiscal year ended March 31, 1993 and incorporated by
reference).
10.12 Form of Non-Qualified Stock Option Agreement for the
Registrant's 1993 Non-Employee Director Stock Option
Plan (filed as Exhibit 10.12 to Annual Report on Form
10-K for the fiscal year ended March 31, 1993 and
incorporated by reference).
10.13 1994 Stock Plan (filed as Exhibit 10.13 to Annual
Report on Form 10-K for the fiscal year ended March 31,
1994 and incorporated by reference).
10.14 1994 Non-Employee Director Plan (filed as Exhibit 10.14
to Annual Report on Form 10-K for the fiscal year ended
March 31, 1994 and incorporated by reference).
10.15 Commercial Lease dated as of June 1, 1996 between the
Registrant and K/B Fund c/o Koll Management Services,
Inc. (filed herewith).
10.16 Credit Agreement dated as of March 16, 1995 between the
Registrant and Silicon Valley Bank (filed as Exhibit
10.16 to Annual Report on Form 10-K for the fiscal year
ended March 31, 1995 and incorporated by reference).
10.17 Promissory Note of the Registrant issued to Silicon
Valley Bank in the principal amount of $2,000,000 due
June 5, 1996 (filed as Exhibit 10.17 to Annual Report
on Form 10-K for the fiscal year ended March 31, 1995
and incorporated by reference).
10.18 Promissory Note of the Registrant issued to Silicon
Valley Bank in the principal amount of $200,000 due
June 5, 1998 (filed as Exhibit 10.18 to Annual Report
on Form 10-K for the fiscal year ended March 31, 1995
and incorporated by reference).
10.19 Security Agreement dated as of March 16, 1996 between
the Registrant and Silicon Valley Bank (filed as
Exhibit 10.19 to Annual Report on Form 10-K for the
fiscal year ended March 31, 1995 and incorporated by
reference).
10.20 Subordination Agreement dated as of March 16, 1995
among the Registrant, Silicon Valley Bank, and Stephen
L. Watson and Beverly F. Watson as Joint Tenants with
the Right of Survivorship (filed as Exhibit 10.20 to
Annual Report on Form 10-K for the fiscal year ended
March 31, 1995 and incorporated by reference).
10.21 Amended and Restated Security Agreement dated as of
March 16, 1995 among the Registrant and Stephen L.
Watson and Beverly F. Watson as Joint Tenants with the
Right of Survivorship (filed as Exhibit 10.21 to Annual
Report on Form 10-K for the fiscal year ended March 31,
1995 and incorporated by reference).
48
10.22 Secured Subordinated Term Note of the Registrant in the
principal amount of $300,000 dated as of October 19,
1993 (filed as Exhibit 10.18 to Annual Report on Form
10-K for the fiscal year ended March 31, 1994 and
incorporated by reference).
10.23 Agreement of Purchase and Sale of Assets by and between
Programmer's Paradise, Inc. and The Software
Developer's Company, Inc and Software Developer's
Company GmbH, as Selling Parties dated May 16, 1996
(filed as Appendix A to Consent Solicitation Statement
dated June 4, 1996 and incorporated by reference).
10.24 Agreement and Plan of Merger among the Registrant, ISC
Acquisition Corporation, Internet Security Corporation
and Richard J. Kosinski dated as of October 17, 1995
(filed as Exhibit 7.01 to Report on Form 8-K filed on
November 30, 1995 and incorporated by reference).
10.25 Amendment No. 1 to the Agreement and Plan of Merger
among the Registrant, ISC Acquisition Corporation,
Internet Security Corporation and Richard J. Kosinski,
dated as of November 16, 1995 (filed as Exhibit 7.02 to
Report on Form 8-K filed on November 30, 1995 and
incorporated by reference).
10.26 Employment and Noncompetition Agreement by and among
Richard J. Kosinski and the Registrant and Internet
Security Corporation (filed as Exhibit 7.03 to Report
on Form 8- K filed on November 30, 1995 and
incorporated by reference).
10.27 Holdback Agreement by and among the Registrant and
Richard J. Kosinski dated November 16, 1995 (filed as
Exhibit 7.04 to Report on Form 8-K filed on November
30, 1995 and incorporated by reference).
11.01 Computation of Earnings Per Share (filed herewith).
22.01 Subsidiaries of the Registrant (filed herewith).
24.01 Consent of Coopers & Lybrand, L.L.P. (filed herewith).
27 Financial Data Schedule
B. REPORTS ON FORM 8-K:
The Company filed a Report on Form 8K/A on January 30, 1996 in connection
with the Agreement and Plan of Merger among The Software Developer's
Company, Inc., ISC Acquisition Corporation, Internet Security Corporation
and Richard Kosinski dated as of October 17, 1995. (See Exhibits 10.24,
10.25, 10.26 and 10.27 above).
C. EXHIBITS:
The Company hereby files as part of this Form 10-K the exhibits listed in
14 (a)(3) above.
D. FINANCIAL STATEMENT SCHEDULES:
The Company hereby files as part of this Form 10-K in Item 14(d) attached
hereto the financial statement schedules listed in Item 14 (a)(2) above.
49
THE SOFTWARE DEVELOPER'S COMPANY, INC.
ANNUAL REPORT ON FORM 10-K
Year Ended March 31, 1996
ITEM 14(d)
FINANCIAL STATEMENT SCHEDULES
50
REPORT OF INDEPENDENT AUDITORS
In connection with our audits of the consolidated financial statements of
The Software Developer's Company, Inc. as of March 31, 1996 and 1995 and each of
the three years in the period ended March 31, 1996, we have also audited the
consolidated schedules included in this Annual Report (Form 10-K) for the year
ended March 31, 1996 as listed in Item 14(a)(2).
In our opinion, the consolidated schedules referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information required to be stated
therein.
COOPERS & LYBRAND, L.L.P
Boston, Massachusetts
May 15, 1996
51
THE SOFTWARE DEVELOPER'S COMPANY, INC.
SCHEDULE IV - INDEBTEDNESS OF AND TO RELATED PARTIES -- NOT CURRENT
<TABLE>
<CAPTION>
Year ended March 31, 1996
-------------------------
Balance at
Beginning -- Indebtedness to -- Balance at
Name of Person of Period Additions Deductions End of Period
- -------------- ----------- --------- ---------- -------------
<S> <C> <C> <C> <C>
Stephen L. Watson (1) $300,000 --- --- $300,000
(1) The note from a related party is a three-year term loan dated November 21, 1990, used for working capital and
capital equipment. The note was exchanged and extended in October 1993, to December 1996, in connection with
the recapitalization transaction (see Note E and Schedule IX).
</TABLE>
52
THE SOFTWARE DEVELOPER'S COMPANY, INC.
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Allowance for Allowance for
doubtful accounts doubtful accounts Reserve
receivable receivable--product for inventory
---------- ------------------- -------------
<S> <C> <C> <C>
Balance as of March 31, 1993 $911,372 $145,182 $516,882
Additions charged to costs and expenses (A) 187,047 193,113 61,622
Charge offs (630,273) (78,580) (255,354)
------- -------- -------
Balance as of March 31, 1994 468,146 259,715 323,150
-------- ---------- ----------
Additions charged to costs and expenses (A) 188,261 152,490 57,480
Charge offs (308,975) (351,460) (238,516)
------- ------- -------
Balance as of March 31, 1995 347,432 60,745 142,114
------- -------- -------
Additions charged to costs and expenses (A) 597,515 124,900 267,030
Charge offs (670,675) (111,931) (268,986)
------- ------- -------
Balance as of March 31, 1996 $274,272 $73,714 $140,158
======= ====== =======
(A) Additions to the valuation and qualifying accounts are reflected either as reductions in net marketing services income
for accounts receivable-products, as reductions in selling, general and administrative expenses for accounts
receivable-trade, or as charges to cost of sales-product for inventory.
</TABLE>
53
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report on Form 10-K to be
signed on its behalf by the undersigned, thereunto duly authorized.
THE SOFTWARE DEVELOPER'S COMPANY,INC.
/s/ Barry N. Bycoff
-------------------
June 27, 1996 Barry N. Bycoff, President,
Chief Executive Officer and Director
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
on Form 10-K has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
June 27, 1995 /s/ Barry N. Bycoff
-------------------
Barry N. Bycoff, President,
Chief Executive Officer and Director
(Principal Executive Officer)
June 27, 1996 /s/ James O'Connor, Jr
----------------------
James O'Connor, Jr., Vice President,
Chief Financial Officer and Treasurer
(Principal Accounting and Financial
Officer)
June 27, 1996 /s/ Aaron Kleiner
-----------------
Aaron Kleiner, Director
June 27, 1996 /s/ Gustav H. Koven
-------------------
Gustav H. Koven, Director
June 27, 1996 /s/ Michael L. Mark
-------------------
Michael L. Mark, Director
June 27, 1996 /s/ Milton J. Pappas
--------------------
Milton J. Pappas, Director
June 27, 1996 /s/ Ralph B. Wagner
-------------------
Ralph B. Wagner, Director
June 27, 1996 /s/ Stephen L. Watson
---------------------
Stephen L. Watson
Chairman of the Board of Directors
54
WINTER STREET OFFICE PARK
245 - 265 WINTER STREET
WALTHAM, MASSACHUSETTS
LEASE
dated as of
MAY_, 1996
ARTICLE I
1.1 REFERENCE DATA
Subjects referred to each reference in this Lease to any of the following
subjects shall be construed to incorporate the data stated for that subject in
this Article:
LANDLORD: K/B Fund III
LANDLORD'S ORIGINAL ADDRESS: c/o Koll Management Services, Inc.
60 State Street
Boston, MA 02109
LANDLORD'S CONSTRUCTION REPRESENTATIVE: Robert Tagliamonte
TENANT: The Software Developer's Company, Inc.
TENANT'S ORIGINAL ADDRESS: 90 Industrial Park Road
Hingham, MA 02043
TENANT'S CONSTRUCTION REPRESENTATIVE:
-------------------------------
TENANT'S FINAL PLANS DATE: Not Applicable
SCHEDULED TERM COMMENCEMENT DATE: June 1, 1996
TENANT'S SPACE: 5,760 Rentable Square Feet on the First (1st) Floor
of Building 245 as shown on Exhibit E
attached hereto.
TERM: Sixty (60) full calendar months
ANNUAL FIXED RENT: YEAR ANNUAL MONTHLY
---- ------ -------
1 $95,040.00 $7,920.00
2 - 5 $100,800.00 $8,400.00
ANNUAL ELECTRICITY CHARGE: $1.00
TENANT'S TAX BASE: Tax Year 1996 (July 1, 1995 - June 30, 1996)
TENANT'S OPERATING EXPENSE BASE: Calendar Year 1996 (January 1,
1996 - December 31, 1996)
1
KBFIII/SOFTWARE DEVELOPER's COMPANY/5.1.96
RENTABLE FLOOR AREA OF THE BUILDING: 89,305 Rentable Square Feet
with respect to 245 Winter
Street.
