SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 1996
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from _______ to ________
Commission File Number 0-25646
EXPERT SOFTWARE, INC.
State of Delaware - I.R.S. Employer Identification No.: 65-0359860
800 Douglas Road
Executive Tower, Suite #750
Coral Gables, FL 33134
(305) 567-9990
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock (par value of $0.01 per share)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ x ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [ ].
The aggregate market value of shares of Common Stock held by non-affiliates of
the registrant as of March 21, 1997 was approximately $12,675,000. For purposes
of this computation, all executive officers, directors and 5% owners of the
registrants have been deemed to be affiliates.
As of March 21, 1997, there were 7,514,679 shares of the Registrant's Common
Stock, $ .01 par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the following documents have been incorporated by reference into
the parts indicated: The registrant's definitive Proxy Statement to be filed
with the Securities and Exchange Commission not later than 120 days after the
end of the fiscal year covered by this report - Part III.
Page 1 of 52.
The exhibit index is on page 38.
<PAGE>
Index to Items
Part I Page
Item 1. Business.............................................3
Item 2. Properties...........................................9
Item 3. Legal Proceedings....................................9
Item 4. Submission of Matters to a Vote of Security
Holders..............................................9
Part II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters..........................9
Item 6. Selected Financial Data.............................11
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................12
Item 8. Consolidated Financial Statements and
Supplementary Data..................................20
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.................37
Part III
Item 10. Directors and Executive Officers of the
Registrant..........................................37
Item 11. Executive Compensation..............................37
Item 12. Security Ownership of Certain Beneficial Owners
and Management......................................37
Item 13. Certain Relationships and Related Transactions......37
Part IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K.................................38
Signatures...................................................40
This Form 10-K contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The Company's actual results could differ materially from
those set forth in the forward-looking statements. Factors that might cause such
a difference are discussed in the section entitled "Factors Affecting Future
Operating Results" on page 20 of this Form 10-K.
<PAGE>
PART 1
ITEM 1. BUSINESS
General
Expert Software, Inc. ("Expert" or the "Company") is a leading publisher of
high-quality, value-priced consumer software that addresses a broad range of
consumer interests and everyday tasks. The Company currently sells over 125
products in the productivity, lifestyle, small office/home office, entertainment
and education market categories. The Company promotes the Expert brand name in
order to generate customer loyalty, encourage repeat purchases and differentiate
the Expert products to retailers and consumers. Expert targets the growing
audience of home PC users who value fully-featured and easy-to-use software.
Expert brand products sell primarily for under $20, a price point intended to
generate impulse purchases in mass market environments.
The Company seeks to develop a broad line of products in categories in which a
leading market share can be attained. The Company also creates product
franchises by upgrading successful products and developing product line
extensions and complementary products. The Company's titles are primarily
available on the Windows operating system, and substantially all are available
on CD-ROM. Over 18.3 million units of Expert products have been sold since 1989,
with more than 4.8 million units sold in 1996 and more than 3.6 million units
sold in 1995. Expert products are currently available at retailers such as Best
Buy, Computer City, CompUSA, Electronics Boutique, , Micro Center, Babbages
Etc., Office Depot, OfficeMax, PriceCostco, Radio Shack, Sam's Club, , Staples,
and Toys "R" Us.
"Expert Software", "Swfte" and all of Expert's logos and product names are
trademarks of the Company. This annual report also contains trademarks of
companies other than those of the Company. The Company includes its wholly-owned
subsidiaries, Swfte International, Ltd. and ES International, Inc.
Industry Background
In recent years, the installed base of PCs in homes has grown substantially as
prices have declined and as improvements in power and capability have been
achieved. There are a number of factors driving the sales of PCs into U.S.
households beyond the general impact of falling prices and increased
performance. Enabling technologies and standards, such as graphical user
interfaces and the Windows operating system, have made PCs easier to use for a
broad range of applications resulting in the transformation of PCs into
general-purpose tools. In addition, today's PCs feature high-speed
microprocessors, large amounts of memory, high-resolution monitors and enhanced
sound and graphics capabilities. These advanced capabilities, along with the
introduction of CD-ROM technology, have allowed software developers to produce
more engaging software with advanced three-dimensional graphics, realistic sound
and full motion video. The Company believes that CD-ROM technology will continue
to impact the growth of the consumer software market as software developers take
advantage of the increasing multimedia capabilities of this hardware technology.
There can be no assurance that the Company will be successful in developing and
marketing products for certain advanced and emerging operating systems and media
formats, including the Internet, and the introduction of new technologies could
render the Company's existing products obsolete or unmarketable.
The increased penetration of PCs into the home has created a large and growing
mass market for consumer software as consumers wish to maximize the utility of
their PCs. The distribution of consumer software has also expanded beyond
traditional software retailers and computer stores to include general mass
merchandisers. In response to these developments, increasing numbers of consumer
software products are being developed to address a broad range of consumer
interests and everyday tasks. Consequently, the Company believes that consumers
are more frequently purchasing software on impulse in the same way that they buy
books, music CDs and movie videos and the distribution channels for consumer
software could continue to expand to include book and music stores, video
outlets and supermarkets. Consumer preferences for software products, however,
are difficult to predict, and few consumer software products achieve sustained
market acceptance.
As consumer software becomes more of a mass market product, it will become
increasingly important for consumer software companies to have direct
relationships with retailers and to effectively market their products to
consumers. Competition for retail shelf space is also likely to increase due to
the proliferation of consumer software products and companies. As a result, the
Company believes that in order to be successful, consumer software companies
must have a consumer-driven focus, a broad offering of category-leading
products, close relationships with retailers, a recognized brand name and a
cost-efficient business model.
Business Strategy
The Company's objective is to be a leading publisher of high-quality,
value-priced consumer software and plans to pursue the following strategies:
Maintain Consumer-Driven Focus. The Company seeks to develop creative and
innovative products with mass appeal. The Company believes that many consumers
base their software purchasing decisions largely on recognized brands, quality,
value and ease of use. As a result, the Company is committed to providing
products that are high quality and value priced, and require minimal technical
expertise to operate. The Company's consumer-oriented marketing strategy
combines attractive and informative packaging with promotional campaigns to
encourage impulse purchases. To enhance customer satisfaction, the Company also
provides technical support for all of its products. In addition, the Company
revises products in response to consumer feedback and upgrades products to
utilize new technologies, such as CD-ROM, Windows 95 and the Internet, as those
technologies gain broader acceptance in the consumer market.
Develop Diversified Titles with Strong Franchise Value. The Company seeks to
develop a broad line of products in sustainable categories in which a leading
market share can be obtained. The Company currently has over 125 products
available for sale in stores in the productivity, lifestyle, small office/home
office, entertainment and education market categories. The Company creates
franchises by upgrading successful products and developing product line
extensions and complementary products. For example, Home Design became the
foundation of a product franchise that includes Home Design 3D(R), Landscape,
Landscape Design 3D and Easy Home Gardening. The Company also seeks to create
evergreen titles with extended life cycles by upgrading successful products to
incorporate new features and to adapt to new technologies.
Leverage Distribution Strengths. The Company has established a distribution
network based largely upon direct sales to, and established relationships with,
a broad base of retailers, including office supply stores, software specialty
stores, warehouse clubs, consumer electronic stores, mall-based chains and mass
merchants, which it believes to be one of its major strengths. The Company
believes that its broad product line, self-supporting packaging,
consumer-oriented marketing programs, and retail support enable it to
effectively sell directly to retailers. Direct sales to retailers allow the
Company to assist retailers in offering a suitable mix of Expert products and
tracking inventory levels and sell-through rates. In addition, direct sales to
retailers allow the Company to tailor marketing efforts, promotions and
merchandising displays to fit the needs of specific retailers. This strategy
enables the Company to identify and react to trends in the retail consumer
market and to help build incremental sales. The Company believes that its
attention to detail at the retail level and careful execution have been the key
factors to its successful marketing programs and have contributed to the sales
growth of its products. The Company is also working to develop Internet access
to and downloading of its software to customers at its web-site at
http://www.expertsoftware.com.
McDonaldland(R). In January 1997, Expert signed a licensing agreement with
McDonald's Corporation for use of McDonaldland(R) characters and marks in
software intended for family entertainment. Under this agreement, Expert, in
cooperation with McDonald's, will develop and market family oriented consumer
software featuring McDonaldland(R) characters through a wide variety of
distribution channels. The first software titles are expected to be introduced
during the second half of 1997.
