SCHEDULE 14A INFORMATION
CONSENT SOLICITATION STATEMENT STATEMENT PURSUANT TO SECTION 14(A) OF THE
SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant: [X]
Filed by a Party other than the Registrant: [ ]
Check the appropriate box:
[ ] Preliminary Consent Solicitation Statement
[X] Definitive Consent Solicitation Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or
Section 240.14a-12
THE SOFTWARE DEVELOPER'S COMPANY, INC.
- - --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
THE SOFTWARE DEVELOPER'S COMPANY, INC.
- - --------------------------------------------------------------------------------
(Name of Person(s) Filing Consent Solicitation Statement)
[ ] $125 per Exchange Act Rules 0-11(c)(1)(ii), or 14a-6(i)(1), or
14a-6(i)(2), or Item 22(a)(2) of Schedule 14A.
[ ] $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and
0-11.
1) Title of each class of securities to which transaction applies:
Common Stock
Series C Preferred Stock
2) Aggregate number of securities to which transaction applies:
9,026,217
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11:
$11,000,000 based on estimated Purchase Price
4) Proposed maximum aggregate value of transaction:
$11,000,000.00
5) Total fee paid:
$2,200.00
[X] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid: $2,200.00
2) Form, Schedule, or Registration Statement No.:
Schedule 14A Information (Preliminary Consent Solicitation
Statement)
3) Filing Party: Registrant
4) Date Filed: May 24, 1996
THE SOFTWARE DEVELOPER'S COMPANY, INC.
33 RIVERSIDE DRIVE
PEMBROKE, MA 02359
Tel: (617) 829-2036
Fax: (617) 829-5002
- - --------------------------------------------------------------------------------
June 4, 1996
Dear Stockholder:
The Software Developer's Company, Inc., a Delaware corporation (the
"Company"), is soliciting consents in connection with a proposal to sell a
substantial portion of the Company's assets, comprised of all of the operating
assets relating to The Programmer's SuperShop catalog, its Web Site for The
Programmer's SuperShop operation, its corporate sales group, its German
subsidiary and its SDC Communications division, pursuant to the terms and
conditions of the Agreement of Purchase and Sale of Assets with Programmer's
Paradise, Inc., dated as of May 16, 1996, in the form attached as Appendix A to
the enclosed Consent Solicitation Statement. In connection with the disposition
contemplated by the Agreement, the Company is also proposing to change its name
to Netegrity, Inc. You will also be asked 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
of Purchase and Sale of Assets. The Company will retain its business relating to
Internet Security Corporation, a Company subsidiary which provides network
security services for enterprise communications. Gross proceeds from the sale of
the Company's assets are estimated to be approximately $11,000,000. Details of
the proposed transaction are set forth in the accompanying Consent Solicitation
Statement which you should review carefully.
The Board of Directors of the Company has unanimously approved both the
asset sale and the name change and RECOMMENDS that all stockholders render their
written consent for the approval of this transaction. The Board of Directors
believes that this proposed action is in the best interest of the Company and
its stockholders.
So that your shares may be represented in the action to be taken by
written consent, I urge you to promptly complete, sign, date and return the
accompanying Consent Card in the enclosed envelope.
/s/ Barry N. Bycoff
BARRY N. BYCOFF
President and Chief
Executive Officer
THE SOFTWARE DEVELOPER'S COMPANY, INC.
33 RIVERSIDE DRIVE
PEMBROKE, MA 02359
----------------
NOTICE AND CONSENT SOLICITATION STATEMENT
FOR ACTION TO BE TAKEN BY WRITTEN CONSENT IN LIEU OF A MEETING OF STOCKHOLDERS
To the Stockholders of The Software Developer's Company, Inc.:
Attached to this notice is a Consent Solicitation Statement which
solicits the written consent of the stockholders of The Software Developer's
Company, Inc., a Delaware corporation (the "Company" or "SDC"), for the
following action (the "Proposal"):
1. 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 of Purchase and Sale of Assets, by and among
Programmer's Paradise, Inc., the Company and Software Developer's Company GmbH,
dated as of May 16, 1996, in the form attached as Appendix A to the Consent
Solicitation Statement accompanying this Notice (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., or
such other name as the Board of Directors deems appropriate.
The Board of Directors has unanimously approved the above Proposal,
deems it advisable and in the best interests of the Company and its
stockholders, and RECOMMENDS that stockholders approve the above Proposal. The
Proposal is described in detail in the Consent Solicitation Statement attached
to this Notice.
The Board of Directors believes that it is in the best interests of the
Company and its stockholders to solicit such approvals by written consent of the
Company's stockholders rather than incur the delay and expense of convening a
special meeting. By the terms of the Agreement, the Company must receive
stockholder approval no later than June 15, 1996, or Programmer's Paradise, Inc.
will be entitled to a fee of $1,000,000. The name change is a condition to the
consummation of the transaction.
The close of business on May 24, 1996 has been fixed as the record date
for the determination of stockholders entitled to notice of and to submit
written consents in connection with the Proposal. The affirmative vote of
holders of a majority of the shares of Common Stock and Series C Preferred
Stock, voting together as a single class, outstanding as of the record date is
required to approve the Proposal. The Proposal will be effective upon receipt by
the Company of Consent Cards which have not previously been revoked representing
the approval by the holders of a majority of the shares of Common Stock and
Series C Preferred Stock, voting together as a class, issued and outstanding on
the record date. Stockholders are not entitled to dissenters' rights under the
Delaware General Corporation Law in connection with the proposed transaction
described in the Agreement. Certain holders of capital stock of the Company,
representing approximately 31% of the outstanding shares of capital stock, have
each separately entered into voting agreements with Programmer's Paradise, Inc.
whereby each holder agreed to vote its shares in favor of the transaction.
PLEASE COMPLETE, SIGN, DATE AND RETURN THE ENCLOSED CONSENT CARD
PROMPTLY. STOCKHOLDERS WHO EXECUTE CONSENT CARDS RETAIN THE RIGHT TO REVOKE THEM
AT ANY TIME PRIOR TO THE TIME OF WHICH THE COMPANY HAS RECEIVED WRITTEN CONSENTS
FROM HOLDERS REPRESENTING NOT LESS THAN A MAJORITY OF THE SHARES OUTSTANDING AS
OF THE RECORD DATE. A RETURN ENVELOPE, WHICH REQUIRES NO POSTAGE IF MAILED IN
THE UNITED STATES, IS ENCLOSED FOR YOUR CONVENIENCE.
ALL STOCKHOLDERS ARE URGED TO COMPLETE, SIGN, DATE AND RETURN THE
ACCOMPANYING CONSENT CARD IN THE ENCLOSED ENVELOPE AS SOON AS POSSIBLE AND, IN
ANY EVENT, PRIOR TO JUNE 14, 1996. CONSENTS ARE REVOCABLE AT ANY TIME PRIOR TO
THE TIME AT WHICH THE COMPANY HAS RECEIVED WRITTEN CONSENTS REPRESENTING NOT
LESS THAN A MAJORITY OF THE VOTES OUTSTANDING AS OF THE RECORD DATE.
By Order of the Board of Directors
/s/ Barry N. Bycoff
Barry N. Bycoff,
President and Chief
Executive Officer
June 4, 1996
TABLE OF CONTENTS
<TABLE>
PAGE
----
<S> <C>
VOTING RIGHTS AND CONSENTS......................................................................................... 1
Delivery and Return of Written Consents......................................................................... 3
Revocation of Written Consents.................................................................................. 3
Notice of Effectiveness of the Transaction...................................................................... 3
SUMMARY............................................................................................................ 4
The Company..................................................................................................... 4
Business to be Sold............................................................................................. 5
The Purchaser................................................................................................... 5
Business to be Retained......................................................................................... 5
Use of Proceeds................................................................................................. 6
Solicitation of Written Consents of Stockholders................................................................ 6
Consents Required............................................................................................... 6
The Transaction................................................................................................. 6
THE TRANSACTION....................................................................................................11
General.........................................................................................................11
Business of the Company to be Sold in the Transaction...........................................................11
Name Change.....................................................................................................12
Background of the Proposed Sale.................................................................................12
Reasons for the Transaction.....................................................................................15
Purchase Price..................................................................................................17
Reimbursement of Certain Shutdown Expenses......................................................................18
Transition Plan Prior to Closing; Employee Retention Plan.......................................................18
Governmental Approvals..........................................................................................20
Closing.........................................................................................................20
The Purchaser...................................................................................................20
Opinion of Financial Advisor....................................................................................21
Interests of Certain Persons in the Transaction.................................................................23
Voting Agreements; Consent to Transaction.......................................................................25
Use of Proceeds.................................................................................................25
Accounting Treatment of the Transaction.........................................................................26
Tax Consequences to the Company.................................................................................26
Recommendation of the Board of Directors Regarding the Transaction..............................................27
No Dissenters' Rights...........................................................................................27
THE AGREEMENT......................................................................................................27
Assets to be Sold...............................................................................................27
Purchase Price..................................................................................................27
Certain Representation and Warranties...........................................................................29
Certain Covenants...............................................................................................29
Conditions to the Transaction...................................................................................30
Transition Plan.................................................................................................30
Reimbursement of Certain Shut-Down Expenses.....................................................................30
Termination and Damages.........................................................................................31
Break-Up Fee....................................................................................................31
Indemnification.................................................................................................32
Noncompetition Covenant.........................................................................................32
Expenses of Transaction.........................................................................................32
Amendment and Waiver............................................................................................32
-i-
TABLE OF CONTENTS -- (CONTINUED)
PAGE
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PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS..............................................................33
SELECTED CONSOLIDATED FINANCIAL DATA...............................................................................38
INFORMATION CONCERNING THE COMPANY.................................................................................39
Market for Registrant's Common Equity and Related Stockholder Matters...........................................39
Security Ownership of Certain Beneficial Owners and Management.................................................39
Dividend Policy.................................................................................................42
BUSINESS OF THE COMPANY PRIOR TO THE TRANSACTION...................................................................42
The Company.....................................................................................................42
Business Strategy...............................................................................................42
Catalog Operations and Publications.............................................................................43
Markets and Customers...........................................................................................43
Marketing and Sales.............................................................................................43
Products and Merchandising......................................................................................44
Purchasing......................................................................................................44
Competition.....................................................................................................45
Product Research and Development................................................................................45
Employees.......................................................................................................45
Business to be Retained - Internet Security Corporation.........................................................45
Properties......................................................................................................47
Legal Proceedings...............................................................................................47
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..............................48
FINANCIAL STATEMENTS...............................................................................................57
AVAILABLE INFORMATION..............................................................................................87
EXPENSES AND SOLICITATION..........................................................................................87
STOCKHOLDER PROPOSALS..............................................................................................87
APPENDIX A - Agreement of Purchase and Sale of Assets by and between Programmer's
Paradise, Inc., the Company and Software Developer's Company GmbH
dated as of May 16, 1996..............................................................................A-1
APPENDIX B - Form of Consent Card.................................................................................B-1
</TABLE>
-ii-
THE SOFTWARE DEVELOPER'S COMPANY, INC.
33 RIVERSIDE DRIVE
PEMBROKE, MA 02359
--------------------
CONSENT SOLICITATION STATEMENT
--------------------
FOR STOCKHOLDER ACTION BY WRITTEN CONSENT
CONSENT CARDS TO BE SUBMITTED PRIOR TO JUNE 27, 1996
This Consent Solicitation Statement is furnished to the holders of
Common Stock, $.01 par value (the "Common Stock"), and the holders of Series C
Preferred Stock, $.01 par value (the "Series C Preferred Stock"), of The
Software Developer's Company, Inc. (the "Company" or "SDC") by the Board of
Directors in connection with the solicitation by the Board of Directors of
written consents in the form enclosed in connection with the following action:
1. 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 of Purchase and Sale of Assets, by and among
Programmer's Paradise, Inc., the Company and Software Developer's Company GmbH,
dated as of May 16, 1996, in the form attached as Appendix A to this Consent
Solicitation Statement (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., or such other
name as the Board of Directors deems appropriate.
The Company intends to mail this Consent Solicitation Statement and the
form of consent to the stockholders of the Company on or about June 4, 1996. The
action proposed above, including the approval of the Agreement and the change of
the Company's name, is referred to in this document as the "Transaction" or the
"Proposal."
VOTING RIGHTS AND CONSENTS
Under the Company's Certificate of Incorporation and By-laws and
pursuant to the Delaware General Corporation Law (the "Delaware Law"), any
action which may be taken at any annual or special meeting of the stockholders
of the Company may be taken without a meeting, without prior notice and without
a vote, if a consent in writing, setting forth the action so taken, is signed by
the holders of outstanding stock having not less than the minimum number of
votes that would be necessary to authorize or take such action at a meeting at
which all shares entitled to vote thereon were present and voted. The matter
being considered by the stockholders is being submitted for action by written
consent, rather than by votes cast at a meeting. The Proposal will be deemed to
have been approved upon receipt by the Company of Consent Cards which have not
previously been revoked representing the approval by the holders of a majority
of the shares of capital stock issued and outstanding on the record date with
respect to the Proposal, provided that such approval is received on or prior to
June 27, 1996 (the "Termination Date"). If, however, sufficient written consents
have not been received by the Termination Date, the Company reserves the right
to extend the solicitation of written consents made hereby. If the Company,
however, does not receive sufficient written consents by June 15, 1996, to
approve the Proposal, then the Company will incur a fee of $1,000,000 to
Programmer's Paradise, Inc. Any election to extend this consent solicitation
beyond the Termination Date and set a new Termination
Date will be made prior to the then existing Termination Date and will be made
by the Company by news release or other similar public announcement. The date on
which the Proposal is deemed approved is referred to as the "Effective Date."
Only stockholders of record at the close of business on May 24, 1996
are entitled to notice of and to submit written consents in connection with the
above Proposal. At the close of business on 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 outstanding share of Common Stock and Series C Preferred
Stock is entitled to one vote per share in connection with the approval of the
Proposal. The written consent of holders of a majority of the shares of Common
Stock and Series C Preferred Stock, voting as a single class, outstanding as of
the record date is required to approve the Proposal. Certain holders of capital
stock of the Company, representing approximately 31% of the outstanding shares
of capital stock of the Company, have each separately entered into voting
agreements with the Purchaser whereby such holder agreed to vote its shares in
favor of the Transaction and delivered an irrevocable proxy in favor of
Purchaser which may be exercised by the Purchaser only if it appears that the
holder has not rendered a written consent in favor of the Transaction. See "The
Transaction--Voting Agreements; Consent to Transaction."
Stockholders are being requested to indicate approval of the Proposal
by executing the enclosed Consent Card and by checking the box which corresponds
to the action the stockholder wishes to take. Failure to check any of the boxes
will, if the Consent Card has been signed and returned, constitute approval of
the Proposal. Nevertheless, signing and indicating approval on the Consent Card
will be deemed to be written consent to the approval of the Proposal, where
specified on the Consent. Consent Cards that reflect abstentions will be treated
as voted for purposes of determining the approval of the Proposal and will have
the same effect as a vote against the Proposal. Consent Cards that reflect
"broker non-votes" will be treated as unvoted for purposes of determining
approval and will not be counted as votes for or against the Proposal.
All shares represented by each properly executed and unrevoked written
consent received on or before the Effective Date will be counted. Any
stockholder giving a written consent has the power to revoke it at any time
before the Company receives written consents representing not less than a
majority of the outstanding shares. Stockholders who do not consent to the
approval of the Proposal by execution of the Consent Card will nonetheless be
bound by the Proposal if sufficient written consents are received by the Company
to approve the Proposal. No dissenters' or similar rights apply to stockholders
who do not approve the Proposal.
This solicitation is being made by the Company. The Company will bear
all costs in connection with the solicitation of written consents, including the
cost of preparing, printing and mailing this Consent Solicitation Statement. In
addition to the use of the mails, written consents may be solicited by the
Company's directors, officers and employees by personal interview, telephone or
telegram. Such directors, officers and employees will not be additionally
compensated, but may be reimbursed for out-of-pocket expenses in connection with
such solicitation. Employees of the Company who assist in such activities will
not receive additional compensation in connection with these soliciting
activities. The Company has also retained Corporate Investor Communications,
Inc. ("CIC") to assist in the solicitation of written consents. CIC will receive
approximately $4,500 for its solicitation services. The Company has agreed to
indemnify CIC against any liabilities incurred by CIC in conjunction with the
services provided, unless such liability results from CIC's negligence.
Arrangements will also be made with brokerage houses, banks and other
custodians, nominees and fiduciaries for the forwarding of solicitation material
to the beneficial owners of the capital stock held of record by such persons,
and the Company may reimburse such persons for their reasonable out-of-pocket
expenses.
The approximate date on which this Consent Solicitation Statement and
the accompanying form of Consent Card will be mailed to the Company's
Stockholders is June 4, 1996. The principal executive offices of the Company are
located at 33 Riverside Drive, Pembroke, MA 02359 and its telephone number is
(617) 829-2036.
2
DELIVERY AND RETURN OF WRITTEN CONSENTS
The Board of Directors requests that each stockholder complete, sign,
date and mail or deliver the Consent Card to Registrar & Transfer Company (the
"Transfer Agent") at the following address:
10 Commerce Drive
Cranford, New Jersey 07016
Attn: Diane Sayak
(908) 272-8511
An addressed envelope is provided for your convenience in returning the
Consent Card. The Consent Card should be returned as soon as possible and, in
any event, with sufficient time for receipt by the Transfer Agent prior to June
14, 1996. DO NOT SEND CONSENT CARDS TO THE COMPANY.
REVOCATION OF WRITTEN CONSENTS
Any Consent Card executed and delivered by a stockholder may be revoked
by delivering written notice of such revocation or a later dated written consent
prior to the Effective Date to the Transfer Agent at the address set forth
below:
10 Commerce Drive
Cranford, New Jersey 07016
Attn: Diane Sayak
(908) 272-8511
NOTICE OF EFFECTIVENESS OF THE TRANSACTION
If the Transaction is approved by the stockholders, the Company will
promptly give notice thereof to all stockholders who have not consented in
writing to the extent and in the manner required by Section 228(d) of the
Delaware Law.
--------------------------------------
No persons have been authorized to give any information or to make any
representations other than those contained in this Consent Solicitation
Statement in connection with the solicitation of consents and, if given or made,
such information or representations must not be relied upon as having been
authorized by the Company or any other person. This Consent Solicitation
Statement does not constitute the solicitation of a consent in any jurisdiction
to any person to whom it is not lawful to make any such solicitation in such
jurisdiction. The delivery of this Consent Solicitation Statement does not,
under any circumstances, create an implication that there has been no change in
the affairs of the Company since the date hereof or that the information herein
is correct as of any time subsequent to its date.
--------------------------------------
-3-
SUMMARY
The following summary of certain information contained elsewhere in
this Consent Solicitation Statement does not purport to be complete and is
qualified in its entirety by reference to the full text, including the
appendices attached hereto. As used in this Consent Solicitation Statement, the
"Company" or "SDC" refers to The Software Developer's Company, Inc., and the
"Purchaser" refers to Programmer's Paradise, Inc., and also includes, unless the
context otherwise requires, such entities and their respective subsidiaries and
affiliates. Certain capitalized terms which are used but not defined in this
summary are defined elsewhere in this Consent Solicitation Statement or in the
appended Agreement.
THE COMPANY
o THE PROGRAMMER'S SUPERSHOP
The Software Developer's Company, Inc. ("SDC" or the "Company") is a
national and international direct marketer and distributor of PC-based specialty
software and hardware to technical and professional PC users through its
proprietary catalog, The Programmer's SuperShop ("TPS"), its TPS World Wide Web
site ("Web Site"), and its corporate sales group, and, through its SDC
Communications division, addresses the marketing needs of the developers and
publishers of the products it distributes by providing advertising and
promotional services. Software Developer's Company, GmbH, a wholly-owned
subsidiary located in Dortmund, Germany, provides similar products and services
to dealers and end-users in Germany. The Company distributes third-party
software and hardware products operating on DOS, Windows, Windows/NT, OS/2, Unix
and Apple operating systems and provides an extensive offering of specialized
add-on hardware for these computers. The Company purchases approximately 40% of
the products it distributes directly from software manufacturers and the balance
from third-party distributors.
SDC currently serves business customers in the software development,
networking, engineering and scientific, and profession multimedia marketplaces
by offering a comprehensive range of third-party products. The Company's
corporate sales group targets mid-size to large commercial, governmental and
educational accounts. Leveraging off of initial sales made through its catalog
operations, this group focuses on establishing relationships with customers and
becoming their primary source for software and specialty hardware. It provides
corporate customers with services including in-depth technical support, product
sourcing and volume discounts. The Company's marketing services organization,
SDC Communications, offers 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 is
creating advertisements and publishing for all of SDC's catalogs. However, it
also develops and circulates direct mail campaigns and specialty catalogs and
digests, and provides trade show assistance. See "The Transaction -- General";
"The Transaction -- Business of the Company to be Sold in the Transaction" and
"Business of the Company Prior to the Transaction."
o INTERNET SECURITY CORPORATION
The Company also provides network security products and services for
enterprise communications through a subsidiary, Internet Security Corporation
("ISC"), acquired in November of 1995. ISC markets an integrated family of
network security solutions and related services along with a range of consulting
and support services to protect and manage access to computer-based information
resources. ISC plans to launch a series of software and hardware products that
authenticate the identity of users accessing a network, allocate network
services for remote users, and authorize user access to specific applications
and data resident on a network. The services offering will assist the customer
in implementing and auditing security policies and products for its
communications networks. See "Business of the Company prior to the Transaction
- - -- Business to be Retained - Internet Security Corporation."
The Company's corporate offices are located at 33 Riverside Drive,
Pembroke, MA 02359, and its general telephone number is (617) 829-2036. The
address of Software Developer's Company, GmbH is: Beratgerstrasse 36, 4600
Dortmund 1, Germany. ISC is located at 245 Winter Street, Waltham, MA 02154, and
its telephone number is (617) 487-9300.
-4-
BUSINESS TO BE SOLD
The assets to be sold by the Company are comprised of all of the
operating assets of the Company related to its catalog operations, "The
Programmer's SuperShop," its Web Site relating to the TPS operations, its
corporate sales group, inbound and outbound telemarketing operations, reseller
operations and the operations of its German subsidiary (collectively, the
"Target Business"). TPS offers software development tools, utilities, databases,
languages and business productivity applications to software developers and
business professionals. Sales from the TPS operations represented approximately
80% of the Company's total sales in fiscal 1995 and 78% in fiscal 1994. 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. See "The Transaction -- Business of the Company to be Sold in
the Transaction" and "The Agreement -- Assets to be Sold."
As of March 31, 1996, the assets of the Target Business (unaudited)
constituted approximately 58% and 65%, respectively, of the Company's total
assets and operating assets. Further, as of such date, the Company derived
revenues (unaudited) of approximately $51,100,000 (91% of total revenues) and
incurred a loss of $275,000 (unaudited) from the operations of the Target
Business. See "The Transaction - Business of the Company to be Sold in the
Transaction."
THE PURCHASER
The purchaser, Programmer's Paradise, Inc., a Delaware corporation (the
"Purchaser"), is located at 1163 Shrewsbury Avenue, Shrewsbury, New Jersey
07702, telephone (908) 389-8950. The Purchaser is an international direct
marketer of third-party software for microcomputers, servers and networks,
operating through three separate distribution channels in the United States and
Europe, catalog, corporate reseller and wholesale distribution, with a strategic
focus on expanding its catalog activities aimed at people who design, program,
document and support software. The Purchaser currently offers catalogs in local
languages and with prices in local currencies in the United States, Italy,
Germany, Austria, the United Kingdom and France. See "The Transaction -- The
Purchaser."
BUSINESS TO BE RETAINED
Following the transaction, the Company will continue to manage and
operate its network security service operation through its subsidiary, Internet
Security Corporation ("ISC"). ISC, a business acquired by the Company in
November 1995, was founded in May 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, the Company has established a
consulting service organization to provide assistance to customers with
enterprise security problems. New services include assistance in developing
enterprise-wide security policies, auditing existing security schemes,
performing threat assessments and evaluating network topologies. The Company
will use a portion of the net proceeds from the sale of the Target Business as
working capital to finance the operations of ISC. See "Business of the Company
Prior to the Transaction -- Business to be Retained - Internet Security
Corporation"; "The Transaction -- Use of Proceeds."
-5-
USE OF PROCEEDS
Following the Closing of the Transaction, the Company will have
approximately $10,000,000 of immediate gross proceeds from the sale of Target
Business. The Company currently plans to utilize approximately $4,560,000 of the
proceeds of the Transaction to expand the ISC business being retained by the
Company. The Company also intends to use approximately $700,000 of the proceeds
for the retirement of secured indebtedness, $550,000 for investment banking,
financial advisory and other professional fees associated with the Transaction,
$700,000 for accrued vacation and bonuses and severance costs, and $240,000 for
termination of leases and the closing of the Company's German operation.
Additionally, the Company may be obligated to use up to $2,000,000 of the
proceeds to repurchase shares of capital stock held by a large stockholder of
the Company. See "The Transaction--Use of Proceeds"; "The Transaction--Interests
of Certain Persons in the Transaction"; "Pro Forma Condensed Consolidated
Financial Statements"; "Selected Consolidated Financial Data"; and "Financial
Statements."
SOLICITATION OF WRITTEN CONSENTS OF STOCKHOLDERS
This Consent Solicitation Statement relates to a solicitation of
written consents of stockholders of the Company (the "Solicitation"). As set
forth in the Notice of Action to be Taken by Written Consent in Lieu of a
Meeting of Stockholders, the stockholders of the Company are being solicited in
connection with a proposal to approve and adopt the Agreement pursuant to which
the Company will sell to the Purchaser the Target Business and to approve an
amendment to the Company's Certificate of Incorporation to change the Company's
name. The assets of the Target Business could be construed to constitute
substantially all of the operating assets of the Company. Certain holders of
capital stock of the Company, representing approximately 31% of the outstanding
shares of capital stock of the Company, have each separately entered into voting
agreements with the Purchaser whereby each holder agreed to vote its shares in
favor of the Transaction and delivered an irrevocable proxy in favor of the
Purchaser which may be exercised by the Purchaser only if its appears that the
holder has not rendered a written consent in favor of the Transaction. See "The
Transaction--Voting Agreements; Consent to Transaction."
The record date for stockholders of the Company entitled to notice of
and to submit written consents is as of the close of business on May 24, 1996.
Each outstanding share of capital stock is entitled to one vote per share upon
all matters to be acted upon by written consent. As of May 24, 1996, there were
8,405,017 shares of Common Stock outstanding, held by approximately 157 holders
of record, and 628,330 shares of Company's Series C Preferred Stock outstanding,
held by approximately 14 holders of record. See "The Transaction--Voting
Agreements; Consent to Transaction."
CONSENTS REQUIRED
Written consents representing at least a majority of the outstanding
shares of the Company's Common Stock and Series C Preferred Stock, voting
together as a class, as of the record date are required to approve the
Transaction. Members of the Company's Board of Directors and its executive
officers, representing approximately 32% of the outstanding shares of the
Company's capital stock as of the record date, have advised the Company that
they intend to vote their shares in favor of the Transaction. Certain holders of
capital stock of the Company, representing approximately 31% of the outstanding
shares of capital stock of the Company, have each separately entered into
multiple voting agreements with the Purchaser whereby each holder agreed to vote
its shares in favor of the Transaction and delivered an irrevocable proxy in
favor of the Purchaser which may be exercised by the Purchaser only if it
appears that the holder has not rendered a written consent in favor of the
Transaction. See "The Transaction -- Voting Agreements; Consent to Transaction."
THE TRANSACTION
PURCHASE PRICE. If the Transaction is consummated, the Purchaser will
pay to the Company in immediately available funds $10,0000,000, less certain
adjustments based on the value of the Target Business, and shall pay $1,000,000
to an escrow agent selected by the Purchaser. The escrowed amount will be
released to the Company one year after the Closing Date, except with respect to
amounts reserved for claims made prior to such date. The
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Company has no present intent to pay a special dividend to stockholders, or to
otherwise distribute to its stockholders any proceeds received from the
Transaction, except that if the Transaction is consummated, the Company may be
obligated to expend up to $2,000,000 in proceeds to repurchase shares of capital
stock held by the Company's largest stockholder, the Edison Venture Funds. See
"The Transaction -- Interests of Certain Persons in the Transaction"; "The
Transaction -- Purchase Price."
REASONS FOR THE TRANSACTION. The Company's Board of Directors
unanimously determined that the terms of the Transaction are fair and in the
best interest of the Company and its stockholders. In the course of reaching its
decision to approve the Transaction, the Board consulted with its legal and
financial advisors, as well as the Company's management, and considered the
following factors:
1. Current industry, economic and financial market conditions relating
to the Company as a whole and to the Target Business separately, as well as the
financial condition, assets, liabilities, businesses and operations of the
Company as a whole and of the Target Business separately, both on an historical
and prospective basis.
2. The belief of the Board of Directors that the industry in which the
Target Business operates is rapidly maturing, highly competitive and price
sensitive, and that further consolidation and possible erosion of operating
margins will occur.
3. The belief of the Company's management and the Board of Directors
that certain trends in the software marketplace are adversely affecting the
Company's margins and ability to compete effectively, including the need of
software distributors to achieve larger critical mass rapidly to obtain
profitability, the trend towards commodity pricing of software products, and the
increasing domination of the market and distribution channels by large software
companies such as Microsoft Corporation.
4. The belief of the Company's management and the Board of Directors
that the increasing consolidation in the software market is further accelerating
domination of market share by a few larger, catalog distributors.
5. The belief of the Company's management and the Board of Directors
that catalog software distribution is being "disintermediated" by electronic
distribution channels, such as CD-ROM and the Internet, allowing software
vendors to market directly to consumers and thereby eliminating the "content
value" of the catalog distributor.
6. The belief of management that the Internet could have a dramatic
effect on the way individuals and companies purchase software, thereby reducing
the value of traditional direct marketing companies such as SDC.
7. The absence of more attractive offers for the Target Business,
whether in cash or securities of another publicly-traded corporation..
8. The recommendation of the Company's management and its investment
banker, Broadview Associates, to enter into the proposed Transaction.
9. The opinion of Adams, Harkness & Hill, an independent financial
advisor engaged by the Company, that the consideration to be received by the
Company pursuant to the Agreement is fair to the Company from a financial point
of view. See "Opinion of Financial Advisor."
10. The proposed terms and structure of the Transaction, which includes
an immediate cash payment of $10,000,000 to the Company. See "The Agreement."
11. The potential utilization of the cash proceeds to finance the
working capital requirements of the Company's profitable ISC subsidiary without
resorting to raising additional equity capital at possibly dilutive prices. See
"Use of Proceeds."
12. The results of the Company's efforts to identify other more
attractive alternatives and acquisition candidates with respect to the Target
Business and the likelihood that a transaction more favorable to the Company and
its stockholders could be consummated in the near term, as well as the risk that
another transaction could be negotiated without also jeopardizing the proposed
Transaction with the Purchaser.
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13. The Purchaser's desire to acquire only selected assets and certain
specific liabilities associated with the Target Business and the Board of
Directors desire to expand the scope of the Company's ISC business to pursue
more profitable opportunities in enterprise security solutions.
14. The belief of the Board of Directors that, based on the foregoing
reasons, the sale of the Target Business at this time would be expedient and in
the best interests of the Company and its stockholders as a whole. See "The
Transaction -- Recommendation of the Board of Directors Regarding the
Transaction."
OPINION OF FINANCIAL ADVISOR. Adams, Harkness & Hill ("Adams,
Harkness"), a nationally recognized investment banking firm retained by the
Company as its financial advisor, rendered its written opinion to the Company's
Board of Directors to the effect that the Transaction was fair to the Company
from a financial point of view. See "The Transaction--Opinion of Financial
Advisor."
INTEREST OF CERTAIN PERSONS IN THE TRANSACTION. In considering the
recommendations of the Board of Directors of the Company with respect to the
Agreement and the Transaction contemplated thereby, stockholders should be aware
that certain affiliates of the Company have certain interests in the Transaction
that are in addition to the interests of stockholders of the Company generally.
If the Transaction is consummated, the Company may be obligated to use up to
$2,000,000 of the proceeds of the Transaction to repurchase shares of capital
stock held by the Company's largest stockholder (who is an affiliate of the
Company), the Edison Venture Funds. The Company's obligation to purchase these
shares depends on the market price of the Company's Common Stock during the
period between May 16, 1996, the day the Agreement was signed, and the last
trading day immediately prior to the Closing Date. If the average market price
during this period is above $3.00 per share, the Company has no obligation to
purchase these shares. If the average market price for the Company's Common
Stock during this period is below $1.50 per share, the Edison Venture Funds, at
their option, can require the Company to repurchase shares held by them at the
average of the daily closing prices during this trading period. If the average
of the daily closing prices during this trading period is between $1.50 and
$3.00 per share, the Company is obligated to purchase, and these entities are
obligated to sell, up to $2,000,000 of shares of capital stock at a price equal
to the average of the daily closing prices for the Company's Common Stock during
this period. See "The Transaction -- Interest of Certain Persons in the
Transaction."
BREAK UP FEE. Upon the occurrence of certain events, the Company must
pay a break-up fee to the Purchaser. These events consist of (i) the Company's
agreeing to sell the Target Business to a party other than the Purchaser, (ii) a
change in control of the Company, (iii) the withdrawal from the Agreement by the
Purchaser because of a material adverse change in the Target Business prior to
Closing, (iv) the termination of the Agreement by the Purchaser because the
Company does not fulfill the closing requirements or breaches its covenants
under the Agreement, or (v) the failure of the Company to obtain the stockholder
consents necessary to approve the Proposal by June 15, 1996, at 5:00 p.m.
If one of the above events occurs prior to April 30, 1997, the break-up
fee payable by the Company to the Purchaser is $250,000. If, however, the
break-up event is the failure of the Company to obtain the necessary stockholder
consents by June 15, 1996, or if another break-up event occurs prior to the
receipt of the necessary stockholder consents (however, the Company has until
June 15, 1996, to obtain such consents), the break-up fee is $1,000,000. See
"The Agreement -- Break-Up Fee."
REPRESENTATIONS, WARRANTIES AND COVENANTS. The Agreement contains
various representations, warranties and covenants of the Company, a breach of
which prior to the Closing could permit the Purchaser to terminate the
Agreement. The representations and warranties made by the Company include, among
other things, customary representations and warranties as to operations of the
Target Business and similar corporate and business matters, its financial
statements, and the absence of certain changes to the Target Business. The
covenants made by the Company include, among other things, an obligation to
conduct the operations of the Target Business in the normal course, preserve the
value of the Target Business pending the closing, solicit the requisite
stockholder consents, and use best efforts to ensure the Proposal is
consummated. See "The Agreement -- Certain Representations and Warranties"; "The
Agreement -- Certain Covenants."
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TRANSITION PLAN. The Agreement contains certain provisions regarding
the transition of the Target Business from the Company to the Purchaser. These
provisions address operations pending the closing of the Transaction. In
addition, the transition plan includes an Employee Retention Plan designed to
provide strong incentives, including bonuses, severance packages and vesting of
options, for employees of the Company to continue their employment through each
employee's agreed-upon departure date. The Purchaser has also agreed to provide
certain outplacement services and enhancements. See "The Transaction --
Transition Prior to Closing; Employee Retention Plan"; "The Agreement --
Transition Plan."
INDEMNIFICATION. The Company and the Purchaser are obligated to
indemnify the other for certain losses, liabilities and costs in connection with
the Transaction. The Purchaser must indemnify the Company for, among other
things, liabilities that the Purchaser assumes under the Agreement, and losses
and liabilities relating to misrepresentation or breach by the Purchaser under
the Agreement. The Company must indemnify the Purchaser for, among other things,
liabilities not assumed by the Purchaser under the Agreement, losses and
liabilities relating to misrepresentations or breaches by the Company under the
Agreement, and losses and liabilities incurred by the Purchaser in connection
with debts and obligations of the Company existing as of, or prior to, the
Closing which are not assumed by the Purchaser. The Company is not obligated to
indemnify the Purchaser until the indemnity claims aggregate $75,000, subject to
certain exceptions. See "The Agreement -- Indemnification."
CONDITIONS TO THE TRANSACTION. The Purchaser's obligation to consummate
the Transaction is subject to the fulfillment of certain conditions including,
among other things: the absence of threatened litigation which would interfere
with the consummation of the Transaction; the accuracy of the representations
and warranties made by the Company; the absence of any material adverse change
in the Target Business prior to the Closing, its operations or financial
condition; the receipt of all consents necessary to assign to the Purchaser
certain contracts and governmental permits; the approval of the Transaction by
the Company's stockholders; the delivery of an opinion to the Company as to the
fairness of the financial terms of the Transaction; and compliance with certain
legal and accounting procedures. See "The Agreement -- Conditions to the
Transaction."
The following factors are deemed to be material adverse changes in the
Target Business and entitle the Purchaser to withdraw from the Agreement and
receive a fee of $250,000: (i) the balance sheet at the time of Closing shall
reflect tangible net assets less than $900,000, or the statement of revenue at
the time of Closing shall reflect revenues during the 30 days preceding the
Closing of 25% or more less than the revenues for the same period set forth in a
Transition Plan agreed to by the parties, or (ii) the weighted-average product
gross margin during the 30 days preceding the Closing is less than 13%, or (iii)
the number of advertising pages placed in the August 1996 catalog is less than
75% of the number of pages in the previous year's catalog for the same month,
with these pages being sold at substantially the same price in the two-year
period. The fee of $250,000 is increased to $1,000,000 if the Company fails to
obtain stockholder approval of the Transaction by June 15, 1996. See "The
Agreement -- Conditions to the Transaction."
NONCOMPETITION COVENANT. In connection with the Transaction, the
Company has agreed with the Purchaser that, effective upon the Closing Date, it
will not compete with the Purchaser in the Target Business for a period of ten
(10) years following the Closing (the "Noncompetition Covenant"). Furthermore,
the Company has agreed that it will not solicit or attempt to hire any employees
of the Target Business or the Purchaser during the ten-year period. The
Noncompetition Covenant does not prohibit the Company from operating its ISC
subsidiary to provide product integration and consulting and support services as
a systems integrator providing Internet, Intranet and other on-line network
security services for enterprise-wide communications. See "The Agreement --
Noncompetition Covenant."
ACCOUNTING TREATMENT OF THE TRANSACTION. For financial statement
reporting purposes, the Transaction will be accounted for as an asset sale,
whereby the Company will receive $11,000,000 (the "Purchase Price"), in return
for transferring ownership of certain assets of the Target Business. The assets
to be transferred consist primarily of accounts receivable, product inventory,
fixed assets (at net book value) and certain prepaid expenses and deposits. In
addition, the Purchaser will assume certain obligations of the Company that
consist primarily of trade accounts payable, unfilled sales orders, and certain
accrued expenses. Both the assets transferred to and obligations assumed by the
Purchaser (the "net assets") will be incorporated in the calculation of the
resulting gain or less on the asset sale. The resulting gain or loss on the
asset sale will be calculated by deducting from the
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Purchase Price the net assets transferred to the Purchaser, the net assets of
Personal Computing Tools (a Company subsidiary) as of the date of the
transaction, the associated transaction costs and the applicable federal and
state income taxes. See "The Transaction -- Accounting Treatment of the
Transaction."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE TRANSACTION. As a result
of the Transaction, the Company will recognize taxable gain equal to the amount
paid by the Purchaser (including liabilities of the Company assumed by the
Purchaser and the $1,000,000 amount placed in the escrow fund) less the
Company's adjusted tax basis in the assets sold in the Transaction. The amount
of gain subject to federal income tax will be reduced by the Company's net
operating losses, currently estimated at $6,400,000. The use of these losses to
offset gain recognized in the Transaction may be limited under the Internal
Revenue Code of 1986 due to certain shifts in the equity ownership of the
Company. See "The Transaction -- Tax Consequences to the Company".
CLOSING DATE; TERMINATION. If the Transaction is approved by the
stockholders, the "Closing Date" or "Closing" for the Transaction is June 28,
1996 (or such other date as the parties may agree). The Agreement may be
terminated prior to the Closing upon (i) mutual consent of the parties, (ii) a
breach by the Company of the representations, warranties or covenants in the
Agreement, (iii) the failure of the Transaction to be consummated by June 28,
1996, (iv) an injunction enjoining the sale of the Target Business, (v) any
negotiations or solicitations by the Company in violation of the Company's
no-shop covenant, or (vi) a decrease in the revenue of the Company by 20% or
more from the revenues reflected in a transition plan agreed among the parties.
In the event of a termination based on a decrease in revenues from the
transition plan, the Purchaser is entitled to a break-up fee of $500,000, unless
the termination occurs as a result of the failure of the Company to obtain the
necessary stockholder consents by June 15, 1996, in which case the fee is
$1,000,000. See "The Transaction -- Closing"; "The Agreement -- Conditions to
the Transaction."
RECOMMENDATION OF THE BOARD OF DIRECTORS REGARDING THE TRANSACTION. The
Board of Directors of the Company has unanimously approved the Transaction and
unanimously recommends a vote by written consent FOR approval of the Transaction
by the Company's stockholders. The Board of Directors believes that the terms of
the Transaction are fair to the Company and in the best interests of its
stockholders. For a discussion of the factors considered by the Board of
Directors in reaching its decision, see "The Transaction--Background of the
Proposed Sale" and "The Transaction--Recommendation of the Board of Directors
Regarding the Transaction."
NO DISSENTERS' RIGHTS. Under Delaware Law, the holders of capital stock
of the Company are not entitled to dissenters' or appraisal rights in connection
with the Proposal. See "The Transaction -- No Dissenters' Rights."
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THE TRANSACTION
GENERAL
Pursuant to the terms of the Agreement, the Company will sell to 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 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. See -- "The Agreement - Purchase Price".
The Company currently operates two distinct businesses, The Computing
SuperShops and Internet Security Corporation. The Computing SuperShops is a
direct marketer and distributor of specialty software and hardware to technical
and professional personal computer users worldwide through catalogs and
telesales. The largest component of The Computing SuperShops is The Programmer's
SuperShop ("TPS"). Through its catalog and corporate sales group, TPS offers
software development tools, utilities, databases, languages and business
productivity applications to software developers. The TPS catalog operations
represented approximately 91 % of the Company total sales in fiscal 1996, 80% in
fiscal 1995 and 78% in fiscal 1994. Recently, in November of 1995, the Company
entered the emerging Internet marketplace with its acquisition of Internet
Security Corporation, a provider of network security solutions for enterprise
communication systems over wide-area, local-area, Internet and Intranet.
The Programmer's SuperShop catalog offers software development tools,
utilities, databases, languages and business productivity applications to
software developers and business professionals. The TPS catalog operation
currently serves business customers in the software development, networking,
engineering and scientific, and profession multimedia marketplaces by offering a
comprehensive range of third-party software products. The Company's corporate
sales group targets mid-size to large commercial, governmental and educational
accounts. Leveraging off of initial sales made through the catalogs, this group
focuses on establishing relationships with customers and becoming their primary
source for software and specialty hardware. It provides corporate customers with
services including in-depth technical support, product sourcing and volume
discounts. The Company's marketing services organization, SDC Communications,
offers 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 is creating advertisements
and publishing for all of SDC's catalogs. However, it also develops and
circulates direct mail campaigns and specialty catalogs, and provides trade show
assistance to software developers and manufacturers.
BUSINESS OF THE COMPANY TO BE SOLD IN THE TRANSACTION
The Company will transfer to the Purchaser substantially all of its
assets, properties and business as a going concern, including all of the assets
and business related to or used in connection with The Programmer's SuperShop
catalog, its TPS Web Site, its corporate sales group, Software Developer's
Company GmbH, a wholly-owned subsidiary of the Company, and SDC Communications
(collectively, the "Target Business"), with the exception of certain excluded
assets and operations. See "The Agreement--Assets to be Sold."
The Target Business consists of all trademarks, tradenames, copyrights,
customer mailing lists, interests in software and computer programs, proprietary
rights relating to the Target Business, the TPS catalog, the TPS Web Site,
know-how and other intellectual property relating to the operation of the Target
Business, contracts, agreements, leases, licenses, franchises, inventory,
capital equipment, furniture, computer systems, supplies, receivables, proceeds
of any insurance, unfilled sales and purchase orders, files, records, deferred
charges, prepaid items, and all of the Target Business as a going concern. The
foregoing is subject to the assumption of certain specified liabilities by the
Purchaser
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including, but not limited to, accounts payable and obligations under contracts.
As of March 31, 1996 the assets of the Target Business constituted approximately
58% and 65%, respectively, of the Company's total assets and operating assets.
Further, as of such date, the Company derived revenues (unaudited) of
approximately $51,100,000 (or 91% of total revenues) and incurred a loss of
$275,000 (unaudited) from the operations of the Target Business. 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.
NAME CHANGE
In the course of reaching its decision to approve the Transaction and
in furtherance of the disposition contemplated by the Agreement, the Board of
Directors determined that the name change is an important term of the
Transaction, and that the current name will not accurately reflect the Company's
business following the Transaction. The Purchaser also desires to use the name
of "Software Developer's Company" following the Transaction and demanded the use
of the name and associated goodwill as part of the purchased assets. The Company
is required to discontinue use of the name following the Transaction in order to
avoid confusion in the marketplace.
BACKGROUND OF THE PROPOSED SALE
Over the last few years, the Company's Board of Directors and its
management have periodically evaluated its competitive position in the direct
marketing for the personal computer industry and the various strategic
alternatives available to the Company, including the acquisition of
complementary products or services by the Company or the merger of the Company
with a larger company with more financial, marketing and distribution resources.
The Company has taken a number of steps in the past few years to
eliminate unprofitable businesses, reduce overhead and focus on its core
business, which had the strongest competitive position. In May of 1992 the
Company sold to Borland International its Brief(TM), BrieForC++(TM), and
Sourcerer's Apprentice(TM) product lines for $5,700,000 in cash. In November of
1992 and March of 1993, faced with declining revenues in its direct marketing
business, the Company effected a reorganization and business restructuring in
order to reduce overhead to more supportable levels.