PERMITTED USES: Office Purposes
PUBLIC LIABILITY INSURANCE: Bodily Injury - $5,000,000.00
Property Damage - $5,000,000.00
SECURITY DEPOSIT: $16,885.00
1.2 EXHIBITS. There are incorporated as a part of this Lease:
EXHIBIT A - Description of Lot
EXHIBIT B - Construction
EXHIBIT C - Tenant Plan Requirements
EXHIBIT D - Landlord's Services
EXHIBIT E - Floor Plan
EXHIBIT F - Required Tenant Work General Conditions
1.3 TABLES OF ARTICLES AND SECTIONS
ARTICLE I - REFERENCE DATA
1.1 Subjects Referred To
1.2 Exhibits
1.3 Table of Articles and Sections
ARTICLE II - PREMISES, TERM AND RENT
2.1 The Premises
2.2 Rights to Use Common Facilities
2.3 Landlord's Reservations
2.4 Commencement of Term
2.5 Monthly Fixed Rent Payments
2.6 Adjustment for Operating Expenses
2.7 Adjustment for Real Estate Taxes
2.8 Due Date of Additional Payments; No Offsets
2.9 Security Deposit
ARTICLE III - ALTERATIONS AND CONSTRUCTION
3.1 Alterations and Additions by Tenant
3.2 Real Estate Taxes on Leasehold Improvements
3.3 Landlord's Right to Make Alterations
ARTICLE IV - LANDLORD'S COVENANTS; INTERRUPTIONS AND DELAYS
4.1 Services Furnished by Landlord
4.2 Additional Services Available to Tenant
4.3 Additional Air Conditioning Equipment
4.4 Roof, Exterior Wall, Floor Slab and Common Facility Repair
4.5 Door Signs and Directory
4.6 Quiet Enjoyment
2
KBFIII/SOFTWARE DEVELOPER's COMPANY/5. 1.96
ARTICLE V - TENANT'S COVENANTS
5.1 Payments
5.2 Repair and Yield Up
5.3 Use
5.4 Obstructions, Items Visible from Exterior; Rules and Regulations
5.5 Safety Appliances
5.6 Assignment; Sublease
5.7 Indemnity; Insurance
5.8 Personal Property at Tenant's Risk
5.9 Right of Entry
5.10 Floor Load; Prevention of Vibration and Noise
5.11 Personal Property Taxes
5.12 Payment of Litigation Expenses
5.13 Compliance with Insurance Regulations
5.14 Subject to Applicable Law
5.15 Fines and Penalties
ARTICLE VI - CASUALTY AND TAKING
6.1 Termination or Restoration; Rent Adjustment
6.2 Eminent Domain Damages Reserved
6.3 Temporary Taking
ARTICLE VII - DEFAULT
7.1 Events of Default
7.2 Damages
ARTICLE VIII - MISCELLANEOUS
8.1 Computation of Rentable Floor Areas
8.2 Notice of Lease; Consent of Approval; Notices; Bind and Inure
8.3 Landlord's Failure to Enforce
8.4 Acceptance of Partial Payments of Rent; Delivery of Keys
8.5 Cumulative Remedies
8.6 Partial Invalidity
8.7 Self-Help
8.8 Tenant's Estoppel Certificate
8.9 Waiver of Subrogation
8.10 All Agreements Contained
8.11 Brokerage
8.12 Submission Not an Option
8.13 Applicable Law
8.14 Waiver of Jury Trial
8.15 Holdover
8.16 Arbitration
8.17 Inability to Perform
8.18 Exculpatory Clause
8.19 Parties Bound - Seisin of Title
ARTICLE IX - RIGHTS OF PARTIES HOLDING PRIOR INTERESTS
9.1 Lease Subordinate
9.2 Rights of Holder of Mortgage to Notice of Defaults Landlords and
to Cure Same.
3
KBFIII/SOFTWARE DEVELOPER's COMPANY/5.1.96
ARTICLE II
PREMISES, TERM AND RENT
2.1 THE PREMISES
Landlord hereby leases to Tenant and Tenant hereby hires from Landlord Tenant's
Space in the Building. The demise of the Premises does not include faces of
exterior walls, the common stairways and stairwells, elevators and elevator
shafts, fan rooms, electric and telephone closets, janitor closets, freight
elevator vestibules, and pipe, ducts, conduits, wires and appurtenant fixtures
serving exclusively or in common other parts of the Building, and if Tenant's
Space includes less than the entire rentable area of any floor, excluding the
common corridors, elevator lobbies and toilets located on such floor. Tenant's
Space with such exclusions is hereinafter referred to as the "PREMISES".
Landlord reserves the right, at its own cost and expense, to require Tenant,
upon not less than thirty (30) days' notice, to relocate its Premises elsewhere
in the Building to an area of substantially equivalent size, construction and
finish as designated by Landlord. Any dispute between the parties as to whether
the area designated by Landlord is "substantially equivalent" shall be submitted
to arbitration pursuant to Section 8.16 hereof The term "Building" means the
building in which the Premises are located, and the term "Lot" means all, and
also any part of, the land described in Exhibit A in whole or in part and
subject to minor adjustments of the lot boundaries. "PROPERTY" means the
Building and Lot and other improvements on the Lot including, without
limitation, other buildings on the Lot.
2.2 RIGHTS TO USE COMMON FACILITIES
Tenant shall have, as appurtenant to the Premises, rights to use in common,
subject to reasonable rules of general applicability to tenants of the Building
from time to time made by Landlord of which Tenant is given notice: (a) the
common lobbies, corridors, stairways, elevators and loading platform of the
Building, and the pipes, ducts, conduits, wires and appurtenant meters and
equipment serving the Premises in common with others, (b) common walkways and
driveways necessary for access to the Building, (c) if the Premises included
less than the entire rentable area of any floor, the common toilets, corridors
and elevator lobbies of such floor and (d) the common parking facilities
adjacent to the Building (Tenant hereby acknowledging that (i) parking is
available on a first-come, first-served basis only, (ii) Tenant, its employees,
agents, contractors and invitees shall not be entitled to use at any time in
excess of 3 parking spaces per 1,000 square feet of Rentable Square Feet of the
Premises, (iii) Landlord shall have the right to designate exclusive and/or
reserved parking areas, and (iv) Landlord shall have the right to institute
measures reasonably necessary to enforce the foregoing); and no other
appurtenant rights or easements.
2.3 LANDLORD'S RESERVATIONS
Landlord reserves the right from time to time, without unreasonable interference
with Tenant's use: (a) to install, use, maintain, repair, replace and relocate
for service to the Premises and other parts of the Building, or either, pipes,
ducts, conduits, wires and appurtenant fixtures, wherever located in the
Premises or Building, and (b) to alter or relocate any other common facility,
provided that substitutions are substantially equivalent or better.
Installations, replacements and reallocations referred to in clause (a) above
shall be located so far as practicable in the central core area of the Building,
above ceiling surfaces, below floor surfaces or within perimeter walls of the
Premises.
4
KBFIII/SOFTWARE DEVELOPER's COMPANY/5. 1.96
2.4 COMMENCEMENT OF TERM
Tenant shall have and hold the Premises for a period commencing on the date
("TERM COMMENCEMENT DATE") which is the earlier of (a) the Substantial
Completion Date, as defined in Exhibit B to the Lease, or (b) that date on which
Tenant commences occupancy of any portion of the Premises for the Permitted Uses
and shall expire as of the Termination Date.
If Landlord shall be unable to give possession of the Premises on the Scheduled
Term Commencement Date because the Premises are not completed and ready for
occupancy, or due to the holding over or retention of possession of any tenant
or occupant, or if repairs, improvements or decorations of the Premises or of
the Building are not completed, or for any other reason, Landlord shall not be
subject to any liability for failure to give possession on said date, nor shall
such failure affect the continuing validity of this Lease.
2.5 MONTHLY FIXED RENT PAYMENTS
Tenant shall pay, without notice or demand, monthly installments of 1/12 of (a)
the Annual Fixed Rent, and (b) a charge ("ANNUAL ELECTRICITY CHARGE") equal to
$1.00 per annum for each square foot of Rentable Floor Area of the Premises for
tenant electricity, as described in paragraph VI (A) of Exhibit D, in advance on
the first day of each month for each full calendar month of the Term, and the
corresponding fraction of said amounts for any fraction of a calendar month at
the beginning or end of the Term. Notwithstanding the provisions hereof, Tenant
shall pay the first monthly installment of Annual Fixed Rent on the execution of
this Lease.
Rental and any other sums due hereunder not paid by the date due shall bear
interest for each month or fraction thereof from the due date until paid
computed at the annual rate of two (2) percentage points over the so-called
prime rate as published in The Wall Street Journal, or at any applicable lesser
maximum legally permissible rate for debts of this nature.
In addition, should Tenant fail to pay when due rental and any other sums due
hereunder, Tenant acknowledges that Landlord will incur additional
administrative expenses which are difficult to determine. Therefore, in such
event, Landlord may assess against Tenant, from and after the tenth (10th) day
following the date on which any sum shall be due and payable, a late payment fee
equal to five (5%) of the sum due from Tenant to Landlord.
2.5.1. RENT REDUCTION
Provided Tenant has not been in default during the Term, and there exists no
condition which with the passage of time or the giving of notice, or both, would
constitute a default under this Lease, Landlord shall waive Tenant's obligation
to pay Monthly Fixed Rent for the 11th and 12th calendar months during the Term.
If Tenant subsequently defaults during the Term, then in addition to and without
limiting Landlord's other remedies, Tenant shall pay to Landlord an amount
equal the Fixed Monthly Rent payments which were hereby waived.
5
KBFIII/SOFTWARE DEVELOPER's COMPANY/5. 1.96
2.6 ADJUSTMENT FOR OPERATING EXPENSES
A. Terms used herein are defined as follows:
(a) "OPERATING YEAR" shall mean any 12 month period elected by Landlord for
operating purposes. Landlord's current Operating Year commences on January 1, of
each year. If Landlord should elect to change said Operating Year, Landlord
shall notify Tenant thereof, and all calculations required to be made at the end
of a Operating Year shall be made and proportioned accordingly.
(b) "OPERATING EXPENSES FOR THE PROPERTY" means the cost of operation of the
Property which shall exclude costs of special services rendered to tenants
(including Tenant) for which a separate charge is made, and items of expense
referred to in Section 2.7 hereof, but shall include, without limitation, the
following: Premiums for insurance carried with respect to the Property
(including insurance against loss in case of fire or casualty, monthly
installments of Annual Fixed Rent and any additional rent which may be due under
this Lease and other leases of space in the Building and, if there be any first
mortgage of the Property, including such insurance as may be required by the
holder of such first mortgage); compensation and all fringe benefits, Worker's
Compensation Insurance premiums and payroll taxes paid to, for or with respect
to all persons engaged in the operating, repairing, maintaining, or cleaning of
the Building or Lot; steam, water, sewer, gas, oil and telephone charges;
electricity provided to the Building and to the Premises; cost of building and
cleaning supplies and equipment; related equipment, facilities and
appurtenances, elevators, cooling and heating equipment, provided, however, that
with respect to the replacement of any capital items or the making of any
capital expenditures (collectively called "capital expenditures") the total
amount of which is not properly incredible in Operating Expenses for the
Operating Year in which they were made, there shall be included in Operating
Expenses for each Operating Year in which and after such capital expenditure is
made the annual charge-off of such capital expenditure. The annual charge-off
shall be determined by (i) dividing the original cost of the capital expenditure
by the number of years of useful life thereof. The useful life shall be
reasonably determined by Landlord; and (ii) adding to such quotient an interest
factor computed on the unamortized balance of such capital expenditure at an
annual rate of either one percentage point over the AA Bond rate [Standard &
Poor's corporate composite or, if unavailable, it equivalent] as reported in the
financial press at the time the capital expenditure is made or, if the capital
item is acquired through third-party financing, then the actual [including
fluctuating] rate paid by Landlord in financing the acquisition of such capital
item. Provided, further, that if Landlord reasonably concludes on the basis of
engineering estimates that a particular capital expenditure will effect savings
in Operating Expenses for the Property, including, without limitation,
energy-related costs, and that such annual projected savings will exceed the
annual charge-off of capital expenditure computed as aforesaid, then and in such
events, the annual charge-off shall be determined by dividing the amount of such
capital expenditure by the number of years over which the projected amount of
such savings shall fully amortize the cost of such capital item or the amount of
such capital expenditure; and by adding the interest factor, as aforesaid; cost
of maintenance, cleaning and repairs, cost of snow removal and care of
landscaping; payments under service contracts with independent contractors or
subsidiaries or affiliates of Landlord; management fees; and all other expenses
paid in connection with the operation, repair, cleaning and maintenance of the
Building, Lot and Property.