Promote Brand Names. Commencing in 1997 the Company promotes it's products
under four brands: Expert, McDonaldland(R), Bicycle(R) and Gamers Choice(TM).
The Company promotes the Expert brand name in order to encourage customer
loyalty and repeat purchases. Expert believes that its brand name products are
recognized by consumers as high-quality, fully-featured software that
consistently exceed consumer expectations. Drawing upon established consumer
marketing techniques, the Company uses the Expert brand name and easily
identifiable packaging which emphasizes high-impact design and concise,
non-technical product information.
The Company believes that by promoting recognizable brand names and consistent
packaging, satisfied consumers are more likely to purchase additional products
when faced with multiple options in a software category. The Company also has an
established public relations effort which seeks to broaden consumer awareness
and acceptance of the Expert, McDonaldland(R), Bicycle(R) and Gamers Choice(TM)
brand names. As the consumer software industry becomes more of a mass market,
the Company believes that brand name recognition will become an increasingly
important means of product differentiation among retailers and consumers.
Manage Development Process. The Company seeks to carefully manage its
development process to provide consistent product quality, shorter and more
predictable delivery schedules, and lower investment risks and overall
development costs. Historically, the Company's internal development efforts have
been focused primarily on product design and features, consistent user
interfaces, ease of use, and product quality and consistency. The Company
supplements its internal product development resources by utilizing existing
technologies and externally developed programming and content. This process
allows the Company to maintain internal control over the creative and
market-driven aspects of its product development efforts, while using outside
resources to lessen its development risks.
Operate Profitably at Consumer Price Points. To maintain its ability to
profitably deliver value-priced consumer software, the Company seeks to
carefully manage its development process, control its component costs while out
sourcing its production and warehousing overhead, and invest in systems that
permit efficient management of high sales volume. As consumer software becomes
more of a mass market driven by consumer demand and lower price points, the
Company believes that the ability to profitably develop, produce, market and
support value-priced products will be an important competitive factor.
Acquire Complementary Products, Technologies and Businesses. The Company
believes that the consumer software industry will continue to consolidate in
response to pressures to expand market offerings and develop broad distribution
channels. The Company intends to explore opportunities to expand its business by
acquiring or licensing products or technologies or acquiring businesses that are
consistent with its overall business strategy. The Company anticipates that its
future acquisitions may be structured as purchases for accounting purposes. As a
result, the Company expects that any such acquisitions will create intangible
assets which will be amortized over time and may be accompanied by write-offs of
purchased research and development and other intangible assets.
Acquisition
On November 2, 1995, Expert acquired Swfte International, Ltd. ("Swfte"), a
developer and publisher of consumer software (the "Swfte Acquisition"). As a
result of the Swfte acquisition, the Company develops and markets a series of
playing card software products under the Bicycle(R) brand name pursuant to a
licensing agreement with The United States Playing Card Company.
Products
The Expert product line addresses a wide range of interests and hobbies. The
Company's products sell in retail stores for under $20, a price point intended
to generate impulse purchases in high-traffic mass market environments.
Currently, the Company's product line includes over 125 titles. During 1996,
Expert introduced over 50 new titles, compared to approximately 40 new titles
during 1995.
The Company currently targets five consumer software market categories:
productivity, lifestyle, small office/home office, entertainment and education.
Due to the diversity of its product offerings, the Company is not dependent on
any single product. In addition, the Company seeks to develop products with long
life cycles; as a result, approximately 84% of its sales in 1996 came from
existing and upgraded products. Most of the Company's titles are compatible with
Windows and Windows 95, and substantially all are available on CD-ROM.
Entertainment. Expert entertainment products target users who seek
entertainment which can be easily mastered and can provide gratification in
short periods of time. Casino is an entertainment product that includes
blackjack, roulette, draw poker, baccarat, craps and slot machine games, using
graphics, animation and sound effects to simulate actual game play.
Entertainment products also include the Bicycle(R) brand playing card series,
the Gamers Choice(TM) brand of game software and the McDonaldland(R) brand
products.
Productivity. Expert productivity products enable users to more efficiently
accomplish a wide variety of tasks using their PCs. The Company has focused on
productivity tasks such as designing a new home, landscaping a yard or creating
a family newsletter. For example, Home Design 3D(R) is a simple-to-use design
program that can be used to lay out a three-dimensional building plan complete
with furniture objects that are provided with the program. Designs can be tested
with various color schemes and movable walls, rooms and furniture that can be
resized or modified with simple design tools and the user can "walk through" the
three-dimensional design.
Lifestyle. Expert lifestyle products are designed to provide enrichment for
all family members. The lifestyle products include an astronomy product that
allows users to plot the night sky, a diet and nutrition advisor, a personalized
greeting card maker and engaging screen savers. Travel Planner is a lifestyle
product that allows users to plot the fastest and shortest routes between
locations throughout the United States and provides maps and detailed written
itineraries which include specific directions, mileage and estimated costs. The
CD-ROM version of Travel Planner also provides the user with interactive
multimedia videos, graphics of travel attractions and suggested scenic routes.
Small Office/Home Office. Small office and home office ("SOHO") users
require powerful, easy-to-use and inexpensive software for business functions
such as creating simple forms, printing labels and generating standard business
agreements. The CD-ROM version of Resume Writer is a SOHO product that provides
a variety of tools for a job search, including video clips of interviewing
advice and examples, resume templates and sample resumes, a word processor for
creating cover letters and Internet access to the Company's exclusive Career
Center web-site with a database of names and addresses of various companies to
whom resumes could be sent by the user. Resume Writer also includes a contact
database to track where resumes were sent and an appointment calendar to assist
in tracking appointments and follow up.
Education. Expert education products are designed to make learning an
interactive adventure for children and adults. Typing provides personalized
lessons and tests designed for varying skill levels. Speak Spanish offers an
interactive immersion into a 3D city where the user builds vocabulary and
pronunciation skills, while Algebra provides animated examples to allow a
student to review and practice algebra at their own pace.
Sales and Marketing
Consumers can purchase Expert products at over 25,000 retail stores. Expert
sells its products primarily on a direct basis to office supply stores, software
specialty stores, warehouse clubs, consumer electronics stores, mall-based
chains and mass merchants, as well as to distributors. Retailers selling the
Company's products include Best Buy, Computer City, CompUSA, Electronics
Boutique, Micro Center, Babbages Etc., Office Depot, OfficeMax, PriceCostco,
Radio Shack, Sam's Club, Staples, and Toys "R" Us.
The Company's customers are not contractually required to make future
purchases of the Company's products and therefore could discontinue carrying the
Company's products in favor of a competitor's products or for any other reason.
There can be no assurance that the Company will be able to increase or sustain
its current amount of retail shelf space or promotional resources, and as a
result, the Company's operating results could be adversely affected.
In 1996, Office Depot and Ingram Micro each represented 10% or more of the
Company's sales. In 1995, Ingram Micro, Office Depot and Best Buy each
represented 10% or more of the Company's sales. The Company believes that mass
market retailers will increasingly be significant outlets for consumer software.
The Company believes that its broad product line, self-supporting packaging,
consumer-oriented marketing programs, and retail support enable it to
effectively sell directly to retailers. Direct retailer sales allow the Company
to actively market and merchandise its products as well as to identify and react
more quickly to trends in the retail consumer market.
The Company's direct retail accounts are managed by its sales personnel, who
work closely with corporate buyers and other purchasing and marketing personnel.
Expert seeks to assure that retailers are carrying a suitable mix of the
Company's products, that inventory levels are adequate, that stocking models are
properly configured to avoid over- and under-stocking, and that merchandising
programs are properly executed. Offering a wide variety of products, the Company
can provide retailers with an assortment of titles in categories of interest to
consumers. The Company also supports its retailers by setting up special Expert
displays, executing targeted promotions, and analyzing sales trends to help
build incremental sales. These efforts are supported by the Company's nationwide
network of field merchandisers who closely monitor and support its large retail
accounts. The Company believes that such efforts have contributed to the sales
growth of its products.
The Company currently intends to continue its efforts to expand its presence
in additional distribution channels with retailers such as book and music
stores, video outlets, drug stores and supermarkets. Additionally, Expert is
incorporating Internet capabilities into many of its new and upgraded products,
and has established a web-site at which customers and prospective customers may
review the Company's products. Expert is developing its on-line capabilities
with the objective of being able to download and sell its software to customers
on the Internet.
The Company's marketing department seeks to create and execute high-impact
merchandising programs with the goal of maximizing Expert's retail exposure.