In September of 1994, a planning meeting was held among management and
the Board of Directors. Also present at that meeting was Broadview Associates,
L.P., an investment banking firm that specializes in mergers and acquisitions
and strategic alliances of companies in the "information technology"
marketplace. The following factors effecting the direct marketing business were
discussed. The low barriers to market entry and the rapid expansion of
distribution channels for all categories of software have increased competition
dramatically. The consolidation of companies, even in the software development
tools marketplace, has occurred and is continuing apace. The result is that more
resellers are competing for market share dominated by a few large companies. The
outgrowth of this environment is that software is becoming more of a commodity,
thus affecting the price it can be sold for and the gross margins that resellers
can derive. Longer term, electronic distribution of software could result in the
further pricing pressures and perhaps the disintermediation of the reseller
distribution channel, particularly for smaller catalog distributors such as the
Company. The Board concluded that two directions for the Company were required
in order for it to produce an adequate return on equity. In the near term, the
Company would have to aggressively increase revenues in its current business to
gain economies of scale and operating synergies. In the longer term, the Company
needed to diversify into markets where it could establish more proprietary
positions through products and services. These directions included both
strategic business combinations as well as internally generated initiatives.
Broadview Associates was retained by the Company to assist it in pursuing these
initiatives.
Several initiatives were undertaken over the years to grow the Target
Business. The acquisition of the Personal Computing Tools SuperShop business in
June of 1993 allowed the Company to enter the scientific and engineering direct
marketing arena. The establishment by the Company of an outbound corporate sales
organization in January of 1994 expanded the distribution of TPS products. The
Company created "CD Select" in March of 1994, one of the first programs
available for purchasing and
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distributing software in electronic format on CD-ROM media. The New Media
SuperShop catalog was launched in February of 1995 to target the multimedia
marketplace. And finally, The Computer Supershops Web site was established in
August of 1995 to compete in the emerging market for electronic purchasing and
distribution of software. These initiatives achieved the desired result. They
accelerated the Company's revenue growth for the Target Business from
$28,500,000 (unaudited) in fiscal 1994 (at a loss of $390,000, unaudited) to
approximately $51,100,000 (unaudited) in fiscal 1996 (at a loss of $275,000,
unaudited) with only a modest investment in the infrastructure. However,
constant competitive pricing pressures in the software marketplace during these
two years reduced the Company's average gross margin, offsetting the gains made
from the Company's revenue growth. Diversification occurred when the Company
acquired Internet Security Corporation ("ISC") in November of 1995. Management
believed that ISC would provide an entry into the rapidly developing market for
network security products and related services.
In January of 1995, the Company was approached, unsolicited, by
MicroWarehouse, a publicly-traded corporation, about the potential of being
acquired. Detailed financial information was provided to MicroWarehouse.
Discussions were held between the management of both companies. These
discussions were relayed to the Board of Directors, who decided to retain
Broadview Associates to market the Company to a qualified list of direct
marketing companies in an effort to pursue opportunities, establish a proper
valuation for the Company, and increase the number of potential candidates.
Although leading to initial meetings with two prospects, Broadview's efforts
turned up no interested buyers. After two months of discussions, MicroWarehouse
decided not to move forward and declined to make an offer. The reason given was
that it had decided not to pursue the acquisition of direct marketing companies
in the software distribution marketplace. In March of 1995, the Company
discontinued the pursuit of an acquisition strategy and decided to focus its
resources on improving revenue and margin growth for the core business and
diversifying into other, complementary businesses with better operating margins.
In late December of 1995, the Company was approached, unsolicited, by
the Purchaser, a direct competitor in the software developers' tools
marketplace. The Purchaser expressed an interest in acquiring the Company,
either through stock-for-stock merger or asset sale. Although no firm proposal
was made by the Purchaser, the Board of Directors discussed the matter and
concluded that the Company should enter into negotiations with the Purchaser to
determine if a merger or other form of acquisition might be possible. This
decision to pursue such a transaction was based on the fact that many of the
concerns of management and the Board of Directors regarding the trends in the
direct marketing business previously discussed were becoming more acute and
causing further erosion of operating margins of the Target Business. Broadview
Associates was contacted to assist the Company in discussions with the
Purchaser.
Broadview Associates arranged for a meeting between the two companies
on January 23, 1996. Broadview Associates provided financial information
regarding the Company in advance of that meeting subject to a confidentiality
agreement. The discussions were focused on giving the Purchaser a better
understanding of the Company's various businesses and their relative
profitability.
The Purchaser sent a proposal to the Company's management on February
13, 1996. The proposal provided that the Purchaser would purchase only selected
assets of The Programmer's SuperShop, the corporate sales group and the TPS Web
Site. It would not purchase the Personal Computing Tools' catalog business or
the ISC business. In consideration for the assets of TPS, the Purchaser offered
to pay $7,000,000 in cash and $3,500,000 in a note payable due in the year 2000.
The Company would provide the Purchaser with $2,000,000 in tangible net assets,
excluding cash and liabilities under a line of credit. Any shortfall to the
$2,000,000 requirement would be deducted from the purchase price. An escrow of
$1,000,000 would be established to cover post-closing adjustments. The Company
would also receive warrants to purchase 400,000 shares of the Purchaser's stock.
The proposal was subsequently reviewed and rejected by the Company's
Board of Directors in late February 1996. Both management and Broadview
Associates updated the Board of Directors with respect to the Company's most
recent operating performance and the status of the factors affecting the
industry. Given their view of the market, Broadview Associates recommended that
a strategic arrangement with another computer-related direct marketing company
was essential to improve SDC's financial return on
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investment. Based on these recommendation, the Board of Directors concluded that
it was essential to find a buyer for the direct marketing business if it would
improve the return on investment. However, the Board of Directors decided that
the offer put forward by Programmer's Paradise was not adequate enough to accept
outright. The Board of Directors instructed Broadview Associates to solicit any
potential interest from many of the same companies that were approached in early
January 1995. At the same time, the Board of Directors instructed management to
continue discussions with Programmer's Paradise and offered a proposal of
$14,000,000 for the assets of the TPS operation.
Over the next month, Broadview contacted the list of qualified buyers
which included many of the companies from the prior year as well as three new
prospects. Telephonic meetings were held with two prospects in March of 1996,
after receiving informational packages from Broadview Associates. Neither
company decided to submit an offer for the Company.
Programmer's Paradise did not respond to the counter offer, but
requested that a second meeting be held on March 26, 1996. At that meeting,
discussions centered on a review of the recent financial performance of the
Company and its various operations. Current financial information of the Company
was discussed as well as the $14,000,000 counter-proposal and the $2,000,000
guarantee for net tangible assets. Extensive discussions followed and a verbal
proposal was put forward for $11,000,000, composed of $8,000,000 in cash and
$3,000,000 in shares of the Purchaser's common stock. It also included some
adjustments to the purchase price for variations in tangible net assets, the
balance sheet and revenues of the Target Business prior to closing that were
unacceptable to the Company. The tangible net asset requirement was then
discussed. Management of the Company requested that the tangible net assets
requirement should be reduced to $1,500,000. Agreement was not reached on this
issue and the meeting was adjourned.
Over the next two weeks, several discussions were held with the Board
of Directors of the Company and then between the management of the two
companies. In early April of 1996, the Company's management asked that the
proposed purchase price of $11,000,000 be composed of all cash and that the
Company's tangible net asset requirement be reduced to $1,500,000.
On April 10, 1996, the Purchaser submitted a new outline of the terms
of the proposed transaction. Under these terms the Purchaser would purchase the
assets of TPS for a purchase price of $11,000,000 cash, or $8,000,000 in cash
and 3,000,000 shares of the Purchaser's common stock. The shares would be
restricted securities until registered following the release of the Purchaser's
next annual report on Form 10-K for the December 31, 1996 fiscal year. The
tangible net assets requirement was reduced to $1,500,000. In addition, the
Purchaser would receive from the Company warrants to purchase 250,000 shares of
the Company's Common Stock at $2.50 per share. Also introduced by the Purchaser
was a requirement for an additional $500,000 to be held in escrow and a negative
variation to a transition plan which included purchase price adjustments based
on declines in revenue during the transition period.
The Company's management responded to that latest proposal with a
letter on April 11, 1996. On April 19, 1996 another proposal was submitted by
the Purchaser which called for a purchase price of $11,000,000 in cash. The
proposed tangible net asset requirement was reduced to $1,500,000 and the
purchase price would be adjusted upward if the Company exceeded that number. The
negative variation from the transition plan was modified and the Purchaser
agreed to pay $85,000 in severance costs with respect to the German operations.
It also included a requirement for the Company and certain stockholders to sign
a no-shop agreement.
Negotiations continued between the management of the two companies and,
on April 25, 1996, another proposal was submitted to the Company that broadened
the definition of the equipment included in the purchase and further refined the
negative variation in revenues during the transition period. This proposal was
discussed with the Company's Board of Directors and management.
On April 30, 1996, the Company and the Purchaser entered into a letter
agreement for the exchange of confidential information regarding the Company's
TPS business. In the letter agreement, the Company agreed to provide the
Purchaser with evaluation materials solely for the purpose of conducting due
diligence investigations and evaluating a possible transaction between the two
parties relating to the Target Business. The Purchaser agreed to keep these
evaluating materials confidential. The Company agreed that for 60 days after the
signing of the letter agreement, it would not dispose of
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the Target Business, issue or purchase its own capital stock, merge with another
entity or solicit or continue discussions with other entities relating to the
sale of the Target Business. In addition, several principal stockholders agreed
not to transfer any shares of capital stock of the Company during the 30-day
period after the signing of any definitive agreement. Finally, the parties
agreed that if and only if they did not enter into an agreement for the sale of
the Target Business, and if certain events occurred within 120 days of the date
of the letter agreement, the Company would pay the Purchaser a break-up fee of
$120,000. These events included the sale of the Target Business to another
entity or a change in control of the Company.
On May 7, 1996 the Board of Directors retained Adams, Harkness & Hill
("Adams, Harkness") to render a fairness opinion with respect to the
Transaction. It is the opinion of Adams, Harkness & Hill that the consideration
to be received by the Company is fair to the Company from a financial point of
view (See "Opinion of Financial Advisor"). In October 1993, Adams, Harkness
rendered an opinion to the Company in connection with a recapitalization of
preferred stock of the Company.
On May 15, 1996, the Company held a meeting of the Board of Directors
at which detailed presentations were made by management and legal counsel
regarding the proposed sale and other matters. Management and legal counsel
reviewed the terms of the Agreement, outlined the benefits and risks of the
proposed Transaction, and answered a number of questions about the business,
legal, tax and accounting aspects of the Transaction. The Directors unanimously
resolved that the proposed sale was expedient, fair and in the best interest of
the Company and its stockholders. On May 16, 1996, the Company and the Purchaser
executed the Agreement of Purchase and Sale of Assets subject to approval of the
Company's stockholders. See "The Agreement".
As of May 16, 1996, five persons, consisting of officers and members of
the Board of Directors representing some of the Company's larger stockholders
and representing approximately 31% of the then outstanding shares of capital
stock of the Company, agreed to vote all shares of capital stock held by them to
approve the proposed Transaction. These holders of capital stock of the Company
each separately entered into voting agreements with the Purchaser whereby such
holder agreed to vote its shares in favor of the Transaction and delivered an
irrevocable proxy in favor of the Purchaser which may be exercised by the
Purchaser only if it appears that the holder has not rendered a written consent
in favor of the Transaction. See "The Transaction--Voting Agreements; Consent to
Transaction."
REASONS FOR THE TRANSACTION
The Board of Directors believes that the Transaction is expedient and
fair to and in the best interests of the Company and its stockholders.
Accordingly, the Board of Directors has unanimously approved the Agreement and
the Transaction. At meetings of the Board of Directors held on February 15, 1996
and May 15, 1996, and on several informal conferences of the Board of Directors
held during the interim before final approval of the Transaction on May 15,
1996. The Board of Directors also carefully reviewed the terms of the Agreement
and the Transaction with the Company's management, and representatives from each
of Broadview Associates, Testa, Hurwitz & Thibeault, counsel to the Company, and
a representative from Adams, Harkness & Hill.
In reaching its conclusions, the Board of Directors considered the
following principal factors:
1. Current industry, economic and financial market conditions relating
to the Company as a whole and to the Target Business separately, as well as the
financial condition, assets, liabilities, businesses and operations of the
Company as a whole and of the Target Business separately, both on an historical
and prospective basis.
2. The belief of the Board of Directors that the industry in which the
Target Business operates is rapidly maturing, highly competitive and price
sensitive, and that further consolidation and possible erosion of operating
margins will occur.
3. The belief of the Company's management and the Board of Directors
that certain trends in the software marketplace are adversely affecting the
Company's margins and ability to compete effectively, including the need of
software distributors to achieve rapidly larger critical mass to obtain
profitability,
-15-
the trend towards commodity pricing of software products, and the increasing
domination of the market and distribution channels by large software companies
such as Microsoft Corporation.
4. The belief of the Company's management and the Board of Directors
that the increasing consolidation in the software market is further accelerating
domination of market share by a few larger, catalog distributors.
5. The belief of the Company's management and the Board of Directors
that catalog software distribution is being "disintermediated" by electronic
distribution channels, such as CD-ROM and the Internet, allowing software
vendors to market directly to consumers and thereby eliminating the "content
value" of the catalog distributor.
6. The belief of management that the Internet could have a dramatic
effect on the way individuals and companies purchase software, thereby reducing
the value of traditional direct marketing companies such as SDC.
7. The absence of more attractive offers for the Target Business,
whether in cash or securities of another publicly-traded corporation.
8. The recommendation of the Company's management and its investment
banker, Broadview Associates, to enter into the proposed Transaction.
9. The opinion of Adams, Harkness & Hill, an independent financial
advisor engaged by the Company, that the consideration to be received by the
Company pursuant to the Agreement is fair to the Company from a financial point
of view. See "Opinion of Financial Advisor."
10. The proposed terms and structure of the Transaction, which includes
an immediate cash payment of $10,000,000 to the Company. See "The Agreement --
Purchase Price."
11. The potential utilization of the cash proceeds to finance the
working capital requirements of the Company's profitable ISC subsidiary without
resorting to raising additional equity capital at possibly dilutive prices. See
"The Transaction -- Use of Proceeds."
12. The results of the Company's efforts to identify other more
attractive alternatives and acquisition candidates with respect to the Target
Business and the likelihood that a transaction more favorable to the Company and
its stockholders could be consummated in the near term, as well as the risk that
another transaction could be negotiated without also jeopardizing the proposed
Transaction with the Purchaser.
13. The Purchaser's desire to acquire only selected assets and certain
specific liabilities associated with the Target Business and the Board of
Directors desire to expand the scope of the Company's ISC business to pursue
more profitable opportunities in network security solutions.
14. The belief of the Board of Directors that, based on the foregoing
reasons, the sale of the Target Business at this time would be expedient and in
the best interests of the Company and its stockholders as a whole.
In view of the wide variety of factors considered in connection with
its evaluation of the Transaction, the Board of Directors did not find it
practicable to, and did not, quantify or otherwise attempt to assign relative
weights to the specific factors considered in reaching its determination.
Considering all of the above factors, the Board of Directors concluded
that it is likely that in an increasingly competitive environment the Target
Business would not have a value higher than that which existed at the time that
the Transaction was approved. The Board also considered that the potential for a
reduction in the value or profitability of the Target Business over time might
negatively impact the Company's public stock price. In addition, management,
with its intimate knowledge of the areas of operation of the Target Business,
had concluded that it was unlikely in the near term that any purchaser would be
willing to pay a price higher than that to be received in the Transaction and
communicated this to the Board of Directors. See "The Transaction -- Background
of the Proposed Sale."
-16-
PURCHASE PRICE
The purchase price to be paid by the Purchaser to the Company for the
Target Business (the "Purchase Price") will consist of (i) a payment at the
closing of the Transaction (the "Closing") of $10,000,000 in immediately
available funds, subject to adjustment for variations in revenues and tangible
net assets of the Target Business as of the Closing, as further described below
(the "Closing Payment"), and (ii) a payment of $1,000,000 to an escrow agent
under a one-year escrow arrangement (the "Escrow Fund"). The escrow period
expires on the date one year after the Closing, subject to claims made prior to
such date. Up to $500,000 of the Escrow Fund may be used by the Purchaser as an
offset to the Purchase Price if any adjustments are made because of variations
in the revenues or tangible net assets as of the Closing from estimates provided
by the Company of the revenues and tangible net assets as of the signing of the
Agreement. The balance of the escrowed funds may be used by the Purchaser to
satisfy general claims of indemnity under the Agreement.
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.
For purpose of calculating the purchase price adjustments, "Tangible
Net Assets" means an amount equal to the difference between the total tangible
purchased assets relating to the Target Business and the liabilities of the
Target Business included as "accounts payable-trade" and "other accrued
expenses" in respect of the Target Business, after taking into account the
Permitted Adjustments noted below, but excluding "Excluded Assets" or "Excluded
Liabilities." For purposes of this calculation, "Permitted Adjustments" means
(i) indebtedness for borrowed money and the liabilities not included as an
assumed liability (that is, trade payables and unfilled purchase orders for
inventory, and liabilities under contracts assigned to the Purchaser), (ii) the
amount of all accounts receivable which are considered to be uncollectible and
are actually written off, or are in excess of the stated allowance for doubtful
accounts as of the Closing Date, (iii) tax credits and other benefits which are
not available to the Company after the Closing, (iv) the value of assets not
transferred to the Purchaser, (v) one-half the costs associated with the
preparation of the estimated financial statements as of the Closing reflected as
an expense and deducted from Tangible Net Assets, and (vi) the amount of all
product returns prior to the delivery of the closing financial statements.
"Excluded Assets" means those contracts and assets which are unrelated to the
Target Business and which are not transferred as part of the Transaction.
"Excluded Liabilities" means all other debts and obligations of the Company,
other than trade payables and unfilled purchase orders for the Target Business,
and liabilities in respect of contracts assigned to the Purchaser.
Within five days prior to the Closing Date, the Purchaser and the
Company will prepare an estimated Balance Sheet and Statement of Revenue for the
Target Business, in accordance with generally accepted accounting principles.
Based on those estimates, if the Tangible Net Assets of the Target Business are
less than $1,500,000 as of the Closing Date, the payment to the Company at
Closing shall be reduced, dollar for dollar, by an amount equal to such
shortfall and, if the Tangible Net Assets of the Target Business are more than
$1,500,000 as of the Closing Date, the payment to the Company at Closing shall
be increased, dollar for dollar, by an amount equal to such excess. The Company
expects the Tangible Net Assets to be approximately $1,500,000 at the time of
the Closing, although it may increase or decrease by as much as $200,000 at any
time because the Company experiences regular daily fluctuations in its working
capital and cash flow based on the amount of customer orders or shipments of
inventory received during any business day.
-17-
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 (as defined below), 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.
The Company has provided the Purchaser with a transition plan prepared
by the Company (the "Transition Plan"). The Transition Plan provides for
projected gross revenue of at least $12,300,000 for the quarter ending June 30,
1996, allocated by each month as follows: $3,600,000 of estimated gross revenue
for April 1996; $4,200,000 of estimated gross revenue for May 1996; and
$4,500,000 of estimated gross revenue for June 1996. The adjustments described
in this paragraph and the preceding paragraph are referred to herein as the
"Estimated Adjustment."
Within 45 days after the Closing Date, auditors selected by the
Purchaser will prepare an audited balance sheet of the Target Business, as of
the day immediately preceding the Closing Date, and an unaudited statement of
revenue from operations of the Target Business for the thirty-day period
preceding the Closing. The balance sheet and statement of revenue may be
adjusted to take into account certain agreed-upon adjustments. This audited
balance sheet is referred to herein as the "Closing Balance Sheet" and the
unaudited statement of revenue is referred to herein as the "Closing Statement
of Revenue." If the Tangible Net Assets of the Business being purchased shown on
the Closing Balance Sheet is more or less than $1,500,000 (the shortfall or
excess being referred to as the "Final Adjustment"), the Purchaser or the
Company shall pay to each other an amount necessary to reconcile the Estimated
Adjustment and the Final Adjustment. Additionally, if during the 30-day period
prior to the Closing, the actual revenues from operations of the Target Business
are more than 12% less than the projected revenue set forth in the Transition
Plan, then the Purchase Price will be reduced by an amount corresponding to the
percentage decrease in actual revenue from estimated revenue as set forth in the
Transition Plan (as described above).
REIMBURSEMENT OF CERTAIN SHUTDOWN EXPENSES
The Purchaser has agreed to reimburse the Company for one-half of all
severance costs related to the closing of the Company's Germany operations. The
total severance cost relating to the shutdown of the German operation is not
expected to exceed $120,000. Hence, the Company expects that it will be
reimbursed by the Purchaser an amount approximately $60,000. The Agreement calls
for a maximum reimbursement liability of the Purchaser to the Company of
$85,000. All other shutdown costs, as well as all other severance costs, are the
responsibility of the Company.
TRANSITION PLAN PRIOR TO CLOSING; EMPLOYEE RETENTION PLAN
The Agreement contains certain provisions regarding the transition of
the Target Business from the Company to the Purchaser which are incorporated
into a Transition Plan jointly prepared by the Company and the Purchaser. The
Transition Plan, in addition to providing the Purchaser with access to
information concerning the Target Business through the Closing Date,
incorporates an employee retention plan (the "Employee Retention Plan"). The
Employee Retention Plan has been designed to provide strong incentives,
including, without limitation, bonuses and severance packages, for employees of
the Company to continue their employment through their agreed-upon departure
date. Should any such employee terminate his or her employment prior to their
agreed-upon departure date, the employee will forfeit all rights to the benefits
afforded by the Employee Retention Plan. The Board of Directors believes that
the Employee Retention Plan will help the Company achieve or exceed its revenue
milestone under the Transition Plan and its Tangible Net Asset requirement of
$1,500,000 as of the Closing, thereby maximizing the value of the Target
Business and increasing the purchase price.
-18-
The severance package provided for in the Employee Retention Plan is a
combination of cash payments, accelerated vesting of stock options and
continuation of medical and dental coverage. The Purchaser has also agreed to
provide certain outplacement services and enhancements.
Prior to the Closing, the Purchaser shall designate those employees it
desires to employ in its business following the Closing Date, but the Purchaser
has no obligation to employ any of such employees. However, it is anticipated
that approximately 90 employees of the Company will be terminated. Of this
amount, 80 employees will represent employees currently working in the corporate
offices located in Pembroke, Massachusetts, with the remaining 10 employees
employed at the Company's German subsidiary operation, located in Dortmund,
Germany.
Severance Plan. The Board of Directors, at the request of Company's
management, has approved a severance package for all employees. The severance
package is a combination of cash payments, accelerated vesting of stock options,
and continuation of medical and dental coverage. All employees must remain with
the Company until their agreed-upon separation date. If any employee decides to
leave the employ of the Company prior to his or her agreed-upon separation date,
he or she will forfeit their rights to any severance benefits.
The cash portion of the severance plan is based on a formula which
takes into account the employee's level of responsibility, as well as a
component that pays the employee an amount based on length of service. The
following outlines the severance payments to be awarded based on job level:
directors are entitled to receive 12 weeks of severance; managers are entitled
to receive 4 weeks of severance; supervisors are entitled to receive 3 weeks of
severance; and all other employees are entitled to receive 2 weeks of severance.
To be entitled to the severance payments, employees who are not terminated must
remain with the Company through their agreed-upon departure date to receive the
benefit of any severance payment.
All employees being terminated are guaranteed a minimum of four weeks
severance based on the above formula. The Company estimates that the total cash
outlay for severance payments to all employees, including accrued vacation
costs, bonuses and commissions, will be approximately $700,000. The amount of
severance payments is summarized by classes of employees as follows: directors,
$93,000; managers, $44,000; supervisors, $63,000; U.S. employees, $183,000; and
the personnel of the German operations, $120,000. Of the aggregate amount, the
Company has also allocated severance payments of $88,000 for key employees and
accrued sales bonuses, and approximately $150,000 of accrued vacation costs.
In addition to the above formula, all employees terminated will also
receive one additional week of base compensation for each year of service with
the Company. This award is rounded up to the nearest year, so that all employees
receive at least one week of base compensation in this computation. For example,
if a employee has been employed by the Company for one and a half years, then
his or her severance would be increased by two weeks. The final component of the
severance plan is a one month continuation of medical and dental coverage.
Employees must be employed at the date of separation to receive this benefit.
Vesting of Employee Stock Options. In addition to the cash payments
made to all terminated employees, the Board of Directors has also approved a
plan that will accelerate the vesting of all employee options as of the date of
separation. If the proposed Transaction is consummated, the Board of Directors
has also determined to accelerate the unvested and unexercisable portion of all
stock options for shares of Common Stock held by all employees, including those
terminated as a result of the Transaction and those who remain with Company
following the Transaction. Similar to the cash portion of the severance plan
described above, employees must remain with the Company until the date of each
employee's agreed-upon departure date to receive the benefit of the accelerated
vesting of stock options. The Board of Directors believed that acceleration of
unvested stock options was a reward for all employees who helped to grow the
value of the Target Business during the last few years. Because most of the
options were granted in the past to management and employees based on the value
of the Target Business, the Board of Directors believed it was important to
provide incentives for all employees upon conclusion of the operations of the
Target Business. The Board of Directors believed that the acceleration
-19-
of stock options and severance payments to employees who remain with the Target
Business through the Closing Date will help the Company achieve or exceed its
revenue milestones under the Transition Plan and its Tangible Net Asset
requirement of $1,500,000 as of the Closing, thereby maximizing the value of the
Target Business and increasing the purchase price for the Target Business. The
Board of Directors also believed that the acceleration of options was an
important component of employee severance. Since approximately 80 employees
working in the corporate offices located in Pembroke, Massachusetts, could be
terminated as a result of the Transaction, the Board of Directors believed these
employees should receive additional benefits following termination in order to
ameliorate the impact of termination. Moreover, the Board of Directors also
believed that to not accelerate stock options for the non-terminated employees
would provide a disincentive for those employees who remained with the Company
to help with the growth of the Company's ISC business -- that is, employees who
remained with the Company were penalized vis-a-vis employees who may be
terminated.
As of May 8, 1996, there were options to purchase an aggregate of
986,831 shares of Common Stock at a weighted-average exercise price of $1.32 per
share. Of this amount, options to purchase 446,601 shares are currently vested
and exercisable, and options to purchase 540,230 shares will become vested and
exercisable if the Transaction is consummated. Executive officers of the
Company, Messrs. Barry Bycoff, Richard Kosinski, James O'Connor and Joseph
Burke, currently hold options to purchase an aggregate of 775,000 shares of
Common Stock at a weighted-average exercise price of $1.22 per share. Of this
amount, options to purchase 395,000 shares are currently exercisable as of the
record date, and options to purchase 380,000 shares will become exercisable if
the Transaction is consummated. Mr. Bycoff, the President and Chief Executive
Officer of the Company, currently holds options to purchase an aggregate of
535,000 shares of Common Stock at a weighted-average exercise price of $1.02 per
share. Of this amount, Mr. Bycoff holds options to purchase 387,500 shares which
are currently vested and exercisable, and options to purchase 147,500 shares
will become exercisable if the Transaction is consummated. Mr. Richard Kosinski,
President of the Company's ISC subsidiary and a Vice-President of the Company,
currently hold options to purchase an aggregate of 75,000 shares of Common Stock
at a weighted-average exercise price of $1.71 per share. Of this amount, Mr.
Kosinski holds no options which are currently vested and exercisable, but
options to purchase 75,000 shares will become exercisable if the Transaction is
consummated. Mr. O'Connor, Chief Financial Officer of the Company, holds options
to purchase an aggregate of 85,000 shares of Common Stock at a weighted-average
exercise price of $1.71 per share. Of this amount, Mr. O'Connor holds no options
which are currently vested and exercisable, but options to purchase 85,000
shares will become exercisable if the Transaction is consummated. Mr. Joseph
Burke, Vice President of Catalog Operations, holds options to purchase an
aggregate of 80,000 shares at a weighted-average exercise price of $1.51 per
share. Of this amount, Mr. Burke holds options to purchase 7,500 shares which
are vested and exercisable, and options to purchase 72,500 shares will become
exercisable if the Transaction is consummated.
GOVERNMENTAL APPROVALS
There are no federal or state regulatory requirements which must be
complied with, or pursuant to which approval must be obtained, in order to
consummate the Transaction, other than compliance with local bulk sales laws
regarding notice to the Company's creditors of the proposed Transaction.
CLOSING
If the Proposal is approved by the stockholders, it is anticipated that
the Closing of the Transaction will take placed at the offices of Testa, Hurwitz
& Thibeault, LLP, High Street Tower, 125 High Street, Boston, Massachusetts
02110, at 10:00 a.m., local time, on June 28, 1996, or such other date, place or
time as the parties to the Agreement shall mutually agree upon.
THE PURCHASER
The Purchaser is an international direct marketer of third-party
software for microcomputers, servers and networks, operating through three
separate distribution channels in the United States and Europe, catalog,
corporate reseller and wholesale distribution, with a strategic focus on
expanding its catalog activities aimed at people who design, program, document
and support software. The Purchaser currently offers catalogs in local languages
and with prices in local currencies in the United States, Italy, Germany,
Austria, the United Kingdom and France.
-20-
The Purchaser's strategy is to build upon its distinctive catalogs -
the established Programmer's Paradise catalog, directed at independent
professional programmers, and its offshoot, Programmer's Paradise Corporate
Developer ("Corporate Developer"), introduced in 1994 and directed at
programmers working in large corporations. These catalogs are full color
"megalogs" created in-house, which combine traditional catalog sales offerings
with detailed product descriptions, magazine style articles, product
announcements and interviews with industry leaders, and contain substantial
amounts of paid and cooperative advertising. In 1995, the Purchaser distributed
over 2.9 million catalogs, typically featuring more than 1,300 stock keeping
units ("SKUs") in each catalog.
The Purchaser operates three separate distribution channels - catalog
operations (Programmer's Paradise, Corporate Developer and System Science),
corporate reselling to large accounts (Corsoft in the U.S., ISP*D in Munich,
Germany and ISP*F in Paris, France) and wholesale distribution to dealers and
large resellers (Lifeboat Distribution in the U.S. and Lifeboat Italy in Milan,
Italy). Through its multiple channels, the Purchaser offers more than 10,000
SKUs, consisting of technical and general business application software, from
over 1,100 publishers at prices generally discounted below manufacturers'
suggested retail prices. The Purchaser's catalogs contain substantial amounts of
advertising and offer one of the most complete collections of microcomputer
technical software, including programming languages, tools, utilities,
libraries, development systems, interfaces and communications products. The
Purchaser is located at 1163 Shrewsbury Avenue, Shrewsbury, New Jersey 07702,
telephone (908) 389-8950.
OPINION OF FINANCIAL ADVISOR
The Company retained Adams, Harkness & Hill ("Adams, Harkness") to
render to its Board of Directors an opinion as to the fairness to Company, from
a financial point of view, of the consideration to be received by the Company
for all of the assets, properties and business as a going concern of the Target
Business in the Transaction. Adams, Harkness has rendered a written opinion to
the Company's Board of Directors to the effect that, as of May 15, 1996, the $11
million to be received by the Company for the Target Business is fair from a
financial point of view, to the Company (the "Adams, Harkness Opinion").
Although Adams, Harkness delivered an opinion to the Company's Board of
Directors concerning the fairness of the Transaction, the amount of
consideration to be exchanged in the Agreement was determined through
negotiations between the Company and the Purchaser, and not by Adams, Harkness.
The Adams, Harkness Opinion was prepared for the Company's Board of
Directors, is directed only to the fairness to the Company as of May 15, 1996,
from a financial point of view, of the consideration to be received by the
Company and does not constitute a recommendation to any stockholder as to how to
vote.
In rendering its opinion, Adams, Harkness did not make or seek to
obtain appraisals of the assets of the Target Business in connection with its
analyses of the valuation of the Target Business. Adams, Harkness relied with
the Company's consent and without independent verification upon the accuracy and
completeness of all of the financial information reviewed by it for the purposes
of its opinion. With respect to any financial forecasts reviewed relating to the
prospects of the Company or the business, Adams, Harkness assumed that they were
reasonably prepared on a basis reflecting the best currently available estimates
and judgments of the Company's management as to the future financial performance
of the Company. No limitations were imposed by the Company's Board of Directors
upon Adams, Harkness with respect to the investigation made or the procedures
followed by Adams, Harkness in rendering its opinion. The Company and its
management cooperated fully with Adams, Harkness in connection with its
investigation. In its analyses, Adams, Harkness made numerous assumptions with
respect to industry performance, general business and economic conditions and
other matters, many of which are beyond the Company's and the Purchaser's
control. Any such estimate is not necessarily indicative of actual values, which
may be significantly more or less favorable than as set forth therein. Estimates
of values of companies do not purport to be appraisals or necessarily reflect
the prices at which companies may actually be sold. Because such estimates are
inherently subject to uncertainty, none of the Company, Adams, Harkness or any
other person assumes responsibility for their accuracy.
In rendering its opinion, Adams, Harkness, among other things: (i)
analyzed certain publicly available financial statements and other information
concerning the Company; (ii) analyzed certain internal financial statements and
other financial and operating data concerning the Company and the
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Target Business prepared by the management of the Company; (iii) analyzed
certain financial forecasts prepared by the management of the Company; (iv)
discussed the past and current operations and financial condition and the
prospects of the Company and the Target Business with the management of the
Company; (v) reviewed the reported prices and trading activity for the Company's
Common Stock; (vi) compared the financial performance of Company and the prices
and trading activity of the Company's Common Stock with that of certain other
comparable publicly traded companies and their securities; (vii) reviewed the
financial terms, to the extent publicly available, of certain comparable
acquisition transactions; and (viii) reviewed and discussed with the senior
management of the Company the strategic rationale for the Transaction and the
benefits of the Transaction to the Company.
In rendering its opinion to the Company's Board of Directors, Adams,
Harkness performed and presented certain financial information and comparative
analyses, with such other factors as it deemed relevant, including, among other
things:
Historical Stock Trading and Financial Statement Analysis. As part of
its analysis, Adams, Harkness reviewed and analyzed selected historical trading
prices and volumes for Company's Common Stock, including daily price and volume
information from January 1, 1995 to May 15, 1996. The average per share closing
prices of the Company's Common Stock for the various periods ending May 15, 1996
were: $1.79 for the previous 12 months; $1.81 for the previous four months;
$2.00 for the previous two months; $2.24 for the previous month; $2.28 for the
previous 20 trading days; $2.56 for the previous 10 trading days; $2.63 for the
previous five trading days; and $2.61 for the previous three trading days. The
Company's Common Stock closed at $2.50 on May 15, 1996. In addition, Adams,
Harkness reviewed and analyzed selected annual and quarterly historical and
forecasted income statements and selected annual historical balance sheets for
the Company. Adams, Harkness also reviewed and analyzed selected historical and
projected income statement information relating to the Target Business.
Peer Group Comparison. Adams, Harkness compared certain financial
information of the Company and Target Business with a group of several publicly
traded computer distribution companies including but not limited to, Micro
Warehouse, Inc., Programmer's Paradise, Inc., CDW Computer Centers, Inc.,
Software Spectrum, Inc., and Egghead Inc. Such financial information included,
among other things, market valuation, stock price as a multiple of earnings, and
aggregate market value as a multiple of revenues. In particular, such analysis
showed that on average after excluding both the maximum and minimum values for
each valuation metric, as of May 15, 1996, based on the closing prices for the
respective common stocks, this group of common stocks traded at 26.5 times
annualized 1995 earnings per share, 20.1 times annualized 1996 forecasted
earnings per share and 17.2 times annualized 1997 forecasted earnings per share
(based on research analysts' estimates as reported by First Call), and 0.5 times
the last 12 months' reported revenues. By comparison and using the financial
results and projections prepared by the management of the Company, the $11
million to be received by the Company for the Target Business resulted in a
transaction value of approximately 22 times the Target Business' 1995
annualized, fully taxed net earnings, 22 times the Target Business' 1996
annualized, projected, fully taxed net earnings, and 21 times the Target
Business' 1997 annualized, projected, fully taxed net earnings.
Analysis of Selected Precedent Transactions. Adams, Harkness examined
selected precedent transactions involving computer distribution companies. Such
analysis resulted in a mean transaction valuation of 24.5 times last 12 months'
net income, 0.2 times last 12 months' revenues and 2.3 times book value. By
comparison and using the financial results and projections prepared by the
management of the Company, the $11 million to be received by the Company for the
Target Business resulted in a transaction value of approximately 20 times the
Target Business' last twelve months revenues, and 4.91 times the Target
Business' book value.
Multiple Analysis. Adams, Harkness prepared an analysis that reviewed
the aggregate consideration to be received by the Company pursuant to the
Agreement as a multiple of various financial operating parameters including
revenues and net income. Such analysis indicated that the aggregate
consideration to be received by the Company (i) as a multiple of the Target
Business'
-22-
annualized 1995 actual revenue, 1996 annualized projected revenue, and 1997
annualized projected revenue was 0.20x, 0.17x, 0.14x, respectively; (ii) as a
multiple of annualized 1995 and forcasted annualized 1996 and 1997 net income
was 22.1x, 22.0x and 20.6x, respectively.
Pursuant to a letter agreement between the Company and Adams, Harkness
(the "Engagement Letter"), the Company agreed to pay Adams, Harkness a fee of
$50,000 for the Adams, Harkness Opinion. The aforementioned opinion fee is not
contingent on the favorable or unfavorable nature of the opinion. In addition,
the Company agreed to reimburse Adams, Harkness for all of its reasonable
out-of-pocket expenses. The Company also agreed to indemnify and hold harmless
Adams, Harkness against certain liabilities, including liabilities under the
federal securities laws or, arising out of, or in connection with its rendering
of services under the Engagement Letter. In the event such indemnification were
not available, however, the Company agreed to contribute to the settlement, loss
or expenses involved in the proportion that the relevant financial interest of
the Company and its stockholders bears to Adams, Harkness' relevant financial
interest.
The summary of the Adams, Harkness analyses set forth above does not
purport to be a complete description of the presentation by Adams, Harkness to
the Company's Board of Directors. The preparation of a fairness opinion is a
complex process and is not necessarily susceptible to partial analyses or
summary description. Adams, Harkness believes that its analyses and the summary
set forth above must be considered as a whole and that selecting portions of its
analyses, or of the above summary, could create an incomplete view of the
process underlying the analyses performed by Adams, Harkness in connection with
the preparation of its opinion letter. In performing its analyses, Adams,
Harkness made numerous assumptions with respect to industry performance, general
business and economic conditions and other matters, many of which are beyond the
control of the Company or the Purchaser. The analyses performed by Adams,
Harkness are not necessarily indicative of actual values or actual future
results, which may be significantly more or less favorable than suggested by
such analyses. In addition, analyses relating to value of businesses do not
purport to the appraisals or to reflect the prices at which businesses actually
may be sold. The Adams, Harkness Opinion is rendered on the basis of securities
market conditions prevailing as of May 15, 1996 and on the conditions and
prospects, financial and otherwise of the Company as known to Adams, Harkness as
of May 15, 1996.
Adams, Harkness, as part of its investment banking activities, is
continually engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings, secondary
distributions of listed and unlisted securities, private placements and
valuations for estate, corporate and other purposes.
INTERESTS OF CERTAIN PERSONS IN THE TRANSACTION
In considering the recommendation of the Board of Directors,
stockholders should be aware that certain principal stockholders of the Company
and members of Company management have certain interests in the proposed
Transaction that are in addition to the interests of the stockholders of the
Company generally.
Repurchase of Shares of Affiliates. If and only if the proposed
Transaction is consummated, the Company may be obligated to use a portion of the
proceeds of the Transaction to repurchase shares of Common Stock and Series C
Preferred Stock held by the Company's largest institutional stockholder. 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.
Edison Venture Funds had previously indicated to the Board of Directors
their desire for liquidity with respect to their holdings of capital stock in
the Company. From time to time during the past nine months, the entities had
advised the Board of Directors of their intent to sell shares of the Company's
Common Stock to the public in open-market transactions in accordance with the
resale limitations of Rule 144 of the Securities Act of 1933. These entities
have also expressed a desire for liquidity for their original investments in the
Company which were made in June of 1991. One of the Edison Venture Funds is due
to expire and will be
-23-
liquidated over the next twenty-four months. Because the trading market for the
Company's Common Stock has been both volatile and illiquid at various times
during the past twelve months, and because the trading volume is also erratic
and low, the Edison Venture Funds are likely to be unable to sell shares to the
public in significant amounts to achieve this liquidity without also disrupting
the trading markets and causing downward pricing pressure on the market price
for the Company's Common Stock. As a consequence, although the Edison Venture
Funds have indicated a desire to liquidate some or all of their holdings of the
Company's capital stock, they have been unable to do so because of volume
restrictions imposed by Rule 144 and because of volatile trading market
conditions and lack of adequate trading volume in the Company's Common 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
the 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 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.
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. 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.
The Board of Directors believes the repurchase of the capital stock
held by the Edison Venture Funds is in the best interests of the Company both in
the short and long term. The Board of Directors believes this repurchase will
eliminate some of the downward pricing pressure on the Company's Common Stock
caused by the large block of stock represented by these entities, improve the
trading volume for the Common Stock, and reduce stock price volatility
associated with the shares held by the Edison Venture Funds entering the open
market at inopportune periods. In addition, future earnings per share
calculations may improve because of a reduction in the number of shares
outstanding following the repurchase.
-24-
Retirement of Secured Debt Held by Director. The Company is using
$300,000 of the net proceeds to repay secured indebtedness of the Company to
Stephen L. Watson. Mr. Watson is a director of the Company and currently its
Chairman of the Board. In November of 1990, 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
assets of the Company. The note was renewed and extended to December 1996, with
interest accruing at 12% per annum, payable quarterly in arrears. The note is
subordinated to any commercial bank or other institutional debt.
Vesting of Stock Options of Management. In connection with the
consummation of the Transaction, the Board of Directors decided to accelerate
the unvested and unexercisable portions of all stock options, including those
options held by executive officers. See "The Transaction -- Transition Plan
Prior to Closing; Employee Retention Plan."
VOTING AGREEMENTS; CONSENT TO TRANSACTION
At the time of the signing of the Agreement, the Purchaser contacted
not more than ten persons who were either members of the Board of Directors or
executive officers of the Company, who are significant holders or who control
significant holders of the Company's capital stock with regard to their support
of the Transaction, pursuant to Rule 14a-2(b)(2) of the Securities Exchange Act
of 1934. In order to induce the Purchaser to enter into the Agreement, several
of these persons or entities entered into separate Voting Agreements with the
Purchaser, each dated May 16, 1996 (the "Voting Agreements"). Pursuant to the
Voting Agreements, each person or entity separately agreed with the Purchaser to
execute a written consent with respect to all capital stock owned by such person
or entity in favor of the Transaction. In addition, each person or entity
separately executed an irrevocable proxy in favor of the Purchaser to render a
written consent in favor of the Transaction. The Purchaser may exercise such
irrevocable proxy only if it appears that such person or entity has not given a
written consent in favor of the Transaction. Each person or entity agrees not to
transfer any Common Stock or Series C Preferred Stock prior to the expiration of
the Voting Agreements. The Voting Agreements expire upon the earlier to occur of
the closing of the Transaction or July 1, 1996.
USE OF PROCEEDS
The Company anticipates proceeds of approximately $9,450,000 following
consummation of the Transaction, after deducting fees and expenses of
approximately $550,000 associated with the Transaction. A total of $1,000,000 is
being withheld by the Purchaser to satisfy potential post-closing adjustments
and indemnity claims. The Company will not have use of these proceeds until all
post-closing adjustments and indemnity claims are satisfied (expected to be one
year from Closing).
The Company anticipates using approximately $700,000 of the net
proceeds to retire existing secured indebtedness, $700,000 for accrued vacation,
benefits, severance and other accrued benefits in connection with its employee
retention and severance plans, $466,000 for estimated tax liabilities associated
with a gain on the sale of the purchased assets, $100,000 for the closing of its
German operation, and $100,000 for the buy-out and cancellation of certain
operating lease obligations. Approximately $550,000 of the proceeds are
anticipated to be expended for legal and accounting fees, investment banking
fees, and fees related to the fairness opinion of Adams, Harkness.
In addition, the Company anticipates dedicating up to $2,000,000 of the
net proceeds to repurchase shares of capital stock held by the Edison Venture
Funds. The Company is not obligated to purchase the shares of capital stock held
by the Edison Venture Funds if the average of the daily closing market prices
for the Company's Common Stock for the period from May 16, 1996 (the date of
signing the Agreement) until the last trading day prior to the Closing exceeds
$3.00 per share. See "The Transaction -- Interests of Certain Persons in the
Transaction."
The Company intends to use the balance of approximately $5,384,000 of
net proceeds of the Transaction (assuming the Company uses the $2,000,000 to
purchase the shares held by the Edison Venture Funds) primarily for working
capital and other general corporate purposes relating to its ISC business and
operations. These working capital requirements include the development of, or
investment in, proprietary product technology or exclusive licensing agreements;
expansion of ISC's service and support capabilities; acquisitions of products or
services that may be comple-
-25-
mentary to the ISC business; and the purchase of additional computer equipment
and enhancement of management information systems for the ISC operations. The
amounts actually expended by the Company for working capital purposes will vary
significantly depending upon any number of factors, including future revenue
growth, the amount of cash generated by the Company's ISC operations and the
progress of the Company's product development efforts in the ISC business. In
addition, the Company may make one or more acquisitions of complementary
technologies, products or businesses with the goal of broadening or enhancing
the Company's current product offerings in the ISC business. The Company,
however, has no present specific agreements or commitments, and is not currently
engaged in any negotiations with respect to any such acquisition.
Following consummation of the Transaction, the Company may also be
obligated to use an additional $913,872 of net proceeds from the Transaction to
purchase outstanding shares of Series C Preferred Stock under certain
circumstances. Under the terms of the Series C Preferred Stock, a sale of all or
substantially all of the assets of the Company (such as the Transaction) may be
regarded as a form of liquidation or dissolution of the Company. Under these
circumstances, holders of the Series C Preferred Stock may elect in writing to
demand payment for their shares following consummation of the Transaction at a
price of $2.00 per share, or, alternatively, they may elect at any time to
convert their Series C Preferred Stock into Common Stock (at a one-to-one
conversion rate) and sell such shares of Common Stock in the open market at
prevailing market prices. The percentage vote of the holders of Series C
Preferred Stock required to treat the Transaction as a liquidation varies
depending on the amount of consideration or yield actually payable to the
holders of Common Stock. If the consideration is greater than $1.50 per share of
Common Stock, the election in writing by holders of at least 50% of the
outstanding shares of Series C Preferred Stock is required to treat the
Transaction as a liquidation. If the consideration is less than $1.50 per share
of Common Stock, the election in writing by holders of at least 15% of the
outstanding shares of Series C Preferred Stock is required to treat the
Transaction as a liquidation. Since the holders of Common Stock are not entitled
to payment for or in respect of their shares as a consequence of the
Transaction, it is the Company's understanding that no liquidation event is
triggered because of the Transaction.