(c) If during all or part of any Operating Year, Landlord is providing any
service or furnishing any item to less than 100% of the Rentable Floor Area of
the Property (the cost of which service or item would otherwise constitute a
part of Operating Expenses for the Property) on account of (a) any rentable
portion of the Property not being occupied or
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leased, (b) such item not being required or desired by a tenant, (c) any tenant
itself obtaining or providing such item, or (d) any other reason, whether
similar or dissimilar to the foregoing; then, Operating Expenses for the
Property shall be deemed to be increased by an amount equal to the additional
costs and expenses which would reasonably have been incurred during such period
by Landlord if it had performed or furnished such item to 100% of the Property.
(d) "OPERATING EXPENSES ALLOCABLE TO THE PREMISES", as may be adjusted pursuant
to Subparagraph (c) hereof, shall mean the same proportion of the Operating
Expenses for the Property which are allocable to the Building, as hereinafter
defined, as the Rentable Floor Area of Tenant's Space bears to the Rentable
Floor Area of the Building actually leased on an average annual basis for said
Operating Year. The Operating Expenses for the Property which are allocable to
the Building shall be (i) those Operating Expenses attributable solely to the
Building, plus (ii) the same proportion of those Operating Expenses attributable
to the portions of the Property other than the buildings thereon as the Rentable
Floor Area of the Building bears to the Rentable Floor Area of the Property, all
as same may be determined and equitably adjusted by Landlord.
(e) The "STATEMENT" shall mean a statement rendered to Tenant by Landlord within
90 days or as soon thereafter as reasonably possible after the end of each
Operating Year, provided Landlord's failure to render such Statement within such
period shall not limit Tenant's obligations to make any required payments when
the Statement is issued. The Statement shall be in reasonable detail, certified
by Landlord's representative, and show the Operating Expenses for the Property,
the Operating Expenses Allocable to the Premises, amounts already paid by Tenant
for Operating Expenses Allocable to the Premises (including Tenant's Operating
Expense Base hereof and amounts paid pursuant to part C of this Section 2.6),
and the amount of Operating Expenses Allocable to the Premises remaining due
from or overpaid by Tenant for the Operating Year or fraction thereof covered by
the Statement with appropriate prorations for fractional years.
B. If with respect to any Operating Year of the Term, Operating Expenses
Allocable to the Premises exceed Tenant's Operating Expense Base then Tenant
shall pay to Landlord as additional rent the amount of such excess. Such
payments shall be made at the times and in the manner hereinafter provided in
this Section 2.6. Appropriate prorations shall be made for those periods at the
beginning or end of the Term which are less than a full Operating Year.
Within 30 days after the date of delivery of such Statement, Tenant shall pay to
Landlord or Landlord shall pay to Tenant as the case may be, the balance of the
amounts, if any, required to be paid pursuant to the above provisions of this
Section 2.6, except that Landlord may at its option credit any amounts due from
it to Tenant against monthly installments of Annual Fixed Rent next thereafter
coming due.
C. Commencing on the first day of the first month following the delivery to
Tenant of the Statement referred to above and on the first day of each month
thereafter until delivery to Tenant of the next such Statement, Tenant shall pay
to Landlord, on account of Tenant's share of increases in Operating Expenses
Allocable to the Premises anticipated by Landlord for the then current Operating
Year, 1/12th of the difference between Operating Expenses Allocable to the
Premises calculated by Landlord on the basis of the most recent Operating
Expense data or budget available from time to time, and Tenant's Operating
Expense Base.
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2.7 ADJUSTMENTS FOR REAL ESTATE TAXES
Terms used herein are defined as follows:
(a) "TAX YEAR" means the twelve-month period beginning July 1 each year during
the Term or if the appropriate governmental tax fiscal period shall begin on any
date other than July 1, such other date.
(b) "TAX EXPENSES ALLOCABLE TO THE PREMISES" shall mean the same proportion of
the Landlord's Tax Expenses which are allocable to the Building, as hereinafter
defined, as the Rentable Floor Area of Tenant's Space bears to the Rentable
Floor Area of the Building actually leased on an average annual basis for said
Tax Year. The Landlord's Tax Expenses which are allocable to the Building shall
be (i) those Tax Expenses attributable solely to the Building, plus (ii) the
same proportion of those Tax Expenses attributable to the portions of the
Property other than the buildings thereon as the Rentable Floor Area of the
Building bears to the Rentable Floor Area of the Property actually leased on an
average annual basis for said Tax Year, all as same may be determined and
equitably adjusted by Landlord.
(c) "LANDLORD'S TAX EXPENSES" with respect to any Tax Year means the aggregate
Real Estate Taxes on the Property with respect to that Tax Year, reduced by any
abatements actually received with respect to that Tax Year.
(d) "REAL ESTATE TAXES" means all taxes, levies, betterments, and special
assessments of every kind and nature assessed by National, State, Municipal or
by any other governmental authority on the Lot or the Building or the Property
which the Landlord shall become obligated to pay because of or in connection
with the ownership, leasing, operating, use or occupancy of the Lot, the
Building, and the Property or based upon rentals derived therefrom; charges,
fees and assessments for transit, housing, police, fire or other governmental
services or purported benefits to the Building; service or user payments in lieu
of taxes; and reasonable expenses of any proceedings for abatement of taxes. The
amount of special taxes or special assessments to be included shall be limited
to the amount of the installment (plus any interest, other than penalty
interest, payable therein) of such special tax or special assessment required to
be paid during the year in respect of which such taxes are being determined.
There shall be excluded from such taxes all income, estate, succession,
inheritance and transfer taxes; provided, however, that if at any time during
the Term the present system of ad valorem tax of real property shall be changed
so that in lieu of or in addition to the whole or any part of the ad valorem tax
on real property, there shall be assessed on Landlord a capital levy or other
tax on the gross rents received with respect to the Lot or Building or Property,
or a federal, state, county, municipal, or other local income, franchise, excise
or similar tax, assessment, levy or charge (distinct from any now in effect in
the jurisdiction in which the Property is located) measured by or based, in
whole or in part, upon any such gross rents, than any and all of such taxes
shall be included within the term "REAL ESTATE TAXES" but only to the extent
that the same would be payable if the Lot, Building or Property were the only
property of Landlord.
If with respect to any Tax Year of the Term, Tax Expenses Allocable to the
Premises exceed Tenant's Tax Base, then Tenant shall pay to Landlord as
additional rent the amount of such excess. Such payments shall be made at the
times and in the manner hereinafter provided in this Section 2.7. Appropriate
prorations shall be made for those periods at the beginning or end of the Term
which are less than a full Tax Year. Within ninety (90) days or as soon
thereafter as reasonably possible after the end of such first Tax Year or
fraction thereof at the beginning of the Term, and of each succeeding Tax Year
during the Term and within ninety (90) days or as soon thereafter as reasonably
possible after lease termination
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(provided Landlord's failure to render such statement within such period shall
not limit Tenant's obligations to make any required payments when the
statement is issued), Landlord shall render to Tenant a statement in
reasonable detail certified by a representative of Landlord showing for the
preceding Tax Year or fraction thereof, as the case may be, Landlord's Tax
Expenses for the Property, and Tax Expenses Allocable to the Premises.
Commencing on the first day of the first month following the delivery to
Tenant of the statement referred to above and on the first day of each month
thereafter until delivery to Tenant of the next such statement, Tenant shall
pay to Landlord, on account toward Tenant's share of increases in Tax Expenses
Allocable to the Premises anticipated for the then current Tax Year, 1/12th of
the total amount of Tax Expenses Allocable to the Premises as shown on the
most recent such statement delivered to Tenant. The statements to be rendered
to Tenant referred to above shall also show for the preceding Tax Year amounts
of Real Estate Taxes already paid by Tenant on account for such year and the
amount of Tax Expenses Allocable to the Premises remaining due from or
overpaid by Tenant for the Tax Year or fraction thereof covered by the
statement. Within 30 days after the date of delivery of such statement, Tenant
shall pay to Landlord or Landlord shall pay to Tenant as the case may be, the
balance of the amounts, if any, required to be paid pursuant to the above
provisions of this Section 2.7, except that Landlord may at its option credit
any amounts due from it to Tenant against monthly installments of Annual Fixed
Rent next thereafter coming due.
To the extent that Real Estate Taxes shall be payable to the taxing authority
in installments for periods less than a Tax Year, the foregoing statement may
be rendered and payments made on account of such installments with respect to
such periods rather than with respect to such full Tax Year.
2.8 DUE DATE, ADDITIONAL RENT; NO OFFSETS
Except as otherwise specifically provided herein, all sums, amounts, items or
charges payable by Tenant to Landlord under this Lease shall be considered as
additional rent, and shall be paid by Tenant to Landlord on the first day of
the month following the date on which Landlord notifies Tenant of the amount
payable or on the tenth day after the giving of such notice, whichever shall
be later.
Any such notice shall specify in reasonable detail the basis of such
additional rent. Annual Fixed Rent and additional rent shall be paid by Tenant
to Landlord without offset or deduction.
2.9 SECURITY DEPOSIT
Contemporaneously with the execution and delivery of this Lease by Tenant,
Tenant shall pay to Landlord, in immediately available funds, the Security
Deposit, which shall be held by Landlord without liability for interest and as
security for the performance by Tenant of its obligations under this Lease.
The Security Deposit is not an advance payment of Rent or a measure or limit
of Landlord's damages upon an Event of Default (as defined below). Landlord
may, from time to time and without prejudice to any other remedy, use all or a
part of the Security Deposit to perform any obligation which Tenant was
obligated, but failed, to perform hereunder. Following any such application of
the Security Deposit, Tenant shall pay to Landlord on demand the amount so
applied in order to restore the Security Deposit to its original amount.
Within thirty (30) days of Landlord's receipt of Tenant's request given at any
time after the Term ends, provided Tenant has performed all of its obligations
hereunder, Landlord shall return to Tenant the balance of the Security Deposit
not applied to satisfy Tenant's obligations. If Landlord transfers its
interest in the
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Premises, then Landlord may assign the Security Deposit to the transferee and
Landlord thereafter shall have no further liability for the return of the
Security Deposit.
ARTICLE III
TENANT ALTERATIONS AND CONSTRUCTION
3.1 Alterations and Additions by Tenant
(a) This Section 3.1 shall apply before and during the Term. Tenant shall not
make alterations and additions to Tenant's Space except in accordance with plans
and specifications and a time schedule therefor first approved by Landlord in
writing. All alterations and additions to Tenant's Space shall equal or exceed
the specifications and quantities provided in Exhibit D. No amendments or
additions to Tenant's approved plans shall be made without the prior written
consent of Landlord. Landlord shall not be deemed unreasonable for withholding
approval of any alterations or additions which (a) involve or might affect any
structural or exterior element of the Building, any area or element outside of
the Premises, or any facility serving any area of the Building outside the
Premises, or (b) will delay completion of the Premises or Building or (c) will
require unusual expense to readapt the Premises to normal office use on Lease
termination or increase the cost of construction or of insurance or taxes on the
Building or of the services called for by Section 4.1 unless Tenant first gives
assurance acceptable to Landlord for payment of such increased cost and that
such readaptation will be made prior to such termination without expense to
Landlord.