Drawing upon established consumer marketing techniques, the Company uses the
Expert brand name and easily identifiable packaging which emphasizes high-impact
design and concise, non-technical product information. The Company believes that
its consumer-driven marketing and the relatively high perceived value and low
price points of its products lead to higher visibility and impulse purchases of
Expert's products in retail stores. The Company seeks to tailor marketing
efforts, promotions and merchandising displays to fit the needs of specific
retailers and provides in-store support to execute its campaigns.
International sales represented approximately 24%, 15% and 7% of Expert's
sales in fiscal years ended 1996, 1995 and 1994, respectively. International
sales have been primarily to customers in the United Kingdom, Canada, Australia
and Western Europe. The Company began to broaden its international sales efforts
in 1994 by establishing relationships with foreign publishers and distributors.
The Company provides technical support to customers by telephone and facsimile
machine at no additional charge. The Company has installed a sophisticated
telephone system and call handling center to facilitate its response to customer
inquiries. The Company has also begun offering technical support on its web page
on the Internet at http://www.expertsoftware.com.
The Company is exposed to the risk of product returns from retailers and
distributors. The Company establishes reserves for returns that it believes to
be adequate based upon historical return data and its analysis of current
customer inventory levels and sell-through rates. Nonetheless, the Company may
accept substantial product returns to maintain its relationships with retailers
and its access to distribution channels. The Company's policies also allow for
returns of defective merchandise for credit. Any significant amount of product
returns could have a material adverse effect on the Company's business,
operating results and financial condition. Sales are typically made on credit
with varying terms, and the Company does not hold collateral to secure payment.
If a significant portion of the Company's accounts receivable was to become
uncollectible or subject to extended payment terms, the Company's business,
operating results and financial condition could be adversely affected.
Development
The Company seeks to develop a broad line of products in sustainable market
categories. The Company depends on a flow of creative ideas to develop
high-quality, value-priced products. Expert believes that its efficient
development model has certain key advantages including consistent product
quality, reliable delivery schedules, cost containment and low investment risk.
The Company may also acquire products through the acquisition of other software
companies or the acquisition or licensing of software products or technologies.
Development expenses totaled $3.3 million, $2.2 million and $1.3 million in
1996, 1995 and 1994, respectively.
The Company's product managers oversee the development of various products
from conception through completion, and control the content, design, scope and
schedule of the project. New product ideas are evaluated based upon market
research on the subject area, the type and demographics of the target consumer,
and the existence and characteristics of competitive products. The Company seeks
to design new products which incorporate all of the important functions and
features of the leading competitive products and to add innovative, helpful
concepts and upgrades. Once a product is approved for development, a design
specification is created that includes the product's features. Whenever
possible, the software is designed to incorporate technology used in existing
Company products in an effort to shorten the development cycle and improve
quality and consistency. The overall product, including documentation, is
designed to meet a manufacturing specification that will meet the Company's
margin requirements at consumer price points.
The product managers then execute the project with a team that includes
programmers, artists, designers, writers and testers. Historically, the
Company's internal development efforts have been focused primarily on product
design and features, consistent user interfaces, and product quality and
consistency. The Company supplements its internal product development resources
by utilizing existing technologies and externally developed programming and
content when such utilization can result in a more efficient method of creating
a higher quality product. Using this method, the Company maintains internal
control over the creative and market-driven aspects of product development while
using external resources to shorten development time and lower development
risks. Development costs associated with externally licensed technology are
generally paid by royalties based on sales, which lowers the Company's
investment risk.
Products under development are tested by the quality assurance department
before being released for production. The department tests for bugs,
functionality, ease-of-use and compatibility with the many popular PC
configurations that are available to consumers.
Product managers are also responsible for reviewing customer feedback,
competitive products, product performance and market positioning in order to
introduce upgrades that keep abreast of consumer tastes and trends.
Operations
The Company controls all purchasing, inventory, scheduling, order processing
and accounting functions related to its operations, with all production and
warehousing performed by independent contractors in accordance with the
Company's specifications. The Company invests in computer systems to handle high
sales volumes, including order processing, inventory management, purchasing and
tracking of shipments. The Company has electronic data interchange (EDI) links
with key customers to increase the efficiency and accuracy of order processing
as well as to shorten order turnaround time. By investing in automated systems
to efficiently process high sales volumes, the Company believes it can minimize
out-of-stock positions. The Company has invested, and intends to continue to
invest in, management information systems and other capital equipment which it
believes are necessary to achieve operational efficiencies and support
increasing sales volumes.
Software orders can be automatically tracked through to delivery to enhance
customer satisfaction and prompt delivery. Shipments are generally made within
48 hours of receiving an order. The Company has relatively little backlog at any
given date, and its backlog is not indicative of potential sales for any future
period.
The Company prepares master software CD-ROMs, user manuals and packaging
designs. Disk and CD-ROM duplication, printing of documentation and packaging,
as well as the assembly of purchased components and the shipment of finished
products, are performed by third parties in accordance with the Company's
specifications. The Company has multiple sources for substantially all
components, with assembly and shipping of the Company's products currently
performed by three independent fulfillment houses. By the end of the second
quarter of 1997, the Company will be using two such fulfillment houses. To date,
the Company has not experienced any material difficulties or delays in the
production and assembly of its products. To the extent that the Company's
fulfillment houses do not continue to perform assembly and shipping functions in
a cost-efficient and timely manner, and transition to substitute fulfillment
houses is not completed in a timely fashion, the Company's business, operating
results and financial condition could be adversely affected.
Competition
The market for the Company's consumer software products is intensely and
increasingly competitive. The Company's competitors range from small companies
with limited resources to large companies with substantially greater financial,
technical and marketing resources than those of the Company. Existing consumer
software companies may broaden their product lines to compete with the Company's
products, and potential new competitors, including computer hardware and
software manufacturers, diversified media companies and book publishing
companies, may enter or increase their focus on the consumer software market,
resulting in greater competition for the Company. Although the Company competes
with a number of different companies across its product lines, the Company
regards The Learning Company, Inc. (formerly known as SoftKey International
Inc.), GT Interactive Software Corp. and CUC International Inc. as its closest
competitors based upon price points and product offerings. In addition, the
Company believes that new competitors, including large software companies and
diversified media companies, are increasing their focus on the consumer software
market, resulting in greater competition for the Company.
Only a small percentage of products introduced in the consumer software market
achieve any degree of sustained market acceptance. Principal competitive factors
in marketing consumer software include product features, quality, reliability,
brand recognition, ease of use, merchandising, access to distribution channels
and retail shelf space, marketing, price, and the availability and quality of
support services. The Company believes that it competes effectively in these
areas, particularly in the areas of quality, brand recognition, ease of use,
merchandising, access to distribution channels and retail shelf space and price.
To the extent that competitors achieve performance, price or other selling
advantages, the Company could be adversely affected. There can be no assurance
that the Company will have the resources required to respond to market or
technological changes or to compete successfully in the future. In addition,
increasing competition in the consumer software market may cause prices to fall,
which could adversely affect the Company's business, operating results and
financial condition.
Proprietary Rights and Licenses
The Company regards its software as proprietary and relies primarily on a
combination of trademark, copyright and trade secret laws, employee and third
party nondisclosure agreements and other methods to protect its proprietary
rights. The Company does not include in its products any mechanism to prevent or
inhibit unauthorized copying. Unauthorized copying occurs within the software
industry, and if a significant amount of unauthorized copying of the Company's
products were to occur, the Company's business, operating results and financial
condition could be adversely affected. Also, as the number of software products
in the industry increases and the functionality of these products further
overlaps, software developers and publishers may increasingly become subject to
infringement claims. There can be no assurance that third parties will not
assert infringement claims against the Company in the future with respect to
current or future products. Any such claims, with or without merit, can be time
consuming and expensive to defend and resolve.
The Company has in the past received communications suggesting that its
products may incorporate material covered by the copyrights, trademarks or other
proprietary rights of third parties. All such communications were, in the
Company's judgment, immaterial in nature. However, there can be no assurance
that there will not be any such communications in the future. The Company's
policy is to investigate the factual basis of such communications and to resolve
such matters promptly by negotiating licenses, enforcing its rights or taking
other appropriate actions.