Pending uses described above, the net proceeds of the Transaction will
be invested in short-term investment grade, interest-bearing securities.
ACCOUNTING TREATMENT OF THE TRANSACTION
For financial statement reporting purposes, the Transaction will be
accounted for as an asset sale, whereby the Company will receive $11,000,000, in
return for transferring ownership of certain assets of the Target Business. The
assets to be transferred consist primarily of accounts receivable, product
inventory, fixed assets (at net book value) and certain prepaid expenses and
deposits. In addition, the Purchaser will assume certain obligations of the
Company that consist primarily of trade accounts payable, unfilled sales orders,
and certain accrued expenses. Both the assets transferred to and obligations
assumed by the Purchaser (the "net assets") will be incorporated in the
calculation of the resulting gain or less on the asset sale. The resulting gain
or loss on the asset sale will be calculated by deducting from the purchase
price the net assets transferred to the Purchaser, the net assets of the catalog
operations of Personal Computing Tools (PCT) as of the date of the Transaction,
the associated transaction costs, and the applicable federal and state income
taxes.
TAX CONSEQUENCES TO THE COMPANY
As a result of the Transaction, the Company will recognize taxable gain
equal to the amount paid by the Purchaser (including liabilities of the Company
assumed by the Purchaser and the $1,000,000 amount placed in the escrow fund)
less the Company's adjusted tax basis in the assets sold in the Transaction. The
amount of gain subject to federal income tax will be reduced by the Company's
net operating losses, currently estimated at $6,400,000. The use of these losses
to offset gain recognized in the Transaction may be limited under the Internal
Revenue Code of 1986 due to certain shifts in the equity ownership of the
Company which have occurred over the past five years.
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RECOMMENDATION OF THE BOARD OF DIRECTORS REGARDING THE TRANSACTION
THE BOARD OF DIRECTORS OF THE COMPANY HAS UNANIMOUSLY APPROVED THE
TRANSACTION AND UNANIMOUSLY RECOMMENDS A VOTE FOR APPROVAL OF THE TRANSACTION BY
THE STOCKHOLDERS OF THE COMPANY. THE BOARD OF DIRECTORS BELIEVES THAT THE
TRANSACTION IS FAIR TO AND IN THE BEST INTERESTS OF THE COMPANY AND ITS
STOCKHOLDERS.
NO DISSENTERS' RIGHTS
UNDER THE DELAWARE GENERAL CORPORATION LAW, THE STOCKHOLDERS OF THE
COMPANY ARE NOT ENTITLED TO ANY RIGHTS OF APPRAISAL IN CONNECTION WITH THE
APPROVAL OR THE CONSUMMATION OF THE TRANSACTION.
THE AGREEMENT
The discussion in this Consent Solicitation Statement of the Agreement
as described below and the description of the Agreement's principal terms are
subject to and qualified in their entirety by reference to the Agreement, a copy
of which is attached to this Consent Solicitation Statement as Appendix A and
which is incorporated herein by reference.
ASSETS TO BE SOLD
Pursuant to the terms of the Agreement, the Company will transfer to
the Purchaser all of the operating assets of the Target Business comprised of
trademarks; copyrights; mailing lists; customer records; interests in software;
know-how; intellectual property; contracts; agreements; licenses; inventory;
equipment; supplies; accounts receivables; certain insurance proceeds; unbilled
sales and purchase orders; files and records; deferred charges; and prepaid
items associated with the Target Business. The acquisition by the Purchaser of
the foregoing is subject to the Purchaser's assumption of certain specified
liabilities including, but not limited to, accounts payable and obligations
under Purchaser's contract.
The Purchaser will not, however, assume certain liabilities, including,
but not limited to, obligations of the Company to apply the Purchase Price;
obligations of the Company based upon acts or omissions of the Company occurring
after the Closing Date; the Company's obligations under any stock or
profit-sharing plans or under stock options; brokerage or finder's fees payable
by the Company in connection with the Transaction; liabilities of the Company to
its stockholders arising out of the Company's actions in connection with the
Transaction; obligations of the Company for certain indebtedness for borrowed
money; obligations of the Company under operating leases or for intercompany
obligations; obligations of the Company incurred or accrued on or prior to the
Closing Date and relating to wages, employee benefits, and certain other
employee related-matters; obligations incurred or accrued under benefit plans;
tax liabilities of the Company imposed on the Company with respect to income of
the Company; obligations of the Company arising under the Agreement; obligations
with respect to claims, actions and other proceedings relating to periods prior
to the Closing Date; real property leases and certain personal property leases;
liabilities under contracts which are not assumed; and other obligations in
connection with the termination of the Company's operations relating to the
Target Business.
According to the Agreement, the Purchaser and the Company may agree to
modify the Agreement to provide for the purchase by the Purchaser of all of the
outstanding shares of capital stock of SDC Germany in lieu of the assets of the
German operations, on terms substantially equivalent, from a legal and business
perspective, and with substantially equivalent benefits and risks to the
parties, as contemplated by the purchase of the assets of the Target Business.
PURCHASE PRICE
The Purchase Price will consist of (i) a payment at the Closing of
$10,000,000 in immediately available funds, subject to adjustment for variations
in revenues and tangible net assets of the Target Business as of the Closing, as
described below (the "Closing Payment"), and (ii) a payment of $1,000,000 to an
escrow agent under an escrow arrangement (the "Escrow Fund"). The escrow period
expires on the date one year
-27-
after the Closing, subject to claims made prior to such date. Up to $500,000 of
the Escrow Fund may be used by the Purchaser as an offset to the Purchase Price
if any adjustments are made because of variations in the revenues or tangible
net assets as of the Closing from estimates provided by the Company of revenue
and tangible net assets as of the signing of the Agreement. The balance of the
escrowed funds may be used by the Purchaser to satisfy general claims of
indemnity under the Agreement.
The aggregate purchase price of $11,000,000 assumes that the Company
will transfer to the Purchaser at the Closing tangible net assets 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.
For purpose of calculating the purchase price adjustments, "Tangible
Net Assets" means an amount equal to the difference between the total tangible
purchased assets relating to the Target Business and the liabilities of the
Target Business included as "accounts payable-trade" and "other accrued
expenses" in respect of the Target Business, after taking into account the
Permitted Adjustments noted below, but excluding "Excluded Assets" or "Excluded
Liabilities." For purposes of this calculation, "Permitted Adjustments" means
(i) indebtedness for borrowed money and the liabilities not included as an
assumed liability (that is, trade payables and unfilled purchase orders for
inventory, and liabilities under contracts assigned to the Purchaser), (ii) the
amount of all accounts receivable which are considered to be uncollectible and
are actually written off, or are in excess of the stated allowance for doubtful
accounts as of the Closing Date, (iii) tax credits and other benefits which are
not available to the Company after the Closing, (iv) the value of assets not
transferred to the Purchaser, (v) one half the costs associated with the
preparation of the estimated financial statements as of the Closing reflected as
an expense and deducted from Tangible Net Assets, and (vi) the amount of all
product returns prior to the delivery of the closing financial statements.
"Excluded Assets" means those contracts and assets which are unrelated to the
Target Business and which are not transferred as part of the Transaction.
"Excluded Liabilities" means all other debts and obligations of the Company,
other than trade payables and unfilled purchase orders for the Target Business,
and liabilities in respect of contracts assigned to the Purchaser.
Within five days prior to the Closing Date, the Purchaser and the
Company will prepare an estimated Balance Sheet and Statement of Revenue for the
Target Business, in accordance with generally accepted accounting principles.
Based on those estimates, if the Tangible Net Assets of the Target Business are
less than $1,500,000 as of the Closing Date, the payment at Closing shall be
reduced, dollar for dollar, by an amount equal to such shortfall and, if the
Tangible Net Assets of the Target Business are more than $1,500,000 as of the
Closing Date, the payment at Closing shall be increased, dollar for dollar, by
an amount equal to such excess. The Company expects the Tangible Net Assets to
be approximately $1,500,000 at the time of the Closing, although it may increase
or decrease by as much as $200,000 at any time because the Company experiences
regular daily fluctuations in its working capital and cash flow based on the
amount of customer orders or shipments of inventory received during any business
day. The Purchase Price is also adjusted for declines in revenues from those
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 revenues
from operations of the Target Business are no more than 12% less than the
revenues for such 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%
-28-
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.
The Company has provided the Purchaser with a Transition Plan. The
Transition Plan provides for revenue of at least $12,300,000 for the quarter
ending June 30, 1996, allocated by each month as follows: $3,600,000 in
anticipated gross revenues for April 1996; $4,200,000 in anticipated gross
revenues for May 1996; and $4,500,000 in anticipated gross revenues for June
1996. The adjustments described in this paragraph and the preceding paragraph
are referred to herein as the "Estimated Adjustment."
Within 45 days after the Closing Date, auditors selected by the
Purchaser will prepare an audited balance sheet of the Target Business, as of
the day immediately preceding the Closing Date, and an unaudited statement of
revenue from operations of the Target Business for the thirty-day period
preceding the Closing. The balance sheet and statement of revenue may be
adjusted to take into account certain agreed-upon adjustments. This audited
balance sheet is referred to herein as the "Closing Balance Sheet" and the
unaudited statement of revenue is referred to herein as the "Closing Statement
of Revenue." If the Tangible Net Assets of the Business being purchased shown on
the Closing Balance Sheet is more or less than $1,500,000 (the shortfall or
excess being referred to as the "Final Adjustment"), the Purchaser or the
Company shall pay to each other an amount necessary to reconcile the Estimated
Adjustment and the Final Adjustment. Additionally, if during the 30-day period
prior to the Closing, the actual revenues from operations of the Target Business
are more than 12% less the projected revenue set forth in the Transition Plan,
then the Purchase Price will be reduced by an amount corresponding to the
percentage decrease in actual revenue from estimated revenue as set forth in the
Transition Plan (as described above).
CERTAIN REPRESENTATION AND WARRANTIES
The Company has made certain representations and warranties regarding
the Company and the Target Business, including, among other things, the accuracy
and completeness of its financial statements and revenue information; the
absence of certain changes in its businesses; its title to and the conditions of
the assets being sold; the validity and enforcement of assigned contracts; its
compliance with certain government regulations; the accuracy of the schedules to
the Agreement; the adequacy of its provision for taxes; the collectibility
validity of accounts receivable constituting part of the Target Business; the
accuracy of the customer and supplier lists included on the schedules to the
Agreement; its license of or other right to the proprietary rights used in the
Target Business; and the absence of litigation which would adversely affect the
Company or the Target Business. The representations and warranties contained in
the Agreement will survive the Closing Date for various periods of time and to
the extent that any of the representations and warranties shall prove to be
inaccurate, the Company has agreed, subject to certain limitations contained in
the Agreement, to indemnify the Purchaser against any loss or expense which may
be incurred by it on account of any such inaccuracies.
CERTAIN COVENANTS
The Agreement contains various covenants of the Company. The Company
has agreed, among other things: in the interim, from the date of the Agreement
to the Closing Date, to conduct the Target Business in the ordinary course, and
not to take any action that would adversely affect the Target Business; to
provide access to the Purchaser to various records and information; to maintain
the confidentiality of information exchanged; to preserve the goodwill of the
Target Business and its relationships with customers and suppliers; and to help
facilitate the Purchaser's employment of those employees who are currently
employed by the Company but whom the Purchaser desires to employ following the
Closing.
The Company also agreed to solicit consents of the Company's
stockholders; to consult with and follow certain recommendations of the
Purchaser with respect to the management of contracts, thediscontinuation of
certain operations and business policies; to permit the Purchaser to have a
management presence at the Company's offices; and to permit the Purchaser to
supervise and manage the Target Business prior to the Closing Date in accordance
with the Transition Plan.
-29-
CONDITIONS TO THE TRANSACTION
Each of the Company's and the Purchaser's obligations under the
Agreement are subject to the satisfaction (or waiver) of certain conditions as
of the Closing Date including, but not limited to, the absence of litigation
which would interfere with the consummation of the Transaction; the performance
of all covenants and other obligations required to be performed prior to the
Closing; and the delivery of an escrow agreement, fairness opinion and comfort
letters from the Company's accountants.
Other conditions include the absence of any material adverse change
with respect to the Target Business, its prospects or value, stockholder
approval of the Transaction, and the delivery of certain financial statements. A
material adverse change is deemed to have occurred if the Tangible Net Assets of
the Company is less than $900,000; if the estimated statement of revenue is less
than or equal to 75% of revenue reflected the Transition Plan; if the
weighted-average product gross margin is less than 13%; or if the dollar backlog
for advertising pages inserted into the next TPS catalog is less than a stated
percentage of advertising content of prior catalogs.
TRANSITION PLAN
During the period prior to Closing, the Company has agreed that it will
conduct its operations in the ordinary course of business and consistent with
past practice and will use its best efforts to keep available the services of
its officers and employees and to maintain satisfactory relationships with its
suppliers, distributors and customers.
The Company has also agreed to consult with and follow the
recommendations of the Purchaser regarding the management of contracts, the
granting of rights or licenses, the commencement or discontinuation of
particular programs or operations, the discontinuation of any products or other
changes, and the business policies and decisions concerning the Target Business
as well as its integration into the operations of the Purchaser. To facilitate
the transition of management of the Target Business to the Purchaser's
management, the Company has agreed to allow the Purchaser have a reasonable
management presence at the Company's facilities.
The Company's management will make its best efforts to retain, motivate
and ensure a high level of professional performance from all employees, use its
best efforts to ensure that during the transition period there is a transfer of
knowledge to the Purchaser's personnel of critical business activities and to
maintain the value of the Target Business for the Purchaser during the
transition period and following the Closing. The Company will produce for the
Purchaser management reports similar to those historically used by the Company's
directors and managers and use good judgment during the transition period and
will avoid taking actions in a fashion inconsistent with prudent management.
The Purchaser may, by written notice to the Company at any time prior
to the Closing, take over the management of the Target Business under the
Transition Plan, provided that the Company has then received the requisite
written consents of stockholders approving the Transaction. The Company is,
however, obligated to continue its management responsibilities until the Closing
Date.
REIMBURSEMENT OF CERTAIN SHUT-DOWN EXPENSES
The Company provided the Purchaser with a shut-down plan for its German
subsidiary, outlining expenses in connection with the closing down of the German
operations. Such expenses include wage continuation, severance, re-employment
assistance, termination pay and the benefits payable to each employee and a
timetable therefor. The Purchaser has agreed to reimburse the Company for
one-half of the portion of certain employee severance expenses paid in
connection with the closing down of the operations of SDC Germany, at the rate
of $.50 for each $1.00 of such amount paid, up to an aggregate amount payable by
the Purchaser in respect of such severance of $85,000.
-30-
TERMINATION AND DAMAGES
The Agreement may be terminated and the Transaction abandoned at any
time prior to Closing, notwithstanding approval by the stockholders of the
Company, by (a) the mutual consent of the Company and Purchaser, (b) either the
Company or Purchaser, if there is a material misrepresentation under or breach
of the Agreement which has not been cured, (c) either the Company or the
Purchaser, if a court order enjoins or otherwise prohibits the Transaction, (d)
by the Purchaser if (i) there is any negotiation or solicitation by the Company
in connection with the sale or other disposition of the Target Business to
another party before the earlier of the Closing or 45 days after May 16, 1996 or
(ii) there is an auction, solicitation or request for bids with respect to a
purchase of the Target Business before the earlier of the Closing or 45 days
after May 16, 1996, (e) by the Company, upon payment by the Company to the
Purchaser of $500,000, if during the 30 days preceding the Closing the revenue
from the Target Business shall be 20% or more less than the revenue for such
period reflected on the Transition Plan, and (f) automatically, if the
Transaction has not been consummated on or before June 28, 1996 (regardless of
whether stockholder approval has been obtained by June 15, 1996) with a payment
of $250,000 to Purchaser. If the Agreement terminates upon the occurrence or
non-occurrence of certain events, the Purchaser shall have the right to collect
from the Company a break-up fee in an amount up to $1,000,000. See "The
Agreement--Break-Up Fee."
BREAK-UP FEE
Upon the occurrence of a Break-Up Event (as defined below), the Company
must pay a Break-Up Fee (as defined below) to the Purchaser. A Break-Up Event
occurs (a) if the Company enters into or announces an agreement with anyone
other than the Purchaser providing for the acquisition of all or any portion of
the Target Business by another party, (b) upon a change of control of the
Company including a stock purchase by any person whose voting power would be 35%
or more of the outstanding Common Stock and Series C Preferred Stock after the
purchase, a change in a majority of the directors or any proxy or voting
agreement by shareholders who signed separate Voting Agreements dated May 16,
1996 other than to vote in favor of the Transaction, (c) the withdrawal from the
Agreement by the Purchaser because of material adverse changes to the Target
Business, (d) the termination of the Agreement by the Purchaser because the
Company does not fulfill its closing requirements or breaches its covenants, or
(e) the Company fails to receive, by 5:00 p.m. on June 15, 1996, stockholder
approval of the Transaction (each, a "Break-Up Event"). A material adverse
change includes any of the following during the transition plan (i) the Tangible
Net Assets of the Company is less than $900,000, (ii) the estimated statement of
revenue is less than, or equal to, 75% of revenue reflected the Transition Plan,
(iii) the weighted-average product gross margin is less than 13%, or (iv) the
dollar backlog for advertising pages inserted into the next TPS catalog is less
than 75% of the advertising pages of the then most recent TPS catalog for the
same calendar period (with the weighted-average price per page no less than 85%
of that obtained for the last TPS catalog).
If a Break-Up Event occurs prior to April 30, 1997, the Break-Up Fee
payable by the Company is $250,000; provided, that if the Break-Up Event is the
Purchaser's failure to receive the necessary stockholder consents by June 15,
1996, or if another Break-Up Event occurs prior to the receipt of the necessary
stockholder consents (provided that the Company shall have until June 15, 1996,
to collect such consents), then the Break-Up Fee is $1,000,000 (each such
amount, a "Break-Up Fee").
The Company shall only be obligated to pay the Break-Up Fee in respect
of a Break-Up Event other than the failure to receive the necessary stockholder
consents by June 15, 1996, if the Purchaser shall not at that time have
exercised any right or stated its intent to terminate or not to perform the
Agreement, the Purchaser shall have performed all of its obligations under the
Agreement, and the Company's failure to fulfill any obligation of the Agreement
is a consequence of any act or omission by the Purchaser.
If a Break-Up Event occurs, the Purchaser shall still be entitled to
make competing bids for any or all of the Company's business. If, however, the
Purchaser is the successful bidder, or if the Purchaser receives a Break-Up Fee
and thereafter closes the Transaction, then the Company will be entitled to
offset from the Purchase Price the Break-Up Fee to be received by the Purchaser.
-31-
INDEMNIFICATION
The Purchaser is obligated to indemnify the Company for, among other
things, liabilities assumed by the Purchaser pursuant to the terms of the
Agreement; losses and liabilities of the Company resulting from any
misrepresentation or breach by the Purchaser under or pursuant to the terms of
the Agreement; and all actions, claims and costs, including reasonable
attorneys' fees, incident to any such losses and liabilities.
The Company is obligated to indemnify Purchaser for, among other
things, liabilities not assumed by the Purchaser under the Agreement; losses and
liabilities incurred by the Purchaser resulting from any misrepresentation by
the Company under the Agreement, pre-Closing debts and obligations, infringement
of the proprietary rights of any third party by products of the Target Business
sold by the Company, defective products or third party liability claims existing
as of or relating to the period prior to the Closing, non-compliance with bulk
transfer laws or work force laws in connection with the Transaction liabilities
incurred by the Purchaser for severance pay and other employee-related matters,
and all actions, claims and costs, including reasonable attorneys' fees, related
to any of the foregoing, subject to certain limitations.
The Company is not required to indemnify the Purchaser until the
aggregate amount of all losses, liabilities, damages and expenses of the party
requesting indemnification exceeds $75,000. The aggregate liability of the
Company to the Purchaser under the Agreement shall in no event exceed the
Purchase Price actually received by the Company, including the escrow fund.
NONCOMPETITION COVENANT
As part of the Transaction, the Company has agreed not to compete
against the Purchaser in the market area previously served by the Target
Business. Each of the Company and its German subsidiary have agreed not to own,
manage, operate or control any business which is competitive with the Target
Business within the United Stated and Germany. Moreover, the Company and its
German subsidiary have agreed not to solicit or employ any person who is or has
been at any time employed by the Company or the Purchaser. These noncompetition
and nonsolicitation covenants expire ten (10) years from the Closing. The
Company, however, may continue the business associated with its ISC subsidiary
and provide product integration and consulting and support services as a
value-added reseller or systems integrator of software products providing
Internet, Intranet and other on-line network security protection for electronic
or enterprise-wide communications.
EXPENSES OF TRANSACTION
Whether or not the Transaction is consummated, all costs and expenses
incurred in connection with the Agreement and the Transaction shall be paid by
the party incurring such expenses, except as otherwise provided in the
Agreement. The parties have agreed to share equally the expenses of the
Purchaser's accounting firm in the preparation of certain post-Closing financial
statements, including an audited balance sheet and unaudited statement of
revenue. The Company has incurred a fee of $340,000 for the services of
Broadview Associates, its merger and acquisition advisor, and a fee of $50,000
for the services of Adams, Harkness & Hill, its financial advisor, in the
preparation of a fairness opinion. In addition to the fees payable to Broadview
Associates and Adams, Harkness & Hill, the Company also estimates additional
transaction expenses of $160,000 incurred in connection with legal, auditing,
tax and accounting services.
AMENDMENT AND WAIVER
The parties may modify or amend the Agreement to the extent permitted
by applicable law. The conditions to each party's obligation to consummate the
Transaction may be waived only in a writing signed by the waiving party with
notice under the Agreement.
-32-
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
On May 16, 1996 the Company entered into an Asset Purchase Agreement
with Programmer's Paradise, Inc. to sell all of the operating assets of the
Target Business.
The following Unaudited Pro Form Condensed Consolidated Financial
Statements are based upon the consolidated historical financial statements of
the Company, adjusted to give effect to the Transaction. The Pro Forma
adjustments are based upon available information and certain assumptions that
management believes are reasonable.
The Unaudited Pro Forma Condensed Consolidated Balance Sheet as of
December 31, 1995 gives effect to the elimination of the disposed businesses
assuming that the disposition had taken place on December 31, 1995 and the net
cash proceeds had been received at that time.
The Unaudited Pro Forma Condensed Consolidated Statements of Operations
for the year ended March 31, 1995 and the nine months ended December 31, 1995
give effect to the elimination of the disposed business assuming the disposition
of the Target Business had taken place on April 1, 1994.
These pro forma statements may not be indicative of the results that
actually would have occurred if the proposed Transaction had been consummated on
the dates indicated or which may be obtained in the future. The pro forma
financial statements should be read with the audited financial statements and
notes thereto of the Company as of and for the periods ended March 31, 1995, and
the unaudited financial statements and notes thereto of the Company as of and
for the nine months ended December 31, 1995, both of which are included in this
Consent Solicitation Statement.
-33-
THE SOFTWARE DEVELOPER'S COMPANY, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AT DECEMBER 31, 1995
<TABLE>
<CAPTION>
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
ASSETS (1)(2)
<S> <C> <C> <C>
Current Assets:
Cash $ 1,258,061 $ 7,543,000 $ 8,801,061
Accounts Receivable, net 5,194,734 (4,335,811) 858,923
Inventory, net 2,350,572 (2,350,572) --
Other Current Assets 288,324 (107,601) 180,723
------------ ------------ ------------
Total Current Assets 9,091,691 749,016 9,840,707
Equipment & Leasehold
Improvements, net 431,513 (384,967) 46,546
Goodwill and Other
Intangibles 867,515 (867,515) --
Other Assets 127,372 (125,282) 2,090
------------ ------------ --------------
$ 10,518,091 $ (628,748) $ 9,889,343
============ =========== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable Trade $ 5,092,795 $ (4,320,712) $ 772,083
Line of Credit 1,423,470 (1,423,470) --
Other accrued expenses 1,765,116 (820,195) 944,921
--------- --------- -------
Total Current Liabilities
8,281,381 (6,564,377) 1,717,004
Long Term Note Payable 300,000 (300,000) --
Stockholders' Equity 1,936,710 6,235,629 8,172,339
------------ ------------ ------------
$ 10,518,091 $ (628,748) $ 9,889,343
============ ============ =============
</TABLE>
SEE NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
-34-
THE SOFTWARE DEVELOPER'S COMPANY, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
(B)(C)
Net Revenue:
<S> <C> <C> <C>
Product sales $ 38,517,400 $ (36,121,554) $ 2,395,846
Marketing services
income 3,839,963 (3,839,963) --
----------- ------------- ---------------
42,357,363 (39,961,517) 2,395,846
Costs and Expenses:
Costs of products sold 31,716,097 (30,306,851) 1,409,246
Cost of marketing services
income 2,272,514 (2,272,514) --
Selling, general and
administrative expenses 8,005,634 (7,292,409) 713,225
----------- ------------- ----------
41,994,245 (39,871,774) 2,122,471
Net Income (Loss) before
interest and income taxes 363,118 (89,743) 273,375
Interest expense (income), net
102,179 (115,765) (13,586)
Provision for income taxes 98,979 -- 98,979
Net Income (Loss) $ 161,960 $ 26,022 $ 187,982
============= ============== ===============
Net Income (Loss) per share
$ 0.02 $ 0.02
Weighted average shares
outstanding 8,791,000 8,791,000
</TABLE>
SEE NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
-35-
THE SOFTWARE DEVELOPER'S COMPANY, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED MARCH 31, 1995
<TABLE>
<CAPTION>
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
(E) (A)(C)(D)
Net Revenue:
<S> <C> <C> <C>
Product sales $ 36,116,191 $ (34,964,445) $ 1,151,746
Marketing services
income 4,733,290 (4,733,290) --
----------- ------------- ---------------
40,849,481 (39,697,735) 1,151,746
Costs and Expenses:
Costs of products sold 29,153,709 (28,511,277) 642,432
Cost of marketing services
income 3,022,666 (3,022,666) --
Selling, general and
administrative expenses 8,149,829 (7,842,864) 306,965
----------- ------------- ----------
40,326,204 (39,376,807) 949,397
Net Income (Loss) before
interest and taxes 523,277 (320,928) 202,349
Interest expense, net 246,575 (246,575) --
Provision for income taxes -- 81,000 81,000
------ ------
Net Income (Loss) $ 276,702 $ (155,353) $ 121,349
================ ================= ============
Net Income (Loss) per share
$ 0.03 $ 0.01
Weighted average shares
outstanding 8,710,000 8,710,000
</TABLE>
SEE NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
-36-
NOTES TO THE UNAUDITED
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AT DECEMBER 31, 1995 AND FOR THE YEAR ENDED MARCH 31, 1995
AND THE NINE MONTHS ENDED DECEMBER 31, 1995
BALANCE SHEET
(1) To record the estimated net proceeds and related gain (net of taxes and
expenses) from the Transaction and to eliminate the assets sold to, and
estimated liabilities assumed by, the Purchaser.
(2) The net proceeds from the Transaction are estimated as follows:
(IN 000'S)
Purchase price $11,000
Transaction costs (1,150)
Repayment of debt and other accruals
(1,874)
Federal and state taxes* (433)
------
Net cash proceeds $7,543
======
*Note: This estimate assumes the full utilization of net operating loss
carryforwards of approximately $6,400,000.
STATEMENT OF OPERATIONS
(A) To eliminate Revenue and Operating expenses of the disposed business
for the period April 1, 1994 to March 31, 1995. Such expenses have been
limited to operating expenses attributable to such businesses and do
not include any allocation of corporate or administrative costs to ISC.
(B) To eliminate Revenue and Operating Expenses of the disposed business
for the period April 1, 1995 to December 31, 1995. Such expenses have
been limited to operating expenses attributable to such businesses and
do not include any allocation of corporate or administrative costs to
ISC.
(C) The Company has not recorded any estimated income from the investment
of the estimated proceeds from the Transaction.
(D) To record estimated tax expense of the remaining business.
(E) Includes the operating results of ISC which was accounted for as a
"Pooling of Interests" in November 1995.
-37-
SELECTED CONSOLIDATED FINANCIAL DATA
STATEMENT OF OPERATIONS DATA
(in thousands, except per share data)
<TABLE>
<CAPTION>
For the years ended March 31,
----------------------------------------------------------------
For the
Nine Months
Ended
Dec. 31,
1995 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Revenues $42,357 $ 40,849 $ 30,893 $ 34,463 $ 36,816 $ 28,715
Income (loss) from continuing
operations before taxes 261 277 (270) (1,481) (1,262) (701)
Income (loss) from continuing
operations 162 277 (270) (1,481) (1,190) (248)
Net income (loss) from
discontinued operations -- -- -- 510 (6,663) 357
---------- ----------- ---------- ---------- --------- ---------
Net income (loss) $ 162 $ 277 $ (270) $ (971) $ (7,852) $ 109
========== =========== ========== ========== ========= =========
Per share amounts:
From continuing operations $ 0.02 $ 0.03 $ (0.07) $ (1.04) $ (0.75) $ (0.10)
---------- ----------- ---------- ---------- --------- ---------
From discontinued operation -- -- -- 0.23 (3.26) 0.15
---------- ----------- ---------- ---------- --------- ---------
Net income (loss) per share $ 0.02 $ 0.03 $ (0.07) $ (0.81) $ (4.01) $ 0.05
========== =========== ========= ========= ======== =========
Weighted average common shares
outstanding 8,791 8,710 4,833 2,227 2,041 2,323
BALANCE SHEET DATA
As of As of March 31,
Dec. 31, ----------------------------------------------------------------
1995 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ----
Working capital (deficit) $ 810 $ 733 $ 280 $ (196) $ (649) $ 699
Total assets 10,518 9,171 7,127 6,929 9,449 10,062
Long-term liabilities 300 300 385 153 3,891 564
Stockholders' equity (deficit) 1,937 2,032 1,701 451 (1,792) 2,936
</TABLE>
-38-
INFORMATION CONCERNING THE COMPANY
MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded principally on the Nasdaq SmallCap
Market under the symbol "SDEV" and is 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, except
for the first and second quarters of fiscal 1994 where quotations are as
reported by the Boston Stock Exchange. The quotations represent interdealer
quotations without adjustment for retail markups, markdowns or commissions, and
may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
FISCAL 1994 QUOTATIONS HIGH BID LOW BID
<S> <C> <C>
First Quarter (4/1/93-6/30/93) $1.00 $0.50
Second Quarter (7/1/93-9/30/93) $1.50 $0.75
Third Quarter (10/1/93-12/31/93) $1.00 $0.50
Fourth Quarter (1/1/94-3/31/94) $1.00 $0.75
FISCAL 1995 QUOTATIONS HIGH BID LOW BID
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 BID LOW BID
First Quarter (4/1/95-6/30/95) $1.875 $.50
Second Quarter (7/1/95-9/30/95) $2.125 $.875
Third Quarter (10/1/95-12/31/95) $2.875 $1.50
Fourth Quarter (1/1/96-3/31/96) $1.813 $1.25
</TABLE>
On May 15, 1996, the day preceding the public announcement of the
Transaction, the high bid and low bid for the Company's Common Stock, as
reported by Nasdaq, were $2.50 and $2.50, respectively.
On May 30, 1996, the high bid and low bid for the Company's Common Stock,
as reported by Nasdaq, were $4.063 and $3.938, respectively.
As of May 8, 1996, there were approximately 157 holders of record of the
Company's 8,197,887 shares of Common Stock outstanding. The Company estimates
that approximately 1,000 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 May 8, 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.
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 shares of Common Stock
outstanding on that date, (ii) the name of each director, and (iii) the name of
each executive officer, 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.
-39-
<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
Brinson Trust Company (4) 615,393 7.4%
c/o Brinson Partners, Inc.
3 National Plaza
9th Floor, Suite 114
Chicago, IL 60602
Richard J. Kosinski 465,838 5.7%
33 Riverside Drive
Pembroke, MA 02359
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 *
Barry N. Bycoff (10) 397,500 4.6%
Michael L. Mark (11) 63,553 *
Joseph C. Burke (12) 10,400 *
All executive officers and directors
as a group (10 persons) (13) 3,534,916 37.7%
- - -------------------------------
</TABLE>
* 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 May 8, 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.
(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
-40-
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 the presently exercisable portion (i.e., 387,500 shares) of
stock options to purchase up to 535,000 shares of Common Stock and also
includes 10,000 shares of Common Stock owned by Mr. Bycoff's children.
(11) 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.
(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.
(13) Includes 755,542 shares which all officers and current directors as a
group have the right to acquire within 60 days after May 8, 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
-41-
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.
DIVIDEND POLICY
The Company has never paid or declared any cash dividends on its Common
Stock. The Company currently intends to retain any earnings for future growth
and, therefor does not expect to pay cash dividends in the foreseeable future.
BUSINESS OF THE COMPANY PRIOR TO THE TRANSACTION
THE COMPANY
The Company is a recognized national and international direct marketer
and distributor of PC-based specialty software and hardware to technical and
professional PC users. The Company offers a total of over 8,000 brand-name
products through targeted mailings of its three catalogs. Through its corporate
sales group, the Company resells all catalog product lines to medium and
large-sized companies. Additionally, the Company addresses the marketing needs
of the developers and publishers of the products it distributes by providing
advertising and promotional services. Software Developer's Company, GmbH, a
wholly-owned subsidiary in Dortmund, Germany, provides similar products and
services to dealers and end users in Germany. The Company distributes
third-party products operating on DOS, Windows, Windows/NT, OS/2, Unix and Apple
operating systems and provides an extensive offering of specialized add-on
hardware for these computers.
BUSINESS STRATEGY
The Company currently serves 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 targets mid-size to large
commercial, governmental and educational accounts. Leveraging off of initial
sales made through the catalogs, this group focuses on establishing
relationships with customers and becoming their primary source for software and
specialty hardware. It provides 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, offers 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 is creating
advertisements and publishing all of the Company's catalogs. However, it also
develops and circulates direct mail campaigns and specialty catalogs, and
provides trade show assistance to software developers and manufacturers.
-42-
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
are published per year with a total annual circulation of approximately 3
million. The Company typically adds 250-300 new and updated products into its
catalogs each quarter. Catalog product sales accounted for 88% of the total
sales of the Company in fiscal 1995 and 86% in fiscal 1994.
The Programmer's SuperShop (TPS) catalog, which is being sold in the
proposed Transaction, offers software development tools, utilities, databases,
languages and business productivity applications to software developers and
business professionals. Sales from TPS represented approximately 80% of the
Company's total sales in fiscal 1995 and 78% in fiscal 1994.
Personal Computing Tools SuperShop (PCT) offers engineers and scientists
specialty hardware and software products that fill their specific networking and
data analysis needs. In fiscal 1995, the PCT catalog featured products for data
acquisition, motion control and data communications. However, growth in data
communications is leading the Company to expand its focus to include broader
networking solutions for LAN (local area network) expansion, LAN management and
administration, as well as remote computing. Sales of PCT's products constituted
approximately 8% of the Company's total sales in fiscal 1995 and 8% in fiscal
1994.
Each of the Company's catalogs is 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 are
designed and produced in-house by the Company's marketing communications staff,
allowing for significant production cost savings.
MARKETS AND CUSTOMERS
The Company selectively mails its catalogs and marketing programs to
attract new customers and stimulate additional purchases from existing
customers. Its mailing list for catalogs and brochures includes approximately
120,000 customers who have previously purchased from the Company. The Company
obtains additional names for mailings from various sources, including
manufacturers, suppliers, distributors and industry magazine publishers.
The Company's customers are principally located throughout the United
States, however, the Company also targets customers in Canada. The Company's
wholly-owned subsidiary in Germany distributes software to dealers and end users
primarily in Germany. Additionally, the Company distributes 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 12% of
fiscal 1995 and 18% of fiscal 1994 revenues.
Through The Programmer's SuperShop, the Company targets 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) targets a marketplace of engineers,
scientists and technical professionals. PCT has built a customer base serving a
wide variety of businesses including systems integrators, Fortune 500 companies,
and academic and government institutions.
MARKETING AND SALES
The Company's success depends on the strength and efficiency of its sales
and technical support representatives. The Company believes its representatives
are well trained, technically knowledgeable and motivated to maximize sales and
provide a high level of customer service. The Company offers toll-free numbers
for each of its catalogs and accepts orders by mail, fax or telephone, Monday
through Friday 8:30 AM to 8:00 PM Eastern time.
-43-
Inbound Telemarketing. The Company employs telemarketing representatives
who assist customers in purchasing decisions and who process product orders
resulting from catalog mailings. Telemarketing representatives also respond to
inquiries regarding order status, product pricing and product availability.
Through the Company's order information system, telemarketers can quickly access
a customer's record which details past purchases as well as billing information.
Corporate Sales. The Company has a dedicated sales force which targets
mid-size to large commercial, governmental and educational accounts. This group
performs outbound business-to-business telesales, once a catalog sale has been
made, in an effort to further penetrate the account. The focus of this group is
to 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 its success. Telemarketing representatives are
trained to respond to various inquiries such as order status or the Company's
return policy.
Technical Support. The Company has a dedicated pre-sales technical support
staff to assist customers in making appropriate product selections based on
technical criteria. Technical support personnel are available by telephone to
assist customers in maximizing the benefits from products purchased from the
Company.
PRODUCTS AND MERCHANDISING
The Company offers a total of over 8,000 microcomputer products through
its two catalog operations, including software for stand-alone and networked
PC's, specialty hardware, peripherals, accessories, and multimedia products.
Software. The Company sells a broad range of PC-related software products
from larger, well known vendors to numerous new technology vendors. Brands
offered by the Company include the product offerings of Adobe Systems, Borland
International, Computer Associates, IBM, Intel, Macromedia, Microsoft, Oracle,
Powersoft and Symantec. General product categories include software development
tools, utilities, databases, languages, business productivity applications,
presentation, authoring, and animation. LAN operating systems, administration
and management tools are also available.
Hardware, peripherals and networking. The Company offers a large selection
of hardware items including peripherals, components and LAN products. Product
categories offered include data communications, data acquisition and control,
networking hubs and routers, video capture and playback, and high capacity
storage devices. Brands sold in this category include 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 1995, 1994, and 1993 fiscal years.
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 31% of total purchases in fiscal 1995. 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.
-44-
COMPETITION
The market for technically-oriented software and hardware is highly
competitive and is characterized by rapid changes in technology and user needs.
The Company competes in the marketing and sales of its existing products with a
variety of software publishers, specialty hardware manufacturers, dealers and
distributors. The Company'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 Company competes
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
The Company does not engage in any product research and development as its
activities are limited to marketing and distributing third-party software and
hardware products. The Company does not hold any proprietary copyrights or trade
secrets or exclusive distribution agreements for the 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.
BUSINESS TO BE RETAINED - INTERNET SECURITY CORPORATION
The other portion of the Company's business, and the business which the
Company will retain following the consummation of the Transaction, 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
-45-
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.
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 require
protection from unauthorized use include financial results, medical records,
personnel 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's 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. The ISC
telesales organization is divided into three territories in the United States.
ISC's 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.
ISC has 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
-46-
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 their 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 22, 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 provides 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 will
offer 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, 1995, 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 Agreement. 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. To date, ISC has satisfied these targets.
PROPERTIES
At March 31, 1996, the Company leases 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. 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.
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.
-47-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND 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.
RESULTS OF OPERATIONS, PERIOD ENDED DECEMBER 31, 1995 AND DECEMBER 31, 1994
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) and Personal
Computing Tools SuperShop (PCT). In addition, SDC Communications (SDCC) 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 information should be read in conjunction with the
consolidated financial statements and notes thereto:
<TABLE>
<CAPTION>
THREE-MONTH PERIOD ENDED % TO NET REVENUE % CHANGE
DECEMBER 31, 1995 VS. DECEMBER 31, 1994 1995 1994 95 V. 94
- - --------------------------------------- ---- ---- --------
<S> <C> <C> <C>
Net Revenues:
Product sales 92% 88% 31%
Marketing services 8% 12% (11%)
--- ---
Combined 100% 100% 26%
Gross Margins:
Product sales 18% 19% 22%
Marketing services 41% 33% 11%
Combined 20% 21% 20%
Selling, general and administrative
expenses 20% 18% 41%
Net income (1%) 3% (127%)
</TABLE>
Revenues: Total net revenues for the third quarter ended December 31,
1995 increased by $2,929,414, or 26%, to $14,353,081 from $11,423,667 for the
same period in the prior year.
Net product sales increased by $3,075,184, or 31%, to $13,168,701 in
the third quarter of fiscal 1996 from $10,093,517 in the third quarter of fiscal
1995. The increase in net product sales was primarily generated by the continued
growth in the Company's corporate sales group, The Programmer's Shop catalog and
the addition of ISC. The Company's PCT catalog has experienced a large drop in
sales from the same period in the prior year.
-48-
Marketing services revenue decreased by $145,770, or, 11%, to
$1,184,380 for the quarter ended December 31, 1995 from $1,330,150 for the same
period in the prior year. This decrease was primarily due to an overall
reduction in new product releases in the marketplace along with a general
rollback of vendor sponsored advertising.
Gross Margins: Total gross margin increased by $479,406, or 20%, to
$2,877,484 for the quarter ended December 31, 1995 from $2,398,078 for the same
period in 1994.
Gross margin from product sales increased by $432,517, or 22%, to
$2,388,272 in the third quarter of fiscal 1996 from $1,955,755 for the same
period in fiscal 1995. Product gross margin, as a percent of sales, decreased to
18% for the quarter ended December 31, 1995 from 19% for the same period in the
prior year. The decline in gross margin percent, despite sales growth, was the
result of continued competition in the marketplace and a greater number of
upgrades being released by software manufacturers, which resulted in lower
selling prices.
Gross margin from marketing services increased by $46,899, or 11%, to
$489,212 for the quarter ended December 31, 1995 from $442,323 for the same
period in the prior year. The increase in gross margin was mainly due to an
increase in advertising related to auxiliary programs.
Selling, General and Administrative Expenses (SG&A): Selling, general
and administrative expenses increased by $842,486, or 41%, to $2,890,472 in the
third quarter of fiscal 1996 from $2,047,986 in the third quarter of fiscal
1995. SG&A expenses, as a percent of sales, increased to 20% for the quarter
ended December 31, 1995 from 18% in the same period in 1994. The increase in
expenses reflects additional charges for professional fees related to the
acquisition of ISC and increases in headcount to support the Company's growth.
Interest Expense: Net interest expense decreased by $17,068 to $37,046
in the third quarter of fiscal 1996 from $54,114 for the same period last year.
This decrease was due to lower interest rates in effect on the Company's line of
credit and approximately $7,000 in interest income provided by ISC.
<TABLE>
<CAPTION>
NINE-MONTH PERIOD ENDED % TO NET REVENUE % CHANGE
DECEMBER 31, 1995 VS. DECEMBER 31, 1994 1995 1994 95 V. 94
- - --------------------------------------- ---- ---- --------
<S> <C> <C> <C>
Net Revenues:
Product sales 91% 88% 57%
Marketing services 9% 12% 17%
--- ---
Combined 100% 100% 52%
Gross Margins:
Product sales 18% 20% 36%
Marketing services 41% 40% 19%
Combined 20% 23% 33%
Selling, general and administrative
expenses 19% 21% 40%
Net income * 1% (60%)
</TABLE>
* Less than 1%.
Revenues: Total net revenues for the nine months ended December 31,
1995 increased by $14,479,897, or 52%, to $42,357,363 from $27,877,466 in the
nine months ended December 31, 1994.
Net product sales increased by $13,934,678, or 57%, to $38,517,400 for
the first nine months of fiscal 1996 from $24,582,722 in the comparable period
last year. Sales growth was primarily generated by continued growth in the
Company's corporate sales group, The Programmer's Shop catalog and the addition
of ISC.
-49-
Marketing services revenue increased by $545,219, or 17%, to $3,839,963
in the first nine months of fiscal 1996 from $3,294,744 for the same period in
fiscal 1995. This increase was the net result of supplemental marketing and
promotional initiatives in the first six months of fiscal 1996. The Company has
experienced a reduction in the most recently reported quarter.
Gross Margins: Total gross margin increased by $2,056,070, or 33%, to
$8,368,752 in the first nine months of fiscal 1996 from $6,312,682 for the same
period in fiscal 1995.
Gross margin from product sales increased by $1,801,284, or 36%, to
$6,801,303 in the nine months ended December 31, 1995 from $5,000,019 for the
same period in fiscal 1995. The increase in gross margin was derived from the
acquisition of ISC and the continued growth in the Company's corporate sales
group.
Gross margin from marketing services increased by $254,786, or 19%, to
$1,567,449 in the first nine months of fiscal 1996 from $1,312,663 for the same
period in fiscal 1995. This increase was attributable to the sale of
supplemental marketing and promotional activities.
Selling, General and Administrative Expenses (SG&A): Selling, general
and administrative expenses increased by $2,271,993, or 40%, to $8,005,634 in
nine month period ended December 31, 1995 from $5,733,641 for the same period in
fiscal 1995. SG&A expenses, as a percent of sales, decreased to 19% from 21% in
the prior year. The increase in SG&A expenses was the result of additional
charges for professional fees related to the acquisition of ISC and increases in
headcount to support the continued growth of the Company.
Interest Expense: Net interest expense decreased by $36,575, or 24%, to
$118,850 for the nine months ended December 31, 1995 from $155,425 for the same
period in fiscal 1995. This decrease was due to lower interest rates in effect
on the Company's line of credit with borrowing levels that were comparable to
the same period in fiscal 1995 and approximately $14,000 in interest income
provided by ISC.