(b) All alterations and additions shall be part of the Building unless and until
Landlord shall specify the same for removal pursuant to Section 5.2. Landlord
may elect to require Tenant at the expiration or sooner termination of the term
of this Lease to restore the Premises to substantially the same condition as
existed at the Term Commencement Date. Upon Tenant's written request made prior
to the making of any alterations and additions, Landlord shall notify Tenant in
writing as to whether Tenant shall be required to remove any such alterations or
additions, and to so restore the Premises.
(c) All of Tenant's alterations and additions and installation of furnishings
shall be coordinated with any work being performed by Landlord in such manner as
to not damage the Property or interfere with Building construction or operation
and, except for installation of furnishings, shall be performed by Landlord's
general contractor or by contractors or workmen first approved by Landlord. In
the event that Tenant shall engage its own contractors to perform such work,
Tenant shall pay to Landlord the cost of services provided by Landlord or
Landlord's contractor to Tenant and to Tenant's contractors while performing
such work, which services shall include, but not be limited to, cleaning,
security, rubbish removal, electricity, toilet facilities, and elevators.
Tenant's contract with any such contractors shall include the Required Tenant
Work General Conditions attached hereto as Exhibit F. and Landlord shall have
the right to enforce such General Conditions directly against any of Tenant's
contractors. Tenant shall defend, save harmless, exonerate and indemnify
Landlord from all injury, loss or damage to any person or property occasioned by
or growing out of such work. Tenant agrees that it will not, either directly or
indirectly, use any contractors and/or materials if their use will create any
difficulty, whether in the nature of a labor dispute or otherwise, with other
contractors and/or labor engaged by Tenant or Landlord or others in the
construction, maintenance and/or operation of the Building or any part thereof.
Except for work by Landlord's general contractor, Tenant, before its work is
started, shall: secure all licenses and permits necessary therefor, deliver to
Landlord a statement of the names of all its contractors and subconstractors and
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the estimated cost of all labor and material to be furnished by them; and cause
each contractor to carry Workmen's Compensation Insurance in statutory amounts
covering all the contractor's and subcontractor's employees, Automobile
Liability Insurance and comprehensive public liability insurance and property
damage insurance with such limits as Landlord may reasonably require but in no
event less than, with respect to public liability insurance, $5,000,000.00 and
with respect to property damage insurance, $5,000,000.00 (all insurance to be
written in companies approved by Landlord and insuring Landlord and Tenant as
well as the contractors), and to deliver to Landlord certificates of all such
insurance. No installations or work shall be undertaken or begun by Tenant
until Tenant has made provision for either written waivers of liens from all
contractors, laborers and suppliers of materials for such installations or work
the filing of lien bonds on behalf of such contractors, laborers and suppliers,
or other appropriate protective measures, approved by Landlord and Tenant has
procured appropriate surety payment and performance bonds which shall name
Landlord as an additional obligee and Tenant has filed lien bond(s) (in
jurisdictions where available) on behalf of such contractors, laborers and
suppliers.
(d) In no event shall any material or equipment be incorporated in or added to
the Premises, so as to become a fixture or otherwise a part of the Building, in
connection with any such alteration, decoration, installation, addition or
improvement which is subject to any lien, charge, mortgage or other encumbrance
of any kind whatsoever or is subject to any security interest or any form of
title retention agreement. Any mechanic's lien filed against the Premises or
the Building for work claimed to have been done for, or materials claimed to
have been furnished to, Tenant shall be discharged by Tenant within ten (10)
days thereafter, at Tenant's expense, by filing the bond required by law or
otherwise. If Tenant fails so to discharge any lien, Landlord may do so at
Tenant's expense and Tenant shall reimburse Landlord for any expense or cost
incurred by Landlord in so doing within fifteen (15) days after rendition of a
bill therefor.
(e) All installations or work done by Tenant shall be at its own expense and
shall at all times comply with (i) laws, rules, orders and regulations of
governmental authorities having jurisdiction thereof; (ii) orders, rules and
regulations of any Board of Fire Underwriters, or any other body hereafter
constituted exercising similar functions, and governing insurance rating
bureaus; (iii) Rules and Regulations of Landlord; and (iv) plans and
specifications prepared by and at the expense of Tenant theretofore submitted
to and approved by Landlord. All construction work required or permitted by
this Lease shall be done in a good and workmanlike manner. Tenant agrees to pay
promptly when due the entire cost of any work done on the Premises by Tenant,
its agents, employees, or independent contractors.
3.2 REAL ESTATE TAXES ON LEASEHOLD IMPROVEMENTS
If under Massachusetts law or regulations, the tax assessor is required to
include leasehold (real property) improvements in determining the assessed
value of the Building, then to the extent that Tenant makes leasehold
improvements (including Tenant's original installation and Tenant's subsequent
alterations, additions, substitutions and improvements) which are in excess of
the general standard of improvements in the remainder of the Building, whether
done prior to or after the commencement of the Term of this Lease, Tenant shall
pay the real estate taxes attributable to the value of such excess leasehold
improvements throughout the Term of this Lease within thirty (30) days after
being billed therefor by Landlord.
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3.3 LANDLORD'S RIGHT TO MAKE ALTERATIONS
Landlord reserves the right, exercisable by itself or its nominee, at any time
and from time to time without the same constituting an actual or constructive
eviction and without incurring any liability to Tenant therefor or otherwise
affecting Tenant's obligations under this Lease, to make such changes,
alterations, additions, improvements, repairs or replacements in or to the
Property (including the Building and the Premises), and the fixtures and
equipment thereof, as well as in or to the street entrances, halls, passages,
elevators, escalators, and stairways thereof, as it may deem necessary or
desirable, and to change the arrangement and/or location of entrances or
passageways, doors and doorways, and corridors, elevators, stairs, toilets, or
other public parts of the Building and other buildings on the Property,
provided, however, that there be no unreasonable obstruction of the right to
access to, or unreasonable interference with the use of the Premises by Tenant.
Nothing contained in this Section 3.3 shall be deemed to relieve Tenant of any
duty, obligation or liability of Tenant with respect to making any repair,
replacement or improvement or complying with any law, order or requirement of
any governmental or other authority. Landlord reserves the right to adopt at any
time and from time to time to change the name or address of the Building and the
Property. Neither this Lease nor any use by Tenant shall give Tenant any right
or easement for the use of any door or any passage or any concourse connecting
with any other building or to any public convenience, and the use of such doors,
passes and concourses and of such conveniences may be regulated or discontinued
at any time and from time to time by Landlord without notice to Tenant and
without affecting the obligation of Tenant hereunder or incurring any liability
to Tenant therefor, provided, however, that there be no unreasonable obstruction
of the right to access to, or unreasonable interference with the use of the
Premises by Tenant.
Landlord shall not be liable to Tenant for any compensation or reduction of rent
by reason of inconvenience or annoyance or for loss of business arising from the
necessity of Landlord or its agents entering the Premises for any of the
purposes in this Lease authorized, or for repairing the Premises or any portion
of the Property or the Building, however the necessity may occur. Subject to
Section 8.18, in case Landlord is prevented or delayed from making any repairs,
alterations or improvements, or furnishing any services or performing any other
covenant or duty to be performed on Landlord's part, by reason of any cause
reasonably beyond Landlord's control, Landlord shall not liable to Tenant
therefor, nor except as expressly otherwise provided in Section 6.1 shall Tenant
be entitled to any abatement or reduction of rent by reason thereof, nor shall
the same give rise to a claim in Tenant's favor that such failure constitutes
actual or constructive, total or partial, eviction from the Premises.
Landlord reserves the right to stop any service or utility system, when
necessary by reason of accident or emergency, or until necessary repairs have
been completed; provided, however, that in each instance of stoppage Landlord
shall exercise reasonable diligence to eliminate the cause thereof. Except in
case of emergency repairs Landlord will give Tenant reasonable advance notice of
any contemplated stoppage and will use reasonable efforts to avoid unnecessary
inconvenience to Tenant by reason thereof.
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ARTICLE IV
LANDLORD'S COVENANTS; INTERRUPTIONS AND DELAYS
Landlord covenants:
4.1 SERVICES FURNISHED BY LANDLORD
To furnish services, utilities, facilities and supplies ("LANDLORD'S SERVICES")
set forth in Exhibit D, which Landlord's Services Landlord shall have the right
to change, from time to time, provided that Landlord's Services (i.e. at the
time that Landlord changes such services) shall be equal in quality to those
customarily provided by landlords in comparable buildings in the Waltham area.
4.2 ADDITIONAL SERVICES AVAILABLE TO TENANT
To furnish, at Tenant's expense, reasonable additional Building operation
services which are usual and customary in similar office buildings in the
Waltham area upon reasonable advance request of Tenant at reasonable rates from
time to time established by Landlord.
4.3 ADDITIONAL AIR CONDITIONING EQUIPMENT
In the event Tenant requires additional air conditioning for business machines,
meeting rooms or other special purposes, or because of occupancy or excess
electrical loads, any additional air conditioning units, chillers, condensers,
compressors, ducts, piping and other equipment, such additional air conditioning
equipment will be installed and maintained by Landlord at Tenant's sole cost and
expense, but only if Tenant has obtained Landlord's prior written consent, which
consent shall not be unreasonably withheld and if the same will not cause damage
or injury to the Building or create a dangerous or hazardous condition or entail
excessive or unreasonable alterations, repairs or expense or interfere with or
disturb other tenants; and Tenant shall reimburse Landlord in such an amounts as
will compensate Landlord for the cost incurred by Landlord in operating such
additional air conditioning equipment.
4.4 ROOF, EXTERIOR WALL, FLOOR SLAB, AND COMMON FACILITY REPAIR
Except as otherwise provided in Article VI to make such repairs to the roof,
exterior walls, floor slabs, and common areas and facilities as may be necessary
to keep them in serviceable condition, the expense of which shall be charged in
accordance with Section 2.6 or, to the extent any such repairs are required as a
result of the acts or omissions of Tenant, its employees, agents, contractors or
invitees, shall be payable as additional rent by Tenant to Landlord upon demand.
4.5 DOOR SIGNS AND DIRECTORY
To provide and install, at Tenant's expense, letters or numerals on doors in the
Premises to identify Tenant's name and Building address; all such letters and
numerals shall be in the building standard graphics and no others shall be used
or permitted on the Premises. In addition, Tenant's name shall be listed by
Landlord, at Tenant's expense, on the Building directory.
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4.6 QUIET ENJOYMENT
Landlord covenants that if, and so long as, Tenant keeps and performs each and
every covenant, agreement, term, provision and condition herein contained on the
part and on behalf of Tenant to be kept and performed, Tenant shall quietly
enjoy the Premises from and against the claims of all persons claiming by,
through or under Landlord subject, nevertheless, to the covenants, agreements,
terms, provisions and conditions of this Lease and to any instrument to which
this Lease is subject and subordinate.
ARTICLE V
TENANT'S COVENANTS
Tenant covenants during the Term and such further time as Tenant occupies any
part of the Premises:
5.1 PAYMENTS
To pay when due all Annual Fixed Rent and additional rent and all charges for
utility services rendered to the Premises (except as otherwise provided in
Exhibit D) and, as further additional rent, all charges for additional services
rendered pursuant to Section 4.2;
5.2 REPAIR AND YIELD UP
Except as otherwise provided in Article VI and Section 4.4, to keep the Premises
in good order, repair and condition, reasonable wear and tear only excepted, and
all glass in windows (except glass in exterior walls of the Building unless the
damage thereto is attributable to Tenant's negligence or misuse) and doors of
the Premises whole and in good condition with glass of the same quality as that
injured or broken (with damage by fire being governed by the applicable
provisions of this Lease), and at the expiration or termination of this Lease
peaceably to yield up the Premises, and all alterations and additions thereto,
in good order, repair and condition, first removing all goods and effects of
Tenant and, to the extent specified by Landlord by notice to Tenant, all
alterations and additions made by Tenant and all partitions, and repairing any
damage caused by such removal and restoring the Premises, and leaving the
Premises clean and neat.