There has been substantial litigation regarding copyright, trademark, and
other intellectual property rights involving computer software companies, and
the Company has in the past resorted to litigation of a routine nature to
protect its proprietary rights. In the future, it may be necessary to resort to
litigation again to enforce the Company's proprietary rights, to protect
copyrights, trademarks and trade secrets and other intellectual property rights
owned by the Company or its licensors, to defend the Company against claimed
infringements of the rights of others and to determine the scope and validity of
the proprietary rights of the Company and others. Any such litigation, with or
without merit, could be costly and a diversion of management's attention, which
could have a material adverse effect on the Company's business, operating
results and financial condition. Adverse determinations in such litigation could
result in the loss of the Company's proprietary rights, subject the Company to
significant liabilities, require the Company to seek licenses from third parties
or prevent the Company from selling its products, any of which could have a
material adverse effect on the Company's business, operating results and
financial condition.
Employees
As of December 31, 1996, the Company had 104 employees, including 30 in sales
and marketing, 22 in development, 18 in customer support and 34 in operations,
administration and finance. None of the Company's employees is represented by a
labor union or is subject to a collective bargaining agreement. The Company has
never experienced a work stoppage and believes that its relations with its
employees are good.
In March 1997, Kenneth J. Tarolla, the Company's Vice President of Development
since December 1994, resigned effective March 28, 1997. The company has begun a
search for a replacement.
Item 2. Properties
Expert leases and subleases approximately 33,000 square feet of office space
in Coral Gables, Florida. A lease for 12,000 square feet of the Company's
current office space expires on March 31, 1999, and subleases for the additional
21,000 square feet expire in August, 2000. The Company currently expects that
these facilities will be sufficient for its needs at least through 1997.
Item 3. Legal Proceedings
On October 21, 1996, the Company reported that it had settled litigation with
David H. Goodman, the former Chairman and Chief Executive Officer of Swfte, and
others. The original dispute involved the contingent purchase price pursuant to
a certain Agreement and Plan of Merger among Expert, ES I Acquisition Corp.,
Swfte and the stockholders of Swfte, dated as of October 16, 1995. The suit, as
well as counterclaims filed by Expert, were settled in the Court of Chancery,
New Castle County, Delaware. The results for the third quarter ended September
1996 include expenses of $1.9 million for the settlement and related legal and
associated costs.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5.Market for Registrant's Common Equity and Related Stockholder Matters.
The Company's common stock is traded on the Nasdaq National Stock Market under
the symbol XPRT. On December 31, 1996, there were 83 holders of record of the
Company's common stock, although the Company believes that the number of
beneficial owners of its common stock as of that date was substantially greater.
The Company does not currently pay dividends on its common stock and is
generally restricted from paying dividends pursuant to the terms of its
revolving credit agreement. The Company currently intends to retain its earnings
for future growth and, therefore, does not anticipate paying any cash dividends
in the foreseeable future.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
High Low
------ ------
Fiscal Year Ended December 31, 1996
Fourth Quarter......................... 7-1/8 3-3/8
Third Quarter.......................... 8-1/4 5
Second Quarter......................... 16-1/2 6-7/8
First Quarter.......................... 14-3/4 8
Fiscal Year ending December 31, 1995
Fourth Quarter......................... 23-1/2 12-3/4
Third Quarter.......................... 24-1/4 13-1/4
Second Quarter (Commencing April 11,
1995 )................................. 19-1/4 14-1/4
</TABLE>
<PAGE>
Item 6. Selected Financial Data
The selected financial data set forth has been derived from the consolidated
financial statements of the Company and the Predecessor. The pro forma combined
statement of operations data for 1992 does not purport to represent what the
Company's results of operations would have been if the 1992 Acquisition had
actually occurred on January 1, 1992. The following selected financial data
should be read in conjunction with the consolidated financial statements of the
Company and the related notes.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Pro
Pre- The Forma
decessor Company Combined The Company
------- ------- ------- -------------------------------
Period
From
Inception
January (October
1,1992 23,1992)
through through Years Ended December 31,
Oct.22 Dec.31 ---------------------------------------
1992 1992 1992 1993 1994 1995 1996
------- ------- ------- ------- ------- ------- -------
(in thousands, except per share data)
Statement of Operations Data:
Net sales............. $6,812 $1,795 $8,607 $12,555 $19,727 $27,638 $31,012
------- ------- ------- ------- ------- ------- -------
Operating costs and expenses:
Cost of sales (1).... 3,304 1,073 4,377 9,352 8,066 10,121 16,420
Marketing and sales.. 1,390 283 1,673 2,493 4,303 6,180 9,888
General and
administrative...... 761 274 1,035 1,631 2,824 4,293 10,124
Development.......... 221 47 268 545 1,328 2,192 3,320
Purchased research
and development..... -- -- -- -- -- 8,392 --
Loss on impairment
of assets........... -- -- -- -- -- -- 5,700
Amortization of
non-compete agreement -- 79 79 417 417 338 --
------- ------- ------- ------- ------- ------- -------
5,676 1,756 7,432 14,438 16,938 31,516 45,452
------- ------- ------- ------- ------- ------- -------
Operating income
(loss)............ 1,136 39 1,175 (1,883) 2,789 (3,878)(14,440)
Other income
(expense), net........ -- (84) (84) (457) (366) 369 92
------- ------- ------- ------- ------- ------- -------
Income (loss) before
provision (benefit)
for income taxes.... 1,136 (45) 1,091 (2,340) 2,423 (3,509)(14,348)
Provision (benefit)
for income taxes...... 421 -- 421 -- 90 (1,324) (4,067)
------- ------- ------- ------- ------- ------- -------
Net income (loss)... $ 715 $ (45) $ 670 $(2,340)$ 2,333 $(2,185)$(10,281)
======= ======= ======= ======= ======= ======= =======
Net income (loss) per
share of common
stock............. $(.01) $(.47) $.38 $(.31) $(1.33)
======= ======= ======= ======= =======
Weighted average number
of common stock and
common stock equivalents
outstanding........ 5,294 5,294 5,795 7,153 7,750
======= ======= ======= ======= =======
<PAGE>
The Company
-----------
December 31,
---------------------------------------
1992 1993 1994 1995 1996
------- ------- ------- ------- -------
(in thousands)
Balance Sheet Data:
Working capital........ $811 $2,825 $5,283 $10,651 $5,076
Total assets........... 10,419 7,762 10,682 29,069 19,077
Subordinated debt...... 2,225 2,357 2,200 -- --
Total stockholders 430 (2,042) 355 20,634 10,425
equity (deficit).........
</TABLE>
------------------------
(1) Includes amortization of software technology which amounted to $324,000
during the period from inception through December 31, 1992, $4,362,000 in 1993,
$477,000 in 1994, $283,000 in 1995 and $404,000 in 1996.
Item 7.Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
The Company designs, develops, markets and supports a broad line of
high-quality, value-oriented consumer software products. The Company currently
derives substantially all of its net sales from products sold to retailers and
distributors. The Company's products are targeted for the consumer mass market.
Expert products were first sold in 1989 by Softsync, Inc. ("Softsync"), a
software company founded by Kenneth and Susan Currier to develop and market
personal computer software for the home and small business market. In March
1990, the Curriers sold Softsync to Bloc Development Corporation ("Bloc"),
although the Curriers continued to manage the Expert product line. In October
1992, the Company was formed by the Curriers and a group of investors, and the
Company purchased substantially all of the software licenses and certain assets
and business of the Expert Division of Softsync (the "Predecessor") from Bloc
for approximately $8.4 million (the "1992 Acquisition").
As technology and consumer preferences have changed, the Company has had to
respond to these changes in a timely fashion. Starting in 1994, the Company
experienced a significant increase in the sale of its CD-ROM products. CD-ROM
products represented 3%, 19%, 46%, and 82% of gross sales in 1993, 1994, 1995
and 1996, respectively. The Company also experienced a significant shift in late
1993 to Windows-based products from DOS-based products. As a result of this
shift, the Company recognized a write-down in 1993 of $2.6 million of the
DOS-based software licenses acquired in the 1992 Acquisition.
Net sales consist of gross sales net of allowances for returns, discounts and
other adjustments. The Company adjusts its allowance for returns as it deems
appropriate. The Company may accept substantial product returns or make other
concessions to maintain its relationships with retailers and distributors and
its access to distribution channels. If the Company chooses to accept product
returns, some of that product may be defective, shelf-worn or damaged and may
not therefore be salable in the ordinary course of business. At December 31,
1996, the Company's allowance for potential returns and doubtful accounts was
$5.1 million. See Note 1 of Notes to the Company's Consolidated Financial
Statements. There can be no assurance, however, that the Company will not
experience significant returns, which could be greater than the Company's
provision for returns or could have a material adverse affect on the Company's
results of operations. In accordance with its policy, the Company will continue
to reassess market conditions and adjust its provision for returns as it deems
appropriate.