LIQUIDITY AND CAPITAL RESOURCES (in thousands, except ratios)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
FINANCIAL CONDITION AS OF 1995 1995
- - ------------------------- ------------ ------
<S> <C> <C>
Cash and cash equivalents $1,258 $672
Working capital $ 810 $654
Current ratio 1.10 1.09
CASH FLOW ACTIVITY SUMMARY FOR DECEMBER 31, DECEMBER 31,
THE NINE MONTHS ENDED 1995 1994
- - ------------------------------- ------------ --------
Net cash provided by continuing
operating activities $885 $340
Net cash (used for) discontinued
operating activities --- (48)
Net cash (used for) investing activities (129) (157)
Net cash (used for) financing activities (183) (26)
</TABLE>
The Company's net cash balance increased $585,675 to $1,258,061 at
December 31, 1995 from $672,386 at March 31, 1995. Cash generated by operating
activities of $885,094 was achieved during the first nine months of fiscal 1996
primarily from increased credit support from vendors.
Accounts receivable-trade increased $500,756 to $5,194,734 at December
31, 1995 from $4,693,978 at March 31, 1995. This increase resulted from the
Company's revenue growth. The Company continues to maintain an expanded
collections program that has yielded favorable collection results.
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 was
recently renewed on February 9, 1996. Available borrowings under the line are
based on 65% of eligible accounts receivable. Covenants under the line of credit
require the Company to maintain certain net worth and financial ratios. The
Company was in default of certain financial covenants and has received a written
waiver for the period December 31,
-50-
1995 with the condition that the maximum borrowings under the credit facility be
limited to the current outstanding balance until such time as a new credit
restructuring is agreed upon. The Company and the bank have renegotiated the
line of credit and the covenants governing the agreement which have caused past
defaults. The renegotiation resulted in the credit line being reset to the
$2,000,000 limit.
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 June 30, 1996, provided it meets
its operating plan and remains in compliance with its credit agreement. The
Company's ability to finance its operations will be dependent 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 likely result
in higher interest charges. Additional equity financings will likely 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 improved
collections of accounts receivable. The Company's ability to borrow under this
facility is dependent upon satisfying certain financial covenants, 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 flow from operations, and its borrowing capacity will be
sufficient to fund operations through June 30, 1996.
In June 1995, the Company became aware of information indicating that
cash and other accrued expenses had been reported improperly in fiscal 1994 and
fiscal 1995 by the accounting staff while implementing controls and procedures
associated with the new computerized transaction processing system installed in
fiscal 1994. As a result of this information, the Company restated its financial
statements in June 1995, with respect to the year ended March 31, 1994.
The effect on the results of the restatement of the quarter ended
December 31, 1994, prior to the pooling of ISC, is as follows:
<TABLE>
<CAPTION>
QUARTER ENDED
DECEMBER 31, 1994
AS REPORTED AS RESTATED
----------- -----------
<S> <C> <C>
Net revenues $10,840,929 $10,824,650
SG&A expenses 1,934,596 1,946,877
Net income 180,691 152,130
Net income per share 0.02 0.02
Accounts receivable 3,772,620 3,756,341
Total current assets 6,108,357 6,092,078
Total assets 7,715,660 7,699,381
Other accrued expenses 518,664 530,945
Total current liabilities 4,942,070 4,954,351
Accumulated deficit (7,473,215) (7,501,775)
Total stockholders' equity 2,469,952 2,441,392
Total liabilities and
stockholders' equity 7,715,660 7,699,381
</TABLE>
-51-
RESULTS OF OPERATIONS FOR THE YEARS ENDED MARCH 31, 1995 AND MARCH 31, 1994
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: The Programmer's SuperShop (TPS), Personal
Computing Tools SuperShop (PCT), and New Media SuperShop (NMS). In addition, SDC
Communications (SDCC) provides marketing services to third-party manufacturers,
developers and publishers of the products the Company distributes.
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
(RESTATED)
1995 1994 1993 95 V. 94 94 V. 93
---- ---- ---- -------- --------
<S> <C> <C> <C> <C> <C>
Net revenues:
Product sales (TPS, PCT, NMS) 88% 86% 85% 2% 1%
Marketing services (SDCC) 12% 14% 15% (2%) (1%)
--- -- ---
100% 100% 100%
Gross Margins:
Product sales (TPS, PCT, NMS) 18% 22% 21% (4%) 1%
Marketing services (SDCC) 36% 26% 39% 0% (13%)
-- -- --- --
21% 22% 24% (1%) (2%)
Selling, general and administrative expenses 20% 23% 26% (3%) (3%)
Restructuring charges --- --- 1% --- (1%)
Net income (loss) from continuing operations --- (1%) (4%) 1% 3%
Net income (loss) from discontinued operation --- --- 1% --- (1%)
Net income (loss) --- (1%) (3%) 1% 2%
</TABLE>
RESTATEMENT OF FISCAL 1994 FINANCIAL STATEMENTS
The Company issued its financial statements for the year ended March 31, 1994 in
its Annual Report on Form 10-K, filed with the Securities and Exchange
Commission ("SEC") on June 28, 1994 and financial statements on Form 10-Q for
the quarters ended June 30, 1994, September 30, 1994, and December 31, 1994
filed with the SEC during the year ended March 31, 1995. In June 1995, the
Company became aware of information indicating that cash and other accrued
expenses had been reported improperly as a result of errors by the accounting
personnell in implementing new controls and procedures associated with the
computerized transaction processing systems installed during fiscal 1994. As a
result of this information, the Company announced that its financial statements
for the above periods were not reliable. The financial statements for the year
ended March 31, 1994 have been restated to reflect a decrease of approximately
$484,000 in the Company's previously reported net income for the year. The
impact of the restatement on fiscal 1994 is summarized as follows:
<TABLE>
<CAPTION>
Year Ended March 31, 1994
As Reported As Restated
<S> <C> <C>
Net revenues $31,097,672 $30,893,672
Cost of products sold 20,518,098 20,894,098
Net Income (loss) 213,809 (270,191)
Net income (loss) per share 0.03 (0.07)
Cash 550,560 273,560
Total current assets 5,598,840 5,321,840
Total assets 7,404,434 7,127,434
Other accrued expenses 340,434 547,434
Total current liabilities 4,834,994 5,041,994
Accumulated deficit (7,732,120) (8,216,120)
Total stockholder's equity 2,184,790 1,700,790
Total liabilities and stockholder's equity 7,404,434 7,127,434
</TABLE>
-52-
The accompanying financial statements for the year ended March 31, 1995
reflect adjustments in the fourth quarter to reduce net income by approximately
$300,000 to correct the errors in the first three quarters of fiscal 1995. The
Company expects to amend its previously filed Form 10-Q reports for the quarters
ended June 30, 1994; September 30, 1994; and December 31, 1994 to reflect the
effect of this fourth quarter fiscal 1995 adjustment when it files the
respective comparative quarters for fiscal 1996. These adjustments for fiscal
1995 and 1994 result primarily from allowances and adjustments due customers,
and a corresponding offset against revenue ($249,000 in 1995 and $204,000 in
1994); bad debt expense, which were not previously recognized ($165,000 in
1995); adjustments to inventory for damaged goods and obsolescence ($243,000 in
1995 and $73,000 in 1994); and understatement of accrued expenses ($207,000 in
1994). The cumulative effect of the adjustments in 1994 resulted in a charge to
fiscal 1994 earnings of approximately $484,000. The effect of these adjustments
for fiscal 1995 resulted in an adjustment to earnings in the fourth quarter of
approximately $385,000.
FISCAL 1995 VS. FISCAL 1994
REVENUES: Total net revenues increased 28%, or $8,708,000, to $39,698,000
in fiscal 1995 from $30,990,000 in fiscal 1994. Product revenues increased 31%
to $34,964,000 in fiscal 1995 from $26,585,000 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 $4,734,000 in
fiscal 1995 from $4,309,000 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.
GROSS MARGIN: Total gross margin increased by $1,277,000, or 19%, to
$8,164,000 in fiscal 1995 as compared to $6,886,000 in fiscal 1994 as a result
of margin growth in both product sales and marketing services. Product gross
margin increased 12% to $6,453,000 in fiscal 1995 from $5,787,000 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 18% 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 $1,100,000 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 $851,000 or 12%, to $7,843,000 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 1995 to 20% in fiscal 1994, reflecting the ability to leverage existing
operations to grow revenue.
INTEREST EXPENSE: Net interest expenses increased to $217,300 in fiscal
1995 from $149,100 in 1994 primarily as a result of an increase in the prime
interest lending rate during this period.
FISCAL 1994 VS. FISCAL 1993
REVENUES: Total net revenues decreased by $3,569,000, or 10%, to
$30,894,000 in fiscal 1994 from $34,463,000 in fiscal 1993. Product revenues
declined by $2,809,000, or 9%, to $26,586,000 in fiscal 1994 from $29,395,000 in
fiscal 1993. The decrease in product revenues was primarily the result of a
general
-53-
decline in the number of new product introductions within the software
development tools marketplace, specifically in the DOS development tools
marketplace, causing a decrease in the number of orders in The Programmer's
SuperShop. The volume of orders stabilized in TPS during the second half of
fiscal 1994, however, competitive pricing pressures and an increase in the
number of upgrade offerings versus new product offerings continued to constrain
revenue growth. Additionally, the work force reduction in fiscal 1993
interrupted the Company's focus on major customer relationships in the first
half of the 1994 fiscal year. These product revenue declines in TPS were
partially offset by sales from the Personal Computing Tools (PCT) business,
which was acquired in June of 1993.
Marketing services revenues declined 15% to $4,309,000 in fiscal 1994 from
$5,068,000 in fiscal 1993. The decline in the number of new product
introductions, combined with the Company's decision to reduce the number of
marketing programs, were the primary causes for this decline. The reduction in
marketing programs was specifically directed at minimizing the amount of
speculative, cooperative advertising offerings, which involve taking product in
exchange for the value of marketing services provided. The Company can now focus
on its primary marketing publication, the TPS BuyersGuide catalog. Marketing
services revenues are generated almost entirely from TPS marketing programs.
GROSS MARGIN: Total gross margin decreased by $1,272,000, or 16%, to
$6,886,000 in fiscal 1994 as compared to $8,159,000 in fiscal 1993, principally
from the decline in marketing services gross margin of $872,000. Marketing
services gross margin decreased 44% to $1,100,000 in fiscal 1994 from $1,972,000
in fiscal 1993 and decreased as a percent of marketing service revenue to 26%
from 39%. This decrease is the result of the declines in TPS marketing services
revenues discussed above and costs associated with publishing the PCT catalog,
which does not generate marketing services revenue.
Gross margin from product revenue decreased by $400,000 or 6% to $5,787,000
in fiscal 1994 from $6,187,000 in fiscal 1993. This decrease was attributable to
the decline in product revenues, offset by gross margins derived from sales by
PCT, which generated $921,000 in product gross margin for the nine months since
the acquisition in June of 1993. Total gross margin from product revenue as a
percent of revenue increased to 22% in fiscal 1994 from 21% in fiscal 1993. The
specialty hardware and software products distributed by PCT generate higher
gross margin as a percent of revenue than the development software products
distributed by TPS.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE: SG&A expenses decreased by
$2,114,000, or 23%, to $6,992,000 (23% of revenue) in fiscal 1994 from
$9,105,000 (26% of revenue) in fiscal 1993. This significant reduction in SG&A
expenses is principally the result of the restructuring effected in fiscal 1993
and the Company's continued focus on strict cost containment in fiscal 1994.
SG&A expenses related to the PCT business were reduced significantly after the
acquisition in June of 1993, primarily through the elimination of management
positions, and its consolidation into the Company's Hingham, Massachusetts
operations in August of 1993.
INTEREST EXPENSE: Net interest expenses decreased to $149,000 in fiscal
1994 from $153,000 in 1993. The decline in net interest expense is primarily the
result of a reduction in the average outstanding balance of the Company's line
of credit in fiscal 1994 from fiscal 1993, partially offset by new interest
charged on the addition of a new $200,000 term note in September of 1993.
<TABLE>
<CAPTION>
LIQUIDITY AND CAPITAL RESOURCES (in thousands, except ratios)
AS OF MARCH 31,
(RESTATED)
1995 1994
<S> <C> <C>
Cash and cash equivalents $335 $ 274
Working capital (deficit) 570 280
Current ratio 1.09 1.06
-54-
FOR THE YEAR ENDED MARCH 31,
(RESTATED)
1995 1994
Net cash provided by (used for) continuing
operating activities $508 $(1,719)
Net cash provided by (used for) discontinued
operating activities (68) 628
Net cash used for investing activities (211) (219)
Net cash used for financing activities (217) 621
</TABLE>
The Company's net cash flow for continuing operations increased in fiscal
1995 to $507,000. The Company was granted substantial increases in credit lines
extended by its major suppliers, resulting in an increase in accounts payable of
$1,625,000, or 67%, to $4,064,000 in fiscal 1995 compared to $2,439,000 in
fiscal 1994.
As a result of the sales growth, the Company's inventories increased to
$1,696,000 in fiscal 1995 from $1,494,000 in fiscal 1994, an increase of 14%,
which is well below the increase in product sales of 31%.
Accounts receivable-trade, before allowances for doubtful accounts,
increased by $1,593,000, or 40%, to $4,761,000 at March 31, 1995 from $3,410,000
at March 31, 1994. This increase was a direct result of the revenue growth in
fiscal 1995. Overall, the Company has reduced its collection days to 24 at March
31, 1995 from 26 days at March 31, 1994. The expanded collections program
implemented in fiscal 1995 has significantly reduced its outstanding
collections.
The Company has a $2,500,000 secured bank line of credit under which
borrowings bear interest at the bank's prime rate plus 1%. The line is subject
to renewal on January 5, 1996. Available borrowings under the line are based on
80% of eligible accounts receivable. Covenants under the line of credit require
the Company to maintain certain net worth and financial ratios. The Company is
currently in default of certain financial covenants and has not received a
written waiver as of July 14, 1995 for the period ended March 31, 1995 and June
30, 1995, although the bank has not currently demanded payment of the line or
accelerated the line of credit. There can be no assurance that the Company will
be in compliance with its financial covenants and ratios for the period ended
June 30, 1995. There can also be no assurance that the Company will obtain a
waiver of defaults for the period ended March 31, 1995 or June 30, 1995. At
March 31, 1995, $1,423,000 was outstanding under this line of credit.
Working capital increased to $570,000 at March 31, 1995 from $280,000 at
the end of fiscal 1994.
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, 1996, provided it meets its
operating plan and remains in compliance with its credit agreement. The Company
is currently in default of its line of credit facility with the bank and the
Company has not received a written waiver of this default for the period ended
March 31, 1995 and June 30, 1995. The Company's ability to finance its
operations will be dependent 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
-55-
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 1996.
While the Company's financial statements have been restated for fiscal 1994
to reflect adjustments to certain balance sheet and operating items, management
believes that the restatement has not adversely impacted the Company's current
operations, and its current ability to generate cash flow from operations and to
meet anticipated obligations in the normal course of business.
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.
-56-
FINANCIAL STATEMENTS
Contained below are the Company's audited Consolidated Balance Sheets
as of March 31,1995 and 1994, and the Company's unaudited Balance Sheets as of
December 31, 1995; the Company's audited Consolidated Statements of Operations
for the years ended March 31, 1995, 1994 and 1993, and the Company's unaudited
Statements of Operations for the three months and nine months ended December 31,
1995 and 1994; the Company's audited Consolidated Statements of Stockholders'
Equity for the years ended March 31, 1995, 1994 and 1993; the Company's audited
Consolidated Statements of Cash Flows for the years ended March 31, 1995, 1994
and 1993, and the Company's unaudited Statements of Cash Flows for the nine
months ended December 31, 1995 and 1994; and the Notes to the foregoing
financial statements. In addition, contained below are the Internet Security
Corporation's ("ISC") audited Balance Sheet as of December 31, 1994; ISC's
audited Statement of Operations from the period of inception (June 15, 1994) to
December 31, 1994; ISC's audited Statement of Stockholder's Equity for the
period from inception (June 15, 1994) to December 31, 1994; ISC's audited
Statement of Cash Flows for the period from inception (June 15, 1994) to
December 31, 1994; and the Notes to the foregoing financial statements.
-57-
THE SOFTWARE DEVELOPER'S COMPANY, INC.
BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1995
---- ----
<S> <C> <C>
CURRENT ASSETS:
Cash $ 1,258,061 $ 672,386
Accounts receivable - trade, net of
allowance for doubtful accounts of
$422,138 and $408,177 at December 31,
1995 and March 31, 1995, respectively 5,194,734 4,693,978
Inventory 2,350,572 1,695,993
Other current assets 288,324 512,158
---------- ---------
TOTAL CURRENT ASSETS 9,091,691 7,574,515
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, net 431,513 540,971
GOODWILL AND OTHER INTANGIBLES 867,515 967,262
OTHER ASSETS 127,372 88,421
---------- ---------
$10,518,091 $9,171,169
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable - trade $ 5,092,795 $4,389,118
Line of credit 1,423,470 1,423,470
Other accrued expenses 1,585,116 1,107,592
Accrued income taxes 180,000 ---
---------- ---------
TOTAL CURRENT LIABILITIES 8,281,381 6,920,180
LONG-TERM NOTES PAYABLE 300,000 300,000
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, authorized 5,000,000 shares:
Series C, voting, non-cumulative 711,876
shares issued and outstanding at
December 31, 1995 (905,968 issued and
outstanding at March 31, 1995) 7,119 9,060
Common stock, voting, $.01 par value,
25,000,000 authorized shares; 8,100,841
issued and 8,075,740 outstanding at
December 31, 1995 (7,321,599 issued and
7,296,498 outstanding at March 31, 1995) 81,008 73,217
Additional paid-in capital 10,011,345 9,949,566
Cumulative translation adjustment 35,376 22,242
Cumulative deficit (8,114,481) (8,019,439)
---------- ---------
2,020,367 2,034,646
Less treasury stock, at cost,
25,101 shares (83,657) (83,657)
---------- ---------
TOTAL STOCKHOLDERS' EQUITY 1,936,710 1,950,989
---------- ---------
$10,518,091 $9,171,169
========== =========
</TABLE>
The accompanying footnotes are an integral part of the financial statements.
-58-
THE SOFTWARE DEVELOPER'S COMPANY, INC.
STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
RESTATED RESTATED
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Revenues:
Product sales $13,168,701 $10,093,517 $38,517,400 $24,582,722
Marketing services income 1,184,380 1,330,150 3,839,963 3,294,744
--------- ---------- ---------- ----------
14,353,081 11,423,667 42,357,363 27,877,466
Costs and expenses:
Costs of products sold 10,780,429 8,137,762 31,716,097 19,582,703
Cost of marketing services income 695,168 887,827 2,272,514 1,982,081
Selling, general and administrative expenses 2,890,472 2,047,986 8,005,634 5,733,641
---------- ---------- ---------- ----------
14,366,069 11,073,575 41,994,245 27,298,425
---------- ---------- ---------- ----------
OPERATING INCOME (LOSS) (12,988) 350,092 363,118 579,041
Interest expense, net 37,046 54,114 118,850 155,425
Other (income) expense (9,693) 14,332 (16,671) 21,367
---------- ---------- ---------- ----------
Total interest and other expense 27,353 68,446 102,179 176,792
Income (loss) before income tax (40,341) 281,646 260,939 402,249
Provision for taxes 36,719 --- 98,979 ---
NET INCOME (LOSS) $ (77,060) $ 281,646 $ 161,960 $ 402,249
========== ========== ========== ==========
NET INCOME (LOSS) PER SHARE $(0.01) $0.03 $0.02 $0.05
==== ==== ==== ====
Weighted average shares outstanding 9,261,000 8,209,000 8,791,000 8,206,000
</TABLE>
The accompanying footnotes are an integral part of the financial statements.
-59-
THE SOFTWARE DEVELOPER'S COMPANY, INC.
STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
DECEMBER 31,
RESTATED
1995 1994
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net income from continuing operations $161,960 $ 402,249
Adjustments to reconcile net income
to net cash provided by operating
activities:
Sale of advertising for product (680,375) (865,804)
Depreciation and amortization 342,269 333,657
Provision for doubtful accounts
receivable 516,540 149,625
Provision for inventory obsolescence 115,000 151,800
Change in assets and liabilities:
(Increase) in accounts receivable (500,756) (1,399,013)
(Increase) decrease in inventory (654,579) 846,524
Decrease in other current assets 223,834 136,878
Increase in accounts payable 703,677 430,100
Increase (decrease) in other
accrued expenses 477,524 154,035
Increase in accrued income taxes 180,000 ---
--------- ---------
Total adjustments $ 723,134 $ (62,198)
Net cash provided by continuing
operating activities 885,094 340,051
Net cash (used for) discontinued
operating activities --- (47,896)
--------- ---------
Net cash provided by operating
activities 885,094 292,155
INVESTING ACTIVITIES
Capital expenditures for equipment $ (129,487) $ (156,585)
--------- ---------
Net cash used for investing activities (129,487) (156,585)
FINANCING ACTIVITIES
Principal payments under capital
lease obligations (27,011) (31,605)
Dividend payments (231,000) ---
Issuance of common stock 74,945 5,701
--------- ---------
Net cash provided by (used for) financing
activities (183,066) (25,904)
Effect of exchange rate changes on cash 13,134 23,056
Net increase (decrease) in cash 585,675 132,722
Cash at beginning of period 672,386 550,560
--------- ---------
Cash at end of period $1,258,061 $ 683,282
========= =========
Supplemental disclosures of cash flow information:
Interest paid $ 137,454 $ 153,213
========= =========
Income taxes paid $ 13,500 ---
========= =========
</TABLE>
The accompanying footnotes are an integral part of the financial statements.
-60-
THE SOFTWARE DEVELOPER'S COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - The unaudited financial information furnished herein reflects
all adjustments which are of a normal recurring nature, which in the opinion of
management are necessary to fairly state the Company's financial position, cash
flows and the results of its operations for the periods presented. Certain
information and footnote disclosure normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted. This information should be read in conjunction with the
Company's audited financial statements for the fiscal year ended March 31, 1995,
included in Form 10-K filed on July 14, 1995.
NOTE 2 - Net income per share is based upon the weighted average number
of common shares outstanding including the dilutive effects of options and
warrants.
NOTE 3 - The Company provides for income taxes during interim reporting
periods based on reported earnings before income taxes using an estimate of the
annual effective tax rate. Deferred income taxes reflect the impact of temporary
differences between the amount of assets and liabilities recognized for tax
purposes. These deferred taxes are measured by applying currently enacted tax
laws.
NOTE 4 - Effective April 1, 1994, 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 financial position of the Company.
The principal components of the Company's deferred tax assets and
liabilities as of April 1, 1995 consisted of the following (in thousands):
Deferred Tax Assets:
Expenses not currently deductible $ 462
Operating loss carryforwards 3,004
-----
3,466
Deferred tax liabilities ---
-----
3,466
Valuation allowance (3,466)
------
Net ---
======
There was no change to the valuation allowance during the first nine
months of fiscal 1996.
NOTE 5 - Interest payments of $9,000 and $27,000 were paid to a related
party for the three-month and nine-month periods ended December 31, 1995,
respectively. Interest was on a $300,000 note payable which is due December,
1996.
NOTE 6 - 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 filed on January 30, 1996.
-61-
THE SOFTWARE DEVELOPER'S COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The acquisition was accounted for as a "pooling of interests"
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 THREE MONTHS FOR THE NINE MONTHS
ENDED DECEMBER 31, ENDED DECEMBER 31,
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenues:
SDC 13,271,815 10,824,650(1) 39,961,517 27,083,260(1)
ISC 1,081,266 599,017 2,395,846 794,206(2)
Net income (loss):
SDC (200,677) 152,130(1) (26,022) 207,905(1)
ISC 123,617 129,516 187,982 194,344(2)
</TABLE>
(1) Reflects SDC's restated financial results from 1994 audit
adjustments.
(2) Reflects ISC's activity from date of inception (June 15, 1994)
through December 31, 1994.
ISC prepares financial statements on a calendar year basis. Beginning
April 1, 1996, ISC will change to a fiscal year end of March 31 to conform with
the Company's fiscal year.
NOTE 7 - In a prior press release the Company reported revenues for the
quarter ended December 31, 1995 of $13,623,000 and net income of $11,000, which
only included ISC's results of operations from November 17, 1995 through
December 31, 1995. The Company was later advised by its accountants that the
Company should report the full impact of ISC's operating results for the period.
ISC's full results of operations for the periods ended December 31, 1995 and
December 31, 1994 are reflected herein.
NOTE 8 - SUBSEQUENT EVENT: On February 9, 1996, the Company decided to
cease publication of the "New Media SuperShop" catalog. The Company booked a
$100,000 charge to cover any possible write down of inventory related to this
decision. Although the Company will attempt to vigorously sell off all of the
remaining inventory related to this catalog, the Company has fully reserved for
the inventory. There were no additional costs associated with this decision. The
impact of transferring employees assigned to New Media SuperShop into the
Company's general operations will be immaterial.
-62-
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, 1995 and 1994 and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended March 31, 1995. 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 disclosure 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, 1995 and 1994, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended March 31, 1995 in conformity with generally accepted
accounting principles.
As discussed in Note A to the consolidated financial statements, the
Company has restated its financial statements for the year ended March 31, 1994.
COOPERS & LYBRAND, L.L.P.
Boston, Massachusetts
July 14, 1995
-63-
THE SOFTWARE DEVELOPER'S COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31,
MARCH 31, 1994
1995 (RESTATED)
ASSETS (Note E)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 334,747 $ 273,560
Accounts receivable--trade, net of allowance for doubtful
accounts of $347,432 and $468,146 in 1995 and
1994, respectively 4,413,884 2,941,357
Accounts receivable--product, net of valuation reserve
of $60,745 and $259,715 in 1995 and 1994, respectively 99,977 220,519
Inventory 1,695,993 1,494,333
Other current assets 339,418 392,071
---------- ----------
TOTAL CURRENT ASSETS 6,884,019 5,321,840
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, NET (Note D) 502,873 628,524
INTANGIBLE ASSETS, NET, INCLUDING GOODWILL 967,262 1,100,267
OTHER ASSETS 88,421 76,803
---------- ----------
TOTAL ASSETS $8,442,575 $7,127,434
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable--trade $4,063,696 $2,438,783
Line of credit (Note E) 1,423,470 1,401,000
Other accrued expenses 511,767 547,434
Accrued payroll 163,281 138,645
Accrued costs for disposal of discontinued operation (Note B) --- 10,580
Customer advances 124,689 262,860
Notes payable (Note E) --- 200,000
Current portion of capitalized lease obligations (Note F) 27,011 42,692
---------- ----------
TOTAL CURRENT LIABILITIES 6,313,914 5,041,994
LONG-TERM DEBT-RELATED PARTY (Note E) 300,000 300,000
LONG-TERM ACCRUED COSTS FOR DISPOSAL
OF DISCONTINUED OPERATION (Note B) --- 57,638
LONG-TERM CAPITAL LEASE OBLIGATION (Note F) --- 27,012
COMMITMENTS AND CONTINGENCIES (Note F) --- ---
STOCKHOLDERS' EQUITY (Notes H and I)
Preferred stock, $.01 par value, authorized 25,000,000 shares:
Series C voting, non-cumulative, 905,968 shares
(905,968 shares in fiscal 1995 and 1994) issued
and outstanding (liquidation preference of $2.00 per share) 9,060 9,060
Common Stock, voting, $.01 par value, authorized 25,000,000
shares; issued 7,321,599, outstanding 7,296,498 shares
(7,317,554 and 7,292,453 in 1994) 73,217 73,176
Additional paid-in capital 9,949,566 9,946,406
Cumulative translation adjustment 22,242 (28,075)
Cumulative deficit (8,141,767) (8,216,120)
--------- ---------
1,912,318 1,784,447
Less treasury stock at cost, 25,101 shares (83,657) (83,657)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 1,828,661 1,700,790
--------- ---------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $8,442,575 $7,127,434
========= =========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
-64-
THE SOFTWARE DEVELOPER'S COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
1994
1995 (RESTATED) 1993
----------------------------------------------------
<S> <C> <C> <C>
Net revenues:
Product sales $34,964,445 $26,585,817 $29,394,831
Marketing services 4,733,290 4,308,855 5,067,911
----------- ----------- -----------
39,697,735 30,893,672 34,462,742
---------- ---------- ----------
Costs and expenses:
Cost of products sold 28,511,277 20,798,098 23,207,805
Cost of marketing services 3,022,666 3,209,115 3,096,080
Selling, general and administrative 7,842,864 6,991,821 9,105,497
Restructuring charges --- --- 354,000
-------------- -------------- -----------
39,376,807 30,998,034 35,763,382
---------- ---------- ----------
Net income (loss) before interest, taxes and
discontinued operations 320,928 (105,362) (1,300,640)
Interest expense, net - third party 181,251 104,076 104,866
Interest expense, net - related party 36,000 45,000 48,000
Other 29,324 15,753 27,644
----------- ----------- -----------
INCOME (LOSS) FROM CONTINUING
OPERATIONS 74,353 (270,191) (1,481,150)
----------- ---------- -----------
Discontinued operation (Note B):
Gain on disposal --- --- 309,635
Gain from sale of assets --- --- 200,000
------------- ------------- -----------
NET INCOME FROM DISCONTINUED
OPERATION --- --- 509,635
------------- ------------- -----------
NET INCOME (LOSS) $ 74,353 $ (270,191) $ (971,515)
=========== =========== ===========
Per share amounts:
From continuing operations $0.01 $(0.07) $(1.04)
From discontinued operation --- --- 0.23
----- ----- ----
EARNINGS (LOSS) PER SHARE $0.01 $(0.07) $(0.81)
==== ==== ====
Weighted average shares outstanding 8,244,000 4,883,000 2,227,000
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
-65-
THE SOFTWARE DEVELOPER'S COMPANY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL
PREFERRED STOCK COMMON PAID-IN CUMULATIVE TRANSLATION
SERIES A SERIES B SERIES C STOCK CAPITAL DEFICIT ADJUSTMENT
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT MARCH 31, 1993 $4,706 $50 --- $26,333 $8,452,530 $(7,945,929) $(3,129)
Net loss (Restated) --- --- --- --- --- (270,191) ---
Issuance of Common Stock
(4,684,211 shares) --- --- --- 46,843 784,535 --- ---
Issuance of Preferred Stock
(905,968 shares) - Series C --- --- 9,060 --- 759,019 --- ---
Retirement of Preferred Stock
(470,679 shares) - Series A (4,706) --- --- --- --- --- ---
(4,999 shares) - Series B --- (50) --- --- --- --- ---
Translation adjustment --- --- --- --- --- --- (24,946)
Dividends - Series B --- --- --- --- (49,678) --- ---
------- ----- ------- -------- ---------- ------------ --------
BALANCE AT MARCH 31, 1994
(RESTATED) --- --- $9,060 $73,176 $9,946,406 $(8,216,120) $(28,075)
======= ===== ===== ====== ========= ========= ======
Net income --- --- --- --- --- 74,353 ---
Issuance of Common Stock
(4,045 shares) --- --- --- 41 3,160 --- ---
Translation adjustment --- --- --- --- --- --- 50,317
------- ----- ------- --------- ----- ------------ ------
BALANCE AT MARCH 31, 1995 --- --- $9,060 $73,217 $9,949,566 $(8,141,767) $22,242
======= ===== ======= ========= ========= ========= =======
</TABLE>
<TABLE>
<CAPTION>
TREASURY STOCKHOLDERS
STOCK EQUITY
<S> <C> <C>
BALANCE AT MARCH 31, 1993 $(83,657) $ 450,904
Net loss (Restated) --- (270,191)
Issuance of Common Stock
(4,684,211 shares) --- 831,378
Issuance of Preferred Stock
(905,968 shares) - Series C --- 768,079
Retirement of Preferred Stock
(470,679 shares) - Series A --- (4,706)
(4,999 shares) - Series B --- (50)
Translation adjustment --- (24,946)
Dividends - Series B --- (49,678)
-------- ---------
BALANCE AT MARCH 31, 1994
(RESTATED) $(83,657) $1,700,790
====== =========
Net income --- 74,353
Issuance of Common Stock
(4,045 shares) --- 3,201
Translation adjustment --- 50,317
-------- ---------
BALANCE AT MARCH 31, 1995 $(83,657) $1,828,661
========= ==========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
-66-
THE SOFTWARE DEVELOPER'S COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
1994
1995 (RESTATED) 1993
----------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) from continuing operations $ 74,353 $ (270,191) $(1,481,150)
Adjustments to reconcile net income (loss) to
net cash used for operating activities:
Sale of marketing services for product (1,235,590) (1,435,469) (2,149,138)
Depreciation and amortization 470,051 444,823 282,041
Provision for losses on inventory 57,480 61,622 396,928
Provision for doubtful accounts receivable 340,751 380,160 940,706
Change in operating assets and liabilities:
Accounts receivable (1,660,788) 479,977 434,497
Inventory 944,502 (121,574) 2,066,736
Other current assets 52,653 82,032 297,857
Other assets (11,618) (22,242) 42,073
Accounts payable 1,624,913 (729,585) (606,721)
Accrued payroll 24,636 (37,280) (64,902)
Other accrued expenses (35,667) (586,419) 188,633
Customer advances (138,171) 34,998 76,554
---------- ---------- ----------
Total adjustments 433,152 (1,448,957) 1,905,264
---------- --------- ---------
Net cash provided by (used for)
continuing operating activities 507,505 (1,719,148) 424,114
Net cash (used for) provided by
discontinued operating activities (68,216) 627,581 (2,054,583)
---------- ---------- ---------
Net cash provided by (used for)
operating activities $ 439,289 $(1,091,567) $(1,630,469)
---------- --------- ---------
INVESTING ACTIVITIES
Capital expenditures for equipment and
leasehold improvements $ (211,395) $ (227,443) $ (311,688)
Business acquired in purchase transaction, net
of cash acquired --- 8,228 ---
------------ ----------- -----------
Net cash used for investing activities $ (211,395) $ (219,215) $ (311,688)
---------- ---------- -----------
FINANCING ACTIVITIES
Net payments on line of credit (1,401,000) (150,500) (848,500)
Principal debt payments (200,000) (121,171) ---
Principal payments under capital leases (42,695) (39,324) (14,882)
Proceeds from line of credit 1,423,470 --- ---
Net proceeds from debt --- 200,000 ---
Proceeds from issuance of common stock and
warrants --- --- 1,014,369
Dividends paid on preferred stock --- (49,678) (123,426)
Net proceeds from issuance of preferred stock 3,201 781,193 2,833,332
Redemption of preferred stock --- --- (500,100)
------------ ------------- ----------
Net cash (used for) provided by
financing activities $ (217,024) $ 620,520 $2,360,793
---------- ---------- ---------
Effect of exchange rate changes on cash 50,317 (24,946) (9,254)
---------- ----------- ----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 61,187 (715,208) 409,382
Cash and cash equivalents at beginning of year 273,560 988,768 579,386
---------- ---------- ----------
CASH AND CASH EQUIVALENTS AT
END OF YEAR $ 334,747 $ 273,560 $ 988,768
========== ========== ==========
Supplemental Disclosures of Cash Flow Information
Interest paid $ 216,460 $ 208,974 $ 237,075
========== ========== ==========
Supplemental Schedules of Non-cash Investing and
Financing Activities
Collection of products in satisfaction of accounts
receivable - product $1,203,640 $1,341,735 $2,220,249
========= ========= =========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
-67-
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 subsidiary, Software Developer's Company, GmbH. The accounts of
Solution Systems, a discontinued business unit of the Company, have been
presented as a discontinued operation.
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
1995 and fiscal 1994 consolidated balance sheets and statements of operations.
As of March 31, 1995, the Company did not report minority interest because PCT
incurred net losses that preclude reporting minority interest (see Note J). All
intercompany amounts and transactions of all subsidiaries have been eliminated
in consolidation.
RESTATEMENT OF FISCAL 1994 FINANCIAL STATEMENTS: The Company issued its
financial statements for the year ended March 31, 1994 in its Annual Report on
Form 10-K, filed with the Securities and Exchange Commission ("SEC") on June 28,
1994 and financial statements on Form 10-Q for the quarters ended June 30, 1994,
September 30, 1994, and December 31, 1994 filed with the SEC during the year
ended March 31, 1995. In June 1995, the Company became aware of information
indicating that cash and other accrued expenses had been reported improperly as
a result of errors by the accounting staff in implementing new controls and
procedures associated with the computerized transaction processing systems
incorporated during fiscal 1994. As a result of this information, the Company
announced that its financial statements for the above periods were not reliable.
The financial statements for the year ended March 31, 1994 have been restated to
reflect a decrease of approximately $484,000 in the Company's previously
reported net income for the year. The impact of the restatement on fiscal 1994
is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, 1994
AS REPORTED AS RESTATED
<S> <C> <C>
Net revenues $31,097,672 $30,893,672
Cost of products sold 20,518,098 20,894,098
Net Income (loss) 213,809 (270,191)
Net income (loss) per share 0.03 (0.07)
Cash 550,560 273,560
Total current assets 5,598,840 5,321,840
Total assets 7,404,434 7,127,434
Other accrued expenses 340,434 547,434
Total current liabilities 4,834,994 5,041,994
Accumulated deficit (7,732,120) (8,216,120)
Total stockholder's equity 2,184,790 1,700,790
Total liabilities and stockholder's equity 7,404,434 7,127,434
</TABLE>
The accompanying financial statements for the year ended March 31, 1995
reflect an adjustment in the fourth quarter to reduce net income by
approximately $385,000 to correct the errors in the first three quarters of
fiscal 1995. The Company expects to amend its previously filed Form 10-Q reports
for the quarters ended June 30, 1994, September 30, 1994, and December 31, 1994
to reflect the effect of this fourth quarter fiscal 1995 adjustment when it
files the respective comparative quarters for fiscal 1996.
-68-
THE SOFTWARE DEVELOPER'S COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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 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.
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.
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.
-69-
THE SOFTWARE DEVELOPER'S COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (C0NTINUED)
INTANGIBLE ASSETS: Intangible assets consist of goodwill, customer
lists and non-compete agreements arising from a business acquisition (see Note
J). 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.
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 options and warrants, which are anti-dilutive, and after deducting
from earnings the assumed 15% cumulative dividend on Series A Preferred Stock.
The amount of the assumed dividend was $0 for fiscal 1995, $50,000 for fiscal
1994 and $842,038 for fiscal 1993.
EXPORT SALES: The Company generates revenues through the sale of
products both domestically and overseas. Export sales generated revenues of
approximately $2,097,000, $2,842,000 and $3,300,000 during fiscal 1995, fiscal
1994 and fiscal 1993, 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 1995, 1994 and 1993
income.
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 weekly payroll deductions which are
invested in any combination of three investment funds. The Company has no
matching contribution obligation and made no contribution to this Plan in either
fiscal 1995, 1994 or 1993.
-70-
THE SOFTWARE DEVELOPER'S COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (C0NTINUED)
FUTURE OPERATIONS: The Company anticipates that its cash requirements
for fiscal 1996 will be satisfied from its present cash balances, cash flow from
operations, and its credit line. Should the Company's cash requirements exceed
expectations, management believes that, (i) additional debt financing, (ii)
additional equity financing, (iii) reduced expenses, or (iv) a combination of
these sources are available to the Company. While the Company remains confident
about its future, it can give no assurance regarding the ultimate success of its
strategy.
NOTE B -- DISCONTINUED OPERATION
In March 1992 the Company decided to discontinue operations of its Solution
Systems business unit. The financial statements reflect the operating results of
Solution Systems as a discontinued operation for all periods presented. The
remaining assets and liabilities have been combined and are recorded as net
current assets, net non-current assets, net current liabilities, and net
non-current liabilities on the accompanying Consolidated Balance Sheets.
Summarized condensed financial information of the remaining Solution Systems
assets and liabilities is as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------
BALANCE SHEET 1995 1994
---- ----
<S> <C> <C>
Assets
Cash --- ---
Accounts receivable --- ---
Inventory --- ---
Prepaid expenses and other assets --- ---
Other long-term assets, net --- ---
------ ------
--- ---
====== =====
Liabilities
Accounts payable ---
Other current liabilities --- $10,580
Accrued royalties --- ---
Accrued payroll --- ---
Other long-term liabilities --- $57,638
Intercompany balances, net --- (68,218)
----- ------
--- ---
===== ========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
RESULTS OF OPERATIONS 1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Net sales --- --- ---
Cost of sales --- --- ---
Royalty expense --- --- ---
Other costs --- --- ---
------ ----- --------
Loss from operations before taxes --- --- ---
Benefit for income taxes --- --- ---
------ ----- --------
Loss from operations --- --- ---
Gain (provision for loss) on disposal --- --- $309,635
Gain from sale of assets --- --- 200,000
----- ----- -------
--- --- $509,635
===== ===== =======
</TABLE>
On May 28, 1992, the Company purchased all rights to the BRIEF, BRIEForC++,
Sourcerer's Apprentice and dBRIEF product lines from their respective
third-party owners for approximately $3,500,000 in cash, 169,753 shares of
Series A Preferred Stock valued at $1,833,333, and 10,000 shares of Series B
Senior Preferred Stock valued at $1,000,000 (see NOTE H -- CAPITAL STOCK AND
CAPITAL STOCK
-71-
THE SOFTWARE DEVELOPER'S COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (C0NTINUED)
WARRANTS). The rights to these product lines were simultaneously sold to Borland
International for $6,700,000 in cash. Of this amount, $4,700,000 was received at
closing, $1,000,000 was received in October 1992 and the remaining $1,000,000
was received in June 1993.
In fiscal year 1992 the Company provided for a loss of $3,356,229 for the
disposal of discontinued operation. In fiscal 1993 management recognized a
benefit of $309,635 due to reductions in lease obligations and estimated
wind-down losses, which resulted in a provision for loss on disposal of
$3,046,594.
The following table sets forth the proceeds and costs related to the
transaction:
<TABLE>
<S> <C>
Total proceeds $6,700,000
Cost of Transaction:
Cash to product owners $3,583,797
Series A Preferred Stock to product owners 1,833,333
Series B Senior Preferred Stock to product owners 1,000,000
Capitalized software 1,009,078
Severance, relocation costs and bonuses 771,271
Assets no longer required 389,770
Leases for equipment no longer required 264,000
Professional fees 312,000
Lease for office space no longer required 147,000
Wind-down losses 436,345
----------
Total costs $9,746,594
==========
Loss on disposal $3,046,594
==========
</TABLE>
NOTE C -- RESTRUCTURING
FISCAL 1993: In March 1993, the Company effected a reorganization in order to
reduce overhead costs to a level that was supportable by the current level of
sales. As part of the reorganization, 20% of the work force (19 people) was
released from the Company. The Company provided for severance and related costs
of $354,000 which are included in the caption "Restructuring charges" in its
Consolidated Statement of Operations.
NOTE D -- EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are stated at cost and consist of the
following:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Computer equipment $1,237,454 $1,063,415
Leasehold improvements 559,892 558,228
Furniture and fixtures 296,998 261,306
---------- ----------
2,094,344 1,882,949
Less accumulated depreciation and amortization (1,591,471) (1,254,425)
--------- ---------
$ 502,873 $ 628,524
========== =========
</TABLE>
The depreciation expense recognized for the fiscal years ended March 31,
1995, 1994 and 1993 was $337,046, $345,076 and $282,041, respectively.
NOTE E -- 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 1%. Prime was 9% at
March 31, 1995. The Line is collateralized by all assets of the Company and it
expires
-72-
THE SOFTWARE DEVELOPER'S COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (C0NTINUED)
in January 1996. The Line requires the Company, among other things, to maintain
levels of earnings, net worth and certain minimum financial ratios. As of March
31, 1995, the Company was not in compliance with the covenants relating to the
Line and had not received from the bank a written waiver of its default of the
financial covenants.
During fiscal 1995, the Company renewed a $2,000,000 line of credit through
July 31, 1995 with Wainwright Bank, which was paid down in March 1995. During
fiscal 1991, the Company entered into a $2,500,000 demand line of credit, and in
fiscal 1993, the agreement with the bank was amended reducing the line to
$2,000,000. Interest was payable at prime plus 3.5% with a minimum interest rate
of 10.5%. The rate charged at March 31, 1994 was 10.5%. The line of credit was
collateralized by all assets of the Company. A provision within the agreement
required that a compensating balance of $100,000 be held by the bank in a
non-interest-bearing account, which was included as a component of cash on the
Consolidated Balance Sheet as of March 31, 1994. The amount available to the
Company was based upon certain levels of accounts receivable and inventory. In
connection with this line of credit, the Company had certain requirements
pertaining to the maintenance of working capital and debt to tangible net worth
and was limited on the incurring of future borrowings and the payment of
dividends.
On September 9, 1993, the Company entered into a subordinated
eighteen-month term note with Long Lines, Limited. This note was collateralized
by all assets of the Company. Interest of 10% per annum was payable quarterly in
arrears on the first day of each calendar quarter. The Company used the proceeds
from the note for working capital and general corporate purposes. This note was
repaid in full in February 1995.
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,
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 note is subordinated
to any commercial bank or other financial institution debt up to $4,000,000.
NOTE F -- COMMITMENTS AND CONTINGENCIES
The Company leases office space and office equipment under leases
classified as operating leases. Rent expense amounted to $641,121 in fiscal
1995, $787,143 in fiscal 1994 and $747,397 in fiscal 1993. During fiscal 1993,
the Company entered into a capital lease for equipment totaling $123,122. Total
payments on the capitalized lease were $42,693 in fiscal 1995, $38,536 in fiscal
1994 and $14,882 in fiscal 1993. The Company also paid $788 for capitalized
lease payments relating to the PCT acquisition in fiscal 1994. Total accumulated
amortization on the capitalized lease was $96,111 in fiscal 1995, $53,418 in
fiscal 1994 and $14,882 in fiscal 1993. Future minimum lease payments under all
noncancelable capital and operating leases as of March 31, 1995 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR ENDING MARCH 31, LEASES LEASES
<S> <C> <C>
1996 $27,958 238,663
1997 --- 3,865
1998 --- 1,043
-------- --------
$27,958 $243,571
========
Less amount representing interest 947
------
Present value of net minimum lease payments $27,011
======
</TABLE>
There are no material outstanding legal proceedings.
-73-
THE SOFTWARE DEVELOPER'S COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (C0NTINUED)
NOTE G -- 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. Due to the utilization
of net operating loss carryforwards, there was no provision for income taxes for
the years ended March 31, 1995, 1994 and 1993.