Tenant will remove any personal property from the Building and the Premises upon
or prior to the expiration or termination of this Lease and any such property
which shall remain in the Building or the Premises thereafter shall be
conclusively deemed to have been abandoned, and may either be retained by
Landlord as its property or sold or otherwise disposed of in such manner as
Landlord may see fit. If any part thereof shall be sold, then Landlord may
receive and retain the proceeds of such sale and apply the same, at its option,
against the expenses of the sale, the cost of moving and storage, any arrears of
Annual Fixed Rent, additional or other charges payable hereunder by Tenant to
Landlord and any damages to which Landlord may be entitled under Section 7.2
hereof or pursuant to law.
5.3 USE
Continuously from the commencement of the Term to use and occupy the Premises
for the Permitted Uses, and not to injure or deface the Premises, Building or
Property, nor to permit in the Premises any auction sale, vending machine, or
inflammable fluids or chemicals, or nuisance, or the emission from the Premises
of any objectionable noise or odor, nor to use or devote the Premises or any
part thereof for any purpose other than the
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Permitted Uses, nor any use thereof which is inconsistent with the maintenance
of the Building as an office building of first class quality in maintenance, use
and occupancy, or which is improper, offensive, contrary to law or ordinance or
liable to invalidate or increase the premiums for any insurance on the Building,
its contents or the Property, or liable to render necessary any alteration or
addition to the Building of the Property.
5.4 OBSTRUCTIONS, ITEMS VISIBLE FROM EXTERIOR; RULES AND REGULATIONS
Not to obstruct in any manner any portion of the Building not hereby leased or
any portion thereof or of the Property used by Tenant in common with others; not
without prior consent of Landlord to permit the painting or placing of any
signs, curtains, blinds, shades, awnings, aerials or flagpoles, or the like,
visible from outside the Premises; and to comply with all reasonable Rules and
Regulations now or hereafter made by Landlord, or which Tenant has been given
notice, for the care and use of the Building and Property and their facilities
and approaches; Landlord shall not be liable to Tenant for the failure of other
occupants of the Property to conform to such Rules and Regulations.
5.5 SAFETY APPLIANCES
To keep the Premises equipped with all safety appliances required by law or
ordinance or any other regulation of any public authority because of any use
made by Tenant other than normal office use, and to procure all licenses and
permits so required because of such use and, if requested by Landlord, to do any
work so required because of such use, it being understood that the foregoing
provisions shall be construed to broaden in any way Tenant's Permitted Uses.
5.6 ASSIGNMENT; SUBLEASE
Tenant covenants and agrees that neither this Lease nor the term and estate
hereby granted, nor any interest herein or therein, will be assigned, mortgaged,
pledged, encumbered or otherwise transferred, voluntarily, by operation of law
or otherwise, and that neither the Premises, nor any part thereof will be
encumbered in any manner by reason of any act or omission on the part of Tenant,
or used or occupied, or permitted to be used or occupied, or utilized for desk
space or mailing privileges, by anyone other than Tenant, or for any use or
purposes other than the Permitted Uses stated in Article 1, or be sublet, or
offered or advertised for any of the foregoing. Notwithstanding the foregoing,
it is hereby expressly understood and agreed, however, if Tenant is a
corporation, that the assignment or transfer of this Lease, and the term and
estate hereby granted, to any corporation into which Tenant is merged or with
which Tenant is consolidated which corporation shall have a net worth at least
equal to that of Tenant immediately prior to such merger or consolidation (such
corporation being hereinafter called "ASSIGNEE"), shall not be deemed to be
prohibited hereby if, and upon the express condition that, Assignee and Tenant
shall promptly execute, acknowledge and deliver to Landlord an agreement in form
and substance satisfactory to Landlord whereby Assignee shall agree to be
independently bound by and upon all the covenants, agreements, terms, provisions
and conditions set forth in this Lease on the part of Tenant to be performed,
and whereby Assignee shall expressly agree that the provisions of this Section
5.6 shall, notwithstanding such assignment or transfer, continue to be binding
upon Assignee with respect to all future assignments and transfers.
Notwithstanding the foregoing to the contrary, Landlord agrees not to
unreasonably withhold its consent to a sublease of all or a portion of the
Premises provided that (i) the Premises shall not be subdivided at any time
during the Term); (ii) Tenant shall not sublease or advertise or offer to
sublease any part of the Premises for a rent which is less than the rent at
which space in the Property is then being offered by Landlord; (iii) Tenant
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shall not sublease or advertise or offer to sublease any part of the Premises to
any entity with which Landlord is then currently negotiating or has within six
months prior thereto negotiated for space in the Property, or to any entity
which is a tenant of the Property; (iv) the proposed subtenant shall have a
business reputation and use which is appropriate for a first class office
building; (v) the proposed subtenant has the financial ability to fulfill all of
its obligations under the proposed sublease; (vi) Tenant pays to Landlord fifty
percent (50%) of the amount by which the rent, additional charges and other
compensation received by Tenant from the subtenant exceeds the sum of (A) the
rent and additional charges payable by Tenant under the Lease for the comparable
portion of the Term minus (B) the reasonable out of pocket expenses incurred by
Tenant with respect to the sublease as amortized over the term of the sublease;
and (vii) the proposed subtenant agrees in writing, in form acceptable to
Landlord in the exercise of reasonable business judgment, that its sublease
shall be subject to all of the terms and conditions of this Lease.
If Tenant is an individual who uses and/or occupies the Premises with partners,
or if Tenant is a partnership, then:
(i) Each present and future partner shall be personally bound by and upon all of
the covenants, agreements, terms, provisions and conditions set forth in this
Lease on the part of Tenant to be performed; and
(ii) In confirmation of the foregoing, Landlord may (but without being required
to do so) request (and Tenant shall duly comply) that Tenant, at the time that
Tenant admits any new partner to its partnership, shall require each such new
partner to execute an agreement in form and substance satisfactory to Landlord
whereby such new partner shall agree to be personally bound by and upon all of
the covenants, agreements, terms, provisions and conditions of this Lease on the
part of Tenant to be performed, without regard to the time when such new partner
is admitted to partnership or when any obligations under any such covenants,
etc., accrue.
The listing of any name other than that of Tenant, whether on the doors of the
Premises or on the Building directory, or otherwise, shall not operate to vest
in any such other person, firm or corporation any right or interest in this
Lease or in the premises or be deemed to effect or evidence any consent of
Landlord, it being expressly understood that any such listing is a privilege
extended by Landlord revocable at will by written notice to Tenant.
If this Lease be assigned, or if the Premises or any part thereof be sublet or
occupied by anybody other than Tenant, Landlord may, at any time and from time
to time, collect rent and other charges from the assignee, subtenant or
occupant, and apply the net amount collected to the rent and other charges
herein reserved, then due and hereafter becoming due, but no assignment,
subletting, occupancy or collection shall be deemed a waiver of this covenant,
or the acceptance of the assignee, subtenant or occupant as a tenant, or a
release of Tenant from the further performance by Tenant of covenants on the
part of Tenant herein contained. Any consent by Landlord to a particular
assignment or subletting shall not in any way diminish the prohibition stated in
the first sentence of this Section 5.6 or the continuing liability of the Tenant
named in Article 1 as the party-Tenant under this Lease.
No assignment or subletting or use of the Premises by an affiliate of Tenant
shall affect the Permitted Uses for which the Premises may be used as stated in
Article 1.
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5.7 INDEMNITY, INSURANCE
To defend with counsel first approved by Landlord, save harmless, and indemnify
Landlord from any liability for injury, loss, accident or damage to any person
or property, and from any claims, actions, proceedings and expenses and costs in
connection therewith (including without limitation reasonable counsel fees), (i)
arising from (a) the omission, fault, willful act, negligence or other
misconduct of Tenant, or of Tenant's employees, agents or contractors, or (b)
from any use made or thing done or occurring on the Premises not due to the
omission, fault, willful act, negligence or other misconduct of Landlord or of
Landlord's employees, agents, or contractors, or (ii) resulting from the failure
of Tenant to perform and discharge its covenants and obligations under this
Lease; to maintain in responsible companies qualified to do business, and in
good standing, in Massachusetts public liability insurance covering the Premises
insuring Landlord as well as Tenant with limits which shall, at the commencement
of the Term, be at least equal to those stated in Article 1 and from time to
time during the Term shall be for such higher limits, if any as are customarily
carried in the Waltham area with respect to similar properties, and Workmen's
Compensation Insurance with statutory limits covering all of Tenant's employees
working in the Premises, and to deposit promptly with Landlord certificates for
such insurance, and all renewals thereof bearing the endorsement that the
policies will not be canceled until after ten (10) days' written notice to
Landlord.
5.8 PERSONAL PROPERTY AT TENANT'S RISK
That all of the furnishings, fixtures, equipment, effects and property of every
kind, nature and description of Tenant, and all persons claiming by, through or
under Tenant which, during the continuance of this Lease or any occupancy of the
Premises by Tenant or anyone claiming under Tenant, may be on the Premises or
elsewhere in the Building or on the Lot, shall be at the sole risk and hazard of
Tenant, and if the whole or any part thereof shall be destroyed or damaged by
fire, water or otherwise, or by the leakage or bursting of water pipes, steam
pipes, or other pipes, by theft or from any other cause, no part of said loss or
damage is to be charged to or be borne by Landlord.
5.9 RIGHT OF ENTRY
To permit Landlord and its agents: to examine the Premises at reasonable times
and, if Landlord shall so elect, to make any repairs or replacements Landlord
may deem necessary; to remove, at Tenant's expense, any alterations, additions,
signs, curtains, blinds, shades, awnings, aerials, flagpoles, or the like not
consented to in writing; and to show the Premises to prospective Tenants during
the eighteen months preceding expiration of the Term and to prospective
purchasers and mortgagees at all reasonable times.
Without incurring any liability to Tenant, Landlord may permit access to the
Premises and open the same, whether or not Tenant shall be present, upon any
demand or any receiver, trustee, assignee for the benefit of creditors, sheriff,
marshal or court officer entitled to, or reasonably purporting to be entitled
to, such access for the purposes of taking possession of, or removing, Tenant's
property or for any other lawful purposes (but this provision and any action by
Landlord hereunder shall not be deemed a recognition by Landlord that the person
or official making such demand has any right or interest in or to this Lease, or
in or to the premises), or upon demand of any representation of the fire,
police, building, sanitation or other department of the city, state or federal
governments.
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5.10 FLOOR LOAD; PREVENTION OF VIBRATION AND NOISE
Not to place a load upon the Premises exceeding an average rate of 90 pounds of
live load per square foot of floor area (partitions shall be considered as part
of the live load); Landlord reserves the right to prescribe the weight and
position of all safes, files and heavy equipment which Tenant desires to place
in the Premises so as properly to distribute the weight thereof; Tenant's
business machines and mechanical equipment which cause vibration or noise that
may be transmitted to the Building structure or to any other space in the
Building shall be so installed, maintained and used by Tenant as to eliminate
such vibration or noise.
5.11 PERSONAL PROPERTY TAXES
To pay promptly when due all taxes which may be imposed upon personal property
(including without limitation, fixtures and equipment) in the Premises to
whomever assessed.