Cost of sales consists primarily of product cost, freight charges, royalties
to outside programmers and content providers, and an inventory provision for
damaged and obsolete products. In addition, cost of sales includes amortization
of software licenses acquired by the Company in connection with the 1992
Acquisition and the Swfte Acquisition. The Company currently licenses content
and programs from outside providers and, from time to time, may seek to acquire
the providers of such content or programs. Accordingly, the Company could have
additional material amortization of software expense in future periods arising
from software acquired in future acquisitions. Product costs consist of the
costs to purchase the underlying materials and print both boxes and manuals,
media costs (disks and CD-ROMs) and fulfillment (assembly and shipping).
The Company's customer mix has changed as a result of certain customers being
sold direct rather than through distributors, a broader customer base and
increases in the Company's overall net sales. The relative percentage of net
sales to the Company's major customers varies from year to year.
Acquisition
On November 2, 1995, the Company acquired all of the capital stock of Swfte.
Pursuant to the terms of the merger agreement, the purchase price was
approximately $7.0 million in cash, subject to post-closing adjustments, and
320,630 unregistered shares of Expert Common Stock.
The acquisition has been accounted for as a purchase. The Company expensed
approximately $8.4 million, or approximately 65%, of the initial purchase price
for Swfte as purchased research and development during the quarter ending
December 31, 1995. Approximately $4.5 million of the initial purchase price for
Swfte was recorded as intangible assets and is being amortized over two to two
and one-half years. Such purchase price allocation was determined based on an
independent appraisal, and related amortization was approximately $0.5 million
and $0.3 million in 1996 and 1995, respectively. Additionally, approximately
$3.5 million of such intangibles were written-off during 1996. See General and
Loss on Impairment of Assets under "Comparison of Years Ended December 31, 1996
and 1995" below.
<PAGE>
Results of Operations
The following table sets forth, for the periods indicated, the percentages of
net sales represented by each item reflected in the Company's statements of
operations.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Years Ended December 31,
-----------------------------
1996 1995 1994
-------- -------- --------
Net sales..................... 100.0% 100.0% 100.0%
Operating costs and expenses:
Cost of sales............... 52.9 36.6 40.9
Marketing and sales......... 31.9 22.4 21.8
General and administrative.. 32.7 15.5 14.3
Development................. 10.7 7.9 6.7
Purchased research and
development................. -- 30.4 --
Loss on impairment of assets 18.4 -- --
Amortization of non-compete
agreement................... -- 1.2 2.2
-------- -------- --------
146.6 114.0 85.9
-------- -------- --------
Operating income (loss)... (46.6) (14.0) 14.1
-------- -------- --------
Other income (expense), net. 0.3 1.3 (1.9)
-------- -------- --------
Income (loss) before
provision (benefit)
for income taxes.......... (46.3) (12.7) 12.2
Provision (benefit) for
income taxes................ (13.1) (4.8) 0.4
-------- -------- --------
Net income (loss)......... (33.2)% (7.9)% 11.8%
======== ======== ========
</TABLE>
General
Results of operations for 1996 were adversely impacted by certain charges
recorded in the second and third quarters. Results for the second quarter ended
June 30, 1996 were impacted significantly by a slowdown of sales at the retail
level during the three months then ended; provisions for potential excess
inventories of $2.6 million and a reduction in the estimated inventory value for
product returned of $1.4 million; an increase in estimated product returns that
exceeded expectations by $0.5 million; an increase in the provision for doubtful
accounts of $1.0 million; and a loss on impairment of intangibles of $5.7
million in connection with the Swfte acquisition. The slowdown in retail sales
resulted in the Company not meeting sales objectives, which contributed to
excess inventories. In addition, the Company experienced temporary difficulties
in the implementation of new management information systems which contributed to
purchasing higher levels of inventory than were necessary in the normal course
of business. Additionally, higher levels of returns resulted in increased
inventory. Based on the foregoing, management determined that the value assigned
to the returned goods should be lower than that assigned in prior periods, and
reserves for potential excess inventories should be increased, causing an
increase in the cost of sales.
Additionally, the products obtained in the Swfte acquisition were selling at
levels substantially below projected levels. Together with other developments
which are described below under "Loss on Impairment of Intangibles", this led
management to record a material loss on the impairment of the intangible assets
arising from the Swfte acquisition. This loss includes additional reserves for
returns and marketing allowances against the acquired accounts receivable,
additional reserves against the acquired inventories, adjustments to fixed
assets, and accruals for guaranteed royalty agreements entered into prior to the
acquisition that are not expected to be recouped in the ordinary course of
business. See the discussion at "Loss on Impairment of Intangibles" below for
further information on these adjustments.
Results for the third quarter ended September 30, 1996 were adversely affected
by provisions of $1.9 million for the settlement of the Swfte litigation and
related legal and associated costs, as well as the continued slowdown of sales
at retail during that period. Management determined that, under the prevailing
retail conditions, the Company could not operate profitably with the operating
overhead then being incurred, and responded by reducing expenses, including,
among other actions, reducing personnel significantly.
Comparison of Years Ended December 31, 1996 and 1995
Net Sales. Net sales increased 12% to $31.0 million in 1996 from $27.6 million
in 1995, due primarily to broader distribution of product, partially offset by
lower average sales prices and increased provisions for potential returns.
Average selling prices declined due to increased competition for shelf space at
retail outlets. Provisions for potential returns increased primarily due to
additional returns associated with the decline in sell-through of product at
retail. International sales increased to 24% of net sales in 1996 from 15% of
net sales in 1995 as the Company continued to broaden its international efforts
by establishing more relationships with foreign publishers and distributors.
CD-ROM products represented 82% of net sales in 1996 compared to 46% in 1995.
Management expects CD-ROM products to remain the dominant media choice of most
its customers. Average selling prices may continue to decline as the Company
expands its distribution network, particularly in the mass merchandising
channel. Returns of Swfte products are not likely to impact future operations as
significantly as they did in 1996 as such inventory in the channel is lower than
in 1995.
Cost of Sales. Cost of sales increased to $16.4 million in 1996 from $10.1
million in 1995 and increased as a percentage of net sales to 52.9% from 36.6%.
The increase in cost of sales was primarily attributable to increased unit sales
volume and the charges for excess and obsolete inventory during the second
quarter. In the second quarter of 1996, the Company's evaluation of the
estimated inventory value for products returned from customers was changed and
resulted in a $1.4 million charge to cost of sales. The Company's valuation
reflects principally the impact of new product versions rendering older product
versions obsolete or unsalable, the return of slow-moving products, and existing
excess quantities of inventory. Such slow-moving products and products for which
new versions have been released are difficult to sell through alternative
channels. When the sales objectives for the June quarter were not achieved, an
evaluation of inventories was performed and a valuation adjustment of $2.6
million was recorded, of which $1.2 million related to Swfte inventories
acquired subsequent to the acquisition and $1.4 million of Expert brand
inventories for which on hand quantities exceed expected future demand.
Amortization expense associated with acquired software technology increased to
$404,000 in 1996 from $259,000 in 1995. The Company expects cost of sales in
future periods will decrease over 1996 levels due to the adverse impact on 1996
results of operations of the charges discussed above, and an anticipated
decrease in media costs.
Marketing and Sales. Marketing and sales expenses increased to $9.9 million in
1996 from $6.2 million in 1995 and increased as a percentage of net sales to
31.9% from 22.4%. The increase in dollar amount was primarily due to increased
marketing activities to promote the Company's products and brand names,
increased personnel and increased competition for shelf space in retail outlets.
The Company intends to continue to launch new and innovative marketing
promotions and to hire additional personnel as needed. As a result, the Company
expects marketing and sales expenses to increase in dollar amount, and expects
competition for shelf space to continue.
General and Administrative. General and administrative expenses increased to
$10.1 million in 1996 from $4.3 million in 1995 and increased as a percentage of
net sales to 32.6% from 15.5%. These increases were primarily due to additional
provisions for doubtful accounts of $1.3 million, the provision of $1.9 million
during the third quarter related to the Swfte settlement, legal fees associated
with the Swfte lawsuit and increased staff and associated overhead expenses. The
Company anticipates that it will continue to incur risks for uncollectible
accounts. The Company expects general and administrative expenses to decrease in
1997 as a result of the settlement of the Swfte litigation.
Development. Development expenses increased to $3.3 million in 1996 from $2.2
million in 1995 and increased as a percentage of net sales to 10.7% from 7.9%.
Development expenses include costs relating to product upgrades, new products
development activities, quality control and expanded customer service support.