Significant components of the deferred tax assets are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Net operating loss carryforward $3,004,321 $2,928,907 $2,710,300
Installment sale --- 58,600 180,000
Difference in cost recognition basis accrual
for books, cash for tax 180,012 457,400 544,800
Deferred rent 10,060 --- ---
Research and development credits in accruals 86,600 86,600 86,600
Depreciation 184,573 165,800 111,200
Valuation allowance (3,465,566) (3,697,307) (3,632,900)
--------- --------- ---------
$ --- $ --- $ ---
============ ============ ===========
</TABLE>
The continuing operations provision for income taxes differs from the
federal statutory rate of 34% as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Federal provision (benefit) at 34% $ 25,280 $(91,865) $(330,315)
State income taxes, net of federal benefit 36,070 (25,668) ---
Non-deductible foreign losses --- --- 330,315
Change in valuation allowance (231,707) 64,407 ---
Difference in foreign rate 77,232 35,900 ---
Amortization 45,220 --- ---
Other 47,905 17,226 ---
-------- -------- --------
$ --- $ --- $ ---
========== ========== ========
</TABLE>
Due to the uncertainty surrounding the realization of tax benefits in
future tax returns, the net deferred tax assets at March 31, 1995, 1994 and 1993
have been offset by a valuation allowance.
At March 31, 1995, the Company had net operating tax loss carryforwards of
approximately $7,460,443 that are available to offset future taxable income at
various dates through fiscal 2010. Certain provisions in the tax law may limit
the net operating loss available for use in any given year in the event of any
significant change of ownership.
NOTE H -- 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.
-74-
THE SOFTWARE DEVELOPER'S COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (C0NTINUED)
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.
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.
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.
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.
On September 9, 1993, in connection with the execution of the term note,
the Company issued to Long Lines, Limited, a warrant to purchase 80,000 shares
of the Company's Common Stock at a price of $1.50 per share. The warrant was
immediately exercisable upon issuance for 20,000 shares of Common Stock.
Beginning on the last day of December 1993, and on the last day of each of the
consecutive fifteen (15) months immediately thereafter, the holder of the
warrant may exercise its right to purchase an additional 4,000 shares per month
under the warrant. These warrants expire July 31, 1995.
-75-
THE SOFTWARE DEVELOPER'S COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (C0NTINUED)
At March 31, 1995, the Company has reserved 411,500 shares of Common Stock
for the issuance upon exercise of these warrants.
NOTE I -- 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 1995, 1994 and 1993, 4,045, 2,325, and 2,663 shares, respectively, of the
Company's Common Stock were issued under the Stock Purchase Plan, and a total of
12,529 shares have been issued under this plan as of March 31, 1995.
-76-
THE SOFTWARE DEVELOPER'S COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (C0NTINUED)
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) and April 1, 1994 (fiscal year 1995), 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, 1995, 615,000 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>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Options outstanding at beginning of year 768,330 583,575 564,011
Option activity during the year:
Granted 845,052 435,000 290,390
Exercised --- --- (11,610)
Cancelled (223,978) (250,245) (259,216)
---------- ------- -------
Options outstanding at end of year 1,389,404 768,330 583,575
========= ======= =======
Price range of outstanding options $0.50-8.13 $1.00-8.13 $2.13-8.13
========= ========= =========
Price range of options exercised --- --- $1.10-1.50
============ ============ =========
Options exercisable at end of year 717,495 431,563 337,959
========= ========= =========
Options available for grant at end of year 1,218,096 234,170 358,925
========= ========= =========
Shares reserved for exercise of options 2,607,500 1,002,500 942,500
========= ========= =========
</TABLE>
NOTE J -- 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.
-77-
THE SOFTWARE DEVELOPER'S COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (C0NTINUED)
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 1995 Consolidated Statement of
Operations and balance sheet. However, as of March 31, 1995, 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 $133,005 and $99,747 for fiscal years ended March 31,
1995 and 1994, respectively, and had $132,752 and $99,747 in accumulated
amortization as of March 31, 1995 and 1994, 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>
-78-
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>
(RESTATED)
1995 1994 1993
---- ---- ----
PRIMARY:
<S> <C> <C> <C>
Average shares outstanding 8,222 4,833 2,227
Net effect of stock options and warrants,
if dilutive, based on the treasury stock
method using the average market price 22 N/A N/A
------ ------- ------
Total 8,244 4,833 2,227
===== ===== =====
Income (loss) - continuing operations $ 74 $ (270) $(1,481)
Net income (loss) - discontinued operation --- --- $ 510
------- ------- ------
Net income (loss) 74 (270) (971)
Less assumed dividend on Series A Preferred
Stock and declared dividend on Series B
Senior Preferred stock --- (50) (843)
-------- ------ -------
Net income (loss) for EPS computation $0.01 $ (320) $(1,814)
==== ====== ======
Income (loss) per share - continuing operations 0.01 $(0.07) $(1.04)
Net income (loss) per share - discontinued operation --- --- $0.23
------ ----- ----
Net income (loss) per share $0.01 $(0.07) $(0.81)
==== ==== ====
</TABLE>
-79-
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
Internet Security Corporation:
We have audited the accompanying balance sheet of Internet Security
Corporation (a Massachusetts corporation) as of December 31, 1994, and the
related statements of operations, stockholder's equity and cash flows for the
period from inception (June 15, 1994) to December 31, 1994. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Internet Security
Corporation as of December 31, 1994, and the results of its operations and its
cash flows for the period from inception (June 15, 1994) to December 31, 1994,
in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Boston, Massachusetts
December 6, 1995
-80-
INTERNET SECURITY CORPORATION
BALANCE SHEET
DECEMBER 31, 1994
ASSETS
<TABLE>
<S> <C>
CURRENT ASSETS:
Accounts receivable $ 621,055
Prepaid expenses and other current assets 49,065
------------
Total current assets 670,120
-------
FIXED ASSETS, AT COST:
Computer equipment 8,636
Less--accumulated depreciation and amortization (3,342)
------
5,294
$ 675,414
============
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Cash overdraft $ 10,507
Accounts payable 321,870
Accrued expenses 58,657
Deferred revenue 71,944
Advance from officer/stockholder 15,592
------------
Total current liabilities 478,570
------------
COMMITMENTS (Note 5)
STOCKHOLDER'S EQUITY:
Common stock, $.01 par value-Authorized--200,000 shares;
Issued and outstanding--2,500 shares 25
Additional paid-in capital 2,475
Retained earnings 194,344
------------
Total stockholder's equity 196,844
------------
$ 675,414
============
The accompanying notes are an integral part of these financial statements.
</TABLE>
-81-
INTERNET SECURITY CORPORATION
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM INCEPTION (JUNE 15, 1994) TO DECEMBER 31, 1994
<TABLE>
<S> <C>
REVENUES:
Software license fees $ 794,206
-----------
EXPENSES:
Cost of software license fees 463,888
Selling, general and administrative 135,974
-----------
Total expenses 599,862
-----------
Net income $ 194,344
===========
The accompanying notes are an integral part of these financial statements.
</TABLE>
-82-
INTERNET SECURITY CORPORATION
STATEMENT OF STOCKHOLDER'S EQUITY
FOR THE PERIOD FROM INCEPTION (JUNE 15, 1994) TO DECEMBER 31, 1994
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
NUMBER $.01 PAID-IN RETAINED STOCKHOLDER'S
OF SHARES PAR VALUE CAPITAL EARNINGS EQUITY
<S> <C> <C> <C> <C> <C>
ISSUANCE OF COMMON STOCK 2,500 $ 25 $ 2,475 $ - $ 2,500
Net income - - - 194,344 194,344
---------- ------ --------- ----------- -----------
BALANCE, DECEMBER 31, 1994 2,500 $ 25 $ 2,475 $ 194,344 $ 196,844
========== ====== ========= =========== ===========
The accompanying notes are an integral part of these financial statements.
</TABLE>
-83-
INTERNET SECURITY CORPORATION
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM INCEPTION (JUNE 15, 1994) TO DECEMBER 31, 1994
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 194,344
Adjustments to reconcile net income to net cash used for operating activities-
Depreciation and amortization 3,342
Changes in assets and liabilities-
Accounts receivable (621,055)
Prepaid expenses and other current assets (49,065)
Accounts payable 321,870
Accrued expenses 58,657
Deferred revenue 71,944
---------------
Net cash used for operating activities (19,963)
---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of fixed assets (8,636)
---------------
Net cash used for investing activities (8,636)
---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 2,500
Proceeds from advance from officer/stockholder 15,592
---------------
Net cash provided by financing activities 18,092
---------------
NET DECREASE IN CASH (10,507)
CASH, BEGINNING OF PERIOD -
---------------
CASH, END OF PERIOD $ (10,507)
===============
The accompanying notes are an integral part of these financial statements.
</TABLE>
-84-
INTERNET SECURITY CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994
(1) ORGANIZATION AND OPERATIONS
Internet Security Corporation (the Company) was incorporated in the
Commonwealth of Massachusetts and began operations on June 15, 1994. The
Company was formed to market and distribute certain software products and
services under a distribution and reseller agreement with Check Point
Software Technologies Ltd. (Check Point), an Israel-based software
company.
Since inception, the Company has devoted substantially all of its efforts
toward product marketing and selling. On November 16, 1995, the Company
was acquired by The Software Developer's Company, Inc. (SDC). Under the
merger agreement, the stockholder of the Company agreed to exchange all
of the issued and outstanding stock of the Company in exchange for
465,838 shares of SDC common stock.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Revenue Recognition
The Company recognizes revenue in accordance with the provisions
of Statement of Position (SOP) No. 91-1, Software Revenue
Recognition. The Company generates revenue from licensing the
rights to use software products developed by Check Point to end
users and resellers. The Company also generates revenues from
consulting and training services performed for license customers
and from support and software update rights (maintenance).
Revenues from perpetual software license agreements are recognized
as revenue upon delivery of the software if there are no
significant postdelivery 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 the Company'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. All maintenance and service revenues
were deferred at December 31, 1994. Cost of software license fees
consist of media and tapes on which products are delivered and
royalties due to Check Point.
(b) Depreciation
The Company provides for depreciation of its computer equipment
over 3 years using the straight-line method.
(c) Income Taxes
The Company has elected for federal and Massachusetts state income
tax purposes to be treated as an S corporation. Under this
election, the taxable income or loss of the Company will be
reported by the stockholder of the Company on his individual
income tax return. Accordingly, the accompanying statement of
operations does not include a provision for federal or
Massachusetts state income taxes.
(d) Advance from Officer/Stockholder
In 1994, an officer/stockholder advanced the Company approximately
$15,600. Subsequent to year-end, the advance was repaid.
-85-
INTERNET SECURITY CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1994
(3) STOCK
Common Stock
In 1994, the Company sold 2,500 shares of common stock to the president
of the Company at $1.00 per share.
(4) RESELLER AGREEMENT
In 1994, the president of the Company entered into a reseller agreement
with Check Point. The president of the Company has the rights to sell
Check Point's product, Fire Wall, in the United States. Under the terms
of the agreement, the Company must meet certain sales goals, as defined.
In connection with the merger with SDC, the president of the Company
assigned his rights under the reseller agreement to ISC.
(5) COMMITMENTS
Facilities
The Company conducts its operations in a 956-square foot facility and is
obligated to pay monthly rent through May 1996, subject to an early
termination clause. Rental expense charged to operations in the period
ended December 31, 1994 was approximately $6,400.
The minimum future rental commitments under this operating lease
agreement are as follows:
Year Ended December 31,
1995 $ 15,300
1996 5,100
---------
$ 20,400
=========
-86-
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended, and in accordance therewith file
reports, proxy statements, and other information with the Securities and
Exchange Commission (the "Commission"). Such reports, proxy statements and other
information filed with the Commission can be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Commission's Regional Offices
at Seven World Trade Center, 13th Floor, New York, New York 10048 and Northwest
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of such material also can be obtained from the Public Reference Section
of the Commission, Washington D.C. 20549 at prescribed rates. In addition,
material filed by the Company can be inspected at the offices of The Nasdaq
Stock Market, Reports Section, 1735 K Street N.W., Washington, D.C. 20006.
EXPENSES AND SOLICITATION
This solicitation is being made by the Company and the Company will
bear all costs in connection with the solicitation of written consents,
including the cost of preparing, printing and mailing this Consent Solicitation
Statement. In addition to the use of the mails, written consents may be
solicited by the Company's directors, officers and employees by personal
interview, telephone or telegram. Such directors, officers and employees will
not be additionally compensated, but may be reimbursed for out-of-pocket
expenses in connection with such solicitation. Employees of the Company who
assist in such activities will not receive additional compensation in connection
with these soliciting activities. The Company has also retained CIC to assist in
the solicitation of written consents. CIC will receive approximately $4,500 for
its solicitation services. The Company has agreed to indemnify CIC against any
liabilities incurred by CIC in conjunction with the services provided, unless
such liability results from CIC's negligence. Arrangements will also be made
with brokerage houses, banks and other custodians, nominees and fiduciaries for
the forwarding of solicitation material to the beneficial owners of the capital
stock held of record by such persons, and the Company may reimburse such
custodians, nominees and fiduciaries for their reasonable out-of-pocket
expenses.
STOCKHOLDER PROPOSALS
As set forth in the proxy statement distributed to stockholders of the
Company in connection with the Company's 1995 Annual Meeting, any proposal
intended to be presented by any stockholder for action at the 1996 Annual
Meeting of Stockholders would have had to have been received by the Secretary of
the Company by May 14, 1996, in order for the proposal to have been included in
the proxy statement and proxy relating to the 1996 Annual Meeting.
-87-
APPENDIX A
AGREEMENT OF PURCHASE AND SALE OF ASSETS
BY AND BETWEEN
PROGRAMMER'S PARADISE, INC., AS BUYER
AND
THE SOFTWARE DEVELOPER'S COMPANY, INC.
AND
SOFTWARE DEVELOPER'S COMPANY GMBH, AS THE SELLING PARTIES
A-1
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE A-
<S> <C>
1. Purchase and Sale of Business and Assets........................................................... 4
----------------------------------------
1.1 Agreement to Sell........................................................................ 4
-----------------
1.2 Excluded Assets.......................................................................... 7
---------------
1.3 Title to Seller's Assets................................................................. 7
------------------------
1.4 Instruments of Transfer.................................................................. 7
-----------------------
1.5 Assignments of Certain Contracts......................................................... 8
--------------------------------
2. Purchase Price; Assumption of Liabilities; Adjustments............................................. 8
------------------------------------------------------
2.1 Purchase Price........................................................................... 8
--------------
2.2 Payment of Purchase Price................................................................ 8
-------------------------
2.3 Allocation............................................................................... 9
----------
2.4 Assumed Liabilities...................................................................... 9
-------------------
2.5 Excluded Liabilities..................................................................... 9
--------------------
2.6 Tangible Net Asset Requirement; Revenue
---------------------------------------
Maintenance.............................................................................. 10
-----------
2.7 Collection of Accounts Receivable........................................................ 13
---------------------------------
2.8 Reimbursement of Certain Shut-Down Expenses.............................................. 14
-------------------------------------------
3. Closing; Deliveries; Conditions Precedent.......................................................... 14
-----------------------------------------
3.1 Closing.................................................................................. 14
-------
3.2 Deliveries of Selling Parties............................................................ 14
-----------------------------
3.3 Deliveries of Buyer...................................................................... 15
-------------------
3.4 Further Assurances....................................................................... 16
------------------
3.5 Certain Agreements to be Executed and Delivered and
Certain Actions to be Taken at or prior to the
Closing.................................................................................. 16
3.6 Conditions Precedent of Buyer............................................................ 16
3.7 Conditions Precedent of Selling Parties.................................................. 18
4. Representations and Warranties of Selling Parties.................................................. 18
-------------------------------------------------
4.1 Organization, Standing and Qualification................................................. 18
----------------------------------------
4.2 Authority................................................................................ 19
---------
4.3 No Violation............................................................................. 19
------------
4.4 Financial Statements; Sales Information.................................................. 19
---------------------------------------
4.5 Title to and Condition of Purchased Assets;
Leases................................................................................... 20
4.6 Proprietary Rights....................................................................... 22
4.7 Litigation............................................................................... 23
4.8 Compliance; Permits...................................................................... 23
4.9 Schedules................................................................................ 24
4.10 Absence of Changes or Events............................................................ 25
4.11 Taxes................................................................................... 27
4.12 Employee Benefits; Labor Matters........................................................ 27
4.13 Accounts Receivables.................................................................... 28
4.14 Environmental Matters................................................................... 28
4.15 SEC Filings............................................................................. 28
4.16 Consent Solicitation Statement.......................................................... 28
4.17 Customers and Suppliers................................................................. 29
4.18 Disclosure.............................................................................. 29
5. Representations and Warranties of Buyer............................................................ 29
---------------------------------------
5.1 Organization and Standing................................................................ 29
-------------------------
5.2 Authority of Buyer....................................................................... 30
------------------
5.3 Litigation............................................................................... 30
----------
5.4 No Violation............................................................................. 30
------------
</TABLE>
A-2
TABLE OF CONTENTS -- (CONTINUED)
<TABLE>
<CAPTION>
PAGE A-
<S> <C>
6. Covenants of Selling Parties....................................................................... 30
----------------------------
6.1 Conduct of Business...................................................................... 30
-------------------
6.2 Changes in Information................................................................... 31
----------------------
6.3 Access to Information.................................................................... 31
---------------------
6.4 Confidentiality.......................................................................... 31
---------------
6.5 Preservation of Business................................................................. 32
------------------------
6.6 Offer of Employment: Seller's Retention Plan............................................. 32
--------------------------------------------
6.7 Consents of Third Parties; Governmental Approvals.................................... 33
-------------------------------------------------
6.8 Financial Statements................................................................. 33
--------------------
6.9 Preparation of Consent Solicitation Statement;
Action by Stockholders........................................................................ 33
6.10 Information Provided to Stockholders................................................. 34
6.11 Recommendations of Buyer; Transition................................................. 34
6.12 Books and Records.................................................................... 35
7. Further Agreements............................................................................ 35
------------------
7.1 Bulk Sales Compliance............................................................... 35
---------------------
7.2 Sales and Other Taxes.................................................................... 35
---------------------
7.3 Brokerage and Finder's Fee............................................................... 36
--------------------------
7.4 Settlement of Assumed Liabilities........................................................ 36
---------------------------------
7.5 Name Change.............................................................................. 36
-----------
7.6 Referral................................................................................. 36
--------
7.7 Break-up Fee......................................................................... 36
------------
7.8 No Shop.............................................................................. 38
-------
7.9 Temporary Extension of Occupancy..................................................... 38
--------------------------------
7.10 Non-Competition......................................................................... 38
---------------
7.11 Plant Closings.......................................................................... 39
--------------
7.12 Record Retention........................................................................ 39
--------------
8. Indemnification.................................................................................... 40
---------------
8.1 Obligation to Indemnify.................................................................. 40
-----------------------
8.2 Survival; Limitations.................................................................... 41
---------------------
8.3 Claims.................................................................................. 43
------
8.4 Arbitration.............................................................................. 43
-----------
9. Termination................................................................................... 44
-----------
9.1 Termination.............................................................................. 44
-----------
9.2 Remedies................................................................................. 45
--------
10. Miscellaneous..................................................................................... 45
-------------
10.1 Specific Performance.................................................................... 45
--------------------
10.2 Binding Agreement; Assignment........................................................... 46
-----------------------------
10.3 Law To Govern........................................................................... 46
-------------
10.4 No Public Announcement.................................................................. 46
----------------------
10.5 Notices................................................................................. 46
-------
10.6 Fees and Expenses....................................................................... 47
-----------------
10.7 Convenience of Forum; Consent to Jurisdiction........................................... 47
---------------------------------------------
10.8 Severability............................................................................ 47
------------
10.9 Entire Agreement........................................................................ 47
----------------
10.10 Amendments; Consents and Waivers....................................................... 47
--------------------------------
10.11 Counterparts........................................................................... 47
------------
10.12 No Third-Party Beneficiaries........................................................... 47
----------------------------
10.13 Section Headings....................................................................... 48
----------------
</TABLE>
A-3
AGREEMENT OF PURCHASE AND SALE OF ASSETS
----------------------------------------
This Agreement dated as of May 16, 1996, by and between
Programmer's Paradise, Inc., a Delaware corporation ("Buyer"), The Software
Developer's Company, Inc., a Delaware corporation ("Seller") and Software
Developer's Company GmbH ("SDEV Germany", and together with Seller, collectively
referred to herein as the "Selling Parties", and each individually as a "Selling
Party").
W I T N E S E T H:
WHEREAS, Seller is a direct marketer and distributor of
PC-based specialty software and hardware to technical and professional PC users,
through its three proprietary catalogs (The Programmer's SuperShop ("TPS"),
Personal Computing Tools SuperShop ("PCT") and New Media SuperShop ("New
Media")), its TPS World Wide Web site ("Web Site"), its corporate sales group,
and SDEV Germany, and through SDC Communications addresses the marketing needs
of the developers and publishers of the products it distributes by providing
advertising and promotional services; and
WHEREAS, Buyer desires to purchase and acquire from each
Selling Party, and each Selling Party desires to sell, assign and transfer to
Buyer, substantially all of its assets, properties and business as a going
concern, including all of the assets and business related to or used in
connection with the TPS business, inbound and outbound telemarketing operations,
reseller operations, all of the operations of SDEV Germany, all advertising and
promotional operations (including the operations of SDC Communications) and
service and support operations relating to TPS and SDEV Germany (collectively,
the "Business"), with the exception of certain excluded assets and operations
hereinafter specified, upon the terms and subject to the conditions hereinafter
set forth;
NOW, THEREFORE, in consideration of the premises and the
mutual covenants and agreements hereinafter set forth, the parties hereto hereby
agree as follows:
ARTICLE 1
1. PURCHASE AND SALE OF BUSINESS AND ASSETS.
1.1 AGREEMENT TO SELL. Subject to and upon the terms and
conditions of this Agreement, each Selling Party will sell, transfer, convey,
assign, grant and deliver to Buyer, and Buyer will purchase, at the Closing (as
defined in Section 3.1 hereof), all of the business, properties (real, personal,
mixed, tangible and intangible), assets, goodwill and rights of the Selling
Parties with respect to the Business as a going concern, of every kind, nature
and description, owned or leased, wherever located and whether or not carried or
reflected on the books or records of the Selling Parties, as the same shall
exist on the Closing Date, including, without limiting the generality of the
foregoing:
(a) all trademarks, trademark applications, trade
names and service marks owned or used by the Selling Parties or any of them in
connection with the Business, including without limitation, "The Programmer's
Shop", "The Programmer's SuperShop", "SuperShop", "The Software Developer's
Company", "Software Developers' Company GmbH", "ComputerWare", "Applications
Development Digest" and the other names set forth on Schedule 1.1(a) hereto, and
any names similar to or any derivation or variation of any and all such names,
and the goodwill pertaining thereto and right to fully exploit such names
(collectively, "Marks");
(b) all copyrights and copyright applications owned
or used by the Selling Parties or any of them in connection with the Business,
including without limitation, the copyright to the Web Site and each and every
issue of the TPS catalog, as set forth on Schedule 1.1(b) hereto (collectively,
"Copyrights");
(c) all mailing lists and lists and records of
customers and prospects and related information and data base or bases used by
the Selling Parties or any of them in connection with the Business, including
without limitation, the distribution of the TPS catalog and the marketing,
publishing, sale and licensing of products and services, including the names of
all persons actually known to the Selling Parties or any of them to have
licensed or purchased products or services of or from the
A-4
Business, other users of such products and services known to the Selling Parties
or any of them and user prospects of such products and services known to the
Selling Parties or any of them, together with file layouts and other information
related to such products and services necessary to or used by the Selling
Parties or any of them for the processing of such information by Buyer
(collectively, the "Mailing List") (such list shall also include information
relating to responses to reader service or information cards received by any
Selling Party from customers or which any Selling Party received from other
sources with respect to the Business, including, without limitation, responses
from so-called "Bingo cards");
(d) all of the right, title and interest (including
by reason of license or lease) of the Selling Parties or any of them in or to
any software, computer program or software product owned, used, developed or
being developed by or for any of the Selling Parties for use in the Business,
whether for internal use (including without limitation, sales, marketing and
training programs for use in the business and software to create, publish,
manufacture and distribute its Web Site) or for sale or license to others, and
any software, computer program or software product, manufactured, published,
licensed and/or marketed by the Selling Parties or any of them through the
Business at any time prior to the Closing, in all versions and releases,
including all run-time systems, libraries, examples, utilities, data files,
manuals, guides and written and related materials and all Proprietary Rights and
Documentation, whether or not patented or copyrighted, related to the
implementation or use thereof (collectively, "Programs");
(e) all documentation, records and software (other
than Inventory), whether in machine or visually readable or other tangible form,
evidencing, representing or containing any Proprietary Rights (as hereinafter
defined) in the possession or under the control of the Selling Parties or any of
them relating to a Program or used in or necessary to the Business, including,
without limitation, any manuals, functional and design specifications, user and
programmer instructions, sales and marketing training and instructions, flow
charts and diagrams, coding constructions, alpha and beta testing notes, error
reports and logs, patches and patch instructions, itemizations of development
tools, and all other writings which would be necessary or helpful to a skilled
programmer or skilled software salesperson or marketeer to understand, maintain
and enhance any Program (collectively, "Documentation");
(f) the TPS catalog, Web Site and all property and
assets (tangible and intangible) used by or necessary for the Selling Parties or
any of them to create, publish, manufacture and distribute such catalog and Web
Site, and all know-how and other intellectual property of the Selling Parties or
any of them relating to or necessary or used in any aspect of the operation of
the Business as of the Closing Date, including, without limitation, all trade
secrets, vendor information, lists and data bases, proprietary processes,
methods and apparatus, information not known to the general public, each
literary work, whether or not copyrightable, ideas, concepts, designs,
discoveries, formulae, patents, patent applications, product and service
developments, inventions, improvements, disclosures, software, source codes and
materials, object codes and materials, algorithms, techniques, architecture,
mask work rights, prototypes, engineering and design models, information with
respect to firmware and hardware, and any information relating to any product or
program which has either been developed, acquired or licensed for or by any
Selling Party, including the maintenance, modification or enhancement thereof,
all vendor and customer sales and purchase records and files of or related to
the Business, and all publishing, outsourcing, fulfillment, reseller and
manufacturing information (collectively, together with the Marks, Copyrights,
Mailing List and Programs, "Proprietary Rights");
(g) each contract, agreement, lease, license,
franchise, purchase order, sale order, permit, instrument, commitment,
arrangement and understanding (in each case, whether written or oral) to which
the Selling Parties or any of them is a party or by which it is bound or under
which it has any rights or is entitled to benefits, relating to the Business,
including, without limitation, (i) all license, supply, purchase, distribution,
OEM, VAR, dealer, advertising and promotional services agreements and agreements
for software acquisition, development, publishing, support, maintenance,
outsourcing, manufacture and fulfillment, reseller and manufacture relating to
the Business, (ii) all
A-5
restrictive and negative covenants, non-competition, proprietary property and
confidentiality agreements in favor of the Selling Parties or any of them from
or with any and all former or current employees and consultants having access to
Proprietary Information or rendering services to a Selling Party in connection
with the Business, and (iii) all leases of tangible personal property accepted
by Buyer and listed on Schedule 1.1(g) hereto relating to the Business
(collectively, "Contracts"), other than those identified as Excluded Assets or
Excluded Liabilities;
(h) all inventory of items of the type sold or
offered for sale by or through the Business, including, without limitation,
goods held by or for the Selling Parties or any of them for sale, lease or
license or to be furnished under contracts of service, samples,
goods-in-transit, work-in-process, raw materials, and other materials and
supplies of every kind, nature and description used or which may be used in
connection with the manufacture, publishing, packing, shipping, advertising,
selling, leasing, licensing or furnishing of such inventory relating to the
Business, including, without limitation, all physical copies of items
constituting any part thereof such as user manuals and diskettes, and all sales
literature and packaging and printed material related to any of the foregoing,
in each case, in which any Selling Parties has any right, title or interest and
of the type sold or offered for sale by or through the Business, and any and all
rights of the Selling Parties on the Closing Date to the warranties received
from its suppliers with respect to such items (to the extent assignable) and
related claims, credits, rights of recovery and set-off with respect thereto
(collectively, "Inventory");
(i) all capital equipment, furniture and furnishings
employed in the normal historical course of the Business, and all computer
systems, including without limitation, all management information, order, bar
coding and inventory tracking systems and technology, hardware, software,
servers, computers, printers, scanners, monitors, peripheral and accessory
devices and the related media, manuals, documentation and user guides, whether
or not related to the Business, including, without limitation, all of same used
to create, publish, manufacture and distribute the TPS catalog and TPS Web Site
and distribute products pursuant thereto, all of which are described on Schedule
1.1(i) hereto, together with the original cost, depreciated cost and carrying
cost thereof (collectively, "Equipment"), with all such items leased by a
Selling Party designated by an asterisk (*);
(j) all supplies of or related to or used in
connection with the Business, including without limitation, advertising, artwork
and related creative materials for catalogs, web sites and advertisements,
catalog insertions, page layouts, promotional and product literature and
displays;
(k) all accounts, notes and other receivables of
the Selling Parties or any of them arising from the Business or products or
services sold by or through the Business (whether payable in cash or product)
and all rights of the Selling Parties or any of them under any security
agreements with respect thereto, including rights to all files and documentation
substantiating Sellers rights to said Receivables in sufficient diary form to
effect an efficient collection of said receivables (collectively,
"Receivables"), and the lock box to which same are currently payable;
(l) the proceeds of any insurance, and the right to
receive the proceeds of any insurance, with respect to any claims which have
been or may be asserted in connection with any of the Purchased Assets or
Assumed Liabilities (as such terms are hereinafter defined) and the right to
continue and maintain any insurance with respect thereto; subject to certain
rights of Seller with respect to a certain insurance claim specifically
identified as an Excluded Asset;
(m) all unfilled sales and purchase orders of or
related to the Business made or entered into by any Selling Party in the
ordinary course of its business and all rights which any Selling Party may have
against its licensors and other suppliers under express or implied warranties
related to the Business or products or services sold or offered by or through
the Business, and the right to receive mail and other communications and
shipments of merchandise addressed to the Selling Parties or any of them related
to the Business;
(n) all books, files and records of or relating to
any of all aspects of the Business, whether in hard copy, magnetic or other
format, including, without limitation, all files of the three executive officers
of Seller relating to the Business, records relating to employees of a Selling
Party retained
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by Buyer, inventory records, sales records, customers' inventory records,
records pertaining to customer requirements, equipment maintenance and warranty
information, customer contracts, customer invoices, suppliers' invoices, expense
invoices, customer returns and vendor product rotation, and restrictive and
negative covenants, non-competition, proprietary property and confidentiality
agreements, files and records (collectively, "Files and Records"); provided,
however, that any file or record that pertains solely to the Excluded Assets or
Excluded Liabilities shall not be included;
(o) all deferred charges and prepaid items, advance
payments, customer advances and prepayments in respect of backlog of the
Business, including catalog and marketing backlog, or which otherwise relate to
the Purchased Assets or the Business; and
(p) all of the Business as a going concern,
including, without limitation, all of the right, title and interest of each
Selling Party in and to its telephone, telex, telefacsimile and facsimile
numbers and directory listings, and all passwords and security protection
procedures and systems.
The business, properties, assets, licenses,
franchises, goodwill and rights relating to the Business to be sold,
transferred, conveyed, assigned, granted and/or delivered to Buyer are
hereinafter sometimes collectively referred to as the "Purchased Assets".
1.2 EXCLUDED ASSETS. Notwithstanding anything to the contrary
contained in this Agreement, it is understood that the Selling Parties are not
selling and Buyer is not acquiring contracts and other assets of the Selling
Parties unrelated to the Business and specifically designated as "Excluded
Assets" on Schedule 1.2 hereto, including, without limitation, any real property
of the Selling Parties, the lease of Seller's offices and warehouse space in
Pembroke, Massachusetts, the lease of SDEV Germany's offices in Dortmund,
Germany, or other leased space wherever located, and those assets of Seller used
solely in connection with its ISC, PCT and New Media businesses, which Seller
shall continue to be responsible for following the closing.
1.3 TITLE TO SELLER'S ASSETS. Except as specifically permitted
by this Agreement and as expressly set forth in the Disclosure Schedule hereto,
title to all of the Purchased Assets and all other rights, licenses and
franchises granted pursuant to this Agreement to Buyer at or after the Closing,
shall be transferred to Buyer free and clear of any and all claims, liabilities
and obligations except to the extent of those liabilities and obligations
expressly assumed by Buyer hereunder and free and clear of any and all liens,
pledges, charges, mortgages, security interests, restrictions, leases, licenses,
easements, liabilities, claims, encumbrances or rights of others of every kind
and description (collectively, "Liens").
1.4 INSTRUMENTS OF TRANSFER. (a) The sale, conveyance, grant,
transfer, assignment and delivery to Buyer of each Purchased Asset as herein
provided shall be effected by bills of sale, licenses, endorsements,
assignments, certificates of title, and/or other good and sufficient instruments
of transfer and conveyance, satisfactory in form and substance to Buyer and its
counsel, as shall be effective to vest in Buyer title to each such Purchased
Asset as contemplated by this Agreement.
(b) Buyer shall have the sole and exclusive right
to use, assert and/or apply for patent, trademark, copyright and other statutory
or common law protection for any or all Proprietary Rights in any and all
countries. Each Selling Party agrees to assist (at Buyer's expense), and to use
commercially reasonable efforts to cause each of its current employees and
contractors to assist, Buyer in every way to apply for, prosecute and obtain,
and from time to time enforce, any and all patent, trademark, copyright and
other statutory or common law protection for any of the Proprietary Rights in
any and all countries. Each Selling Party shall, or shall use commercially
reasonable efforts to cause the appropriate employee or contractor to, execute
any and all assignments, transfers, applications and other papers covering any
Proprietary Rights which may be considered necessary or helpful by Buyer in
furtherance of the foregoing and/or to accomplish the assignment, transfer
and/or license of any Proprietary Rights to persons designated by Buyer. Without
limiting the generality of the foregoing, Buyer shall be authorized to comply
with the registration and deposit requirements of the United States Copyright
Acts with respect to each separately distributable element of a Purchased Asset
at Buyer's expense. Each Selling Party constitutes and appoints Buyer its
attorney-in-fact to execute and deliver all applications for registration in its
behalf of such copyrights and to cause all assignments required or permitted
under the terms of this Agreement to be recorded.
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1.5 ASSIGNMENTS OF CERTAIN CONTRACTS. (a) Buyer and the
Selling Parties acknowledge that certain of the Contracts may not, by their
terms, be assignable without obtaining third-party consents or approvals. A
complete and correct list of all such unassignable contracts and
non-transferrable rights and other assets are set forth as item 1.5 of the
Disclosure Schedule (collectively, "Unassignable Contracts"). Each of the
Selling Parties acknowledges that the inability to assign any of the
Unassignable Contracts shall not relieve the Selling Parties of the obligation
to sell and deliver such of the Purchased Assets as shall be tangible and
physically capable of being delivered or otherwise assignable. Anything in this
Agreement to the contrary notwithstanding, this Agreement shall not constitute
an agreement to assign any Unassignable Contracts if an attempted assignment
thereof, without the consent of a third party thereto, would constitute a breach
thereof or in any way affect the rights of Buyer or a Selling Party thereunder.
Until such consents are obtained, the Selling Parties will cooperate with Buyer,
in any arrangement designed to provide for Buyer all rights and benefits under
all Unassignable Contracts, including enforcement for the benefit of Buyer of
any and all rights of such Selling Party against any third party thereto arising
out of the breach or cancellation by such third party or otherwise, and such
Selling Party shall, without further consideration therefor, pay, assign and
remit to Buyer promptly all monies, and, to the extent permitted, all other
rights or consideration received, or which may be received or obtained in
respect of performance of any Unassignable Contracts. When any such consent
shall be obtained or any Unassignable Contract shall otherwise become
assignable, such Selling Party shall promptly assign same to Buyer and Buyer
shall, without the payment of any further consideration therefor, be deemed
hereby to have assumed such rights and also, to the extent constituting Assumed
Liabilities (as hereinafter defined in Section 2.4) to have assumed such Selling
Party's obligations under the Unassignable Contracts, but only if Buyer shall be
entitled to the benefits associated therewith. Until such time, no Selling Party
shall enter into any amendment of any Unassignable Contract without the prior
written consent of Buyer.
(b) At the Closing and effective as of the Closing
Date, all bids and requests for proposals related to the Business shall be
transferred to Buyer to the extent permitted by law. Buyer and Seller shall work
together and use commercially reasonable efforts to preserve such bids and
requests for proposals and to facilitate award thereon consistent with
applicable laws and regulations.
(c) Each Selling Party shall cooperate with Buyer in
obtaining any necessary novation agreements of Government Contracts and any
other Contracts requiring novation, and each Selling Party shall use
commercially reasonable efforts to obtain such novations by the Closing Date.
1.6 GERMAN STOCK ACQUISITION RIGHT. At any time prior to the
Closing, Buyer and Seller may mutually agree to cause this Agreement to be
modified to provide for the purchase by Buyer of all of the outstanding shares
of capital stock of SDEV Germany in lieu of the assets thereof included in the
Purchased Assets, on terms substantially equivalent, from a legal and business
perspective, and with substantially equivalent benefits and risks to the
parties, as contemplated by the purchase of assets contemplated by this
Agreement.
ARTICLE 2
2. PURCHASE PRICE; ASSUMPTION OF LIABILITIES; ADJUSTMENTS.
2.1 PURCHASE PRICE. Subject to and upon the terms and
conditions of this Agreement, including, without limitation, the adjustments
hereinafter referred to, Buyer shall pay to the Selling Parties, in full payment
for the Purchased Assets and the Business and in reliance upon the
representations and warranties made herein by the Selling Parties, a total
purchase price (the "Purchase Price") of Eleven Million Dollars ($11,000,000).
2.2 PAYMENT OF PURCHASE PRICE. The Purchase Price shall be
payable as follows:
(a) At the Closing, Buyer shall pay to the Selling
Parties Ten Million Dollars ($10,000,000) less the Estimated Adjustment, if any,
determined in accordance with the provisions of Section 2.6 hereto (the "Closing
Payment"), by certified check, bank check or wire transfer in immediately
available funds.
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(b) At the closing, Buyer shall pay to the Escrow
Agent under the Escrow Agreement in the form of Exhibit 2.2(b) hereto (the
"Escrow Agreement"), the sum of One Million Dollars ($1,000,000) (the "Escrow
Fund"), such amount to be held and dealt with as provided in Escrow Agreement.
As more fully set forth in the Escrow Agreement, the escrow period shall expire
on the date one year after the Closing Date, except with respect to claims on
the Escrow Fund made prior to such date.
(c) The balance of the Purchase Price, if any,
shall be payable at the Post-Closing Settlement in accordance with Section 2.6
hereto.
2.3 ALLOCATION. The Purchase Price for the Purchased Assets
shall be allocated between the Selling Parties and among the Purchased Assets as
set forth on Schedule 2.3 hereto.
2.4 ASSUMED LIABILITIEs. Except as may otherwise be provided
hereunder, Buyer shall, at the Closing, execute and deliver to the Selling
Parties an Undertaking in the form of Exhibit 2.4 hereto, pursuant to which
Buyer shall assume and agree to pay, perform and otherwise discharge as the same
shall become due in accordance with their respective terms, the liabilities and
obligations of such Selling Party set forth below, in each case, only to the
extent that the same shall be documented to a commercially reasonably extent as
to the events causing such liability and also shall not have been paid,
performed or discharged prior to the Closing (hereinafter collectively referred
to as the "Assumed Liabilities"):
(a) all trade payables and unfilled purchase orders
for inventory incurred by and for the benefit of the Business by such Selling
Party in the ordinary course of its business and consistent with its past
practices during the period prior to the Closing Date, but only if the same are
of the type which would be set forth on a balance sheet in accordance with
generally accepted accounting principles consistently applied and which
otherwise are incurred in accordance with this Agreement and which are not
expressly Excluded Liabilities (as defined below), in each case only to the
extent included on the Closing Balance Sheet (as described in Section 2.6
hereto); and
(b) all liabilities and obligations after the
Closing Date in respect of the period after the Closing Date under the Contracts
which are assigned to Buyer under this Agreement to the extent they are listed
or described under item 2.4(b) of the Disclosure Schedule (the "Assumed
Contracts").
2.5 EXCLUDED LIABILITIES. Except as expressly set forth in
Section 2.4 hereof, Buyer shall not assume any debts, commitments, obligations
or liabilities of the Selling Parties or any of them. Without limiting the
generality of the foregoing, Buyer shall not assume any of the following (herein
collectively referred to as the "Excluded Liabilities"):
(a) any obligation or liability of a Selling Party
to distribute to its stockholders or otherwise apply all or any part of the
Purchase Price received hereunder;
(b) any obligation or liability of a Selling Party
based upon acts or omissions of a Selling Party occurring after the
Closing Date;
(c) Seller's obligations under any stock option,
stock purchase or profit-sharing plans or under any outstanding qualified or
non-qualified stock options;
(d) any brokerage or finder's fee payable by a
Selling Party in connection with the transactions contemplated hereby;
(e) any liabilities of Seller to any of its present
or former stockholders as such arising out of any action by Seller in connection
with the transactions contemplated hereby;
(f) any and all obligations of the Selling Parties
or any of them for indebtedness for borrowed money, including without
limitation, Seller's line of credit with Silicon Valley Bank or other lender,
long-term debt to Stephen L. Watson, and capitalized leases for equipment not
expressly assumed by Buyer hereunder (shown on the audited balance sheet of
Seller as at March 31, 1995 as $1,423,470, $300,000 and $27,011, respectively),
and any and all obligations of the Selling Parties under operating leases or for
intercompany obligations;
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(g) any and all debts, liabilities and obligations
of the Selling Parties or any of them incurred or accrued with respect to any
period, or circumstances, or state of facts or occurrences, on or prior to the
Closing Date, relating to bonuses, salaries, wages, incentive compensation,
compensated absences, workmen's compensation, FICA, unemployment taxes, employee
benefits, deferred compensation, wage continuation, severance, termination,
pension, section 401(k) plans, cafeteria, retirement, profit-sharing or similar
plans or arrangements and any and all vacation, holiday or sick pay or leave
incurred or accrued with respect to any employees of the Selling Parties or any
of them whether or not such employees become employees of Buyer, and any and all
liabilities or obligations incurred or accrued under Benefit Plans (as such term
is defined in Section 4.12(a), including, without limitation, contractual and
statutory wage continuation, severance, reemployment assistance, termination pay
and other benefits as may be provided in the Employee Retention Plan included as
part of the Transition Plan referred to in Section 4.4(e) thereof.
(h) any and all domestic and foreign federal, state
and local income, payroll, property, sales, use, franchise or value added tax
liabilities, imposed on the Selling Parties or any of them or with respect to
income or activities of the Selling Parties or any of them, including
assessments and governmental charges or levies imposed in respect of such taxes;
its being understood that Buyer shall be responsible for sales tax properly
invoiced and included as part of Receivables transferred to Buyer and use tax
imposed on it from and after the Closing Date.
(i) any and all obligations and liabilities of the
Selling Parties or any of them arising under this Agreement (including, without
limitation, indemnification obligations and obligations to pay expenses arising
out of this Agreement), or from its failure to perform any of its agreements
contained herein or incurred by it in connection with the consummation of the
transactions contemplated hereby, or for which any of the Selling Parties is
responsible under this Agreement, including, without limitation, fees of
lawyers, accountants and other advisors;
(j) any and all liabilities and obligations with
respect to claims, suits, legal, administrative, arbitral or other actions,
proceedings and judgments with respect to causes of action or disputes arising,
and other non-contractual liabilities of the Selling Parties or any of them
asserted or imposed, or arising out of, any events occurring, or circumstances
or state of facts existing, on or prior to the Closing Date (including, without
limitation, under the Mail or Telephone Order Merchandise Rule in respect of the
acceptance or receipt of money or credit by Seller prior to the Closing for
product not theretofore shipped), or any product liability or warranty claim
with respect to products sold, licensed or distributed or services rendered by
the Selling Parties or any of them prior to the Closing Date;
(k) any and all leases of real property or
improvements thereon, including, without limitation, any and all premises
occupied by any of the Selling Parties, all leases of tangible personal property
not listed on Schedule 1.1(g) hereto, and the other leases specified in item
2.5(k) of the Disclosure Schedule;
(l) any commitment, liability or obligation under
any Contracts other than Assumed Contracts; and
(m) all liabilities and obligations arising in
respect of closing down and terminating the operations of Seller relating to the
Business and the operations of SDEV Germany, including, without limitation, all
rent and utility charges, taxes, vendor and supplier terminations, and statutory
and contractual wage continuation, severance, reemployment assistance,
termination and other benefits payable in respect of the continuation of the
Business, including the operations of Seller and SDEV Germany, by Buyer, the
failure of Buyer to retain employees of Seller or SDEV Germany or the
consummation of the transactions contemplated hereby (collectively, "Shut-Down
Expenses"), subject to Section 2.8 hereof; and any and all liabilities and
obligations under Work Force Laws (as defined in Section 7.11).
2.6 TANGIBLE NET ASSET REQUIREMENT; REVENUE MAINTENANCE.
(a) For purposes hereof:
(i) The term "Tangible Net Assets" shall mean an
amount equal to the difference between the total tangible Purchased Assets and
the liabilities of the Business included as "accounts payable-trade" and "other
accrued expenses" in respect of the Business, in all cases of the
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type which would be set forth on a balance sheet of the Business in accordance
with generally accepted accounting principles consistently applied, after taking
into account the Permitted Adjustments, but not including Excluded Assets or
Excluded Liabilities.
(ii) The term "Revenue Measurement Period" shall
mean the thirty-day measurement period ending on the date prior to the Closing
Date.
(iii) The terms "Estimated Closing Balance
Sheet" and "Estimated Statement of Revenue" (collectively, the "Estimated
Statements"), and the "Closing Balance Sheet" and "Closing Statement of Revenue"
(collectively, the "Closing Statements") are defined in this Section 2.6.