5.12 PAYMENT OF LITIGATION EXPENSES
As additional rent, to pay all reasonable costs, counsel and other fees incurred
by Landlord in connection with the enforcement by Landlord of any obligations of
Tenant under this Lease.
5.13 COMPLIANCE WITH INSURANCE REGULATIONS
Not to do or permit to be done any act or thing upon the Premises which will
invalidate or be in conflict with the terms of the Massachusetts standard form
of fire, boiler, sprinkler, water damage or other insurance policies covering
the Building and the fixtures and property therein; Tenant shall, at its own
expense, comply with all rules, regulations, and requirements of the National
Board of Fire Underwriters or any state or other similar body having
jurisdiction, and shall not knowingly do or permit anything to be done in or
upon the Premises in a manner which increases the rate of fire insurance upon
the Building, the Property or on any property or equipment located therein.
5.14 SUBJECT TO APPLICABLE LAW
Notwithstanding any provision of this Lease to the contrary, Landlord shall in
no event be indemnified or held harmless or exonerated from any liability to
Tenant or to any person, for any injury, loss, damage or liability to the extend
such indemnity, hold harmless or exoneration is prohibited by law, provided
Tenant agrees that, prior to making any claims against Landlord (and, to the
extent Tenant is successful, in place of any such claims), Tenant shall pursue
all other available remedies including, without limitation, seeking recovery
under Tenant's insurance policies.
5.15 REQUIREMENTS OF LAW - FINES AND PENALTIES
Tenant, at its sole expense, shall comply with all laws, rules, orders and
regulations, including, without limitation, all energy-related requirements, of
Federal, State, County and Municipal Authorities and with any direction of any
public officer or officers, pursuant to law, which shall impose any duty upon
Landlord or Tenant with respect to or arising out of Tenant's use or occupancy
of the Premises. Tenant shall reimburse and compensate Landlord for all
expenditures made by, or damages or fines sustained or incurred by, Landlord due
to nonperformance or noncompliance with or breach or failure to observe any
item, covenant, or condition of this Lease upon Tenant's part to be kept,
observed,
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performed or complied with. If Tenant receives notice of any violation of law,
ordinance, order or regulation applicable to the Premises, it shall give prompt
notice thereof to Landlord.
ARTICLE VI
CASUALTY AND TAKING
6.1 Termination or Restoration; Rent Adjustment
In case during the Term all or any part of the Premises or the Building or the
Property are damaged materially by fire or other casualty or by action of public
or other authority in consequence thereof, or are taken by eminent domain or
Landlord receives compensable damage by reason of anything lawfully done in
pursuance of public or other authority, this Lease shall terminate at Landlord's
election, which may be made notwithstanding Landlord's entire interest may have
been divested, by notice given to Tenant within six (6) months after the
casualty or taking specifying the effective date of termination. The effective
date of termination specified by Landlord shall not be less than 15 nor more
than 30 days after the date of notice of such termination. Unless terminated
pursuant to the foregoing provisions, this Lease shall remain in full force and
effect following any such damage or taking, subject, however, to the following
provisions. If in any such case the Premises are rendered unfit for use and
occupation and this Lease is not so terminated, Landlord shall use due diligence
(following the expiration of the period in which Landlord may terminate this
Lease pursuant to the foregoing provisions of this Section 6.1), subject to the
then applicable statutes, building codes, zoning ordinances, and regulations of
any governmental authority and at the expense of Landlord (but only to the
extent of insurance proceeds made available to Landlord) to put the Premises, or
in case of taking what may remain thereof (excluding in case of both casualty
and taking any items installed or paid for by Tenant which Tenant may be
required to remove pursuant to Section 5.2), into proper condition for use and
occupation and a just proportion of the Annual Fixed Rent and additional rent
according to the nature and extent of the injury shall be abated from the date
of such casualty or taking until the Premises or such remainder shall have been
put by Landlord in such condition; and in case of taking which permanently
reduces the area of the Premises, a just proportion of the Annual Fixed Rent and
additional rent shall be abated for the remainder of the Term.
6.2 EMINENT DOMAIN
Landlord reserves to itself any and all rights to receive awards made for
damages to the Premises, Building and Property, and the leasehold hereby
created, or any one or more of them, accruing by reason of exercise of eminent
domain or by reason of anything lawfully done in pursuance of public or other
authority. Tenant hereby releases and assigns to Landlord all Tenant's rights to
such awards, and covenants to deliver such further assignments and assurances
thereof as Landlord may from to time request. Tenant hereby irrevocably
designates and appoints Landlord as its attorney-in-fact to execute and deliver
in Tenant's name and behalf all such further assignments thereof.
Notwithstanding the foregoing to the contrary, Tenant shall have the right to
retain any separate award for the Tenant's relocation expenses which does not
reduce Landlord's award.
6.3 TEMPORARY TAKING
In the event of a taking of the Premises or any part thereof for temporary use
(less than 365 days), (i) this Lease shall be and remain unaffected thereby and
rent shall not abate, and (ii)
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Tenant shall be entitled to receive for itself such portion or portions of any
award made for such use with respect to the period of the taking which is within
the Term, provided that if such taking shall remain in force at the expiration
or earlier termination of this Lease, Tenant shall then pay to Landlord a sum
equal to the reasonable cost of performing Tenant's obligations under Section
5.2 with respect to surrender of the Premises and upon such payment shall be
excused from such obligations.
ARTICLE VII
DEFAULT
7.1 EVENTS OF DEFAULT
If (a) Tenant shall neglect or fail to perform or observe any of Tenant's
covenants or agreements herein, including the obligation to pay, when due,
Annual Fixed Rent or additional rent, and such failure continues, in the case of
Annual Fixed Rent or additional rent, for more than ten (10) days after written
notice of such default, or in any other case, for more than thirty (30) days
after written notice of such default and such additional time, if any, as is
reasonably necessary to cure the default if the default is of such a nature that
it cannot reasonably be cured in thirty (30) days, provided however, that no
such notice need be given and no such default shall be curable if on two (2)
prior occasions within the same calendar year there had been a default which had
been cured after notice thereof had been given by Landlord to Tenant as herein
provided (i.e. Landlord shall have the right in any such event to terminate the
Lease immediately upon the occurrence of such default without giving Tenant any
opportunity to cure such default) or if Tenant or any guarantor or any guarantor
of any of Tenant's obligations under this Lease, (b) is not paying its debts as
such debts become due, becomes insolvent, seeks relief under any chapter of the
U.S. Bankruptcy Code (or any insolvency or similar law of any jurisdiction), or
(c) proposes any dissolution, liquidation, composition, financial reorganization
or recapitalization with creditors; or (d) makes an assignment or trust mortgage
for the benefit of creditors or (e) if a receiver, trustee, custodian or similar
agent is appointed or takes possession with respect to any property or business
of Tenant or such guarantor, or (f) Tenant shall desert or abandon the Premises
or the same shall become, or appear to have become, vacant (whether or not the
key shall have been surrendered or the rent shall have been paid), or (g) any
event shall occur or any contingency shall arise whereby this Lease, or the term
and estate thereby created, would (by operation of law or otherwise) desolve
upon or pass to any person, firm or corporation other than Tenant, except as
expressly permitted under Section 5.6 hereof then, in any such case, whether or
not the Term shall have begun, Landlord may immediately, or at any time while
such default exists and without further notice, terminate this Lease by entry by
Landlord or upon the giving of notice to Tenant, and this Lease shall come to an
end as fully and completely as if such date were the date herein originally
fixed for the expiration of the Term, and Tenant shall then quit and surrender
the Premises to Landlord, but Tenant shall remain liable as hereinafter
provided.
7.2 DAMAGES
In the event that this Lease is terminated under any of the provisions contained
in Section 7.1 or shall be otherwise terminated for breach of any obligation of
Tenant, Tenant covenants to pay forthwith to Landlord, as compensation, the
excess of the total rent reserved for the residue of the Term over the rental
value of the Premises for said residue of the Term. In calculating the rent
reserved there shall be included, in addition to the Annual Fixed Rent and all
additional rent, the value of all other considerations agreed to be paid or
performed by Tenant for said residue. Tenant further covenants as an additional
and
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cumulative obligation after any such ending to pay punctually to Landlord all
the sums and perform all the obligations which Tenant covenants in this Lease to
pay and to perform in the same manner and to the same extent and at the same
time as if this Lease had not been terminated. In calculating the amounts to be
paid by Tenant under the next foregoing covenant Tenant shall be credited with
any amount paid to Landlord as compensation as in this Section 7.2 provided and
also with the net proceeds of any rent obtained by Landlord by reletting the
Premises, after deducting all Landlord's expenses in connection with such
reletting, including, without limitation, all repossession costs, brokerage
commissions, fees for legal services and expenses of preparing the Premises for
such reletting, it being agreed by Tenant that Landlord may (i) relet the
Premises or any part or parts thereof, for a term or terms which may at
Landlord's option be equal to or less than or exceed the period which would
otherwise have constituted the balance of the Term and may grant such
concessions and free rent as Landlord in its sole judgment considers advisable
or necessary to relet the same and (ii) make such alterations, repairs and
decorations in the Premises as Landlord in its sole judgment considers advisable
or necessary to relet the same, and no action of Landlord in accordance with the
foregoing or failure to relet or to collect rent under reletting shall operate
or be construed to release or reduce Tenant's liability as aforesaid.
In lieu of any other damages or indemnity and in lieu of full recovery by
Landlord of all sums payable under all the foregoing provisions of this Section
7.2, Landlord may by written notice to Tenant, at any time after this Lease is
terminated under any of the provisions contained in Section 7.1 or is otherwise
terminated for breach of any obligation of Tenant and before such full recovery,
elect to recover, and Tenant shall thereupon pay, as liquidated damages, an
amount equal to the aggregate of the Annual Fixed Rent and additional rent
accrued under Section 2.5, 2.6 and 2.7 in the 12 months ended next following
such termination plus the amount of Annual Fixed Rent and additional rent of any
kind accrued and unpaid at the time of termination and less the amount of any
recovery by Landlord under the foregoing provisions of this Section 7.2 up to
the time of payment of such liquidated damages.
Nothing contained in this Lease shall limit or prejudice the right of Landlord
to prove for and obtain in proceedings for bankruptcy or insolvency by reason of
the termination of this Lease, an amount equal to the maximum allowed by any
statute or rule of law in effect at the time when, and governing the proceedings
in which, the damages are to be proved, whether or not the amount be greater,
equal to, or less than the amount of the loss or damages referred to above.
ARTICLE VIII
MISCELLANEOUS
8.1 COMPUTATION OF RENTABLE FLOOR AREAS
For all purposes of this Lease, the rentable floor area is the gross area of
Tenant's Space measured from the plane of the inside surface of the exterior
glass line to the middle of the demising walls, and adding a pro-rata share of
all Building common areas, but allowing no deductions for columns or projections
within such Tenant's Space. For purposes hereof, the Building common areas shall
include (a) any public elevator shafts, elevator machine rooms, machinery
shafts, and common stairways and stairwells, (b) on multi-tenant floors,
restrooms, elevator lobby, janitor closets, common corridors, and mechanical
rooms, and (c) the first and third floor lobbies, and electrical equipment and
mechanical rooms.
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8.2 NOTICE OF LEASE; CONSENT OF APPROVAL; NOTICES; BIND AND INURE
(a) The titles of the Articles are for convenience only and are not to be
considered in construing this Lease.
(b) Tenant agrees not to record this Lease, but upon request of either party
both parties shall execute and deliver a notice of this Lease in form
appropriate for recording or registration, and if this Lease is terminated
before the term expires, an instrument in such form acknowledging the date of
termination.