The increase was principally due to additional staffing, mostly as a result of
the acquisition of Swfte. During the fourth quarter of 1996, the Company reduced
development personnel and did not renew the lease for the facilities previously
occupied by Swfte, which will help to contain development expenses in future
periods. The Company currently believes that the steps taken to reduce
development expenses in 1996 will be offset by additional costs to develop new
brands and titles, including the development of products to take advantage of
the Internet and other on-line capabilities.
Loss on Impairment of Assets. During the three months ended June 30, 1996,
management reevaluated the carrying value of the intangible assets recorded in
connection with the November 1995 acquisition of Swfte. These intangible assets
consisted of acquired software technology, a license agreement to use the
Bicycle(R) brand name in certain card game software, the assembled workforce
acquired, and Swfte's customer list. This reevaluation of the intangible assets
was necessitated by management's determination based on recent results of
operations that the expected sales and cash flows from the acquired assets would
be substantially lower than had been previously expected by management.
The acquired Swfte products originally projected to generate the most
significant sales and cash flows sold at substantially lower than expected rates
in 1996. Certain of those titles now face new competition from other publishers,
which has taken market share away from those titles. In particular, the card
games category has become more competitive as a result of recent marketing
efforts by Sierra On Line, and others. Additionally, certain other acquired
titles were released shortly before the acquisition of Swfte. Based on low sales
rates, some retailers discontinued certain of these new titles and management
has determined their expected future sales to be minimal.
A significantly higher level of returns has been experienced with the
products acquired in the acquisition over the rate of returns experienced with
the Company's other products. Management believes that certain titles were sold
into the distribution and retail channel prior to the acquisition at higher
rates than could be supported by sales through to the end users. This has
prompted distributors and retailers to return these products. This overstock of
product and returns experience has, in management's judgment, damaged the brand
and reduced their expected future sales levels.
Lower than expected acceptance of the acquired products, together with the
terminations resulting from closing the Swfte facilities in Delaware to
consolidate all operations at the Company's headquarters in Florida, caused
management to write-off the value originally ascribed to the workforce in place.
Value was originally ascribed to Swfte's customer list based upon
management's assessment of the value of Swfte's experience in dealing with
certain educational channels and bookstores. Due to the lower than expected
sales rates and higher than expected returns rates for the acquired products,
management no longer believes this to be true, and accordingly has written-off
the costs assigned to the customer list.
These factors are not expected to be short-term or temporary in nature,
causing management to reduce the carrying value of the intangible assets by $3.5
million. Management also determined that the lower demand for the acquired
products and recent customer claims for pre-acquisition cooperative marketing
and price protection credits required an additional provision for reserves for
returns of $1.1 million higher than originally provided on the acquired accounts
receivable; and a provision for reserves $0.2 higher than originally provided on
the acquired inventory. Such provisions were recorded during the three months
ended June 30, 1996, and are included in the stated loss on impairment of
intangibles. Additionally, the lower than expected sales and higher than
expected returns levels on the acquired products indicate that the minimum
royalties required under certain contracts and prepaid royalties will not be
recouped in the ordinary course of business. Approximately $0.3 million of such
royalties have therefore been accrued as part of the loss on impairment of
intangibles as of June 30, 1996. Similarly, losses on fixed assets and certain
other assets determined to have lower values than originally assigned have been
accrued as part of the loss on impairment of intangibles as of June 30, 1996.
Interest Income (Expense). Net interest income decreased to $92,000 in 1996
from $370,000 in 1995, due primarily to reduced balances of interest-bearing
assets.
Tax Provision (Benefit). The benefit for income taxes increased to $(4.1)
million in 1996 from $(1.3) million in 1995, due primarily to increased
operating losses. The benefit for income taxes in 1996 also reflects an increase
in the valuation allowance for deferred tax assets of $2.5 million, which
reduced the benefit by $0.9 million compared to the expected benefit computed at
the statutory federal income tax rate.
Comparison of Years Ended December 31, 1995 and 1994
Net Sales. Net sales increased 40% to $27.6 million in 1995 from $19.7 million
1994, due primarily to increased sales of CD-ROM products and broader
distribution, as well as sales of Swfte products in November and December 1995.
CD-ROM products represented 46% in 1995 compared to 23% of net sales in 1994.
International sales increased to 15% of net sales in the fiscal year ended 1995
from 7% of net sales in 1994 as the Company continued to broaden its
international efforts by establishing relationships with foreign publishers and
distributors. To a lesser degree, sales improved as the result of the
introduction of a children's educational line of products.
Cost of Sales. Cost of sales increased to $10.1 million in 1995 from $8.1
million in 1994 and decreased as a percentage of net sales to 36.6% from 40.9%.
The increase in the dollar amount of cost of sales was primarily attributable to
increased unit sales volume. The decrease as a percentage of net sales was
principally attributable to a decrease in amortization expense associated with
acquired software technology. Such amortization expense decreased to $259,000 in
1995 from $477,000 in 1994. The percentage decrease in cost of sales was also
attributable to lower per unit component costs due to higher volume purchases to
meet higher unit sales volumes, as well as lower media costs. Additionally,
conversion of manuals and catalogs to CD-ROM has contributed to cost savings by
reducing printing costs. Amortization of acquired software technology related to
the Swfte Acquisition included in costs of sales was $237,000 in 1995.
Marketing and Sales. Marketing and sales expenses increased to $6.2 million in
1995 from $4.3 million in 1994 and increased as a percentage of net sales to
22.4% from 21.8%. The increase in dollar amount was primarily due to increased
marketing activities to promote the Company's products and brand names,
increased personnel and increased "in-store promotions" in retail outlets. The
Company intends to continue to launch new and innovative marketing promotions
and to hire additional personnel as needed. As a result, the Company expects
marketing and sales expenses to increase in dollar amount.
General and Administrative. General and administrative expenses increased to
$4.3 million in 1995 from $2.8 million in 1994 and increased as a percentage of
net sales to 15.5% from 14.3%. These increases were primarily due to the
write-off of expenses associated with a public offering of securities which was
not consummated and legal fees associated with the lawsuit concerning the Swfte
Acquisition. Additionally, increased staff and associated overhead expenses
necessary to manage and support the Company's growth contributed to the increase
in expenses. As the Company continues to grow, staff and associated overhead
will increase proportionally.
Development. Development expenses increased to $2.2 million in 1995 from $1.3
million in 1994 and increased as a percentage of net sales to 7.9% from 6.7%.
Development expenses include increased costs relating to product upgrades, new
products development activities, quality control and expanded customer service
support. The increase also reflects increased staffing mostly as a result of the
acquisition of Swfte. In addition, in 1995 the Company used an outside customer
support service to supplement its inside customer support during peak times.
Purchased Research and Development. Purchased research and development of $8.4
million in 1995 represents the immediate write-off of the fair value of
incomplete research and development projects at Swfte at the time of
acquisition. These projects had not reached technological feasibility as defined
by SFAS No. 86. The fair value was determined by an independent appraisal and is
based on acceptable valuation techniques. The write-off of this amount during
the quarter ended December 31, 1995 resulted in a loss for the quarter and the
year then ended. To the extent the Company acquires new technologies or
businesses, such acquisitions may entail additional write-offs of acquired
research and development in the future.
Amortization of Non-Compete Agreement. Amortization expenses decreased to
$338,000 in 1995 from $416,000 in 1994. In February 1995, the Company released
Bloc from the remaining nine month term under the non-compete agreement as part
of a general settlement of the parties' obligations relating to the 1992
Acquisition and, as a result, the remaining net book value of the non-compete
agreement was expensed in the first quarter of 1995.
Interest Income (Expense). Interest changed to income of $370,000 in 1995 from
an expense of $366,000 in 1994. In February 1995, the Company prepaid $500,000
in subordinated debt, thereby eliminating interest on this portion of its
subordinated indebtedness. In connection with the Company's initial public
offering in April 1995, the remainder of the subordinated indebtedness of $3.9
million was repaid, eliminating that interest expense going forward. The 1995
interest income was derived from the investment of the excess proceeds from the
Company's initial public offering as well as cash provided from operations.
Tax Provision (Benefit). The provision for income taxes in 1994 was $91,000
resulting in an effective tax rate of 3.7%, which reflected the benefit of a
reduction of $885,000 in the Company's valuation allowance for deferred taxes.
For 1995, the Company recorded a tax benefit from income taxes of $1.3 million,
resulting from the write-off of incomplete purchased research and development
from the Swfte Acquisition. For information regarding certain tax aspects of the
Swfte Acquisition, see "Recent Acquisition" above.