(iv) The term "Permitted Adjustments" shall mean
with respect to the Estimated Statements and Closing Statements, and for
purposes of calculating Estimated Tangible Net Assets and Tangible Net Assets,
the following: (i) the amount of all indebtedness for borrowed money and the
liabilities not included as Assumed Liabilities shall not be included, (ii) the
amount of any and all Receivables outstanding which were included (to the extent
not reserved against or written-off) in an Estimated Statement or Closing
Statement but which in the good faith judgment of the Selected Accountants are
considered to be uncollectible and are actually written off, or are in excess of
the stated allowance for doubtful accounts of the Selling Parties therefor as of
the Closing Date, shall not be included, unless such excluded Receivables are
collected by Buyer within thirty (30) days after the Closing, (iii) the amount
of all tax credits, refunds and other benefits included on the Estimated or
Closing Statements but not available to Buyer after the Closing by virtue of the
change in control, consolidated return regulations, by contract or otherwise,
shall not be included, (iv) the carrying value of all assets not transferred to
Buyer following the Closing, including Excluded Assets, shall not be included,
(v) one-half of the costs associated with the preparation of the Estimated and
Closing Statements shall be reflected on the Estimated and Closing Balance
Sheets as an expense and shall be deducted from Tangible Net Assets, except to
the extent paid by Seller to Buyer in cash, and (vi) the amount of all returns
prior to the delivery of the Closing Statements in excess of the stated return
rate of the Selling Parties shall not be included as a Receivable, but may be
included as Inventory if of merchantable quality for sale in the ordinary course
of business.
(b) Within five (5) days prior to the Closing Date,
Buyer and Seller shall in good faith jointly prepare an estimate of the Closing
Balance Sheet (the "Estimated Closing Balance Sheet") and Statement of Revenue
(the "Estimated Statement of Revenue"), utilizing the books and record of the
Selling Parties and the taking of a physical inventory, in accordance with
generally accepted accounting principles and as herein provided for the
respective Closing Statement, as adjusted to take into account good faith
estimates of the Permitted Adjustments.
If the Tangible Net Assets of the Business being
purchase as set forth on the Estimated Closing Balance Sheet reflects (i)
Tangible Net Assets of the Business being purchased less than $1,500,000 as of
the Closing Date, the Closing Payment shall be reduced, dollar for dollar, by an
amount equal to such shortfall, or (ii) Tangible Net Assets of the Business
being purchased more than $1,500,000 as of the Closing Date, the Closing Payment
shall be increased, dollar for dollar, by an amount equal to such excess. If
during the Revenue Measurement Period the revenue from operations of the
Business being purchased hereunder, as shown on the Estimated Statement of
Revenue, shall be more than twelve percent (12%) less than the revenue for such
period reflected on the Transition Plan contemplated by Section 4.4(e) hereof,
calculated pursuant to this Section 2.6, the Closing Payment shall be reduced by
the amount determined in accordance with Section 2.6(h) below. The net amount of
any and all such adjustments pursuant to this paragraph is herein referred to as
the "Estimated Adjustment."
(c) As promptly as practicable after the Closing
Date but in no event later than forty-five (45) days thereafter, Buyer shall
oversee and cause to be prepared by such of either Seller's or Buyer's auditors
as shall be selected by Buyer (the "Selected Accountants") and delivered to
Buyer and Seller an audited balance sheet of the Business being purchased
hereunder, the Purchased Assets and Assumed Liabilities as at the close of
business on the day immediately preceding the Closing
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Date, and an unaudited statement of revenue from operations of the Business
being purchased hereunder for the Revenue Measurement Period, together with the
report of the Selected Accountants, addressed to Buyer and Seller, stating that
its examinations of such closing date balance sheet and statement of revenue
were made in accordance with U.S. generally accepted accounting principles and
applied on a basis consistent with such U.S. generally accepted accounting
principles and the financial statements of Seller as at and for the period ended
March 31, 1995, previously furnished to Buyer. Such balance sheet, as so
audited, and as adjusted to take into account the Permitted Adjustments, is
referred to herein as the "Closing Balance Sheet" and such statement of revenue,
as so adjusted, is referred to herein as the "Closing Statement of Revenue". The
cost of such audit and the preparation of the Estimated and Closing Statements
by the Selected Accountants shall be shared equally by Buyer and Seller; and
Seller's share thereof shall be an Excluded Liability, and paid to Buyer on
receipt of an invoice therefor.
(d) The scope of the audit and the procedures to be
followed shall be agreed upon by the Selected Accountants, Seller and Buyer
prior to the commencement of field work. The scope of the engagement and
procedures to be followed with respect to the Closing Statement of Revenue shall
be determined by Buyer and the Selected Accountants. Buyer and its accountants
shall be provided with all information used to value or record balance sheet or
revenue items and have the right to witness or participate in the taking and
pricing of the physical inventory. In addition, Buyer and its accountants shall
have full access to review the work papers of Seller's accountants, and shall
have access to the books and records of the Selling Parties as shall be
necessary in connection with such audit simultaneously with the delivery of such
books and records to the Selected Accountants.
(e) The calculation of Tangible Net Assets set forth
in the Closing Balance Sheet and revenue on the Closing Statement of Revenue
shall be deemed to be conclusive and binding upon the parties, unless at or
prior to the fifth business day following the completion of the Closing Balance
Sheet or Closing Statement of Revenue and its delivery to Buyer and Seller,
Seller or Buyer shall give written notice to the other that it objects to the
valuation, inclusion or omission of any item. Such notice shall specify Seller's
or Buyer's objections to the computation of Tangible Net Assets or revenue,
citing the items or principles disputed. In the event that Seller and Buyer are
unable to mutually agree upon the valuation or amount of any disputed item set
forth in such notice within twenty (20) days after the receipt thereof by the
non-objecting party, the parties shall submit the unresolved items to
arbitration by a firm of independent public accountants to be selected jointly
by Buyer and Seller. Such accounting firm shall be requested to consider the
respective positions of the parties and render an opinion as to the valuation or
amount of the disputed items. The determination of such jointly selected
accounting firm shall be conclusive and binding upon the parties hereto. The
cost of such accounting firm shall be paid by the non-prevailing party. A party
shall be deemed to have prevailed with regard to disputed matters if its last
offer or demand immediately prior to submission to such accounting firm is
closer to the final resolution of the disputed matters than the other party's
offer or demand.
(f) If the Tangible Net Assets of the Business
being purchased shown on the Closing Balance Sheet as finally determined in
accordance with the above shall be more or less than $1,500,000 (the shortfall
or excess being referred to as the "Final Adjustment"), Buyer or Seller shall
pay to each other, at the Post- Closing Settlement, an amount necessary to
reconcile the Estimated Adjustment and the Final Adjustment. For example, if
such Tangible Net Assets shall be less than $1,500,000, Buyer and Seller, as the
case may be, shall make the following payments:
(i) Buyer shall pay to, or on behalf of, the
Selling Parties, as allocated between them as determined by Seller, an amount
equal to the amount by which the Estimated Adjustment exceeds the Final
Adjustment, if any; or
(ii) Seller shall pay to Buyer an amount equal
to the amount by which the Final Adjustment exceeds the Estimated Adjustment, if
any, and for such purposes, Seller shall be entitled to cause to be delivered to
Buyer under the Escrow Agreement an aggregate amount (together with any
adjustment pursuant to Section 2.6(g) below) up to $500,000, and any unpaid
balance remaining after depletion of the Escrow Fund to (but not in excess of)
$500,000 shall be payable to Buyer in cash by Seller.
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(g) Without limiting the foregoing, if during the
Revenue Measurement Period, the revenue from operations of the Business being
purchased hereunder (after taking into account the Permitted Adjustments), as
shown on the Closing Statement of Revenue as finally determined in accordance
with the above, shall be more than twelve percent (12%) less than the revenue
for such period reflected on the Transition Plan contemplated by Section 4.4(e)
hereof (calculated as the weighted average between the two months within which
such Revenue Measurement Period arises if such period does not end at a
month-end), the Purchase Price shall be reduced by and the Selling Parties shall
pay and/or cause the Escrow Agent to pay from the Escrow Fund to Buyer at the
Post- Closing Settlement, the amount specified below; provided, that the
aggregate amount payable from the Escrow Fund for all adjustments pursuant to
this Section 2.6 shall not exceed $500,000:
Negative Variation Total
to Transition Plan Reduction
0 to 12% 0
more than 12 and up $1,000,000
to 17%
more than 17 and up $2,000,000
to 27%
more than 27 and up $4,000,000
to 32%
more than 32 and up $6,000,000
to 42%
more than 42% $8,000,000
For purposes of determining the variance from the
Transition Plan of such revenue for the calculation of such revenue adjustment
only (and without affecting the adjustment based on Tangible Net Assets in any
way), the following adjustments shall be made:
(i) Potential revenue associated with unfilled
advertising contracts (i.e., catalog insertion orders) that are validly signed
by advertisers on the Closing Date, and subsequently within thirty (30) days
after the Closing Date are placed in the regularly scheduled TPS catalog and the
currently scheduled Applications Development Digest and are paid for by such
advertisers within sixty (60) days after the actual catalog drop date of the TPS
catalog which includes such advertisement, shall be deemed to be considered as
revenue for purposes of determining any adjustment to the Closing Payment or
Purchase Price based on revenue (but not Tangible Net Assets), notwithstanding
that under generally accepted accounting principles such revenue would not then
be recognized; and
(ii) Eighty percent (80%) of the value of backlog
associated with announced but unreleased Powerbuilder 5.0 at Closing will be
considered revenue associated with the Revenue Measurement Period for purposes
of determining the revenue-based adjustment, provided such backlog consists of
valid customer purchase orders and on weighted average is priced at ten percent
(10%) gross margin; provided, further, that the revenue adjustment pursuant to
this clause (ii) shall in no event exceed five percent (5%) of the total revenue
for the Revenue Measurement Period. All cancellations and returns associated
with such backlog that occur during the forty-five (45) days immediately
following Closing will be eliminated from the gross and any backlog that remains
unfilled through no fault of Buyer at the end of said forty-five (45) day period
shall likewise be subtracted from the gross amount.
(h) Any payments or offsets required to be made
following the Closing, if any, shall be paid and made at the post-closing
settlement (the "Post-Closing Settlement"), which shall take place at the
offices of Buyer's counsel at 11:00 a.m. local time on the tenth (10th) business
day following the date that the Closing Balance Sheet and Closing Statement of
Revenue become final and binding upon the parties, or at such other time and
place as Buyer and Seller shall agree in writing.
2.7 COLLECTION OF ACCOUNTS RECEIVABLE. (a) Each of the Selling
Parties agrees that Buyer shall have the right and authority from and after the
Closing to collect for its own account all Receivables and other items which
shall be included within the Purchased Assets and to endorse with the name of
any
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of the Selling Parties any checks received on account of any such Receivables or
other items; and, in furtherance thereof, effective at the Closing, each of the
Selling Parties shall transfer to Buyer any and all lock boxes into which such
Receivables are sent, and hereby constitutes and appoints Buyer its
attorney-in-fact to so endorse and/or deposit such checks. Each payment
collected by Buyer after the Closing Date from any person or entity who is an
account debtor of any Receivable constituting a Purchased Asset shall be applied
against the oldest outstanding Receivable of such account debtor in the case of
payments on account, unless payment shall be specified otherwise, in which event
payment shall be applied to the accounts receivable specified by the account
debtor as being paid thereby.
(b) From and after the Closing Date, Buyer or its
agents shall be entitled to contact accounts of the Selling Parties conveyed to
Buyer hereunder to disclose the sale of such accounts and the Business and to
direct payment to Buyer as it shall determine. Each of the Selling Parties shall
hold in trust for and immediately deliver to Buyer any and all cash, checks,
drafts, notes, money orders and other evidences of payment of any Receivable
received by such Selling Party, and also amounts paid to a Selling Party in
respect of sales of goods or services invoiced by Buyer, in the original form
received. When remitting sums to Buyer as aforesaid, the Selling Parties shall,
to the extent practicable, specifically identify the Receivable with respect to
which such payment relates.
2.8 Reimbursement of Certain Shut-Down Expenses. The Selling
Parties have established and furnished to Buyer a Shut-Down Plan for SDEV
Germany, reflecting an itemization of any and all Shut-Down Expenses relating to
SDEV Germany, including, without limitation, wage continuation, severance,
reemployment assistance, termination pay and the benefits payable to each
employee pursuant to any applicable contract, guild or trade agreement, or
sections 419 and 613(a) of the BGB (German Civil Code), and a timetable
therefor, in form and substance reasonably satisfactory to Buyer (the "German
Shut-Down Plan"). A copy of the German Shut-Down Plan is included as item 2.8 to
the Disclosure Schedule. Actions with employees under the German Shut-Down Plan
shall be coordinated between Buyer and Seller. Upon presentation to Buyer of
documentation reasonably satisfactory to Buyer evidencing such payment, Buyer
shall reimburse SDEV Germany (within thirty days) for one-half of the portion of
the Shut-Down Expenses paid by SDEV Germany to its employees in respect of such
statutory severance pursuant to the German Civil Code and in accordance with the
German Shut-Down Plan, at the rate of $.50 for each $1.00 of such severance
paid, up to an aggregate amount payable by Buyer in respect of such severance of
$85,000; provided that such maximum reimbursable amount shall be reduced, on a
dollar for dollar basis, by the amount of the severance set forth on the German
Shut-Down Plan in respect of each employee of SDEV Germany who accepts
employment with Buyer or any subsidiary thereof.
ARTICLE 3
3. CLOSING; DELIVERIES; CONDITIONS PRECEDENT.
3.1 CLOSING.
(a) The Closing under this Agreement (the "Closing")
shall take place at the offices of Testa, Hurwitz & Thibeault, LLP, High Street
Tower, 125 High Street, Boston, Massachusetts 02110, at 10:00 a.m., local time,
on June 28, 1996 or such other date, place or time as the parties hereto shall
mutually agree upon (the "Closing Date").
(b) All proceedings to be taken and all documents
to be executed and delivered by all parties at the Closing shall be deemed to
have been taken and executed simultaneously and no proceedings shall be deemed
taken nor any documents executed or delivered until all have been taken,
executed and delivered.
3.2 DELIVERIES OF SELLING PARTIES. At the Closing each of
the Selling Parties shall deliver to Buyer:
(a) a Bill of Sale and Assignment (the "Bill of
Sale") in the form of Exhibit 3.2(a) hereto;
(b) an Assignment of Copyrights in the form of
Exhibit 3.2(b)-1 hereto, an Assignment of Patents in the form of Exhibit
3.2(b)-2, and an Assignment of Trademarks in the form of Exhibit 3.2(b)-3, in
each case in recordable form;
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(c) possession and control over, (i) all Programs in
machine readable object code and source code for computers, including receipt by
Buyer of a "gold" disk complete back-up of Seller's MIS system, Internet Web
Site documentation, programs and materials, (ii) such Programs' Documentation in
machine readable form or in paper or in other electronic medium (including, but
not limited to, user Documentation, technical Documentation, production
materials and marketing materials) in the possession of such Selling Party,
(iii) all advertising, artwork and related creative materials, catalog
insertions completed and in progress and page layouts in existence on the
Closing Date used for current advertising and packaging in camera ready and
other existing form (it being understood that all deliverables conveyed by
electronic transmission shall be made using mutually acceptable protocols), and
(iv) all Files and Records; and a verification report of Smith Gardener
Associates, Inc., reasonably acceptable to Buyer and addressed to Buyer and
Seller, to the effect that the MACs to be transferred to Buyer shall be complete
and machine readable;
(d) original copies (including an assignment thereof
to Buyer and, if necessary, the other party's written consent thereto) of all
Assumed Contracts;
(e) a certificate of good standing of Seller, issued
as of a recent date by the Secretary of State of the State of Delaware and
comparable evidence with respect to SDEV Germany;
(f) a certificate of the Secretary or an Assistant
Secretary of each Selling Party, dated the Closing Date, in form and substance
reasonably satisfactory to Buyer, as to (i) the resolutions of the Board of
Directors of such Selling Party authorizing the execution, delivery and
performance of this Agreement and each exhibit hereto to which it is a signatory
and the consummation of the transactions contemplated herein and therein and the
consents of the stockholders (and classes or series of stockholders) of each
Selling Party adopting this Agreement in accordance with applicable law; and
(ii) the incumbency and signatures of the officers of each Selling Party
executing this Agreement and any Seller Documents (as hereinafter defined);
(g) a copy (in paper and electronic form) of its
Mailing List;
(h) possession of, and control over, all Inventory,
together with a listing of where all such Inventory is located;
(i) the written consents and approvals required by
Section 3.6(e) of this Agreement;
(j) the certificate required by Section 3.6(f)
hereto;
(k) a certificate executed by the Chief Financial
Officer of Seller affirming that the Estimated Closing Balance Sheet fairly
reflects the Tangible Net Assets of the Business purchased as of the Closing
Date and the Estimated Statement of Revenue fairly reflects Seller's revenue for
the Revenue Measurement Period, in accordance with Section 2.6; and
(l) all other documents, materials, items and
property required by the terms of this Agreement to be delivered to Buyer under
or to effect the provisions of this Agreement.
3.3 DELIVERIES OF BUYER. At the Closing, Buyer will deliver
to Seller:
(a) cash, certified check(s) and/or wire transfer(s)
in the amount required by Sections 2.2(a) and (b) hereof;
(b) the Undertaking;
(c) a certificate of good standing of Buyer, issued
as of a recent date by the Secretary of State of the State of
Delaware;
(d) a certificate of the Secretary or an Assistant
Secretary of Buyer, dated the Closing Date, in form and substance reasonably
satisfactory to Seller, as to (i) the resolutions of the Board of Directors of
Buyer authorizing the execution delivery and performance of this Agreement and
each exhibit hereto to which it is a party and the consummation of the
transactions contemplated herein and therein; and (ii) the incumbency and
signatures of the officers of Buyer executing this Agreement and each exhibit
hereto to which it is a party; and
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(e) the certificate required by Section 3.7(d)
hereof; and
(f) all other documents required by the terms of
this Agreement to be delivered to Seller at the Closing under or to effect the
provisions of this Agreement.
3.4 FURTHER ASSURANCES. At any time and from time to time
after the Closing, at Buyer's request, and without further consideration
therefor, each of the Selling Parties will execute and deliver such other
instruments of sale, transfer, conveyance, assignment and confirmation as Buyer
may reasonably deem necessary or desirable in order more effectively to
transfer, convey and assign to Buyer, and to confirm Buyer's title to, all of
the Purchased Assets, to put Buyer in actual possession and operating control
thereof, and to assist Buyer in exercising all rights with respect thereto.
Buyer and each of the Selling Parties hereby agree to cooperate to effectively
transfer the Business worldwide to Buyer.
3.5 CERTAIN AGREEMENTS TO BE EXECUTED AND DELIVERED AND
CERTAIN ACTIONS TO BE TAKEN AT OR PRIOR TO THE CLOSING. The following agreements
shall be executed and delivered by each party thereto and delivered to the other
at the Closing or at such earlier time or shall be specified below:
(a) Seller's and SDEV Germany's lenders shall have
consented to this Agreement and released their liens on the Purchased Assets,
and there shall have been delivered to Buyer executed counterparts reasonably
satisfactory in form and substance to Buyer and its counsel; and
(b) Licensors of Seller's MIS system, including
without limitation MACs, shall have consented to the transfer thereof to Buyer
in accordance with this Agreement and the retransfer by Buyer as it shall
determine; and
(c) Seller's and SDEV Germany's landlord and
warehousemen shall have released their liens on the Purchased Assets, and there
shall have been delivered to Buyer executed counterparts reasonably satisfactory
in form and substance to Buyer and its counsel.
3.6 CONDITIONS PRECEDENT OF BUYER. The obligations of Buyer
under this Agreement to proceed with the purchase and other transactions
contemplated hereby, are, at the option of Buyer in its sole discretion, subject
to the fulfillment of all of the following conditions at or prior to the
Closing, and each of the Selling Parties shall use commercially reasonable
efforts to cause each such condition to be fulfilled:
(a) No Litigation. No action, suit, proceeding or
investigation shall have been instituted against Buyer or any of the Selling
Parties and be continuing before or by any court, tribunal or governmental body
or agency or have been threatened, and be unresolved, to restrain or prevent, or
to obtain substantial damages by reason of, any of the transactions contemplated
hereby;
(b) Representations. The representations and
warranties of each of the Selling Parties contained in this Agreement, and any
Schedules hereto and any certificate or documents delivered in accordance with
this Agreement shall be true and correct in all material respects at the time of
the Closing with the same force and effect as though such representations and
warranties were made at that time except for changes expressly permitted by this
Agreement;
(c) Performance of Covenants. Each covenant,
agreement and obligation required by the terms of this Agreement to be complied
with and performed by the Selling Parties or any of them at or prior to the
Closing shall have been duly and properly complied with and performed;
(d) No Material Adverse Change. Since the date of
this Agreement, there shall not have occurred any material adverse change in the
condition (financial or otherwise), business, properties, assets, liabilities,
prospects or results of the Business or in the value of the Purchased Assets or
in the utilizability thereof by Buyer, and Seller shall not have suffered a
substantial fire or other casualty loss or damage; and without limiting the
foregoing, if any of the following shall occur, then a material adverse change
shall be deemed to have occurred, entitling Buyer to withdraw from this
Agreement and to immediate receipt of the Break-up Fee contemplated by Section
7.7 hereof: (i) the Estimated Closing Balance Sheet shall reflect Tangible Net
Assets of less than $900,000, or the Estimated Statement of Revenue shall
reflect revenues during the Revenue Measurement Period of
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twenty-five percent (25%) or more less than the revenue for such period
reflected in the Transition Plan, or (ii) the weighted average product gross
margin achieved during the Revenue Measurement Period is less than 13%, or (iii)
the dollar backlog for insertion orders for the next scheduled TPS catalog is
less than 75% of the same backlog for the identical calendar period of the then
most recent TPS catalog (such insertion order backlog to be priced at a weighted
average per page rate no less than 85% of that of the then most recent TPS
catalog); provided, however, that if Buyer shall take over the supervision of
and management and control of the Business as contemplated by Section 6.10(c)
below and the Transition Plan, then and only in such event, the condition under
this Section shall be limited to a substantial fire or other casualty loss or
damage and any of the occurrences set forth in clauses (i), (ii) or (iii) of
this Section;
(e) Consents. All consents necessary to the
assignment to Buyer of the Contracts specified on Schedule 3.6(e), and all
approvals or actions necessary to the assignment to Buyer of those governmental
licenses as specified on such Schedule, shall have been obtained by the Selling
Parties, and there shall have been delivered to Buyer executed counterparts
reasonably satisfactory in form and substance to Buyer and its counsel, of all
such consents, approvals and actions;
(f) Certificate. There shall have been delivered
to Buyer a certificate executed by the President of each Selling Party, dated
the date of the Closing, certifying that the conditions set forth in subsections
(a), (b), (c), (d) and (e) of this Section 3.6 have been fulfilled;
(g) Certain Agreements. Each other document,
instrument and agreement contemplated hereby shall have been executed and
delivered by each party thereto other than Buyer;
(h) Stockholder Approval. This Agreement and each
exhibit hereto to which a Selling Party is a party and the transactions
contemplated hereby and thereby, including the change of corporate name of each
Selling Party, shall have been duly approved by written consent or affirmative
vote of the requisite holders of shares of capital stock of each Selling Party
entitled to vote thereon and by the written consent or affirmative vote of the
requisite holders of the shares of each class and series of capital stock of
each Selling Party entitled to vote thereon, as required, in the case of Seller,
by the General Corporation Law of the State of Delaware, the Certificate of
Incorporation of Seller and all applicable federal and state securities laws,
and, in the case of SDEV Germany, by applicable federal and local German laws;
(i) Letter of Coopers & Lybrand. Buyer shall have
received a comfort letter addressed to Buyer from Coopers & Lybrand LLP,
independent certified public accountants, dated the Closing Date, in form and
substance reasonably satisfactory to Buyer;
(j) Escrow Agreement. Each of the Selling Parties
shall have executed and delivered to Buyer the Escrow Agreement substantially in
the form of Exhibit 2.2(b) hereto;
(k) Fairness Opinion At the reasonable request of
Buyer, Buyer shall have received an opinion of a firm reasonably acceptable to
Buyer, attesting to the fairness of the financial terms of the transaction
contemplated by this Agreement;
(l) Opinion of Counsel. Buyer shall have received
the written opinion of Seller's counsel covering the matters set forth on
Exhibit 3.6(l) hereto in form and substance reasonably acceptable to Buyer and
its legal counsel; and Buyer shall have received an opinion from German counsel
to the Selling Parties, dated the Closing date, in form and substance
satisfactory to Buyer;
(m) Financial Statements. Seller shall have
delivered to Buyer copies of the (i) audited consolidated balance sheet of
Seller as at March 31, 1996 and audited consolidated statements of operations,
stockholders' equity and cash flows, certified by Coopers & Lybrand LLP,
independent certified public accountants, whose opinion shall be unqualified and
(ii) unaudited consolidated and consolidating balance sheets of each Selling
Party as at April 30, 1996, and unaudited consolidated and consolidating
statements of operations, stockholders' equity and cash flow of each Selling
Party for the period then ended, prepared by Seller, and in each case certified
by
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Seller's President as being true, correct and complete in all material respects
and prepared from the books and records of Seller and its subsidiaries as
contemplated in Section 6.8 (collectively, the "Recent Financial Statements");
and
(n) Proceedings. All legal matters and proceedings
taken in connection with the sale of the Purchased Assets by the Selling Parties
to Buyer as herein contemplated and the other transactions contemplated by this
Agreement shall be reasonably satisfactory to Buyer's legal counsel.
3.7 CONDITIONS PRECEDENT OF SELLING PARTIES. The obligations
of the Selling Parties under this Agreement to proceed with the sale
contemplated hereby and to proceed with the other transactions contemplated
hereby, are, at the option of Seller, subject to the fulfillment of all of the
following conditions at or prior to the Closing, and Buyer shall use
commercially reasonable efforts to cause each such condition to be fulfilled:
(a) No Litigation. No action, suit, proceeding or
investigation shall have been instituted against any Selling Party and be
continuing before or by any court, tribunal or governmental body or agency or
have been threatened, and be unresolved, to restrain or prevent, or to obtain
substantial damages by reason of, any of the transactions contemplated hereby;
(b) Representations. The representations and
warranties of Buyer contained in this Agreement or any certificates or documents
delivered in accordance with this Agreement shall be true and correct in all
material respects at the time of the Closing with the same force and effect as
though such representations and warranties were made at that time except for
changes expressly permitted by this Agreement;
(c) Performance of Covenants. Each covenant,
agreement and obligation required by the terms of this Agreement to be complied
with and performed by Buyer at or prior to the Closing, shall have been duly and
properly complied with and performed;
(d) Certificate. There shall have been delivered
to Seller a certificate executed by an officer of Buyer, dated the date of the
Closing, certifying that the conditions set forth in subsections (a), (b) and
(c) of this Section 3.7 have been fulfilled;
(e) Escrow Agreement Buyer shall have executed and
delivered to Seller the Escrow Agreement substantially in the form attached
hereto as Exhibit 2.2(b).
(f) Opinion of Counsel. Seller shall have received
the written opinion of Buyer's counsel covering the matters set forth on Exhibit
3.7(f) hereto in form and substance reasonably acceptable to Seller and its
legal counsel; and
(g) Proceedings. All legal matters and proceedings
taken in connection with the sale of the Purchased Assets by the Selling Parties
to Buyer and the assumption of the Assumed Liabilities by Buyer as herein
contemplated and the other transactions contemplated by this Agreement shall be
reasonably satisfactory to Seller's counsel.
ARTICLE 4
4. REPRESENTATIONS AND WARRANTIES OF SELLING PARTIES. Each of
the Selling Parties hereby jointly and severally represents and warrants to
Buyer as follows (except as otherwise disclosed in the Disclosure Schedule
delivered concurrently herewith by Seller to Buyer):
4.1 ORGANIZATION, STANDING AND QUALIFICATION.
(a) Each of the Selling Parties is a corporation
duly organized, validly existing and in good standing under the laws of its
jurisdiction of incorporation, as set forth in Schedule 4.1 of the Disclosure
Schedule; and has all requisite power and authority and is entitled to own,
lease and operate its properties and to carry on its business as and in the
places such properties are now owned, leased or operated and where such business
is presently conducted. Each of the Selling Parties is qualified to do business
and is in good standing in each state or jurisdiction listed in Schedule 4.1 of
the Disclosure
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Schedule, which states constitute all states in which the failure to be so
qualified could have a material adverse effect on the condition (financial or
otherwise), business, properties, assets, liabilities, prospects or results of
the operations of a Selling Party.
(b) No part or aspect of the Business has been
conducted through any direct or indirect subsidiary or any direct or indirect
affiliate of Seller, other than SDEV Germany, or of any stockholder of any
thereof. All of the outstanding capital stock of SDEV Germany is validly issued,
fully paid and nonassessable. Except as set forth in this Agreement in Schedule
4.1(b), there are no agreements, arrangements, options, warrants, calls, rights
or commitments of any character (i) relating to the issuance, sale, purchase or
redemption of any capital stock, partnership interest or other equity interest
of SDEV Germany, or (ii) requiring it to purchase any capital stock, partnership
interest or other equity interest held by others. None of the issued and
outstanding shares of capital stock or partnership interests or other equity
interests of SDEV Germany has been issued in violation of, or is subject to, any
preemptive or subscription rights. Except as set forth in this Agreement and in
Schedule 4.1(b), there are no voting trust agreements or any other similar
contracts, agreements, arrangements, commitments, plans or understandings
restricting or otherwise relating to voting, dividend, ownership or transfer
rights of any shares of capital stock or partnership interests or other equity
interests of SDEV Germany. Seller has good and valid title to, and beneficial
ownership of, all of the outstanding capital stock of SDEV Germany, free from
any and all Liens.
4.2 AUTHORITY. Each Selling Party has all requisite power and
authority to enter into this Agreement, the Bill of Sale and each other
agreement, document and instrument to be executed or delivered by it in
accordance with this Agreement (the "Seller Documents") and to carry out the
transactions contemplated hereby and thereby. The execution, delivery and
performance of this Agreement and the Seller Documents by each Selling Party
have been duly authorized and approved by its board of directors and, except for
the adoption of this Agreement by the stockholders of Seller, no other corporate
proceedings on the part of any Selling Party are necessary to authorize this
Agreement, the Seller Documents and the transactions contemplated hereby and
thereby. This Agreement has been duly authorized, executed and delivered by each
Selling Party and is the legal, valid and binding obligation of each Selling
Party enforceable in accordance with its terms, and each of the Seller Documents
has been duly authorized by each Selling Party and upon execution and delivery
by such Selling Party will be a legal, valid and binding obligation of such
Selling Party enforceable in accordance with its terms.
4.3 NO VIOLATION. The execution, delivery and performance of
the Seller Documents and the consummation of the transactions contemplated
hereby and thereby, including without limitation the sale of the Purchased
Assets to Buyer, will not (a) conflict with or violate any provision of the
Certificate of Incorporation or By-Laws of any Selling Party, (b) with or
without the giving of notice or the passage of time, or both, result in a breach
of, or violate, or be in conflict with, or constitute a default under, or permit
the termination of, or cause or permit acceleration under, any mortgage,
indenture, loan agreement, security document, deed of trust, capitalized lease,
sales order, governmental contract or distribution agreement, or any material
other agreement or instrument of any kind or character to which any Selling
Party is a party or by which it, or any of its properties or assets are bound,
or result in the loss or adverse modification of any license, franchise, or
other authorization granted to or otherwise held by any Selling Party, (c)
require the consent of any party to any Contract, (d) result in the creation or
imposition of any Lien upon any of the Purchased Assets, or (e) violate, with or
without the giving of notice or the passage of time, any law, rule or regulation
or any order, judgment, decree or award of any court, governmental authority or
arbitrator to which any Selling Party is subject or by which it or its
properties or assets may be bound or affected.
4.4 FINANCIAL STATEMENTS; SALES INFORMATION.
(a) Seller has delivered to Buyer copies of the
financial statements of Seller listed on Schedule 4.4(a) of the Disclosure
Schedule, including without limitation, the consolidated balance sheet of Seller
as of March 31, 1996 (the "Balance Sheet" and the date thereof is the "Balance
Sheet Date"). All of the financial statements are complete and correct, have
been prepared from the books and records of Seller
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and its subsidiaries in accordance with generally accepted accounting principles
consistently applied and maintained throughout the periods indicated and fairly
present the consolidated financial condition of Seller as at their respective
dates and the consolidated results of its operations for the periods covered
thereby. Such financial statements do not contain any items of special or
nonrecurring income or any other income not earned in the ordinary course of
business except as expressly specified therein, and include all adjustments,
which consist only of normal recurring accruals, necessary for such fair
presentation. All of the Recent Financial Statements, upon delivery to Buyer,
shall be complete and correct, shall have been prepared from the books and
records of Seller and its subsidiaries and shall fairly present the consolidated
financial condition of Seller as at the dates hereof and the consolidated
results of its operations for the period covered thereby. Such statement of
profits and losses will not contain any items of special or nonrecurring income
or any other income not earned in the ordinary course of business except as
expressly specified therein, and such Recent Financial Statements shall include
all adjustments, which consist only of normal recurring accruals, necessary for
such fair presentation.
(b) At least ten days prior to the Closing Date and
again at the Closing, Seller shall deliver to Buyer an estimated Closing Balance
Sheet and estimated Statement of Revenue of the Business being purchased
hereunder, setting forth Seller's good faith estimate of the Closing Balance
Sheet and Closing Statement of Revenue as of the scheduled Closing Date,
prepared pursuant to Section 2.6 hereof and reflecting Seller's good faith
estimates thereof.
(c) Attached to the Disclosure Schedule as item
4.4(c) are copies of certain historical sales figures for each of the Selling
Parties for the Business for the periods indicated thereon, and copies of weekly
management reports of the Selling Parties for the month preceding the date
thereof. All of such historical figures are true, correct and complete and are
fairly presented in all material respects.
(d) Except as and to the extent reflected or
reserved against on the Balance Sheet (including the notes thereto), or set
forth on Schedule 4.4(d) of the Disclosure Schedule, as of the Balance Sheet
Date, neither of the Selling Parties had any debts, liabilities or obligations
(whether absolute, accrued, contingent or otherwise) of any nature whatsoever
relating to or arising out of any act, transaction, circumstance or state of
facts which occurred or existed on or before the Balance Sheet Date, whether or
not then known, due or payable (other than contract obligations disclosed
pursuant to this Agreement or not required to be disclosed pursuant to this
Agreement, which in each case conform to the representations and warranties with
respect thereto in this Agreement).
(e) Seller has established and furnished to Buyer a
Transition Plan prepared by Seller and accepted by Buyer (the "Transition
Plan"), a copy of which is attached as item 4.4(e) to the Disclosure Schedule
relating to the operations of the Selling Parties prior to the Closing,
including, without limitation, revenue targets and scheduled catalog drops. As
more particularly described therein, the Transition Plan provides for revenue of
at least $12,300,000 for the quarter ending June 30, 1996, allocated by month as
follows: $3,600,000 for April 1996; $4,200,000 for May 1996; and $4,500,000 for
June 1996. The Transition Plan sets forth the current plans and forecasts of the
Selling Parties, and the revenue targets therein were prepared in good faith on
the basis of information and assumptions (including without limitation,
assumptions as to a normal and historical mix of revenues) which the Selling
Parties believe to be reasonable. Without limiting the foregoing, the Selling
Parties have no reason to believe that they will be unable to meet such revenue
targets or make such catalog drops. The Transition Plan also includes the
Employee Retention Plan, which shall be the responsibility of the Selling
Parties.
4.5 TITLE TO AND CONDITION OF PURCHASED ASSETS; LEASES.
(a) None of the Selling Parties owns any real
property. Each Selling Party has good and marketable title to all of the
Purchased Assets which it owns or uses in the Business or purports to own,
including, without limitation, all items which are located on its premises or
held in storage by or for it which would constitute Inventory or Equipment if
such Selling Party had any right, title or interest therein, and to all
leasehold and franchise interests and all interests in all of the Contracts.
None of the Purchased Assets are subject to any Lien of any nature whatsoever,
direct or indirect, whether accrued, absolute, contingent or otherwise.
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(b) All of the tangible Purchased Assets (other
than Inventory) are in good operating condition and repair, reasonable wear and
tear excepted, are suitable for the purposes used and are adequate and
sufficient for all of the current operations of such Selling Party relating to
the Business. Each item of Inventory now owned or hereafter acquired (and not
subsequently disposed of in the ordinary course of business) is of merchantable
quality for sale in the ordinary course of business, and passes for what it
purports to be in accordance with normal trade standards. No Selling Party is
aware of any fact which could materially and adversely affect the future
marketability of Inventory. Each Selling Party has on hand sufficient Inventory
to fill all outstanding and reasonably expected sales orders and licenses,
subject only to backlog in respect of announced but unreleased Powerbuilder 5.0.
(c) Each Selling Party enjoys peaceful possession of
all leasehold interests and personal property constituting any part of the
Purchased Assets and held under lease or license. All of the Contracts (other
than those which have been fully performed) are legal, valid, binding and
enforceable in accordance with their respective terms against such Selling
Party, and to the best of each Selling Party's knowledge, against each other
party thereto, are in full force and effect and will be unaffected by the sale
or other transfer of the Purchased Assets to Buyer hereunder so that, after such
sale, Buyer will be entitled to the full benefits thereof subject to no Lien.
Each Selling Party is in good standing and has met all of its obligations and
paid all amounts due under each Contract. There is not under any Contract, any
existing default or event which, after notice or lapse of time, or both, would
constitute a default by a Selling Party, or to each Selling Party's best
knowledge, by any other party thereto, or result in a right to accelerate or
loss of rights by a Selling Party, or to each Selling Party's best knowledge, by
any other party thereto. To the best of each Selling Party's knowledge, no party
to any material Contract has threatened to or is likely to breach, violate or
terminate such Contract. No amount payable or reserved under any Contract has
been assigned or anticipated and no amount payable under any Contract is in
arrears or has been collected in advance and to the best of each Selling Party's
knowledge, there exists no offset or defense to payment of any amount due to
Seller under a Contract. True and complete copies of all Contracts (to the
extent in writing or if not in writing, an accurate summary thereof), other than
sales orders for products with end users, have been delivered to Buyer.
(d) The Purchased Assets, including the Assumed
Contracts, are all of the assets, contracts, leases and licenses and all of the
other properties and rights of every type and description, real, personal and
mixed, tangible and intangible, which are necessary or appropriate to the
conduct of the Business as presently conducted, and for Buyer to conduct all the
Business in the same manner, subject to the arrangements with respect to the
occupancy of the existing premises of Seller contemplated by Section 7.9 hereof.
(e) During the past three years, except as
disclosed in filings made by Seller with the Securities and Exchange Commission,
no Selling Party has, directly or indirectly, purchased, leased or otherwise
acquired any property or obtained any services from, or sold, leased to others
or otherwise disposed of any property or furnished any services to, or otherwise
dealt with, in the ordinary course of business or otherwise, except with respect
to customary remuneration for services rendered as an officer or employee of a
Selling Party in the ordinary course of business, any of its directors or
officers or any other person, firm or corporation which, directly or indirectly,
alone or together with others, controls, is controlled by or is under common
control with a Selling Party or any director or officer thereof or any member of
the family thereof (an "Affiliate"). No Selling Party owes any amount to, or has
any contract with or commitment to any of its Affiliates (other than
compensation for current services not yet due and payable and reimbursement of
expenses arising in the ordinary course of business), and none of such persons
owes any amount to a Selling Party. No part of the property or assets of any
Affiliate of a Selling Party is used by a Selling Party in connection with the
Business.
(f) Each of the Selling Parties maintains mailing and
subscription lists and data bases which it uses in connection with the
marketing, distribution, sale and licensing of its products, distribution of
materials and otherwise in connection with its business. No person or entity
other than the Selling Parties may utilize, or has utilized, any or all of the
Mailing List without the prior consent of Seller and Seller has not since March
31, 1993 given any such consent, nor has any or all of the Mailing List of a
Selling Party been rented, leased or otherwise made available since such date to
any party for any
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purpose whatsoever. The Mailing List is proprietary to the Selling Parties,
which own all right, title and interest in and to the Mailing List. The Mailing
List includes at least 120,000 customers as set forth in Seller's Form 10-K for
the year ended March 31, 1995, plus new customers since such date.
4.6 PROPRIETARY RIGHTS.
(a) The Selling Parties own or possess the perpetual
and royalty-free licenses and other rights to use all Proprietary Rights used in
connection with or necessary to conduct the Business as it is presently operated
(including, without limitation, any necessary to create, publish, manufacture
and distribute the TPS catalog, TPS Web Site and the planned release of the
Applications Development Digest, and market, license and sell products and
services in connection therewith), all of which are free and clear of any Liens
and rights of others of any kind and, to Seller's knowledge, in good standing
and uncontested. No Proprietary Rights are owned or licensed or held by any
shareholder, director, officer, entity controlled by a Selling Party or any
director, officer, consultant or employee thereof other than a Selling Party
itself. No Selling Party is infringing upon or otherwise acting adversely to any
copyrights, trademarks, trademark rights, service marks, service names, trade
names, licenses or trade secrets or other Proprietary Rights or intellectual
property of any other person or entity, which representation and warranty is
made to the knowledge of the Selling Parties with respect to third party
software distributed or resold by a Selling Party. No claim, suit, demand,
proceeding or investigation is pending, has been asserted or, to the knowledge
of the Selling Parties, is threatened against a Selling Party with respect to,
based on or alleging infringement of any such rights or the proprietary rights
or intellectual property of any third party, or challenging the validity or
effectiveness of any license for such rights, and no Selling Party knows of any
basis for any such claim, suit, demand, proceeding or investigation.
(b) The Selling Parties have the exclusive right to
manufacture, develop, publish, market, license or sell the products set forth on
Schedule 4.6(b) of the Disclosure Schedule in such media and by print or
electronic means as shall be specified on such Schedule, including the TPS
catalog, the TPS Web Site and the planned Applications Development Digest (the
"Proprietary Products"). Except as disclosed to Buyer on the Disclosure
Schedule, no person or entity other than Seller may manufacture, develop,
publish, market, license or sell all or any part of the Proprietary Products
without the prior consent of Seller and Seller has not given any such consent
and Seller owns or is the exclusive licensee (as shall be designated on such
Schedule) of all right, title and interest in and to the Proprietary Products
and the exclusive right to apply for copyright protection therefor. No director,
officer, employee or independent contract of a Selling Party has in his or her
personal possession outside the offices of such Selling Party, for safekeeping,
convenience of work or otherwise, any proprietary material of such Selling
Party. To the best of Seller's knowledge, none of the individuals or entities
who have performed services in connection with the development of any of the
Proprietary Products, as employees or as independent contractors, or any other
employee of a Selling Party, holds any proprietary rights with respect to such
Proprietary Products and each of such employees and independent contractors has
signed an employment contract or confidentiality agreement with Seller in the
form annexed as item 4.6(b) to the Disclosure Schedule, which contains a
covenant prohibiting the use or disclosure of confidential information and
proprietary rights.
(c) Schedule 4.6(c) of the Disclosure Schedule
contains a true and complete list of all software licensed to, owned, developed,
or published by a Selling Party in connection with the Business, with all such
software owned by a Selling Company designated by an asterisk (*) (the "Company
Software") as well as a description of any instructions or sequences of
instructions, in whatever form embodied, which are included in any of the
Company Software and which requires the consent (whether subject to royalty or
otherwise) of a party other than a Selling Party in order for any such Company
Software (including without limitation sales, marketing and training programs,
Seller's MIS system, and software to create, publish, manufacture and distribute
the TPS catalog or Web Site) to be sold, transferred, used, licensed, updated,
enhanced or modified or integrated with other software by a Selling Party, Buyer
or other party together with true and correct copies of all contracts between or
among a Selling Party, on the one hand, and such authors or licensors, on the
other hand. To the best of Seller's knowledge, there has been no
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publication or public distribution of any of the source codes of any of the
Company Software that would in any way affect the right of Seller or Buyer to
seek copyright protection for such Company Software. Item 4.6(c) to the
Disclosure Schedule contains true and correct copies of each form of license
agreement which has been used by Seller, in connection with the marketing,
license and distribution of the Company Software. To the best of Seller's
knowledge, each end user of Company Software has either signed a license
agreement or has acquired the Company Software pursuant to a so-called "shrink
wrap license." With respect to the Contracts pertaining to Company Software
entered into by a Selling Party, such Selling Party has licensed the Company
Software and not sold it, thus retaining ownership of the underlying software.
Seller is not aware of any claims actually or purporting to be within the scope
of any warranty coverage, express or implied, afforded to licensees of any
Company Software or of any errors, omissions or failures to perform. To the best
of Seller's knowledge, there are no bugs in the Company Software reasonably
detectable with normal use of the Company Software except as set forth in the
Disclosure Schedule, all of which can be corrected by Buyer without unreasonable
effort or expense.
(d) The Selling Parties have the non-exclusive right
to market or sell the products set forth on Schedule 4.6(d) of the Disclosure
Schedule in connection with the Business in such media and by print or
electronic means as shall be specified on such Schedule.
4.7 LITIGATION.
(a) There is no action, suit, proceeding, arbitration
or investigation pending against or affecting any Selling Party or the
transactions contemplated by this Agreement, nor to the best of the knowledge of
any Selling Party, any basis therefor or threat thereof which, in any case or in
the aggregate, could if adversely determined have a material advance effect on
the business, assets, liabilities, operations or financial condition of such
Selling Party, the Business or the Purchased Assets or the use thereof by Buyer.
No Selling Party is subject to any court or administrative order, writ,
injunction or decree, applicable specifically to it or to its business, property
or employees, nor is it in default with respect to any order, writ, injunction
or decree, of any court or federal, state, municipal or other governmental
department, commission, board, agency or instrumentality, domestic or foreign.
(b) Schedule 4.7 of the Disclosure Schedule sets
forth a complete list and description of all defective product or service
warranty and/or third party liability claims, other than returns or exchanges of
defective or unwanted goods in the ordinary course of business consistent with
industry practice, made against any Selling Party with respect to Company
Software during the past three years and with respect to other software since
March 31, 1995, in each case, together with the resolution thereof (whether
under insurance policies or otherwise).