(c) Whenever any notice, approval, consent, request or election is given or made
pursuant to this Lease it shall be in writing. Communications and payments shall
be addressed if to Landlord at Landlord's Original Address or at such other
address as may have been specified by prior notice to Tenant, and if to Tenant,
at Tenant's Original Address or at such other place as may have been specified
by prior notice to Landlord. Any communication so addressed shall be deemed duly
given when mailed by registered or certified mail, return receipt requested. If
Landlord by notice to Tenant at any time designates some other person to receive
payments or notices, all payments or notices thereafter by Tenant shall be paid
or given to the person designated until notice to the contrary is received by
Tenant from Landlord.
(d) The obligations of this Lease shall run with the land, and this Lease shall
be binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns, except that only the original Landlord named
herein shall be liable for obligations accruing before the beginning of the
Term, and thereafter the original Landlord named herein and each successive
owner of the Premises shall be liable only for obligations accruing during the
period of ownership.
8.3 LANDLORD'S FAILURE TO ENFORCE
The failure of Landlord to seek redress for violation of, or to insist upon
strict performance of, any covenant or condition of this Lease, or with respect
to such failure of Landlord to enforce any of the Rules and Regulations referred
to in Section 5.4, whether heretofore or hereafter adopted by Landlord, shall
not be deemed a waiver of such violation nor prevent a subsequent act which
would have originally constituted a violation, from having all the force and
effect of an original violation, nor shall the failure of Landlord to enforce
any of said Rules and Regulations against any other tenant of the Property be
deemed a waiver of any such Rule or Regulation. The receipt by Landlord of
Annual Fixed Rent or additional rent with knowledge of the breach of any
covenant of this Lease shall not be deemed a waiver of such breach. No provision
of this Lease shall be deemed to have been waived by Landlord, or by Tenant,
unless such waiver be in writing signed by the party to be charged. No consent
or waiver, express or implied, by Landlord or Tenant, to or of any breach of any
agreement or duty shall be construed as a waiver or consent to or of any other
breach of the same or any other agreement or duty.
8.4 ACCEPTANCE OF PARTIAL PAYMENTS OF RENT; DELIVERY OF KEYS
No acceptance by Landlord of a lesser sum than the Annual Fixed Rent and
additional rent then due shall be deemed to be other than on account of the
earliest installment of such rent due, nor shall any endorsement or statement on
any check or any letter accompanying any check or payment as rent be deemed an
accord and satisfaction, and Landlord may accept such check or payment without
prejudice to Landlords right to recover the balance of such installment or
pursue any other remedy in this Lease provided. The delivery of keys to any
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employee of Landlord or to Landlord's agent or any employee thereof shall not
operate as a termination of this Lease or surrender of the Premises.
8.5 CUMULATIVE REMEDIES
The specific remedies to which Landlord may resort under the terms of this Lease
are cumulative and are not intended to be exclusive of any other remedies or
means of redress to which it may be lawfully entitled in case of any breach or
threatened breach by Tenant of any provisions of this Lease. In addition to
other remedies provided in this Lease, Landlord shall be entitled to the
restraint by injunction of the violation or attempted or threatened violation of
any of the covenants, conditions or provisions of this Lease or to a decree
compelling specific performance of any such covenants, conditions or provisions.
8.6 PARTIAL INVALIDITY
If any term of this Lease, or the application thereof to any person or
circumstances, shall to any extent be invalid or unenforceable, the remainder of
this Lease, or the application of such term to persons or circumstances other
than those as to which it is invalid or unenforceable shall not be affected
thereby, and each term of this Lease shall be valid and enforceable to the
fullest extent permitted by law.
8.7 SELF-HELP
If Tenant shall at any time fail to promptly perform any obligation under this
Lease, Landlord shall have the right, but shall not be obligated, to enter upon
the Premises and to perform such obligation notwithstanding the fact that no
specific provision for such substituted performance by Landlord is made in this
Lease with respect to such default. In performing such obligation, Landlord may
make any payment of money or perform any other act. All sums so paid by Landlord
(together with interest at the rate of 2 1/2 percentage points over the then
prevailing prime rate as set forth in The Wall Street Journal) and all necessary
incidental costs and expenses in connection with the performance of any such act
by Landlord, shall be deemed to be additional rent under this Lease and shall be
payable to Landlord immediately on demand. Landlord may exercise the foregoing
rights without waiving any other of its rights or releasing Tenant from any of
its obligations under this Lease.
8.8 TENANT'S ESTOPPEL CERTIFICATE
Tenant agrees from time to time, upon not less than fifteen (15) days' prior
written request by Landlord, to execute, acknowledge and deliver to Landlord a
statement in writing certifying that this Lease is unmodified and in full force
and effect and that Tenant has no defenses, offsets or counterclaims against its
obligations to pay the Annual Fixed Rent and additional rent and to perform its
other covenants under this Lease and that there are no uncured defaults of
Landlord or Tenant under this lease (or, if there have been any modifications
that the same is in full force and effect as modified and stating the
modifications and, if there are any defenses, offsets, counterclaims, or
defaults, setting them forth in reasonable detail), and the dates to which the
Annual Fixed Rent, additional rent and other charges have been paid. Any such
statement delivered pursuant to this Section 8.8 may be relied upon by a
prospective purchaser or mortgagee of the Premises or any prospective assignee
of any mortgagee of the Premises. Time is of the essence in respect of any such
requested certificate, Tenant hereby acknowledging the importance of such
certificates in mortgage financing arrangements, prospective sale and the like.
Tenant hereby appoints Landlord Tenant's attorney-in-fact in its name and behalf
to execute such statement if Tenant shall fail to execute such statement within
such fifteen-(15)-day period.
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8.9 WAIVER OF SUBROGATION
In any case in which Tenant shall be obligated to pay to Landlord any loss,
cost, damage, liability, or expense suffered or incurred by Landlord, Landlord
shall allow to Tenant as an offset against the amount thereof (i) the net
proceeds of any insurance collected by Landlord for or on account of such loss,
cost, damage, liability or expense, provided that the allowance of such offset
does not invalidate or prejudice the policy or policies under which such
proceeds were payable, and (ii) if such loss, cost, damage, liability or expense
shall have been caused by a peril against which Landlord has agreed to procure
insurance coverage under the terms of this Lease, the amount of such insurance
coverage, whether or not actually procured by Landlord.
In any case in which Landlord or Landlord's agents shall be obligated to pay to
Tenant any loss, cost, damage, liability or expense suffered or incurred by
Tenant, Tenant shall allow to Landlord and Landlord's agents as an offset
against the amount thereof (i) the net proceeds of any insurance collected by
Tenant for or on account of such loss, cost, damage, liability, or expense,
provided that the allowance of such offset does not invalidate the policy or
policies under which such proceeds were payable and (ii) the amount of any loss,
cost, darnage, liability or expense caused by a peril covered by fire insurance
with the broadest form of property insurance generally available on property in
buildings of the type of the Building, whether or not actually procured by
Tenant.
The parties hereto shall each procure an appropriate clause in, or endorsement
on, any property insurance policy covering the premises and the Building and
personal property, fixtures and equipment located thereon and therein, pursuant
to which the insurance companies waive subrogation or consent to a waiver of
right of recovery. Having obtained such clauses and/or endorsements each party
hereby agrees that it will not make any claim against or seek to recover from
the other for any loss or damage to its property or the property of others
resulting from firm or other perils covered by such property insurance.
8.10 ALL AGREEMENTS CONTAINED
This Lease contains all of the agreements of the parties with respect to the
subject matter thereof and supersedes all prior dealings between them with
respect to such subject matter.
8.11 BROKERAGE
Landlord and Tenant each warrant that they have had no dealings with any broker
or agent other than LYNCH MURPHY WALSH & PARTNERS and RADER PROPERTIES in
connection with the Lease and covenant to defend, hold harmless and indemnify
each other from and against any and all cost, expense or liability for any
compensation, commissions and charges claimed by any broker or agent claiming by
or through them with respect to dealings in connection with this Lease or the
negotiation thereof
8.12 SUBMISSION NOT AN OPTION
The submission of this Lease or a summary of some or all of its provisions for
examination does not constitute a reservation of or option for the Premises or
an offer to lease.
8.13 APPLICABLE LAW
This Lease, and the rights and obligations of the parties hereto, shall be
construed and enforced in accordance with the laws of the Commonwealth of
Massachusetts.
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8.14 WAIVER OF JURY TRIAL
Landlord and Tenant hereby waive trial by jury in any action, proceeding or
counterclaim brought by either of the parties hereto against the other, on or in
respect to any matter whatsoever arising out of or in any way connected with
this Lease, the relationship of Landlord and Tenant hereunder, Tenant's use or
occupancy of the Premises, and/or claim of injury or damages.
8.15 HOLDOVER
If Tenant or anyone claiming under Tenant shall remain in possession of the
Premises or any part thereof after the expiration or prior termination of the
term of this Lease without any agreement in writing between Landlord and Tenant
with respect thereto, then, prior to the acceptance of any payments for rent or
use and occupancy by Landlord, the person remaining in possession shall be
deemed a tenant-at-sufferance. Whereas the parties hereby acknowledge that
Landlord may need the Premises after the expiration or prior termination of the
term of the Lease for other tenants and that the damages which Landlord may
suffer as the result of Tenant's holding-over cannot be determined as of the
date of this Lease, in the event that Tenant so holds over, Tenant shall pay to
Landlord in addition to all rental and other charges due and accrued under the
Lease prior to the date of termination, charges (based upon the fair market
rental value of the Premises) for use and occupation of the Premises thereafter
and, in addition to such sums and any and all other rights and remedies which
Landlord may have at law or in equity, an additional use and occupancy charge in
the amount of fifty percent (50%) of either the Annual Fixed Rent and other
charges calculated (on a daily basis) at the highest rate payable under the
terms of this Lease, but measured from the day on which Tenant's hold-over
commenced and terminating on the day on which Tenant vacates the Premises or the
fair market rental value of the Premises for such period, whichever is greater.
Notwithstanding the foregoing, Landlord shall have the right to elect to recover
any other damages which Landlord is permitted to recover under this Lease in
lieu of said liquidated damages by giving Tenant written notice of such
election. From and after the date on which Landlord gives Tenant such notice,
said liquidated damages shall cease to accrue and Tenant shall be liable to
Landlord for any damages recoverable under this Lease which accrue thereafter.
8.16 ARBITRATION
Any disputes relating to provisions or obligations in this Lease as to which a
specific provision for a reference to arbitration is made herein shall be
submitted to arbitration in accordance with the provisions of applicable state
law, as from time to time amended, provided that in no event shall Tenant have
the right to require arbitration of any matter relating to Tenant's obligation
to pay Annual Fixed Rent, additional rent or any other charges. Arbitration
proceedings, including the selection of an arbitrator, shall be conducted
pursuant to the rules, regulations and procedures from time to time in effect as
promulgated by the American Arbitration Association. Prior written notice of
application by either party for arbitration shall be given to the other at least
ten (10) days before submission of the application to the said Association's
office in the city wherein the Building is situated (or the nearest other city
having an Association office). The arbitrator shall hear the parties and their
evidence. The decision of the arbitrator shall be binding and conclusive, and
judgment upon the award or decision of the arbitrator may be entered in the
Superior Court of the Commonwealth of Massachusetts. The parties consent to the
jurisdiction of the Superior Court of the Commonwealth of Massachusetts and
further agree that any process or notice of motion or other application to the
Superior Court or a Judge thereof may be served outside the Commonwealth of
Massachusetts by registered mail or
25
KBFIII/SOFTWARE DEVELOPER's COMPANY/5.1.96
by personal service, provided a reasonable time for appearance is allowed. The
costs and expenses of each arbitration hereunder and their apportionment between
the parties shall be determined by the arbitrator in his award or decision. No
arbitrable dispute shall be deemed to have arisen under this Lease prior to (i)
the expiration of the period of twenty (20) days after the date of the giving of
written notice by the party asserting the existence of the dispute together with
a description thereof sufficient for an understanding thereof; and (ii) where a
Tenant payment is in issue, the amount billed by Landlord having been paid by
Tenant.