<PAGE>
Quarterly Results of Operations
The following tables set forth certain unaudited financial data for the
Company's eight most recent financial quarters, as well as such data expressed
as a percentage of the Company's net sales. This data has been derived from
unaudited financial statements that, in the opinion of management, include all
adjustments (consisting of normal recurring adjustments and the charges recorded
in the second and third quarters of 1996 discussed above) necessary for a fair
presentation of such quarterly information when read in conjunction with the
Company's Consolidated Financial Statements and the related Notes thereto
included in Item 8. The operating results for any quarter are not necessarily
indicative of results for any future period.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Three Months Ended
--------------------------------------------------------
Dec. Sept. June March Dec. Sept. June March
1996 1996 1996 1996 1995 1995 1995 1995
------ ------ ------ ------- ------ ------ ------ ------
Net sales............$8,234 $6,401 $6,354 $10,383 $8,784 $7,126 $5,772 $5,956
------ ------ ------ ------- ------ ------ ------ ------
Operating costs and
expenses:
Cost of sales.......3,268 2,408 6,851 3,893 3,216 2,564 2,141 2,200
Marketing and sales.2,443 2,150 2,632 2,663 2,090 1,565 1,194 1,331
General and
administrative.....1,389 3,953 3,029 1,753 1,651 973 894 775
Development......... 592 978 890 860 691 497 509 495
Purchased research and
development......... -- -- -- -- 8,392 -- -- --
Loss on impairment of
assets.............. -- -- 5,700 -- -- -- -- --
Amortization of
non-compete agreement -- -- -- -- -- -- -- 338
------ ------ ------ ------- ------ ------ ------ ------
7,692 9,489 19,102 9,169 16,040 5,599 4,738 5,139
------ ------ ------ ------- ------ ------ ------ ------
Operating income(loss) 542 (3,448)(12,748) 1,214 (7,256) 1,527 1,034 817
Other(expense)income,
net.............. 3 20 29 40 122 197 122 (72)
------ ------ ------ ------- ------ ------ ------ ------
Income (loss) before
provision (benefit)
for income taxes... . 545 (3,428) (12,719) 1,254 (7,134) 1,724 1,156 745
Provision (benefit) for
income taxes........ 202 -- (4,727) 459 (2,543) 536 404 279
------ ------ ------ ------- ------ ------ ------ ------
Net income (loss)... $343$(3,428) $(7,992) $795$(4,591) $1,188 $752 $466
====== ====== ======= ====== ====== ====== ====== ======
Net income (loss) per
share of common
stock................. $.04 $(.46) $(1.07) $.10 $(.62) $.15 $.10 $.07
======= ====== ======= ====== ====== ====== ====== ======
As a Percentage of Net Sales:
Net sales 100% 100% 100% 100% 100% 100% 100% 100%
Operating costs and
expenses:
Cost of sales....... 40 37 108 38 37 36 37 37
Marketing and sales. 30 34 41 26 24 22 21 22
General and
administrative..... 17 62 48 17 19 14 15 13
Development......... 7 15 14 8 8 7 9 8
Purchased research and
development........ -- -- -- -- 95 -- -- --
Loss on impairment of
assets............. -- -- 90 -- -- -- -- --
Amortization of
non-compete agreement -- -- -- -- -- -- -- 6
------- ------ ------ ------- ------ ------ ------ ------
93 148 301 88 183 79 82 86
------- ------ ------ ------- ------ ------ ------ ------
Operating income.... 7 (54) (201) 12 (83) 21 18 14
Other (expense) income,
net................ -- -- -- -- 2 3 2 (1)
------- ------ ------ ------- ------ ------ ------ ------
Income before provision
(benefit) for income
taxes............. 7 (54) (200) 12 (81) 24 20 13
Provision (benefit) for
income taxes........ 3 -- (74) 4 (29) 7 7 5
------- ------ ------ ------- ------ ------ ------ ------
Net income (loss).... 4.2% (54)% (126)% 8% (52)% 17% 13% 8%
======= ====== ======= ====== ====== ====== ====== ======
</TABLE>
The Company has experienced, and may continue to experience, fluctuations in
operating results due to a variety of factors, including, but not limited to
market acceptance of the Company's products and those of its competitors,
development and promotional expenses, new versions of existing products or
operating systems, product returns, acquisitions of new businesses by the
Company and related charges and write-offs, and those items included in "Factors
Affecting Future Operating Results" discussed below. The Company's expense
levels are based, in part, on its expectations as to future sales and, as a
result, operating results would be disproportionately affected by a reduction in
sales or a failure to meet the Company's sales expectations.
The consumer software business is seasonal. Typically, net sales are the
highest during the fourth calendar quarter and decline sequentially in the first
and second calendar quarters. The seasonal pattern is due primarily to the
increased demand for consumer software during the year-end holiday buying
season. The Company expects its net sales and operating results to continue to
reflect seasonality.
Liquidity and Capital Resources
Over the last year, the Company has experienced a reduction in its
stockholders' equity, working capital and ratio of current assets to current
liabilities, primarily as a result of net losses realized during that period.
Management has responded by reducing expenses, including, among other actions,
reducing personnel significantly. With these actions and the continuation of the
Company's revolving line of credit, management believes that it has adequate
financial resources for its planned operations through 1997. Longer term,
management believes that its expense reduction efforts, together with
anticipated revenue increases, should return the Company to profitability and
provide for positive cash flow to fund future operations.
As of December 31, 1996, the Company had $5.1 million in working capital,
including $3.0 million in cash. To date, the Company has not invested in any
financial instruments that involve a high level of complexity or risk. Net cash
used by operating activities was $(3.5) million for the year ended December 31,
1996. Net cash provided by investing activities was $5.5 million, primarily due
to the maturity and sales of marketable securities, offset by purchases of
property and equipment.
The Company believes that cash generated by operations may be affected by an
increase in working capital requirements as it continues to expand operations.
In response to such growth in working capital requirements, the Company entered
into a two-year, $5.0 million unsecured revolving line of credit in May 1996.
Availability under the line is based on an advance rate applied to eligible
receivables and the maintenance of certain financial ratios. As a result of the
Company's performance in the second and third quarters, the Company was no
longer in compliance with the original financial ratios under its revolving line
of credit. Amendments to the line of credit were entered into, modifying the
financial ratios to reflect its year to date results of operations and granting
a security interest in the Company's assets. There can be no assurance that the
Company's results of operations will continue to be in compliance with the line
of credit covenants which, among other things, prohibit two consecutive
quarterly losses commencing with the third quarter of 1996, or that the line of
credit would be otherwise available to the Company. To date, there have been no
borrowings under the line of credit.
The Company's federal tax filings with respect to the year ended December
31, 1992 and subsequent years are presently being reviewed by the Internal
Revenue Service ("IRS"). The IRS has questioned the allocation of the purchase
price made by the Company in connection with the acquisition of assets and
business of the Predecessor from Bloc in October 1992, and related amortization
and other deductions with respect to the acquired assets. The IRS has not
proposed any assessment from their review, but it is expected to conclude its
audit in the near future and has indicated that it intends to propose
adjustments to the Company's federal income tax returns claiming additional tax
due. At this time, it is not possible to quantify the amount of additional taxes
the IRS will claim are due. There can be no assurance that the Company will
prevail in its position, or that the appeals, if any, and final resolution of
any IRS claims will not have a material adverse impact on the Company's
liquidity, financial position, or results of operations. See Note 13 of Notes to
the Company's Consolidated Financial Statements at Item 8.
From time to time, the Company evaluates potential acquisitions of products,
businesses and technologies that would complement or expand the Company's
business. The Company currently does not have any commitments or agreements with
respect to any such acquisitions. There can be no assurance that any such
acquisitions will be made or, if made, will be successfully integrated.