4.8 COMPLIANCE; PERMITS.
(a) No Selling Party, nor any officer or director
thereof has violated any law, rule, regulation, order, judgment or decree
applicable to any Selling Party, any of its employees, any of the Purchased
Assets and/or any aspect of the Business, including without limitation, any
laws, rules, regulations, ordinances, codes, orders, judgments or decrees as to
zoning, building requirements or standards, import, export, environmental,
health and/or safety matters, and any rules and related regulations promulgated
by the Federal Trade Commission, including, without limitation, the Mail or
Telephone Order Merchandise Rule, which violation could have a material adverse
effect on the condition (financial or otherwise), business, properties, assets,
liabilities, prospects or results of the operations of a Selling Party, the
Purchased Assets or the Business. Each Selling Party has all licenses, consents,
certificates, franchises, permits, and authorizations issued by any department,
board, commission, bureau or instrumentality ("Licenses") necessary to conduct
the Business in the manner that it is currently conducted by it, and none of
operations of any Selling Party are being conducted in any manner which violates
in any material respect any of the terms of conditions under which such License
was granted. Each License has been duly obtained, is valid and in full force and
effect, and is not subject to any pending or, to the knowledge of a Selling
Party, threatened administrative or judicial proceeding to revoke, cancel or
declare such License invalid in any respect. No Licenses by their terms will
terminate or lapse by reason of the transaction contemplated by this Agreement.
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(b) Neither of the Selling Parties nor any officer
employee or agent thereof, nor any other person acting on its behalf, has,
directly or indirectly, within the past five years given or agreed to give any
gift or similar benefit to any client, customer, governmental employee or other
person who is or may be in a position to help or hinder the business of a
Selling Party (or assist a Selling Party in connection within any actual or
proposed transaction) which (i) might subject a Selling Party to any damage or
penalty in any civil, criminal or governmental litigation or proceeding, (ii) if
not given in the past, might have had an adverse effect on the assets,
operations or prospects of such Selling Party or (iii) if not continued in the
future, might adversely affect the retention of such account or business or the
assets, operations or prospects of such Selling Party or which might subject
such Selling Party to suit or penalty in any private or governmental litigation
or proceeding.
4.9 SCHEDULES. The Disclosure Schedule hereto contains
a true, complete and accurate list and description of the
following:
(a) all real property in which a Selling Party has an
ownership, leasehold or other interest or which is used by a Selling Party in
connection with the conduct of the Business;
(b) all items of Equipment, owned, leased or used by
a Selling Party in connection with the Business and setting forth with respect
to all such listed property an identification of all leases relating thereto,
including the parties thereto, the current rental or other payment terms, and
expiration date thereof;
(c) all Proprietary Rights (including any licensed to
a Selling Party) specifying such Selling Party's interest therein and in the
case of any licensed to a Selling Party, the expiration date of such license, or
if owned by a Selling Party, the date on, and manner in, which acquired; and all
Contracts (including Licenses) relating to any Proprietary Rights; and all
Licenses, permits and approvals;
(d) all fire, theft, casualty, liability, collision,
personal injury and other insurance policies insuring any Purchased Assets or
any Designated Employees, specifying with respect to each such policy, the name
of the insurer, the risk insured against, the limits of coverage, the deductible
amount (if any), the premium rate and the date through which coverage will
continue by virtue of premiums already paid;
(e) all sales agency, supply, purchase, distribution,
OEM, VAR, dealer, advertising, promotional, support, maintenance, outsourcing,
manufacture and fulfillment agreements or franchises, and agreements for
software acquisition, development agreements, author agreements and publishing
agreements, and all agreements providing for the services of an independent
contractor to which a Selling Party is a party or by which it is bound and which
relate to any of the Purchased Assets or the conduct of the Business;
(f) all guarantees, loan agreements, indentures,
mortgages and pledges, all conditional sale or title retention agreements,
security agreements, equipment obligations, leases or lease purchase agreements
as to items of personal property, in each case to which Seller is a party or by
which it is bound or under which it has rights and which are secured by or
otherwise relate to any of the Purchased Assets or the Business;
(g) all collective bargaining agreements, employee
policies, employment and consulting agreements, and all other employee bonus or
benefit plans and all group insurance plans, whether or not legally binding,
relating to the Business or any person or firm providing services to or for the
Business, including, without limitation, wage continuation, severance,
reemployment assistance, termination, deferred compensation, holiday, sympathy,
sick leave or pay, vacation, personal day, education, pension, retirement,
welfare and group or individual life, health, hospitalization, dental and
accident insurance and other bonus practices, plans, agreements, arrangements,
and/or commitments to which any Selling Party is a party or bound and, with
respect to each Designated Employee, the current annual rates, showing
separately for each such person, the amounts paid or payable as salary, bonus
payments and any indirect compensation for the year ended March 31, 1996 and the
current fiscal year;
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(h) all contracts, agreements, commitments, purchase
orders, leases, licenses or other understandings or arrangements to which Seller
is a party or by which it or any of its property is bound or affected, relating
to or in connection with the Business, except for the Proprietary Rights
agreements set forth on Schedule 4.6 of the Disclosure Schedule, end user
licenses on a form included as Schedule 4.6 of the Disclosure Schedule and
excluding contracts entered into in the ordinary course of business which are
terminable by a Selling Party on less than 30 days' notice without any penalty
or consideration and involving payments or receipts during the entire life of
such contracts by the Selling Parties of less than $2,000 in the case of any
single contract but not more than $10,000 in the aggregate, and including,
without limitation, a true and complete itemized description all Contracts
between Seller and software developers, licensors and authors or pursuant to
which any royalty or similar payment shall be payable;
(i) a listing of all Inventory as of a date within
five (5) days of the execution of this Agreement (which shall be updated a day
not more than one week prior to the Closing), broken down by type, quantity and
location; and
(j) a listing of all outstanding Receivables and
accounts payable of the type to be assumed by Buyer hereunder, as of a date
within five (5) days of the execution of this Agreement (which shall be updated
as of a day not more than one week prior to the Closing), broken down by
customer or vendor, as the case may be, and the amounts and dates due.
True and complete copies of all contracts,
agreements, plans, arrangements, commitments and documents required to be listed
or identified pursuant to this Section 4.9 (to the extent in writing or if not
in writing, an accurate summary thereof), together with any and all amendments
thereto, have either been delivered to Buyer or attached to Schedule 4.9.
Except as set forth on Schedule 4.9 of the Disclosure
Schedule, all of the contracts and agreements required to be listed or
identified pursuant to this Section 4.9 (other than those which have been fully
performed) are legal, valid, binding and enforceable in accordance with their
respective terms, in full force and effect, do not require the consent or
approval of any party to the assignment thereof and will be unaffected by the
sale or other transfer of the Purchased Assets to Buyer hereunder, and Buyer
will be entitled to the full benefits thereof, and none of such contracts and
agreements is with a governmental agency or authority. To the best of the
knowledge of each Selling Party, there is not under any contract or agreement
required to be listed or identified pursuant to this Section 4.9 any existing
default or event which, after notice or lapse of time, or both, would constitute
a default or result in a right to accelerate or loss of rights. There have been
no oral or written modifications to the terms or provisions of any of such
agreements. No amount payable or reserved under any such agreement has been
assigned or anticipated and no amount payable under any such agreement is in
arrears or has been collected in advance and to the best of the knowledge of the
Selling Parties, there exists no offset or defense to payment of any amount
under such an agreement.
4.10 ABSENCE OF CHANGES OR EVENTS. Since the Balance Sheet
Date each of the Selling Parties, has conducted its business only in the
ordinary course in a manner consistent with past practices. Without limiting the
foregoing, since such date, neither of the Selling Parties has:
(a) incurred any obligation or liability, absolute,
accrued, contingent or otherwise, whether due or to become due, except current
liabilities for trade or business obligations incurred in the ordinary course of
business and consistent with its prior practice, none of which liabilities, in
any case or in the aggregate, materially adversely affects the business, assets,
liabilities, operations, or financial condition of a Selling Party;
(b) discharged or satisfied any Lien, other than
those then required to be discharged or satisfied, or paid any obligation or
liability, absolute, accrued, contingent or otherwise, whether due or to become
due, other than current liabilities shown on the Balance Sheet and current
liabilities incurred since the Balance Sheet Date as permitted by subsection (a)
above;
(c) mortgaged, pledged or subjected to any Lien any
of the Purchased Assets;
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(d) sold, transferred, leased to others or otherwise
disposed of any assets relating to the Business, except for the sale of
non-exclusive licenses of third-party software in object code form to end-users
and other inventory in the ordinary course of business and consistent with prior
practice; or canceled or compromised any debt or claim, or waived or released
any right of value;
(e) received any notice of termination of any
contract, license, lease or other agreement relating to the Business;
(f) suffered any damage, destruction or loss (whether
or not covered by insurance) which, in any case or in the aggregate, could have
a material or adverse effect on its assets, operations or prospects; or disposed
of or destroyed any records other than disposal of duplicates, drafts and other
immaterial documents in the ordinary course of business in accordance with its
written document retention policy;
(g) transferred or granted any rights under, or
entered into any settlement regarding the breach or infringement of, any United
States or foreign license, patent, copyright, trademark, trade name, invention
or other proprietary right, or modified any existing rights with respect
thereto;
(h) instituted, settled or agreed to settle any
litigation, action, arbitration, investigation or proceeding before any court or
governmental body relating to it or its property or received any threat thereof;
(i) suffered any change, event or condition which, in
any case or in the aggregate, has had or may have a materially adverse effect on
its condition (financial or otherwise), properties, assets, liabilities,
operations or prospects, including, without limitation, any change in its
revenues, costs, backlog, or relations with its employees, landlords, agents,
customers, OEMs, VARs, dealers, suppliers or government regulators;
(j) entered into any transaction, contract or
commitment other than in the ordinary course of business or, except as
contemplated by the Employee Retention Plan included as part of the Transition
Plan, incurred any severance pay obligations by reason of this Agreement or the
transactions contemplated hereby;
(k) made any change in the rate of compensation,
commission, bonus or other direct or indirect remuneration payable to, or paid
or agreed or orally promised to pay, conditionally or otherwise, any bonus or
extra compensation to, or made any change in any pension, wage continuation,
severance, reemployment assistance, termination or vacation pay policy covering,
any officer, employee, salesman, distributor or agent relating to the Business
or providing services to or for the Business, other than as specifically
identified in the Employee Retention Plan included as part of the Transition
Plan;
(l) made any capital expenditure or capital additions
or betterments, whether or not reflected on its financial statements as
capitalized expenditures;
(m) failed to replenish its inventories and supplies
in a normal and customary manner consistent with its prior practice and prudent
business practices prevailing in the industry, or made any purchase commitment
in excess of normal, ordinary and usual requirements of its business or at any
price materially in excess of the then current market price or upon terms and
conditions more onerous than those usual and customary in the industry or trade,
or made any change in its selling, pricing, advertising or personnel practices
inconsistent with its prior practice or prudent business practices prevailing in
the industry or trade;
(n) encountered any labor union organizing activity,
had any actual or threatened employee strikes, work stoppages, slow downs or
lockouts, or had any material change in its relations with its employees,
agents, customers or supplies or any governmental regulatory authority or
self-regulatory authorities;
(o) received any notice from any customer or supplier
that it intends to cease doing business with it (or will refuse to do business
with Buyer), which, in any case, has had or could have a material adverse effect
on the business, financial condition, assets, liabilities, operations or
prospects of any Selling Party or of the Business, or on the value of Purchased
Assets or the transfer thereof to Buyer;
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(p) failed to publish and distribute its catalogs in
substantially the same manner with substantially the same frequency, volume and
style as in prior periods, and no such failure to publish or distribute, in any
case or in the aggregate, has had, or could have, a material and adverse affect
on the business, condition (financial or otherwise), assets, liabilities,
operations or prospects of a Selling Party; or delayed or accelerated activities
or planned events for the unusual benefit of Seller and detriment of Buyer; or
(q) entered into any agreement or made any commitment
to take any of the types of action described in subsections (a) through (p)
above.
4.11 TAXES. Each Selling Party has paid or made adequate
provision for the payment of all taxes, fees, assessments and charges,
including, without limitation, income, property, sales, use, franchise, added
value, employees' income withholding and social security taxes, imposed by the
United States or by any foreign country, or by any state, municipality or
instrumentality of any of same or by any other taxing authority, and for all
penalties and interest thereon, which has or may become due for or during all
periods ending, and in respect of all operations, on or prior to the Closing
Date. All tax returns required to be filed in connection therewith have been
accurately prepared and filed and all deposits required by law to be made by
Seller or any Subsidiary with respect thereto have been duly made. Neither
Selling Party is a party to any pending action, proceeding or audit by any
governmental authority for assessment or collection of any amount of taxes for
which it may be directly or indirectly liable, and there is no claim for
assessment or collection of any amount of taxes for which it may be directly or
indirectly liable. No Lien for taxes exists with respect to any Purchased Asset.
Attached to the Disclosure Schedule as item 4.11 is a list of the Tax Exemption
Certificates of the Selling Parties relating to the Business, together with
copies thereof.
4.12 EMPLOYEE BENEFITS; LABOR MATTERS. (a) All pension,
retirement, profit-sharing, deferred compensation, bonus, incentive, medical,
vision, dental and other health insurance, life insurance or any other employees
benefit plan, arrangement or understanding and any trusts or insurance contracts
maintained in connection therewith (collectively, "Benefit Plans"), conform to,
and the administration thereof is in material compliance with, all applicable
laws and regulations, including, without limitation, the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), the Internal Revenue Code of
1986, as amended (the "Code"), and comparable foreign laws, rules and
regulations, and neither the operation or administration of any such Benefit
Plan, nor the transactions contemplated by this Agreement will result in any
liability to any Selling Party or Buyer under or in respect of any of such
Benefit Plans, in Buyer incurring or suffering any liability, or have any
adverse effect on the financial condition, assets liabilities or results of
operations of any Selling Party, Buyer or the Business. All contributions
required, by law or by contract, to be made to any Benefit Plans subject to
ERISA or any foreign law for any plan year, or other period on the basis of
which contributions are required, ending before the date hereof, have been made
as of the date hereof. Each Selling Party has complied in all material respects
with all reporting and disclosure requirements with respect to each Benefit
Plan. No such Benefit Plan (including any trust created thereunder), nor any
trustee or administrator thereof, has engaged in any transaction prohibited by
ERISA or any foreign law, or by Section 4975 of the Code, which could subject
any Selling Party, or such Plan to any penalty imposed under ERISA or any
foreign law or to any tax imposed by Section 4975 of the Code or any foreign law
or, if any such transaction has occurred, it has been corrected within the
meaning of Section 4975 of the Code or such foreign law, and all applicable
taxes and penalties with respect thereto have been paid. No "reportable event"
as that term is defined in ERISA has occurred with respect to any of the Benefit
Plans. No liability to the Pension Benefit Guaranty Corporation or comparable
foreign authority has been or is expected to be incurred with respect to any of
such Benefit Plans. Neither Selling Party participates, maintains or contributes
to (nor has neither within the preceding three years participated, maintained or
contributed to) nor has any liability or obligation under or with respect to any
multi-employer plan governed by or subject to ERISA or any foreign law, nor has
it participated, maintained, contributed or incurred any liability in respect of
any thereof within the last three fiscal years. Neither Selling Party has any
liability or obligation with respect to any Benefit Plan or trust related
thereto that may have been terminated prior to the date hereof.
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(b) Each Selling Party has complied in all material
respects with all applicable laws, rules and regulations relating to the
employment of labor, including those relating to hiring, wages, hours,
collective bargaining and the payment and withholding of taxes, and has withheld
all amounts required by law, regulation or agreement to be withheld from the
wages or salaries of its employees and is not liable for any arrears of wages or
any taxes or penalties for failure to comply with any of the foregoing. Neither
of the Selling Parties has engaged in any unfair labor practice, and there is no
unfair labor practice, sexual harassment or other employment-related complaint
pending, or, to the knowledge of any Selling Party, threatened against any
Selling Party or any officer, director or employee thereof. There do not exist
any pending workmen's compensation claims against any Selling Party that are not
adequately provided for by insurance, or any pending or, to the knowledge of any
Selling Party, threatened claims that the workplace of any Selling Party is
unsafe or that any Selling Party has engaged in unfair labor practices,
employment discrimination or wrongful discharge. No union, trade, guild or
collective bargaining unit represents any employees of any Selling Party, and no
union organizing or election activities involving any non-union employees of
Seller or any Subsidiary is now in progress nor, to the best of Seller's
knowledge, threatened.
(c) Prior to the date hereof, Seller has not been
required by the Worker Adjustment and Retraining Notification Act ("WARN"), the
Massachusetts Reemployment Assistance Program or German law to provide any type
of notice or report in respect of terminations of employees, reductions in the
work force, plant closings, temporary shutdowns of work sites, or as may
otherwise be required thereunder.
4.13 ACCOUNTS RECEIVABLES. All Receivables constituting any
part of the Purchased Assets have arisen only from bona fide transactions in the
ordinary course of business.
4.14 ENVIRONMENTAL MATTERS. Each Selling Party has taken all
steps necessary to determine and have determined that no Hazardous Substance (as
hereinafter defined) is or has been stored, treated, recycled, released,
disposed of or discharged on, about, from or affecting any of the premises
occupied by any Selling Party or where any of the Purchased Assets are stored or
located. Neither Selling Party has any liability which is based upon or in any
way related to the environmental conditions under or about any of the premises
where any of the Purchased Assets are stored or located. The term "Hazardous
Substance" as used in this Agreement shall include, without limitation,
gasoline, oil and other petroleum products, explosives, radioactive materials
and related and similar materials, and any other substance or material defined
as a hazardous, toxic or polluting substance or material by any ordinance, rule
or regulation, domestic or foreign including PCBs, asbestos and urea
formaldehyde foam insulation.
4.15 SEC FILINGS. Seller has filed with the Securities and
Exchange Commission (the "SEC") all notices, prospectuses, offering statements
and registration statements required to be filed in connection with the offer or
sale of securities by Seller under the Securities Act of 1933, as amended (the
"Securities Act"), and the rules and regulations promulgated thereunder. All
such notices, prospectuses, offering statements and registration statements
comply in all material respects with the requirements of the Securities Act, and
the rules and regulations promulgated thereunder, and such notices,
prospectuses, offering statements and registration statements at the date of
filing thereof with the SEC did not contain an untrue statement of any material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein not misleading in light of the
circumstances under which they were made. In addition, Seller has filed with the
SEC all reports and proxy statements required to be filed by Seller under the
Securities Exchange Act of 1934, as amended (the "1934 Act"), and the rules and
regulations promulgated thereunder, and such reports and proxy statements at the
date of filing thereof with the SEC did not contain an untrue statement of any
material fact nor omit to state any material fact required to be stated therein
or necessary to make the statements therein not misleading in light of the
circumstances under which they were made. Seller has delivered to Buyer copies
of (i) all notices, prospectuses, offering statements and registration
statements filed with the SEC by Seller under the Securities Act since January
1, 1993; and (ii) all reports and definitive proxy statements filed with the SEC
by Seller under the 1934 Act since such date.
4.16 CONSENT SOLICITATION STATEMENT. (a) The consent
solicitation statement and related materials (collectively, the "Consent
Solicitation Statement") to be prepared by Seller in accordance with Section 6.9
and used in connection with Seller's solicitation of consents from stockholders
described in
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Section 6.9, relating to the adoption of this Agreement, the sale of the
Business, the change of corporate name and other transactions contemplated
hereby (the "Consent Solicitation") will, when prepared by Seller and
distributed to the stockholders, comply in all material respects with the
provisions of the Delaware General Corporation Law and the 1934 Act and the
rules and regulations promulgated thereunder and will not, at the time of the
mailing of the Consent Solicitation Statement to the holders of capital stock of
Seller (the "Stockholders") or at the Closing Date, contain any untrue statement
of a material fact or omit to state any material fact required to be stated
therein or necessary in order to make the statements therein, in the light of
the circumstances under which they are made, not misleading; provided, that
Seller makes no representation with respect to information concerning Buyer
supplied by Buyer to Seller for inclusion in the Consent Solicitation Statement.
The manner and conduct of the Consent Solicitation by Seller shall comply in all
material respects with the provisions of the Delaware General Corporation Law
and the 1934 Act and the rules and regulations promulgated thereunder.
(b) Set forth on Schedule 4.16 is a list of not more
than ten (10) persons (within the meaning of Rule 14a-2(b)(2) promulgated under
the 1934 Act), specifying the number of shares of Common Stock of Seller owned
or believed by Seller to be controlled by each such person (specifying shares
owned or controlled) and the percentage ownership of each such person based on
the number of shares entitled to be voted in the Consent Solicitation. Such
persons are the owners of or control the requisite number of shares of each
class and series of capital stock of Seller entitled to consent thereto as a
class or series, and have duly and validly approved by written consent the sale
of the Business contemplated hereby and other matters to be covered by the
Consent Solicitation, as required by the Delaware General Corporation Law
(subject to the consent of such other stockholders as may be required to attain
a majority of the shares of Seller entitled to consent thereto), the Certificate
of Incorporation of Seller and all applicable federal and state securities laws.
True and complete copies of all such written consents have been delivered to
Buyer or attached to Schedule 4.16.
4.17 CUSTOMERS AND SUPPLIERS. Set forth in Schedule 4.17 is a
list of the names and addresses of the fifty (50) largest customers and the one
hundred (100) largest suppliers (measured by dollar volume of purchases or sales
in each case) of each Selling Party and the percentage of the business of such
Selling Party which each such customer or supplier represented during each of
the years ended March 31, 1995 and 1994. Except as set forth in Schedule 4.17,
there exists no actual or threatened termination, cancellation or limitation of,
or any modification or change in, the business relationship of any Selling Party
with any supplier or customer listed in Schedule 4.17.
4.18 DISCLOSURE. No representation or warranty by any Selling
Party contained in this Agreement nor any written statement or certificate
furnished or to be furnished by or on behalf of any Selling Party to Buyer in
connection herewith contains or will contain any untrue statement of a material
fact, or omits or will omit to state any material fact required to make the
statements herein or therein contained, under the circumstances under which
made, not misleading or necessary in order to provide a prospective purchaser of
the Purchased Assets with adequate information as to the operations of each
Selling Party and the Purchased Assets and each Selling Party has disclosed to
Buyer in writing all material adverse facts known to it relating to the same.
ARTICLE 5
5. REPRESENTATIONS AND WARRANTIES OF BUYER.
Buyer represents and warrants to the Selling Parties that:
5.1 ORGANIZATION AND STANDING. Buyer is a corporation duly
incorporated, validly existing and in good standing under the laws of the State
of Delaware and has all requisite corporate power and authority to enter into
this Agreement and each other agreement, document and instrument to be executed
or delivered by Buyer in accordance with this Agreement (the "Buyer Documents")
and to carry out the transactions contemplated hereby and thereby.
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5.2 AUTHORITY OF BUYER. The execution, delivery and
performance of this Agreement and the Buyer Documents by Buyer have been duly
authorized and approved by its board of directors and no other corporate
proceedings on the part of Buyer are necessary to authorize this Agreement, the
Buyer Documents and the transactions contemplated hereby and thereby. This
Agreement has been duly authorized, executed and delivered by Buyer and is the
legal, valid and binding obligation of Buyer enforceable in accordance with its
terms, and each of the Buyer Documents has been duly authorized by Buyer and
upon execution and delivery by Buyer will be a legal, valid and binding
obligation of Buyer enforceable in accordance with its terms.
5.3 LITIGATION. There is no action, suit, proceeding,
arbitration or investigation pending against or affecting Buyer or the
transactions contemplated by this Agreement, nor to the best of Buyer's
knowledge, any basis therefor or threat thereof, which is reasonably likely to
have a materially adverse effect on Buyer's ability to make the payment of the
Purchase Price pursuant hereto. Buyer is not subject to any court or
administrative order, writ, injunction or decree, applicable specifically to it
or to its business, property or employees, nor is it in default with respect to
any order, writ, injunction or decree, of any court or federal, state, municipal
or other governmental department, commission, board, agency or instrumentality,
domestic or foreign, in each case, which is reasonably likely to have a
materially adverse effect on Buyer's ability to make the payments of the
Purchase Price pursuant hereto.
5.4 NO VIOLATION. The execution, delivery and performance of
the Buyer Documents and the consummation of the transactions contemplated hereby
and thereby, including without limitation, the purchase of the Purchased Assets
from Seller, does not (a) conflict with or violate any provision of the
Certificate of Incorporation or By-Laws of Buyer, or to Buyer's knowledge,
(b)(i) with or without the giving of notice or the passage of time, or both,
result in a breach of, or violate, or conflict with, or constitute a default
under, or permit the termination of, or cause or permit acceleration under, any
loan or credit agreement or instrument to which Buyer is a party or by which it,
or any of its properties or assets are bound, (ii) require the consent of any
party to any such agreement, or (iii) violate with or without the giving of
notice or the passage of time, any law, rule or regulation or any order,
judgment, decree or award of any court, governmental authority or arbitrator to
which Buyer is subject or by which it or its properties or assets may be bound
or affected.
ARTICLE 6
6. COVENANTS OF SELLING PARTIES.
6.1 CONDUCT OF BUSINESS. During the period from the date of
this Agreement to and including the Closing Date, each Selling Party shall
conduct or cause to be conducted the Business in the ordinary and usual course
of business and consistent with past practices, and shall not take any action
which might result in any material change in such operations or which might have
a materially adverse effect on the value of the Purchased Assets or the Business
other than changes made with the prior written consent of Buyer. Without
limiting the generality of the foregoing, prior to the Closing, no Selling Party
will, without the prior written consent of Buyer:
(a) dissolve, liquidate, merge or consolidate or
sell, transfer, lease or otherwise dispose of any assets or properties of or
related to the Business or obligate itself to do so, other than the sale of
non-exclusive licenses of third-party software in object code form to end users
and other inventory in the ordinary course of business on standard terms,
conditions and operating procedures customarily used by it, or change the
frequency of publication, volume or style of the TPS catalog, Web Site, or
discontinue any products, or effect or announce price changes or special
promotions, or sell or otherwise make available to any third person any or all
of the Mailing List;
(b) amend, modify, change, alter, terminate, rescind
or waive any rights or benefits under any Contract;
(c) fail to maintain the Purchased Assets in
reasonably good condition, repair and working order, reasonable and ordinary
wear and tear excepted;
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(d) perform, take any action or incur or permit to
exist any of the acts, transactions, events or occurrences of a type which would
be inconsistent with or render untrue any of the representations or warranties
set forth in Section 4.10 hereof had the same occurred after the Balance Sheet
Date and prior to the date hereof;
(e) fire, discharge or otherwise terminate the
employment of any Designated Employee or alter, change, adjust or modify the
terms of any existing employment agreement or arrangement with any Designated
Employee (including changes in compensation);
(f) cancel, compromise or modify or agree to cancel,
compromise or modify any Receivable; or
(g) cancel any of the current insurance policies or
any of the coverage thereunder maintained for the protection of the Selling
Parties, any of the Purchased Assets, or the Business or the operation thereof.
6.2 CHANGES IN INFORMATION. During the period from the date of
this Agreement to the Closing Date, each Selling Party shall give Buyer prompt
written notice of any change in, or any of the information contained in, the
representations and warranties made by it in or pursuant to this Agreement or
the Disclosure Schedule or of any event or circumstance which if it had occurred
on or prior to the date hereof, would cause any of such representations or
warranties not to be true or correct.
6.3 ACCESS TO INFORMATION.
(a) During the period from the date of execution of
this Agreement to the Closing Date, Buyer and its counsel, accountants and other
representatives shall be given, during normal business hours, and without undue
disruption of the Business, full access to and copies of all of the books, tax
returns, contracts, commitments, records, facilities and properties of the
Selling Parties pertaining to the Business or constituting any part of the
Purchased Assets, work papers of accountants of each Selling Party pertaining to
the Business and all personnel of each Selling Party, and they shall be
furnished with all such documents and information with respect to the affairs of
each Selling Party pertaining to the Business as may from time to time
reasonably be requested, including without limitation, employee files, employee
benefit files, contracts with the current customer and vendor base of the
Business, projections of customer and vendor activities, all computer files,
systems and records, leases, and accounts payable and receivable. During the
period from the date of this Agreement and prior to Closing, Seller and its
subsidiaries and their respective directors, officers and employees shall
cooperate fully with Buyer's investigation. Prior to Closing, Buyer will (and
will cause its representatives to) maintain the confidentiality of the
confidential information it receives from the Selling Parties, provided that
such information may be disclosed (in confidence) to lawyers, accountants,
prospective lenders and investors, and other persons or entities involved in the
transactions, and that nothing herein shall prevent disclosure or use of any
information as may be required by applicable law or that is at the date hereof
or hereafter becomes generally available to and known by the public other than
by reason of Buyer's breach of its obligations under this Section 6.3, or is or
becomes available to Buyer on a non- confidential basis from a source that is
not (after due inquiry) known by Buyer to be prohibited from disclosing such
information pursuant to a confidentiality agreement with Buyer or its
representatives, or has been independently developed by Buyer without violation
of any obligation under this Agreement and without access by the developing
person or persons to such material.
(b) Without limiting the foregoing, from time to time
after the date hereof and prior to the Closing Date, each Selling Party shall
provide to Buyer sample electronic files so as to allow Buyer to prototype the
transfer of all management information system records of or pertaining to the
Business electronically on Buyer's management information system at its facility
in New Jersey, and all block, process and flow diagrams of its MIS, telephone
and desktop publishing systems.
6.4 CONFIDENTIALITY. Each Selling Party shall hold
confidential (and will not disclose) (a) any information obtained by it or any
of its representatives from or concerning Buyer or otherwise arising out of its
negotiations with Buyer or investigations of Buyer, and such information shall
not be used except in furtherance of the transactions contemplated herein or (b)
after the Closing, any information regarding the Purchased Assets or the
Business, including without limitation, the Mailing List, except
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(i) information which is publicly available at the time of disclosure (through
no act of Seller or any of its affiliates) or (ii) which is disclosed to Seller
or an affiliate of Seller by a third party which did not disclose it in
violation of a duty of confidentiality or (iii) disclosures which (x) are
required to be made by Seller under applicable laws or regulations, (y) are
requested by Buyer or (z) with respect to information under clause (b), are
required in connection with dealing with any Excluded Liabilities.
6.5 PRESERVATION OF BUSINESS. During the period from the date
of this Agreement to the Closing Date, each Selling Party shall use commercially
reasonable efforts to preserve intact the present goodwill of such Selling Party
and the relationships of such Selling Party with customers, dealers, OEMs, VARs,
suppliers, creditors, distributors, consultants, governmental authorities and
others having business relations with it and the present business organization
and personnel of such Selling Party. Each Selling Party shall cause to be paid
before they become delinquent all taxes, assessments, and governmental charges
or levies imposed prior to the Closing Date upon its business or properties and
all claims or demands of materialmen, mechanics, carriers, warehousemen,
landlords, and other similar persons asserted prior to the Closing Date which,
if unpaid, might result in the creation of a Lien upon any Purchased Assets or
otherwise have an adverse effect on the conduct the Business.
6.6 OFFER OF EMPLOYMENT: SELLER'S RETENTION PLAN.
(a) Seller has heretofore supplied Buyer with a list
setting forth the names, dates of birth, dates of hire, social security numbers
(or foreign equivalents), current rates of compensation and date and amount of
last salary adjustment, of all employees presently employed by each Selling
Party. Prior to the Closing, Buyer shall review such list and advise Seller of
those employees whom Buyer desires to employ in its business following the
Closing Date, but Buyer has no obligation to employ any of such employees in its
business following the Closing Date. Each Selling Party agrees that Buyer shall
have the right to employ the employees so designated (each of whom that accepts
such employment being hereinafter referred to as a "Designated Employee") and
Buyer agrees to offer employment commencing on the Closing Date to all of such
employees on such date at such basic salary rates and on such other terms as
Buyer shall determine, provided that each such employee executes and delivers to
Buyer a confidentiality agreement substantially in the form executed by other
employees of Buyer and further provided that Buyer shall not be obligated to
maintain any Designated Employees for any specific length of time after the
Closing Date and all Designated Employees shall be employees at will. Nothing in
this Section 6.6 shall be construed to confer any rights or remedies on any
employee of any Selling Party (Designated or not). Each Selling Party will use
its best efforts to encourage and induce such persons to become employees of
Buyer and will not take any action to prevent any such employee from being
employed by Buyer from and after the Closing Date or derogate Buyer, nor will
any Selling Party solicit, invite, induce or entice any Designated Employee to
remain, directly or indirectly, in the employ or be employed by such Selling
Party or otherwise attempt to retain the services of any Designated Employee;
provided, however, Seller shall be entitled to re-hire former employees of
Seller who become employees of Buyer and who leave the employ of Buyer and
request to return to Seller's ISC business, so long as such persons are not so
solicited, invited, induced or enticed while an employee of Seller.
(b) Seller shall be solely responsible for any and
all claims and obligations, if any, for wages, commissions, salary, insurance,
wage continuation, severance pay, termination pay and other benefits (including
accrued and unearned vacation, holiday, sick pay and other benefits, if any)
arising or accruing or claimed to arise or accrue with respect to any employee
of any Selling Party for any period on or prior to the Closing Date, or out of
termination of employment of any employee of any Selling Party on or prior to
the Closing Date, or the failure of Buyer or a subsidiary to retain any employee
of a Selling Party after the Closing Date, or the effect of the transactions
contemplated by this Agreement on the employment status of any employee of any
Selling Party, including without limitation, Designated Employees, and/or the
termination of employment with Buyer or any subsidiary thereof within 120 days
after the Closing Date of any employee who prior to the Closing Date was an
employee of any Selling Party and thereafter becomes an employee of Buyer (in
this latter case to the same extent as if any such employee were then still
employed by such Selling Party). Each Selling Party shall pay all withholding
tax and similar obligations in each case with respect to all employees of such
Selling Party for all periods ending on or prior to the Closing Date.
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(c) Without limiting the foregoing, Seller has
adopted and furnished Buyer with a copy of and Seller shall at its sole expense
offer to its employees the benefits of Seller's Employee Retention Plan included
as part of the Transition Plan, incorporating bonuses, incentives and other
contingencies designed to retain employees of the Business of Seller through the
Closing Date. Seller shall pay for, and indemnify and hold harmless Buyer from
and against, all costs incurred in connection with such plan and any and all
claims, liabilities, damages and losses associated with or arising out of such
plan.
(d) As soon as reasonably practicable after the
Closing Date, the Selling Parties shall, at their sole expense, cause the
termination of the participation of the Designated Employees in all Benefit
Plans covering such employees in accordance with the provisions of such plans
and applicable law and, as soon as is reasonably practicable, shall cause the
trustees, or other persons responsible for the administration of such plans, to
make distributions to all participants or their beneficiaries of all accrued
benefits thereunder in accordance with the provisions of such Plans and all
applicable requirements of ERISA and comparable foreign laws, rules and
regulations. The Selling Parties shall pay for, and indemnify and hold harmless
Buyer from and against, all costs incurred in connection with terminating such
plans or such participation therein and any and all claims, liabilities, damages
and losses associated with or arising out of such plans and/or any such
termination.
(e) All liabilities of the Selling Parties under this
Section shall constitute Excluded Liabilities.
6.7 CONSENTS OF THIRD PARTIES; GOVERNMENTAL APPROVALS. (a)
Each of the Selling Parties will act diligently and reasonably to secure, before
the date initially scheduled as the Closing Date herein, the consent, approval
or waiver, in form and substance reasonably satisfactory to Buyer, from any
party with respect to the assignment of the Contracts and all other contracts,
including without limitation, any governmental consents, licenses, permits and
approvals, and consents of lessors, landlords, licensors, manufacturers,
authors, publishers, suppliers, distributors, OEMs, VARs and dealers, requested
by Buyer prior to the consummation of the transaction contemplated by this
Agreement; provided that no Selling Party shall have any obligation to offer or
pay any consideration in order to obtain any such consents or approvals; and
provided, further, that no Selling Party shall make any agreement or
understanding affecting the Business or the Purchased Assets as a condition for
obtaining any such consents or waivers except with the prior written consent of
Buyer.
6.8 FINANCIAL STATEMENTS. Between the date of this Agreement
and the Closing Date, Seller shall deliver to Buyer true and complete copies (i)
not later than twenty-one days after the date hereof, the Recent Financial
Statements, (ii) within twenty-one days after the end of each month ended before
the Closing Date, an unaudited combined and combining balance sheets and
statements of operations, stockholders' equity and cash flow as of the end of
such month, prepared and certified by the chief financial officer of Seller,
(iii) as soon as available, daily and weekly management reports of the Selling
Parties and (iv) promptly after the same become publicly available, copies of
all reports, registration statements, proxy and information statements and other
documents filed with the SEC on behalf of Seller prior to the Closing Date. All
such financial statements will be prepared at Seller's expense from the
respective books and records of Seller and its subsidiaries in accordance with
generally accepted accounting principles consistently applied throughout the
periods covered by such statements; and will fairly present the consolidated
financial condition of Seller as of their respective dates and the results of
operations and changes in the financial condition of Seller and its subsidiaries
for the periods then ended. Notwithstanding the foregoing, any of such financial
statements that are unaudited will not necessarily reflect normal year-end
adjustments, which adjustment will not individually or in the aggregate have a
material adverse effect upon the business or financial condition of Seller or
any of its subsidiaries taken as a whole or necessarily contain footnotes
prepared in accordance with generally accepted accounting principles. Buyer
shall have access to the underlying records and work papers sufficient to enable
Buyer's accountants to prepare all financial statements required to be filed by
Buyer with the SEC in a timely manner.
6.9 PREPARATION OF CONSENT SOLICITATION STATEMENT; ACTION BY
STOCKHOLDERS. (a) Seller shall prepare the Consent Solicitation Statement as
promptly as possible after the date hereof and use its best efforts to cause the
preliminary Consent Solicitation Statement to be filed with the SEC within four
(4) business
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days after the execution of this Agreement. Seller shall submit the proposed
Consent Solicitation Statement to Buyer and its counsel not less than two days
prior to submitting the Consent Solicitation Statement to the SEC or the
Stockholders. Buyer shall furnish Seller with such information concerning Buyer
as shall be required to be included in the Consent Solicitation Statement, and
Seller shall be responsible for all other information included therein. Seller
shall cause to be distributed to the Stockholders of record as of the record
date for the Consent Solicitation, in accordance with the applicable regulations
of the SEC and the applicable provisions of the Delaware General Corporation
Law, a copy of the Consent Solicitation Statement filed by Seller with and
cleared by the SEC. Seller shall use commercially reasonable efforts to mail the
Consent Solicitation Statement to Stockholders on or before June 6, 1996. If
prior to the Closing Date either Seller or Buyer determines that the Consent
Solicitation Statement needs to be amended or supplemented in order to comply
with the 1934 Act or the rules and regulations promulgated thereunder or for
Seller's representations or warranties in Section 4.16 to be correct, Buyer or
Seller, as the case may be, shall notify the other of such determination and
shall deliver to the other such amendment or supplement as such party believes
is necessary to comply with the applicable regulations of the SEC and to make
such representation and warranty correct. Seller shall consider all such
amendments proposed by Buyer, and shall cause all such amendments or supplements
that the parties reasonably believe are necessary to be mailed to the
Stockholders as soon as practicable after such delivery.
(b) Seller shall, through its Board of Directors,
recommend to the Stockholders the adoption of this Agreement and approval of all
other matters in the Consent Solicitation, and shall use all reasonable efforts
to make the actions contemplated by the Consent Solicitation to be effective on
or before June 26, 1996. Seller shall keep Buyer apprised of the progress of the
Consent Solicitation from time to time.
6.10 INFORMATION PROVIDED TO STOCKHOLDERS. Between the date of
this Agreement and the Closing Date, Seller shall deliver to Buyer true and
correct copies of all information, materials, notices, mailings and other
written communications sent by Seller to its Stockholders or any class or series
thereof.
6.11 RECOMMENDATIONS OF BUYER; TRANSITION. (a) Each Selling
Party shall consult with and follow (and cause its executive officers to consult
with and follow) the recommendations of Buyer with respect to (i) the management
of contracts, agreements, commitments and other understandings or arrangements
to which it is a party, including, without limitation, renewal, modification or
termination of any agreement for the supply of products, (ii) the granting of
any rights or licenses or the commencement of the orderly and gradual
discontinuation of particular programs or operations, (iii) the discontinuation
of any products, or the initiation of any special promotion or any change (or
announcement of a change) in its selling, pricing, advertising or personal
practices, (iv) any deviation in the date of a catalog drop or other deviation
from the Transition Plan and (v) business policies, strategies, decisions,
directives and tactics concerning the Business and the integration of the
Business with the operations of Buyer; provided however, that nothing contained
in this subsection (a) shall require a Selling Party to take or fail to take an
action that, in its reasonable judgment, is likely to give rise to a substantial
penalty or a claim for damages by any third party against it, or is likely to
result in losses to it, or is otherwise likely to prejudice in any material
respect or unduly interfere with the conduct of its business and operations in
the ordinary course consistent with prior practices, or is likely to result in a
breach by any Selling Party.
(b) To facilitate and prepare for the transition from
the current management of the Business to management of the Business by Buyer
and without limiting the provisions of Section 6.3 hereof, each of the Selling
Parties shall permit Buyer to have a reasonable management presence on site at
each location from which any part of the Business shall be conducted and shall
provide such representatives of Buyer, without charge, with reasonable office
space and secretarial assistance, as well as access to its telephone and other
systems. The provisions of Section 6.3 shall be applicable to such persons.
(c) Consistent with the provisions of Sections 6.1
and 6.5 hereto, each of the Selling Parties shall adhere to and follow the
Transition Plan and use its best efforts and take all steps necessary to manage
the Business in order to meet its monthly plan as provided in the Transition
Plan and neither of the Selling Parties shall, without the prior written consent
of Buyer, deviate from or take any action
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inconsistent with the Transition Plan. Notwithstanding anything contained in
this Agreement to the Contrary, Buyer shall be entitled, by written notice to
Seller, at any time prior to the Closing Date, to take over the supervision of
and management and control of the Business in accordance with the Transition
Plan; provided that Seller shall have previously received written consents from
the holders of a majority of the outstanding shares of Common Stock of Seller
approving this Agreement. Each of the Selling Parties shall continue their
management responsibilities in accordance with the provisions of this Agreement
until the Closing Date or such earlier date as Seller shall receive such written
notice from Buyer.
(d) Upon Buyer actually taking over the supervision
and management control of the Business operated by any or all of the Selling
Parties as contemplated by and pursuant to the Transition Plan, Buyer and such
Selling Party shall enter into a joint written confirmation thereof. For
purposes of allocating the risk of the operations of the Business between Buyer
and the Selling Parties and determining adjustments to the Purchase Price, the
"Closing Date" solely with regard to Sections 2.4, 2.5, 2.6, 4.5, 4.6, 4.8, 4.9,
4.10 and 4.13 hereof shall be deemed to be the date of such written
confirmation; provided, that the actual Closing shall occur, and all Purchased
Assets shall be transferred by the Selling Parties to and the Purchase Price
paid by Buyer, as set forth in Article 3, without regard to such change in
management (except as contemplated by Sections 3.6(b) and (d) hereof).
(e) No advice, recommendation, management presence,
request, notice or confirmation by Buyer nor participation in or take-over of
supervision or management of the Business under this Section 6.11, the
Transition Plan or otherwise shall affect or impair any of the rights of Buyer
under this Agreement or act as or constitute a waiver of any of the provisions
of this Agreement, including without limitation, the provisions of Sections 3.6,
7.7 and 7.8 and Articles 8 and 9 hereof, or release any Selling Party from any
covenant, agreement or obligation required by the terms of this Agreement to be
complied with or performed by it.
6.12 BOOKS AND RECORDS. Each of the Selling Parties will
maintain its books, accounts and records in the usual, regular and ordinary
manner, and on a basis consistent with prior periods, and will duly comply with
all legal and accounting requirements applicable thereto and to the conduct of
its business. In maintaining its accounting records, neither of the Selling
Parties will make any change in the accounting methods or practices followed or
in the depreciation policies adopted in connection with the preparation of the
financial statements heretofore delivered to Buyer.
ARTICLE 7
7. FURTHER AGREEMENTS.
7.1 BULK SALES COMPLIANCE. Each Selling Party shall comply
with the provisions of any applicable bulk sales law or comparable statute
relating to notice to and rights of creditors of a Selling Party in connection
with the transfer of the Purchased Assets and Business, or the execution of this
Agreement and the consummation of the transactions contemplated hereby. To the
extent any such bulk sales law or comparable statute requires Buyer to assure
that the proceeds of the transfer are applied so far as necessary to pay any
Excluded Liabilities, Seller shall (from and after the Closing Date) pay or
cause to be paid (or provide for payment of, in a manner reasonably satisfactory
to Buyer) any claim or debt of a Selling Party which is payable with respect to
an Excluded Liability and for which Buyer would be liable under such law or
statute if not paid by a Selling Party.
7.2 SALES AND OTHER TAXES. Each Selling Party shall pay all
sales tax, transfer tax, intangibles tax, filing fees, recording and
registration fees and similar government charges applicable to the transactions
contemplated by this Agreement, including, without limitation, all taxes and
charges payable, if any, upon the transfer of title to any Purchased Assets.
Buyer and the Selling Parties will cooperate to prepare and file with the proper
public officials, as and to the extent available and necessary, all appropriate
sales tax exemption certificates or similar instruments as may be necessary to
avoid the imposition of sales, transfer and similar taxes on the transfer of
Purchased Assets pursuant hereto.
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7.3 BROKERAGE AND FINDER'S FEE. Buyer represents and warrants
to the Selling Parties and the Selling Parties jointly and severally represent
and warrant to Buyer, that no person is entitled to any brokerage commissions or
finder's fees in connection with the transactions contemplated by this Agreement
as a result of any action taken by it or any of its affiliates, officers,
directors or employees, other than to Broadview Associates and Unterberg Harris.
The Selling Parties agree jointly and severally that they will pay all amounts
due to Broadview Associates, and Buyer agrees that it will pay all amounts due
to Unterberg Harris, arising out of any services rendered by it in connection
with this Agreement or the transactions contemplated hereby pursuant to a
separate agreement with such firm.