8.17 INABILITY TO PERFORM
This Lease and the obligations of Tenant to pay rent hereunder and perform all
the other covenants, agreements, terms, provisions and conditions hereunder on
the part of Tenant to be performed shall in no way be affected, impaired or
excused because Landlord is unable to fulfill any of its obligations under this
Lease or is unable to supply or is delayed in supplying any service expressly or
impliedly to be supplied or is unable to make or is delayed in making any
repairs, replacement, additions, alterations, improvements or decorations or is
unable to supply or is delayed in supplying any equipment or fixtures if
Landlord is prevented or delayed from so doing by reason of strikes or labor
troubles or any other similar or dissimilar cause whatsoever beyond Landlord's
reasonable control, including but not limited to, governmental preemption in
connection with a national emergency or by reason of any rule, order or
regulation of any department thereof of any governmental agency or by reason of
the conditions of supply and demand which have been or are affected by war,
hostilities or other similar or dissimilar emergency. In each such instance or
inability of Landlord to perform, Landlord shall exercise reasonable diligence
to eliminate the cause of such inability to perform.
8.18 EXCULPATORY CLAUSE
Neither Tenant or any person or entity claiming by, through or under Tenant
shall not assert or seek to enforce any claim or breach of this Lease against
any of Landlord's assets other than Landlord's equity interest in the Building
and in the uncollected rents, issues and profits thereof, and Tenant and such
parties shall look solely to such interest for the satisfaction of any liability
of Landlord or Landlord's agents under this Lease or otherwise, it being
specifically agreed that in no event shall Landlord (or any of the officers,
trustees, directors, partners, beneficiaries, joint venturers, members,
stockholders or other principals, agents (including, without limitation,
Landlord's managing agent for the Property) or representatives, and the like,
disclosed or undisclosed, thereof) ever by personally liable for any such
liability. This paragraph shall not limit any right that Tenant might otherwise
have to obtain injunctive relief against Landlord or to take any other action
which shall not involve the personal liability of Landlord to respond in
monetary damages from Landlord's assets other than the Landlord's interest in
the Building, as aforesaid. In no event shall Landlord (or any of the officers,
trustees, directors, partners, beneficiaries, joint venturers, members,
stockholders or other principals, agents (including, without limitation,
Landlord's managing agent for the Property) or representatives and the like,
disclosed or undisclosed, thereof) ever be liable for consequential damages. If
by reason of Landlord's failure to complete construction of the Premises,
Landlord shall be held to be in breach of this Lease, Tenant's sole and
exclusive remedy shall be a right to terminate this Lease.
8.19 PARTIES BOUND - SEISIN OF TITLE
The covenants, agreements, terms, provisions and conditions of this Lease shall
bind and benefit the successors and assigns of the parties hereto with the same
effect as if mentioned
26
KBFIII/SOFTWARE DEVELOPER's COMPANY/5.1.96
in each instance where a party hereto is named or referred to, except that no
violation of the provisions of Section 5.6 hereof shall operate to vest any
rights in any successor or assignee of Tenant and that the provisions of this
Section 8.19 shall not be construed as modifying the default provisions
contained in Article VII hereof.
If, in connection with or as a consequence of the sale, transfer or other
disposition of Landlord's interest in the Building or Property, any party who
is Landlord ceases to be the owner of the reversionary interest in the
Premises, Landlord shall be entirely freed and relieved from the performance
and observance thereafter of all covenants and obligations hereunder on the
part of Landlord to be performed and observed, it being understood and agreed
in such event (and it shall be deemed and construed as a covenant running with
the land) that the person succeeding to Landlord's ownership of said
reversionary interest shall thereupon and thereafter assume, and perform and
observe, any and all of such covenants and obligations of Landlord.
ARTICLE IX
RIGHTS OF PARTIES HOLDING PRIOR INTERESTS
9.1 Lease Subordinate
This Lease shall be subject and subordinate to any mortgage now or hereafter
on the Property or Building, or both, which are separately and together
hereinafter in this Article IX referred to as "the mortgaged premises", and to
each advance made or hereafter to be made under any mortgage, and to all
renewals, modifications, consolidation, replacements and extensions thereof
and all substitutions therefor, provided that the holder thereof enters into
an agreement with Tenant by the terms of which such holder will agree to
recognize the rights of tenant under this Lease and to accept Tenant as tenant
of the Premises under the teens and conditions of this Lease in the event of
acquisition of title by such holder through foreclosure proceedings or
otherwise and Tenant will agree to recognize the holder of such mortgage as
Landlord in such event, which agreement shall be made expressly to bind and
inure to the benefit of the successors and assigns of Tenant and of the holder
and upon anyone purchasing the Premises at any foreclosure sale, provided
however, that such holder shall not: (i) be liable for any previous act or
omission of Landlord under this Lease; (ii) be subject to any offset, defense
or counterclaim which shall theretofore have accrued to Tenant against
Landlord; (iii) have any obligation with respect to any security deposit
unless it shall have been paid over or physically delivered to such successor;
or (iv) be bound by any previous modification of this Lease or by any previous
payment of Annual Fixed Rent for a period greater than one (1) month, made
without the consent of such holder where such consent is required by the
applicable instrument. Notwithstanding the foregoing any such holder may at
its election subordinate its mortgage to this Lease without the consent or
approval of Tenant. Tenant and Landlord agree to execute and deliver any
appropriate instruments necessary to carry out the agreements contained in
this Section 9.1. Tenant acknowledges that, where applicable, any consent or
approval hereafter given by Landlord may be subject to the further consent or
approval of the holder; and the failure or refusal of such holder to give such
consent or approval shall, notwithstanding anything to the contrary in this
Lease contained, constitute reasonable justification for Landlord's
withholding its consent or approval. Tenant hereby irrevocably constitutes and
appoints Landlord or any holder, and their respective successors in interest,
acting singly, Tenant's attorney-in-fact to execute and deliver any such
certificate or instrument for, on behalf and in the name of Tenant, but only
if Tenant fails to execute, acknowledge and deliver any such certificate or
instrument within ten ( 10) days after Landlord or such holder has made
written request therefor.
27
KBFIII/SOFTWARE DEVELOPER's COMPANY/5.1.96
9.2 RIGHTS OF HOLDER OF MORTGAGE TO NOTICE OF DEFAULTS BY LANDLORD AND TO CURE
SAME
No act or failure to act on the part of Landlord which would entitle Tenant
under the terms of this Lease, or by law, to be relieved of Tenant's obligations
hereunder or to terminate this Lease, shall result in a release or termination
of such obligations or a termination of this Lease unless (i) Tenant shall have
first given written notice of Landlord's act or failure to act to Landlord's
mortgagees of record, if any, specifying act or failure to act on the part of
Landlord which could or would give basis to Tenant's rights; and (ii) such
mortgagees after receipt of such notice, have failed or refused to correct or
cure the condition complained of within a reasonable time thereafter; but
nothing contained in this Section 9.3 shall be deemed to impose any obligation
on any such mortgagees to correct or cure any condition. "Reasonable time" as
used above means and includes a reasonable time to obtain possession of the
mortgaged premises if the mortgagee elects to do so and a reasonable time to
correct or cure the condition if such condition is determined to exist.
EXECUTED as a sealed instrument in two or more counterparts on the day and year
first above written.
LANDLORD:
K/B Fund III
/s/ Mark F. Tassinari
Mark F. Tassinari
Vice President
Hereunto Duly Authorized
TENANT:
The Software Developer's Company, Inc.
/S/ Barry N. Bycoff
Barry N. Bycoff
President and Chief Executive Officer
Hereunto Duly Authorized
EXHIBIT 11.01
THE SOFTWARE DEVELOPER'S COMPANY, INC.
COMPUTATION OF EARNINGS PER SHARE
(in thousands, except per share data)
For the years ended March 31,
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
PRIMARY:
<S> <C> <C> <C>
Average shares outstanding 8,354 8,688 4,883
Net effect of stock options and warrants,
if dilutive, based on the treasury stock
method using the average market price 481 22 N/A
----- ------ -------
Total 8,835 8,710 4,883
===== ===== =====
Net income (loss) $ 129 $ 196 $ (270)
Less assumed dividend on Series A Preferred
Stock and declared dividend on Series B
Senior Preferred stock --- --- (50)
------- -------- ------
Net income (loss) for EPS computation $ 129 $ 196 $ (320)
===== ===== ======
Net income (loss) per share $0.01 $0.02 $(0.07)
==== ==== ====
</TABLE>
EXHIBIT 22.01
THE SOFTWARE DEVELOPER'S COMPANY, INC.
SUBSIDIARIES OF THE REGISTRANT
The Software Developer's Company, GmbH
Beratgerstrasse 36
4600 Dortmund 1
Germany
Personal Computing Tools, Inc. (a California Corporation)
33 Riverside Drive
Pembroke, MA 02359
Internet Security Corporation
245 Winter Street
Waltham, MA 02154
EXHIBIT 24.01
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration
Statements of the Software Developer's Company, Inc. on Forms S-8 (File nos.
33-37796, 33-35318, 33-7797, and 33-35225) and on Forms S-3 (File nos. 33-53818
and 33-57878) of our reports dated May 15, 1996, with respect to the
consolidated financial statements and financial statement schedules of The
Software Developer's Company, Inc. as of March 31, 1996 and 1995 and for each of
the three years in the period ended March 31, 1996 which reports are included in
this Annual Report on Form 10-K.
/s/ Coopers & Lybrand, L.L.P.
COOPERS & LYBRAND, L.L.P.
Boston, Massachusetts
June 26, 1996
REPORT OF INDEPENDENT AUDITORS
In connection with our audits of the consolidated financial statements
of The Software Developer's Company, Inc. as of March 31, 1996 and 1995 and each
of the three years in the period ended March 31, 1996, we have also audited the
consolidated schedules included in this Annual Report (Form 10-K) for the year
ended March 31, 1996 as listed in Item 14(a)(2).
In our opinion, the consolidated schedules referred to above, when
considered in relation to the basic financial statements take as a whole,
present fairly, in all material respects, the information required to be stated
therein.
/s/ Coopers & Lybrand, L.L.P.
COOPERS & LYBRAND, L.L.P.
Boston, Massachusetts
June 26, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-03-1996
<PERIOD-END> MAR-03-1996
<CASH> 1,410,445
<SECURITIES> 0
<RECEIVABLES> 6,107,462
<ALLOWANCES> 347,986
<INVENTORY> 1,292,961
<CURRENT-ASSETS> 8,766,311
<PP&E> 2,668,455
<DEPRECIATION> 1,923,187
<TOTAL-ASSETS> 10,455,745
<CURRENT-LIABILITIES> 8,364,965
<BONDS> 0
0
6,283
<COMMON> 81,979
<OTHER-SE> 1,815,101
<TOTAL-LIABILITY-AND-EQUITY> 10,455,745
<SALES> 56,106,646
<TOTAL-REVENUES> 56,106,646
<CGS> 45,044,860
<TOTAL-COSTS> 55,802,750
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 162,887
<INCOME-PRETAX> 154,118
<INCOME-TAX> 25,200
<INCOME-CONTINUING> 128,918
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 128,918
<EPS-PRIMARY> 0.01
<EPS-DILUTED> 0.01
</TABLE>