7.4 SETTLEMENT OF ASSUMED LIABILITIES. From and after the
Closing Date, Buyer shall have complete control over the payment, settlement or
other disposition of, or any dispute involving, any Assumed Liability, and Buyer
shall have the right to conduct and control all negotiations and proceedings
with respect thereto. Each Selling Party will notify Buyer promptly of any claim
made with respect to any such obligation or liability and will not, except with
the prior written consent of Buyer, voluntarily make any payment of, or settle
or offer to settle, or consent to any compromise with respect to, any such
obligations or liabilities. Each Selling Party will cooperate with Buyer in any
reasonable manner requested by Buyer in connection with any negotiations or
proceedings involving any such obligations or liabilities.
7.5 NAME CHANGE. Each Selling Party will change its name and
will cooperate with Buyer to enable Buyer to use the name "The Software
Developer's Company" and/or any names similar thereto which Buyer may designate
by executing and filing such forms with the State of Delaware and in Germany and
with such other jurisdictions as shall be reasonably necessary to effectuate
such change in all relevant jurisdictions and/or as Buyer shall request and by
taking such other actions as shall be reasonably requested by Buyer to
effectuate such change. In furtherance thereof, at the Closing, Seller shall
deliver to Buyer a certificate of amendment to its certificate of incorporation
changing the name of Seller to a name other than any of the Marks, Buyer's Marks
or any name similar thereto, and SDEV Germany shall deliver to Buyer a
certificate of amendment to its certificate of incorporation changing the name
of SDEV Germany to a name acceptable to Buyer. Nothing contained herein shall
require a Selling Party to liquidate or dissolve itself.
7.6 REFERRAL. Each Selling Party shall use its best efforts to
refer all requests for and forward all orders for products to Buyer at such
telephone number and address as Buyer from time to time informs such Selling
Party. The Selling Parties and Buyer shall each attempt in good faith to direct
or deliver to the other all incoming mail, telephone or other communications or
deliveries which are not received by the appropriate party (that is, Buyer in
the case of matters or materials pertaining to the Business or Seller in the
case of matters or materials pertaining to the Excluded Assets).
7.7 BREAK-UP FEE. (a) Subject to and upon the occurrence of a
"Break-up Event" (as defined in Subsection 7.7(b) below), Seller shall pay, in
immediately available funds, to Buyer, at the offices of its counsel in New
York, New York, the "Break-up Fee" specified in subsection 7.7(c) hereof.
(b) The following shall each be a "Break-up Event":
(i) Any Selling Party (or any successor, assign, trustee or
custodian thereof) shall execute or the Board of Directors of any Selling Party
shall authorize or approve (with or without and whether or not subject to,
diligence, financing or other conditions), or publicly announce or confirm an
agreement with any group, entity or person other than Buyer providing for the
acquisition of all or any portion of the Business by such other party, whether
by merger, purchase of assets or stock, purchase of claims against such Selling
Party or its estate, plan of reorganization, liquidation or otherwise (other
than the sale of inventory for fair consideration in the ordinary course of
business, and the sale of obsolete tangible property which is replaced by other
tangible property at least the functional equipment thereof);
(ii) A Change of Control of Seller or any subsidiary shall
occur. For purposes of this paragraph, "Change of Control" shall mean:
(A) a stock purchase of any "person" or
"entity" (as such terms are used in Sections 13(d) and 14(d) (2) of the
Securities Exchange Act of 1934, as amended) who then owns or by virtue
of such purchase becomes the beneficial owner of, directly or
indirectly, voting
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securities of Seller or of any of the subsidiaries, or rights or
options with respect thereto or securities convertible into or
exchangeable for any of same, representing 35% or more of the combined
voting power of the then outstanding voting securities of Seller or any
of its Subsidiaries,
(B) any change in the composition of the
Board of Directors of Seller or any subsidiary in any period which
involves a majority of such directors, or
(C) any proxy, voting trust, or any
voting or other agreement by any of the persons listed on Schedule
4.16, or any management agreement, having the effect of transferring
the power or authority (whether or not exercised) to influence control
(affirmatively or negatively) over Seller, a subsidiary or its
operations (other than covenants in a loan or credit agreement in favor
of the holder of the secured indebtedness of Seller following the
acquisition and other than agreements in favor of Buyer).
(iii) The withdrawal from this Agreement by Buyer as
contemplated by Section 3.6(d) hereof, or the termination of this Agreement by
Buyer as contemplated by Section 9.1(b) hereof.
(iv) Buyer shall fail to receive, by 5:00 p.m. on June 15,
1996, duly and validly approved written consents from the holders of record of a
majority of the shares of capital stock of Seller entitled to consent in the
Consent Solicitation with respect to and in favor of the sale of the Business
contemplated hereby and other matters to be covered by the Consent Solicitation,
as required by the Delaware General Corporation Law, the Certificate of
Incorporation of Seller and all applicable federal and state securities laws.
(c) If a Break-up Event shall have occurred prior to
April 30, 1997, then the Break-up Fee shall be $250,000; provided, that if the
applicable Break-up Event shall be as set forth in clause (iv) of Section 7.7(b)
above, or if another Breakup Event shall occur prior to satisfaction of the
condition set forth in Section 3.6(h) above (provided that Seller shall have
until June 15, 1996 to satisfy such condition), then in any such case the
Break-up Fee shall be $1,000,000; provided, that the obligation of Seller to pay
such Break-up Fee in respect of a Break-up Event set forth in any of clause (i),
(ii) or (iii) of Section 7.7(b) above shall be subject to the satisfaction of
the following conditions:
(i) Buyer shall not have theretofore exercised any right or
stated its intent to terminate or not to perform this Agreement, except as a
consequence of the failure of a Selling Party to perform its obligations
hereunder;
(ii) the representations and warranties of Buyer contained in
this Agreement shall have been true and correct in all material respects and
Buyer shall have performed all of its obligations under the this Agreement to
the extent required to be performed on or prior to the date of the Break-up
Event; and
(iii) consummation of the transaction contemplated thereby
shall not have been prevented by the failure of any condition to the obligations
of a Selling Party set forth in the this Agreement to have been satisfied as a
consequence of any act or omission by Buyer.
(d) The obligations of Seller to pay the Break-up
Fee shall be absolute and unconditional and shall not be affected by any
circumstances, including, without limitation, any set-off, counterclaim,
recoupment, defense or other right which any Selling Parties may have against
Buyer or any principal thereof, or anyone else. Neither Buyer nor any principal
thereof shall be required to mitigate its or his damages.
(e) If a Break-up Event occurs, Buyer shall
nevertheless continue to be entitled to make competing bids for any or all of
the business of the Selling Parties (and to present the relative merits of bids
it may make to parties in interest) but in the event that Buyer is the
successful bidder, or if Buyer shall receive a Break-up Fee hereunder and
thereafter close the acquisition contemplated hereby, then Seller shall be
entitled to offset from the Purchase Price the Break-up Fee received by Buyer.
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7.8 NO SHOP. From the date hereof until the expiration of the
"Restricted Period" described below, (i) Seller agrees, directly or indirectly,
without Buyer's prior written consent, that it shall not and shall not permit
any subsidiary to (A) offer or convey any of the Purchased Assets or the
Business (except only the sale of non-exclusive licenses of software in object
code form to end users and other inventory for fair consideration and in the
ordinary course of business consistent with past practices), (B) issue, sell or
purchase any shares of any class or series of any of the issued and outstanding
capital stock of Seller or any subsidiary or any security convertible into or
exchangeable for such stock or any option or warrant with respect to such stock
(except options granted under existing stock option plans and shares of Seller
capital stock issuable upon the exercise or conversion of options, rights, or
securities presently outstanding), or (C) merge or consolidate with another
entity, and (ii) neither of the Selling Parties nor anyone acting on their
behalf will solicit, entertain or encourage inquiries or proposals, or enter
into, pursue, or carry on any discussions or negotiations, with respect to any
transaction of the type referred to in clause (i) above with any person or
entity other than Buyer. Seller will immediately cease and cause to be
terminated any existing activities, discussions or negotiations with any parties
conducted heretofore in respect of any such transaction. Without limiting the
generality of, or providing an exception to the foregoing, if an offer
unsolicited by Seller, its investment bankers or their representatives, agents
or others is received by Seller prior to the signing of this Agreement or the
earlier approval by the Board of Directors, consistent with the fiduciary
obligation Seller may then owe to its stockholders and to the extent required by
applicable law, such offer may be communicated to the Board of Directors of
Seller, provided that Seller will not provide information to such offeror.
Seller will promptly advise Buyer of the identity of such offeror and
communicate to Buyer the terms of any oral inquiry or proposal which it or they
may receive and deliver to Buyer a copy of any such offer in writing. For
purposes of this Section, such an unsolicited offer shall not include an offer
by any offeror who has previously submitted an offer or proposal for, or had (or
is currently having) negotiations with Seller. Buyer will have the right, prior
to any other person, firm or corporation (including such offeror), to enter into
an agreement to purchase the Purchased Assets and the Business from Seller at
the same price and for the same terms and conditions as offered by such offeror.
Without limiting the rights of Buyer to pursue any remedies, the parties agree
that damages are not an adequate remedy for a breach of this Section and that
the obligations hereunder may be specifically enforced.
The "Restrictive Period" shall continue until the expiration
of the earlier of (a) forty-five (45) days after the date of the execution and
delivery of this Agreement by all parties, and (b) the Closing.
If requested by Buyer, Barry N. Bycoff shall exercise all
vested options at their own expense.
7.9 TEMPORARY EXTENSION OF OCCUPANCY. Each of the Selling
Parties agrees to permit after the Closing Date the temporary continuation of
the occupancy of the Business in its current space until Buyer makes alternative
arrangements and so notifies Seller, or until the expiration of thirty (30) days
from the Closing Date, whichever is earlier. Such occupancy shall be in
accordance with a short-term facilities lease in the form of Exhibit 7.9 hereto,
pursuant to which Buyer will agree to reimburse Seller for the pro rata portion
of costs incurred on account of the continuation of such occupancy from and
after the second Friday after the Closing Date, upon presentation of invoices
therefore and proof of payment, and Seller will agree to make available to
Buyer, as a contract provider, employees of Seller that Buyer wishes to assist
it temporarily through such period of occupancy.
7.10 Non-Competition. (a) The Selling Parties will not and
will not permit any parent or subsidiary to, for a period of ten (10) years from
the Closing Date (the "Limited Period"):
(i) directly or indirectly, anywhere within the
United States and Germany (the "Territory"), own, manage, operate or control, or
participate in the ownership, management, operation or control of, or be
connected with or have any interest in, as a stockholder, agent, consultant,
partner or otherwise, or refer or exploit any customers, business or
opportunities to or with, or otherwise assist in any manner any business which
is competitive within the Territory with the Business and/or any business
related or similar to the Business; or
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(ii) without the express prior written consent of
Buyer, directly or indirectly employ or attempt to employ, or knowingly arrange
or solicit to have any other person or entity employ, any person who heretofore
has been, or is, on the date hereof or hereafter, in the employ of either of the
Selling Parties or Buyer.
For purposes hereof, the sale or distribution of software in any and all media
and advertising and promotional services in each case through catalogs and other
direct mail publications, web site, Internet, Intranet and other on-line or
electronic communications or distribution, and corporate reseller and wholesale
operations, shall be deemed competitive with the Business, except that a Selling
Party may provide product integration and consulting and support services as a
value added reseller or systems integrator of software products providing
Internet, Intranet and other on-line network security protection for electronic
or enterprise-wide communications for corporate enterprises doing business on
the Internet; provided that any third-party software products being distributed
by Buyer are offered by Seller as a component of network security services and
not on a stand-alone basis.
(b) Since Buyer will be irreparably damaged if the provisions
of Section 7.10(a) above are not specifically enforced, Buyer shall be entitled
to an injunction restraining any violation or attempted violation of any of the
provisions of this Section (without any bond or other security being required),
or any other appropriate decree of specific performance. Such remedies shall not
be exclusive and shall be in addition to any other remedy which Buyer may have.
7.11 PLANT CLOSINGS. Each of the Selling Parties shall be
responsible for making any and all filings with and reports to any governmental
authorities and furnishing any and all notices to employees and others under all
laws, rules and regulations, domestic and foreign, relating to the closure of a
plant or facility, the reduction of a work force or the termination of
employment of any employee, including without limitation, under WARN, the
Massachusetts Reemployment Assistance Program and the German Civil Code
(collectively, "Work Force Laws"). Subject to Section 2.8, the Selling Parties
shall be responsible for making, prior to or as soon as reasonably practicable
after the Closing Date, all payments to employees and others required under such
laws, including, without limitation all such payments contemplated by the German
Shut-Down Plan, and using their best efforts to obtain releases from such
employees and others in favor of Buyer and its subsidiaries reasonably
satisfactory to Buyer. All such filings, reports and notices shall be made
within such time period as shall be prescribed by applicable law, and in any
event within ten days from the date hereof. Set forth as item 7.11 to the
Disclosure Schedule is a calculation of such payments for each of the Selling
Parties.
7.12 RECORD RETENTION. Buyer agrees that for a period of not
less than six years following the Closing Date it shall not, and shall not
permit any other person to, destroy or otherwise dispose of any Files and
Records existing on or before the Closing Date except in a manner consistent
with policies approved by counsel for Buyer in light of applicable statutes of
limitation. For a period of six years following the Closing Date, Buyer agrees
that it shall upon reasonable notice make available to Seller and its
representatives and agents all Files and Records relating to the Business on or
before the Closing Date, and permit Seller and its respective representatives
and agents to examine, make extracts from and, at their expense, copy such Files
and Records relating to the Business on or before the Closing Date at any time
during normal business hours for any proper purpose relating to the Excluded
Liabilities. Buyer shall have the right to destroy all or part or the Files and
Records relating to the Business on or before the Closing Date after the sixth
anniversary of the Closing Date or at an earlier time by giving Seller thirty
days' prior written notice of such intended disposition and by offering to
deliver to Seller, at Seller's expense, custody of such Files and Records
relating to the Business on or before the Closing Date as Buyer may intend to
destroy; if Buyer delivers any Files and Records to Seller, Seller agrees to
retain such Files and Records and the provisions of this Section shall apply
thereto with Seller having the rights and obligations of Buyer and Buyer having
the rights and obligations of Buyer and Buyer having the rights and obligations
of Seller.
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ARTICLE 8
8. INDEMNIFICATION.
8.1 OBLIGATION TO INDEMNIFY.
(a) Buyer hereby assumes and agrees to indemnify and
hold each Selling Party harmless from, against and in respect of, and shall on
demand reimburse the Selling Parties for:
(i) any and all Assumed Liabilities;
(ii) any and all loss, liability, damage or
deficiency suffered or incurred by a Selling Party resulting from any
misrepresentation or breach of warranty by Buyer or nonfulfillment of any
covenant to be performed or complied with by Buyer under this agreement or in
any agreement, certificate, document or instrument executed by Buyer and
delivered to Seller pursuant hereto or in connection with this Agreement; and
(iii) all actions, suits, proceedings,
claims, demands, assessments, judgments, costs and expenses, including
reasonable attorneys' fees, incident to any of the foregoing, or reasonably
incurred in investigating or attempting to avoid any of same or to oppose the
imposition thereof or in enforcing any of the obligations under this Section
8.1(a).
(b) The Selling Parties jointly and severally hereby
assume and agree to indemnify and hold Buyer harmless from, against and in
respect of, and shall on demand reimburse Buyer for:
(i) any and all Excluded Liabilities;
(ii) any and all loss, liability, damage or
deficiency suffered or incurred by Buyer resulting from any misrepresentation or
breach of warranty or nonfulfillment of any covenant by Seller under this
agreement to be performed or complied with or in any agreement, certificate,
document or instrument executed by a Selling Party and delivered to Buyer
pursuant hereto or in connection with this Agreement;
(iii) any and all loss, liability, damage,
cost or expense suffered or incurred by Buyer in respect of or in connection
with any and all debts, liabilities and obligations of, and any and all
violation of laws, rules, regulations, codes or orders by a Selling Party,
direct or indirect, fixed, contingent, legal, statutory, contractual or
otherwise, which exist at or as of the Closing Date or which arise after the
Closing Date but which are based upon or arise from any act, transaction,
circumstance, sale of goods or services, state of facts or other condition which
occurred or existed on or before the Closing Date, whether or not then known,
due or payable, except to the extent specifically assumed by Buyer under the
terms of this Agreement;
(iv) any and all loss, liability, damage,
cost or expense suffered or incurred by Buyer based on or arising out of the
infringement or alleged infringement of products of the Business sold by a
Selling Party of the Proprietary Rights of any third party;
(v) any and all loss, liability, damage,
cost or expense suffered or incurred by Buyer based on or arising out of any
defective or allegedly defective product or service warranty and/or third party
liability claims (whether alleged in contract, tort, strict liability or
otherwise), which exist at or as of the Closing Date or which arise after the
Closing Date but which are based upon or arise from any act, transaction,
circumstance, sale of goods or services, state of fact or other condition which
occurred or existed on or before the Closing Date, including, without
limitation, any products manufactured, assembled, sold or distributed by a
Selling Party or its predecessors in interest at any time;
(vi) any and all loss, liability, damage,
cost or expense suffered or incurred by Buyer based on or arising from (A) the
presence of any Hazardous Substance on or about any premises occupied by any
Selling Party or any hazardous discharge on or prior to the Closing Date, and/or
any environmental complaint, and/or the failure to obtain any license or permit
required in connection with any Hazardous Substance or hazardous discharge or
the retention, disposal, treatment or use
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thereof, and/or arising out of any noncompliance with any environmental, health
or safety law, ordinance, rule or regulation (each, an "Environmental
Requirement"), in each case, based on or arising from any act, transaction,
state of facts or other condition which occurred or existed on or before the
Closing Date, whether or not then known, (B) any personal injury (including
wrongful death) or property damage (real or personal) arising out of or related
to any hazardous discharge, the presence, use, disposal or treatment of a
Hazardous Substance, or noncompliance with any Environmental Requirement, on or
prior to the Closing Date, and/or (C) any environmental complaint and/or any
demand of any government agency or authority prior to, on or after the Closing
Date which is based upon or in any way related to any hazardous discharge, the
presence, use, disposal or treatment of a Hazardous Substance, and/or
noncompliance with any Environmental Requirement on or prior to the Closing
Date, and including, without limitation and in each such case under this clause
(vi), the reasonable costs and expenses of all remedial action and clean-up,
attorney and consultant fees, investigation, sampling and laboratory fees, court
costs and litigation expense and costs arising out of emergency or temporary
assistance or action undertaken by or as required by any duly authorized
regulatory body in connection with any of the foregoing;
(vii) any and all loss, liability damage,
cost or expense suffered or incurred by Buyer by reason of noncompliance with
the provisions of the bulk transfer provisions of the Uniform Commercial Code or
any other bulk transfer law of any jurisdiction, or with the provisions of any
and all Work Force Laws (including, without limitation, the failure of a Selling
Party to satisfy all obligations to its current employees for wage continuation,
severance, reemployment assistance and termination pay and other benefits), in
connection with any of the transactions contemplated by this Agreement, except
to the extent of liability specifically assumed by Buyer under the terms of this
Agreement;
(viii) any and all loss, liability, damage,
cost or expense suffered or incurred by Buyer by reason of any claims of or
entitlements to severance pay, termination pay and/or other benefits arising or
accruing or claimed to arise or accrue with respect to any employee of Seller,
whether by reason of or in connection with any of the transactions contemplated
by this Agreement or otherwise to the extent based on any employment of such
employee by any Selling Party;
(ix) any and all taxes, including, without
limitation, income, franchise, property, sales, use, added value, employees'
income withholding and social security taxes, and all assessments or
governmental charges imposed by the United States or by any foreign country or
by any state, municipality, subdivision or instrumentality of the United States
or of any foreign country, or by any other taxing authority, which are due or
payable by any Selling Party in connection with or arising out of the operation
of its business on or prior to the Closing Date and all interest and penalties
thereon; and
(x) all actions, suits, proceedings, claims,
demands, assessments, judgments, costs and expenses, including reasonable
attorneys' fees, incident to any of the foregoing, or reasonably incurred in
investigating or attempting to avoid any of same or to oppose the imposition
thereof or in enforcing any of the obligations under this Section 8.1(b).
8.2 SURVIVAL; LIMITATIONS. (a) The respective representations
and warranties of the parties contained in this Agreement or in any agreement,
instrument or document delivered pursuant hereto and indemnification in respect
thereof shall survive the Closing Date until April 30, 1998, except for the
provisions of Sections 4.11, 4.12, 4.15, 4.16 and 8.1(b)(ix) hereof, which shall
survive for thirty (30) days beyond the full period of all applicable statutes
of limitations (giving effect to any waiver, mitigation or extension thereof),
and except for the provisions of Sections 4.2, 4.5, 4.6 and 4.8 hereof which
shall survive the Closing Date without time limit. Notwithstanding the
foregoing, individual representations and warranties referred to in this Section
8.2(a) shall survive the periods specified if notice of misrepresentation or
breach thereof giving rise to such right of indemnity shall have been given as
herein provided to the party or parties against whom such indemnity may be
sought prior to the expiration of such periods, and the covenants and agreements
of parties hereto contained in this Agreement or any agreement, instrument or
document delivered pursuant hereto and indemnification in respect thereof shall
survive the Closing Date without time limit.
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(b) No party hereto shall have an indemnification
obligation pursuant to this Article 8 in respect of any representation, warranty
or covenant unless such party shall have received from the party seeking
indemnification written notice of the existence of the claim for or in respect
of which indemnification is sought. Such notice shall set forth with reasonable
specificity (i) the basis under this Agreement, and the facts that otherwise
form the basis, of such claim, (ii) an estimate of the amount of such claim
(which estimate shall not be conclusive of the final amount of such claim) and
an explanation of the calculation of such estimate, including a statement of any
significant assumptions employed therein, and (iii) the date on and manner in
which the party delivering such notice became aware of the existence of such
claim.
(c) Notwithstanding anything to the contrary
contained in this Agreement, the Selling Parties shall not be required hereunder
to indemnify or hold Buyer or any affiliate thereof harmless against damages or
other losses until such time as the aggregate amount of all losses, liabilities,
damages, and expenses of indemnitees based thereon or resulting therefrom shall
exceed $75,000 (the "Liability Cushion"), at which time the Selling Parties
jointly and severally shall be responsible without regard to such threshold;
provided, however, that such Liability Cushion shall not apply to or include (A)
any obligations of the Selling Parties for Excluded Liabilities or under
Sections 2, 6 or 7 hereof, or any other covenant or agreement of any Selling
Party (as opposed to their representations and warranties) relating to a period
after the Closing contained in this Agreement, or (B) any losses, liabilities,
damages and expenses in respect of misrepresentations or breaches of warranty as
to title contained in Sections 4.5 or 4.6 hereof, taxes or other payments
contained in Sections 4.11 or 4.12, litigation contained in Section 4.7, or as
to the Consent Solicitation Statement or Consent Solicitation contained in
Section 4.16 hereof; provided, further, however, that the aggregate liability of
the Selling Parties under this Agreement to Buyer shall not exceed the Purchase
Price theretofore actually received by the Selling Parties (including the Escrow
Fund).
(d) In the event that a Selling Party becomes
liable to Buyer hereunder, the Selling Parties shall be entitled to a credit or
offset against any such liability an amount equal to (i) the net amount of
insurance proceeds received by Buyer in respect of such indemnifiable loss, and
(ii) except to the extent already provided for in Section 8.2(e) or elsewhere in
this Agreement, the present value (as calculated pursuant to Section 8.2(e) of
any net tax benefit, if any, attributable to such loss and actually realized by
Buyer during any taxable period after the Closing Date in connection with the
loss or damage suffered by it which forms the basis of the liability of the
Selling Parties' liability hereunder. Such tax benefit shall be equal to the
product of (x) any allowable tax deduction attributable to such loss (reduced by
any tax income or tax basis reduction resulting from the receipt of any
indemnity payment in respect of such loss) which was or will be available in
computing any tax owed by Buyer for any taxable period after the Closing Date
and (y) the maximum marginal rate of such tax payable by Buyer for any taxable
period in which such deduction was or will be available after first reflecting
all other items of income, gain, deduction, loss or credit (including but not
limited to any net operating loss) for such taxable period.
(e) Whenever any indemnification payment is made by
any party and such payment is includable in the taxable income of the
indemnified party for purposes of any tax, such payment shall be adjusted to an
amount that will provide the indemnified on an after-tax basis with an amount
equal to the amount of the underlying indemnification claim. For purposes of
calculating the adjustment to the indemnified party pursuant to the preceding
sentence, if any, the following items shall be taken into account: (A) all taxes
imposed with respect to the accrual or receipt of such indemnification payment
(as the same may be increased pursuant to this Section 8.2(e)), and (B) any tax
savings (including without limitation any credit, deduction or other benefit)
realized or to be realized by the indemnified party as a result of (i) the
payment or accrual of the amounts in respect of which the underlying
indemnification payment and any additional payments to be made pursuant to this
Section 8.2(e) to or on behalf of the indemnified party hereunder is made, and
(ii) if the payment to or on behalf of the indemnified party hereunder relates
to taxes, any additional tax benefit that the indemnified party will be entitled
to receive as a result of any tax adjustment to which such indemnification
payment relates. For purposes of the preceding sentence, when the indemnified
party will receive a tax savings in a year following the tax year the
indemnification is made, the value of the tax savings shall be calculated on a
present value basis, and the discount rate used shall be the rate set forth from
time to time under the authority of Section 7520(a)(2) of the Code.
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To the extent that any disagreements relating to this Section 8.2(e) arise in
regard to tax effecting any indemnification payment, and such disagreements are
not resolved by mutual agreement, such agreements shall be resolved by an
accounting firm in the manner set forth in Section 2.6.
(f) Except as otherwise provided in the Escrow
Agreement, and subject to the provisions of Section 8.4 hereof, any
indemnification payment shall be made not later than thirty (30) days after
receipt by the indemnifying party of a request for indemnification from the
indemnified party specifying that an indemnifiable amount has been paid by or is
payable by such indemnified party and the amount thereof, and any such
indemnification payment that is not made when due shall bear interest at the
rate of ten percent (10%) per annum for each day until paid.
(g) To the extent that a Selling Party liquidates
or dissolves or distributes assets after the Closing Date, the provisions of
this Article 8 shall be applicable to those persons or entities who shall then
be stockholders of such Selling Party, on the same terms and subject to the same
limitations as are applicable to such Selling Party.
8.3 CLAIMS. Buyer shall promptly give Seller written notice of
any matter which Buyer has determined has given or which Buyer expects is likely
to give rise to a right of indemnification under this agreement stating the
amount of the loss, if known, provided that failure to give any such notice
shall not reduce the indemnity available hereunder except to the extent such
failure increased the amount to be indemnified hereunder. The obligations and
liabilities of the Selling Parties under this Article 8 with respect to loss
arising from claims of any third party (including, without limitation, claims by
any assignee or successor of Buyer or any governmental agency) that are subject
to the indemnification provided for in this Article 8 ("Third-Party Claims")
shall be governed by and be contingent upon the following additional terms and
conditions: if Buyer shall receive notice of any Third-Party Claim, Buyer shall
give Seller prompt written notice thereof and shall permit Seller, at its
option, to participate in the defense of such Third-Party Claim by counsel of
its own choosing and at its expense, provided that failure to give any such
notice shall not reduce the indemnity available hereunder except to the extent
such failure increased the amount to be indemnified hereunder. If Seller
acknowledges in writing its obligation to indemnify Buyer hereunder against any
loss, damage, cost or expense that may result from such Third-Party Claim
(subject to the limitations set forth in Section 8.2, if applicable), Seller
shall be entitled, at its option, to assume and control the defense of such
Third-Party Claim at its expense and through counsel of its choice if it gives
prompt written notice of its intention to do so to Buyer. Buyer shall have the
right to employ separate counsel and participate in the defense of such
Third-Party Claim which has been assumed by Seller, but the fees and expenses of
such counsel shall be at the expense of Buyer unless either of the following
conditions exists (in which case the fees and expenses of such counsel shall be
at the expense of Seller): (i) Seller has agreed in writing to pay such fees and
expenses, (ii) Seller, or Seller's counsel, is not diligently pursuing such
defense or (iii) Buyer has defenses which are different from those of Seller. If
Seller exercises its right to assume the defense against any such Third-Party
Claim as provided above, Buyer shall cooperate with Seller in such defense and
make available to Seller, at Seller's expense, all pertinent records, materials
and information in its possession or under its control relating thereto as is
reasonably required by Seller. Similarly, if Buyer is, directly or indirectly,
conducting the defense against any such Third-Party Claim, Seller shall
cooperate with Buyer in such defense and make available to it all such records,
materials and information in its possession or under its control relating
thereto as is reasonably required by Buyer. No such Third-Party Claim may be
settled by either Buyer or Seller without the written consent of the other,
which consent shall not be unreasonably withheld.
8.4 ARBITRATION. (a) The parties hereto agree that they shall
use their best efforts to settle amicably any disputes, differences or
controversies arising among the parties out of or in connection with the
indemnification provisions of this Agreement. However, any such disputes,
differences or controversies, if not so settled within thirty (30) days after
occurrence thereof, shall be submitted to arbitration in accordance with the
rules and procedures of the American Arbitration Association, by three
arbitrators appointed in accordance with such rules, at the request of any
party; provided,
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however, that nothing contained herein shall prevent the party or parties
hereinafter indicated from pursuing any and all of their rights and remedies in
the courts of any competent jurisdiction, without submitting the same to
arbitration or consenting to the arbitration thereof, as follows:
(i) Buyer, in the event of a default or alleged default by a
Selling Party in its obligations with respect to Excluded Liabilities or under
Articles 2, 6, or 7 hereof or any other matter to which the Liability Cushion
shall not be applicable.
(ii) Either party, in the event of the occurrence or alleged
occurrence of an event of termination under Article 9 or payment of the Break-up
Fee in respect thereof.
(iii) Buyer, in the event of a claim for or in the nature of
fraud. An individual matter shall be deemed fully and finally resolved in the
event of a matter submitted to arbitration upon the entry of an award by the
arbitrator and, in the event of a matter submitted to a court, upon the entry of
judgment by a court of final authority. Any award rendered as a result of
arbitration shall be final and may be enforced in any court having jurisdiction
over the party to be bound.
ARTICLE 9
9. TERMINATION.
9.1 TERMINATION. Notwithstanding anything in this
Agreement to the contrary:
(a) Mutual Consent. This Agreement may be
terminated by the mutual written consent of Buyer and Seller.
(b) Selling Party Breach. If, notwithstanding
the terms of this Agreement, any of the conditions to Buyer's obligation to
proceed set forth in Article 3 hereof shall not have been fulfilled, or any
of the covenants, agreements or obligations required by the terms of Article
6 to be performed by a Selling Party shall not have been duly or properly
performed or complied with or a Selling Party hereto shall intentionally fail or
refuse to consummate the transactions contemplated herein or to take any other
action referred to herein to be taken by it necessary to consummate the
transactions contemplated herein, then Buyer shall have the right in addition
to the other rights specified in Section 9.2, at its election, to terminate this
Agreement by five (5) days' written notice given to Seller or to close the
purchase of the Purchased Assets as herein provided.
(c) Outside Date. Except as provided in Section
9.1(b) hereof, if for any reason the Closing Date shall not have occurred on or
before June 28, 1996, unless otherwise agreed to in writing between Buyer and
Seller, this Agreement shall terminate automatically at the close of business on
such date.
(d) Legal Restraint. Any party may, by at least
forty-five days' prior notice to the other parties, terminate this Agreement if
at the time the written notice of termination is given there is in effect a
preliminary or permanent injunction enjoining the sale, transfer or delivery of
the Purchased Assets or the payment of the Purchase Price, unless such
injunction shall be stayed, lifted or dismissed.
(e) No Shop. Without limiting Section 7.8 or any
other provision of this Agreement, Buyer shall have the option (exercisable in
its sole discretion) to terminate this Agreement, upon written notice to Seller,
if after the date hereof (i) there is any negotiation or solicitation by Seller
or any of its Affiliates which would violate Section 7.8 of this Agreement or
(ii) any person conducts an auction, or solicits or requests bids or offers,
with respect to a purchase of all or a material portion of the Purchased Assets
or the Business or any other transaction referred to in Section 7.8 (whether or
not any such bids or offers are made or accepted).
(f) Decrease of Revenue - Seller. If during the
Revenue Measurement Period the revenue from operations of the Business being
purchased hereunder shall be twenty percent (20%) or more less than the revenue
for such period reflected on the Transition Plan (calculated as provided in
Section 2.6 above), then Seller shall have the right, at its election, to
terminate this Agreement by
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five (5) days' written notice given to Buyer upon payment to Buyer of a sum
equal to two (2) times the Break-up Fee (i.e., $500,000) (unless such
termination shall occur prior to the satisfaction of the condition set forth in
Section 3.6(h) above, then in any such case the Break-up Fee shall be
$1,000,000), or to close the sale of the Purchased Assets as herein provided;
provided, that Seller shall be entitled to so terminate this Agreement only if
(i) the representations and warranties of each of the Selling Parties contained
in this Agreement shall be true and correct in all material respects and each of
the Selling Parties shall have performed all of its obligations under this
Agreement to the extent required to be performed on or prior to the scheduled
Closing Date; and (ii) the consummation of the transaction contemplated hereby
shall not have been prevented by the failure of any condition to its obligations
set forth in this Agreement to have been satisfied as a consequence of any act
or omission by a Selling Party.
(g) Buyer Breach. If, notwithstanding the terms of
this Agreement, any of the conditions to a Selling Party's obligation to proceed
set forth in Article 3 hereof shall not have been fulfilled, or Buyer shall
intentionally fail or refuse to consummate the transactions contemplated herein
or to take any other action referred to herein to be taken by it necessary to
consummate the transactions contemplated herein, then Seller shall have the
right, at its election, to terminate this Agreement by five (5) days' written
notice given to Buyer or to close the purchase of the Purchased Assets as herein
provided.
9.2 REMEDIES.
(a) Specific Performance. If Buyer shall desire to
proceed with the Closing despite any breach, condition or intentional failure or
refusal of a Selling Party of the type described in Section 9.1(b) hereof, Buyer
shall have the right to pursue the remedy of specific performance as provided in
Section 10.1.
(b) Damages. Subject to compliance with the terms
of Section 9.2(d), if Buyer shall terminate this Agreement pursuant to Section
9.1(b), 9.1(c) or 9.1(e), it shall have the right to collect from the Selling
Parties or any of them the Break-up Fee; and if Seller shall terminate this
Agreement pursuant to Section 9.1(f), Buyer shall have the right to collect from
the Selling Parties or any of them a sum equal to the applicable Break-up Fee
set forth in Section 9.1(f), depending on whether the condition set forth in
Section 3.6(h) shall have been satisfied. If Seller shall terminate this
Agreement pursuant to Section 9.1(g), it shall have the right to collect from
Buyer its reasonable attorneys' fees and other out-of-pocket expenses incurred
in connection with the negotiation and execution of this Agreement, the Consent
Solicitation and other matters contemplated hereby.
(c) Effect of Termination. Any termination of this
Agreement by either party hereto shall have the effect of causing this Agreement
thereupon to become void and of no further force or effect whatsoever, and
thereupon no party hereto will have any rights, duties, liabilities or
obligations of any kind or nature whatsoever against any other party hereto
based upon either this Agreement or the transactions contemplated hereby,
except, in each case (i) the obligations of Seller to pay Buyer under Sections
7.7 or 9.2(d), (ii) the obligations of each party with respect to
confidentiality set forth in Sections 6.1 and 6.4, and with respect to brokers
and finders set forth in Section 7.3, (iii) any obligations under Section 7.8
and Sections 9.2(b) or 9.2(d), and (iv) the obligations of each party with
respect to accountants' fees set forth in Section 2.6.
(d) Attorneys' Fees. In any action, suit, or other
proceeding under or to enforce any provision of this Agreement, the prevailing
party shall be entitled to recover its reasonable attorneys' fees and other
out-of-pocket expenses from the losing party.
ARTICLE 10
10. MISCELLANEOUS.
10.1 SPECIFIC PERFORMANCE. The Selling Parties jointly and
severally agree that the Purchased Assets are unique property that cannot be
readily obtained on the open market and that Buyer will be irreparably injured
if this Agreement is not specifically enforced. Therefore, Buyer shall have the
right specifically to enforce the performance of the Selling Parties under this
Agreement without the necessity of posting any bond or other security, and each
Selling Party hereby waives the defense in any such suit
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that Buyer has an adequate remedy at law and agrees not to interpose any
opposition, legal or otherwise, as to the propriety of specific performance as a
remedy. The remedy of specifically enforcing any or all of the provisions of
this Agreement in accordance with this Section shall not be exclusive of any
other rights which Buyer may have to terminate this Agreement, or of any other
rights or remedies which Buyer may otherwise have under this Agreement or
otherwise, all of which rights and remedies shall be cumulative.
10.2 BINDING AGREEMENT; ASSIGNMENT. All the terms and
provisions of this Agreement shall be binding upon, inure to the benefit of, and
be enforceable by, the parties hereto and their respective successors, heirs,
legal representatives and permitted assigns. No Selling Party may assign any of
its rights or obligations under this Agreement. This Agreement and all rights of
Buyer shall be assignable to one or more subsidiaries or affiliates of Buyer.
Such assignment shall not relieve Buyer of its obligations hereunder.
10.3 LAW TO GOVERN. This Agreement shall be construed and
enforced in accordance with the internal laws of the State of Delaware
applicable to contracts executed, delivered and to be fully performed in the
State of Delaware, without regard to contrary principles of conflict of laws.
10.4 NO PUBLIC ANNOUNCEMENT. No party hereto shall, without
the prior written approval of Buyer and Seller, make any press release or other
public announcement concerning the transactions contemplated by this Agreement,
except as and to the extent that Buyer or Seller shall be so obligated by law or
the rules of any stock exchange, in which case such party shall so advise the
other party and Buyer and Seller shall use their reasonable best efforts to
cause a mutually agreeable release or announcement to be issued; provided that
the foregoing shall not preclude communications or disclosures necessary to
implement the provisions of this Agreement or to comply with accounting and SEC
disclosure or reporting obligations.
10.5 NOTICES. All notices shall be in writing and shall be
deemed to have been duly given if delivered personally or when deposited in the
mail if mailed via registered or certified mail, return receipt requested,
postage prepaid, or when delivered to a nationally recognized overnight courier
service or when sent by electronic facsimile transmission (with a copy to follow
by mail as aforesaid), to the other party hereto at the following addresses:
if to Seller, to:
The Software Developers Company, Inc.
33 Riverside Drive
Pembroke, Massachusetts 02359
Attention: President
with a copy to:
Testa Hurwitz & Thibeault, LLP
High Street Tower
125 High Street
Boston, Massachusetts 02110
Attention: John M. Hession, Esq.
if to Buyer, to:
Programmer's Paradise, Inc.
1163 Shrewsbury Avenue
Shrewsbury, New Jersey 07702
Attention: President
with a copy to:
Golenbock, Eiseman, Assor & Bell
437 Madison Avenue
New York, New York 10022
Attention: Lawrence M. Bell, Esq.
or to such other address as any such party may designate in writing in
accordance with this Section 10.5.
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10.6 FEES AND EXPENSES. Except as otherwise provided in
Sections 2.6, 7.7 and 9, each of the parties hereto shall bear its own costs and
expenses (including, without limitation, fees and disbursements of its counsel,
accountants and other financial, legal, accounting or other advisors) incurred
or otherwise payable by it in connection with the preparation, negotiation,
execution, delivery and performance of this Agreement and each of the other
documents and instruments executed in connection with or contemplated by this
Agreement.
10.7 CONVENIENCE OF FORUM; CONSENT TO JURISDICTION. The
parties to this Agreement, acting for themselves and for their respective
successors and assigns, without regard to domicile, citizenship or residence,
hereby expressly and irrevocably elect as the sole judicial forum for the
adjudication of any matters arising under or in connection with this Agreement,
and consent and subject themselves to the jurisdiction of, the courts of the
State of New York located in New York City, and/or the United States District
Court for the Southern District of New York and/or the Bankruptcy Court for the
Southern District of New York, in respect of any matter arising under this
Agreement. Service of process, notices and demands of such courts may be made
upon any party to this Agreement by personal service at any place where it may
be found or giving notice to such party as provided in Section 10.5.
10.8 SEVERABILITY. In the event that any of the provisions
contained in this Agreement would be held to be invalid, prohibited or
unenforceable in any jurisdiction for any reason because of the scope, duration
or area of its applicability or for other reasons, unless narrowed by
construction, such provision shall for purposes of such jurisdiction only, be
construed as if such invalid, prohibited or unenforceable provision had been
more narrowly drawn so as not to be invalid, prohibited or unenforceable (or if
such language cannot be drawn narrowly enough, the court making any such
determination shall have the power to modify, to the extent necessary to make
such provision or provisions enforceable in such jurisdiction, such scope,
duration or area or all of them, and such provision shall then be applicable in
such modified form). If, notwithstanding the foregoing, any such provision would
be held to be invalid, prohibited or unenforceable in any jurisdiction for any
reason, such provision, as to such jurisdiction only, shall be ineffective to
the extent of such invalidity, prohibition or unenforceability, without
invalidating the remaining provisions of this Agreement. No narrowed
construction, court-modification or invalidation of any provision shall affect
the construction, validity or enforceability of such provision in any other
jurisdiction. Subject to the foregoing, in case any one or more of the
provisions contained herein should be invalid, illegal or unenforceable in any
respect, the validity, legality and enforceability of the remaining provisions
contained herein shall not be affected in any way thereby.
10.9 ENTIRE AGREEMENT. This Agreement and the schedules,
exhibits and other documents referred to herein which form a part hereof contain
the entire understanding of the parties hereto in respect of the subject matter
contained herein. There are no restrictions, promises, representations,
warranties, covenants, or undertakings, other than those expressly set forth or
referred to herein. This Agreement supersedes all prior agreements and
understandings between the parties with respect to such subject matter, except
that the provisions of any former letter agreement between or among Buyer and
any of the Selling Parties with respect to confidentiality shall survive until
the Closing.
10.10 AMENDMENTS; CONSENTS AND WAIVERS. This Agreement and the
other agreements to be executed in connection herewith may not be modified,
amended or terminated except by a written agreement specifically referring to
this Agreement signed by Buyer and Seller. Any failure by any party to this
Agreement to comply with any of its obligations hereunder may be waived by any
Seller in the case of a default by Buyer and by Buyer in case of a default by a
Selling Party. No waiver shall be effective unless in writing and signed by the
party granting such waiver, and no such waiver shall be deemed a waiver of any
subsequent breach or default of the same or similar nature.
10.11 COUNTERPARTS. This Agreement may be executed in any
number of counterparts, each of which shall be deemed an original but all of
which shall constitute one and the same instrument.
10.12 NO THIRD-PARTY BENEFICIARIES. Nothing herein, express or
implied, is intended or shall be construed to confer upon or give to any person,
firm, corporation or legal entity, other than the parties hereto, any rights,
remedies or other benefits under or by reason of this Agreement or any other
documents executed in connection with this Agreement.
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10.13 SECTION HEADINGS. The Article, Section and paragraph
headings contained herein are for the purposes of convenience only and are not
intended to define or limit the contents of this Agreement.
IN WITNESS WHEREOF, the parties have duly executed this
Agreement as of the date first above written.
PROGRAMMER'S PARADISE, INC.
By: /s/ Roger Paradis
-----------------------------
THE SOFTWARE DEVELOPER'S
COMPANY, INC.
By: /s/ Barry Bycoff
-----------------------------
SOFTWARE DEVELOPER'S COMPANY
GMBH
By: /s/ Barry Bycoff
-----------------------------
A-48
APPENDIX B
[X]PLEASE MARK CONSENTS
AS IN THIS EXAMPLE
REVOCABLE CONSENT
THE SOFTWARE DEVELOPER'S COMPANY, INC.
CONSENT OF STOCKHOLDER
The undersigned, being a holder of record of shares of (i) Common Stock (the
"Common Stock"), or (ii) Series C Preferred Stock (the "Preferred Stock"), of
The Software Developer's Company, Inc. (the "Company"), hereby waives any
requirement for calling, giving notice of and holding a meeting of the
stockholders of the Company and hereby consents and agrees to the following
actions:
1. 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 of Purchase and Sale of Assets, by and among Programmer's
Paradise, Inc., the Company and Software Developer's Company GmbH, dated as
of May 16, 1996, in the form attached as Appendix A to the Consent
Solicitation Statement accompanying the Notice (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. or such other name as the Board of
Directors deems appropriate.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" APPROVAL OF THE ABOVE PROPOSAL.
FAILURE TO CHECK ANY OF THE ABOVE BOXES WILL, IF THIS CONSENT CARD HAS BEEN
SIGNED AND DATED, CONSTITUTE APPROVAL OF AND CONSENT TO THE ADOPTION OF THE
PROPOSAL.
(NOTE--Please sign exactly as your name or names appear on the label. If more
than one name appears, all persons so designated should sign. When signing in a
representative capacity, please give your full title.)
THIS CONSENT IS SOLICITED ON BEHALF OF THE COMPANY'S BOARD OF DIRECTORS.
Please be sure to sign and date Date:
this Consent in the box below. ----------------------
- - -------------------------- -------------------------------
Stockholder sign above Co-holder (if any) sign above
- - --------------------------------------------------------------------------------
Detach above card, sign, date and mail in postage paid envelope provided
THE SOFTWARE DEVELOPER'S COMPANY, INC.
- - --------------------------------------------------------------------------------
PLEASE ACT PROMPTLY
SIGN, DATE & MAIL YOUR CONSENT CARD TODAY
- - --------------------------------------------------------------------------------
B-1
[LETTERHEAD OF COOPERS & LYBRAND L.L.P.]
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Consent Solicitation Pursuant to Section
14(a) of the Securities Exchange Act of 1934, dated as of June 3, 1996, of our
report dated July 14, 1995, on our audits of the consolidated financial
statements of The Software Developer's Company, Inc. as of March 31, 1995 and
1994, and for the years ended March 31, 1995, 1994, and 1993.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
June 3, 1996
[LETTERHEAD OF ARTHUR ANDERSEN LLP]
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
dated December 6, 1995 on the financial statements of Internet Security
Corporation included in this Definitive Consent Solicitation Statement pursuant
to Section 14(a) of the Securities Exchange Act of 1934, dated as of June 4,
1996.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Boston, Massachusetts
June 4, 1996