Factors Affecting Future Operating Results
This Form 10-K contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The Company's actual results could differ materially from
its historical operating results and from those set forth in the forward-looking
statements and may fluctuate between operating periods. Factors that might cause
such a differences and fluctuations include, without limitation, the following:
the size and rate of growth of the consumer software market, consolidation of
the software industry among both customers and competitors, market acceptance of
the Company's products and those of its competitors, competitors' marketing
strategies and promotions, development and promotional expenses relating to the
introduction of new products, new versions of existing products or new operating
systems, evolving distribution channels, the growth in popularity of the
Internet and other new technologies which could impact the distribution and
purchase of software, product returns, acquisitions of new businesses by the
Company and related charges and write-offs, the collectibility of accounts
receivable, changes in pricing policies by the Company and its competitors, the
accuracy of retailers' forecasts of consumer demand, competition for retail
space, consumer confidence, the timing of the receipt of orders from major
customers, account cancellations or delays in shipment, future cash flow and
working capital requirements, payment of the Company's obligations under the
settlement of the litigation with the former owners of Swfte, implementation and
expansion of the Company's systems and operations to accommodate the Company's
anticipated future revenues, the outcome of current and future examinations by
taxing authorities, and other factors. In addition, the consumer software
business is seasonal due primarily to the increased demand for consumer software
during the year-end holiday buying season. Further, a significant portion of
sales within a quarter is typically not realized until late in that quarter. As
a result, it may be difficult for the Company to predict its net sales for the
quarter or to quickly adapt its spending levels within a quarter to reflect
changes in demand for its products. The market price of the Company's Common
Stock has been, and in the future will likely be, subject to significant
fluctuations in response to variations in quarterly operating results and other
factors, such as announcements of technological innovations or new products by
the Company or its competitors, or other events.
Item 8. Consolidated Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Certified Public Accountants................. 21
Consolidated Balance Sheets as of December 31, 1996 and December
31, 1995........................................................... 22
Consolidated Statements of Operations for the Years Ended December
31, 1996, 1995 and 1994............................................ 23
Consolidated Statements of Stockholders' Equity for the Years
Ended December 31, 1996, 1995 and 1994............................. 24
Consolidated Statements of Cash Flows for the Years Ended December
31, 1996, 1995 and 1994............................................ 25
Notes to Consolidated Financial Statements......................... 27
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders of
Expert Software, Inc.:
We have audited the accompanying consolidated balance sheets of Expert
Software, Inc. (a Delaware corporation) as of December 31, 1996 and 1995 and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Expert Software, Inc., as of
December 31, 1996 and 1995, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1996, in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Miami, Florida,
February 12, 1997.
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
EXPERT SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995
(in thousands, except share data)
1996 1995
-------- -------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................... $2,959 $ 912
Marketable securities............................... -- 6,222
Accounts receivable, net............................ 3,775 6,570
Income taxes receivable............................. 2,397 --
Inventories......................................... 1,256 3,962
Prepaid expenses.................................... 425 504
Deferred income taxes............................... 2,616 807
------- -------
Total current assets............................... 13,428 18,977
PROPERTY AND EQUIPMENT, net........................... 1,897 2,575
ACQUIRED SOFTWARE TECHNOLOGY, net..................... 163 3,575
ACQUIRED INTANGIBLES, net of accumulated amortization
of $55 in 1995........................................ -- 608
DEFERRED INCOME TAXES................................. 3,586 3,295
OTHER ASSETS.......................................... 3 39
------- -------
Total assets....................................... $19,077 $29,069
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.................................... $3,226 $2,581
Accrued expenses.................................... 5,038 5,745
Current portion of capital lease obligations........ 88 95
------- -------
Total current liabilities.......................... 8,352 8,421
------- -------
NONCURRENT LIABILITIES................................ 300 14
------- -------
COMMITMENTS and CONTINGENCIES (Note 13)
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 1,000,000 shares
authorized; 975,000 shares undesignated,
25,000 shares designated as Series A Junior
Participating Cumulative; none outstanding............ -- --
Common stock, $.01 par value, 30,000,000 shares
authorized; 7,507,804 and 7,470,451 shares issued
and outstanding in 1996 and 1995, respectively..... 75 75
Additional paid-in capital.......................... 23,198 23,126
Accumulated deficit................................. (12,848) (2,567)
------- -------
Total stockholders' equity......................... 10,425 20,634
------- -------
Total liabilities and stockholders' equity......... $19,077 $29,069
======= =======
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these balance sheets.
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
EXPERT SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Years Ended December 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
NET SALES....................... $31,012 $27,638 $19,727
--------- --------- ---------
OPERATING COSTS AND EXPENSES:
Cost of sales................. 16,420 10,121 8,066
Marketing and sales........... 9,888 6,180 4,303
General and administrative.... 10,124 4,293 2,824
Development................... 3,320 2,192 1,328
Purchased research and
development.................. -- 8,392 --
Loss on impairment of assets.. 5,700 -- --
Amortization of non-compete
agreement.................... -- 338 417
--------- --------- ---------
45,452 31,516 16,938
--------- --------- ---------
Operating income (loss)....... (14,440) (3,878) 2,789
--------- --------- ---------
OTHER INCOME (EXPENSE):
Interest expense.............. (26) (121) (450)
Interest income............... 118 490 84
--------- --------- ---------
92 369 (366)
--------- --------- ---------
Income (loss) before
provision (benefit)
for income taxes...... (14,348) (3,509) 2,423
PROVISION (BENEFIT)FOR INCOME
TAXES (4,067) (1,324) 90
--------- --------- ---------
Net income (loss)............ $(10,281) $(2,185) 2,333
========= ========= =========
Net income (loss) per share of
common stock.................. $ (1.33) $ (.31) $ .38
========= ========= =========
Weighted average number of
common stock and common stock
equivalents outstanding........ 7,750 7,153 5,795
========= ========= =========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
EXPERT SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except share data)
Common Stock Additional
------------- Paid-in Accumulated
Shares Amount Capital Deficit Total
-------- ------ ----------- ------------ --------
Balance, Dec. 31,1993.....5,000,000 $50 $450 $(2,542) $(2,042)
Dividends on redeemable
preferred stock......... -- -- -- (132) (132)
Issuance of common stock in
connection with exercise
of stock options........ 313,193 3 28 -- 31
Compensation expense on
stock option grants..... -- -- 165 -- 165
Net income............... -- -- -- 2,333 2,333
--------- ---- ------- --------- -------
Balance, Dec. 31,1994.....5,313,193 53 643 (341) 355
Dividends on redeemable
preferred stock.......... -- -- -- (41) (41)
Initial public offering of
common stock.............1,700,000 17 18,955 -- 18,972
Costs associated with
issuance of common stock. -- -- (1,017) -- (1,017)
Issuance of common stock in
connection with exercise of
stock options............ 136,628 2 30 -- 32
Issuance of common stock in
connection with Swfte
acquisition.............. 320,630 3 4,388 -- 4,391
Tax benefit related to the
exercise of stock options -- -- 127 -- 127
Net loss.................. -- -- -- (2,185) (2,185)
--------- ---- ------- --------- -------
Balance, Dec.31,1995..... 7,470,451 75 23,126 (2,567) 20,634
Issuance of common stock in
connection with exercise of
stock options............ 37,353 -- 65 -- 65
Compensation expense on stock
option grants............ -- -- 7 -- 7
Net loss.................. -- -- -- (10,281) (10,281)
--------- ---- ------- --------- -------
Balance, Dec.31,1996......7,507,804 $75 $23,198 $(12,848) $10,425
========= ==== ======= ========= =======
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
EXPERT SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Years Ended December 31,
-----------------------------
1996 1995 1994
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................$(10,281) $(2,185) $2,333
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating
activities:
Depreciation of property and equipment..... 1,105 496 245
Amortization of acquired software technology 544 283 477
Amortization of acquired intangibles....... -- 55 --
Amortization of non-compete agreement...... -- 338 417
Compensation expense on stock option grants 7 -- 164
Loss on impairment of assets............... 5,700 -- --
Purchased research and development......... -- 8,392 --
Deferred income tax benefit................ (2,100) (3,583) (228)
Loss on disposition of equipment........... -- -- 21
Changes in net assets and liabilities :
(Increase) decrease in accounts receivable. 1,899 (1,901) (98)
(Increase) decrease in income taxes
receivable............................... (2,397) -- --
(Increase) decrease in inventories......... 2,556 (1,759) (741)
(Increase) decrease in prepaid expenses.... (31) (124) 116
(Increase) decrease in other assets........ 10 (1) 35
Increase (decrease) in accounts payable.... 405 (28) 78
Increase in accrued expenses............... 934 644 644
Increase (decrease) in income taxes payable (2,125) 2,270 --
Increase in noncurrent liabilities......... 300 -- --
--------- --------- ---------
Net cash provided by (used in) operating
activities.............................. (3,474) 2,897 3,463
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment......... (644) (1,681) (881)
Purchases of marketable securities......... -- (17,915) --
Maturities and sales of marketable
securities................................ 6,222 11,693 --
Cash used for acquisition, net of cash
acquired of $187.......................... -- (7,674) --
--------- --------- ---------
Net cash provided by (used in) investing
activities.............................. 5,578 (15,577) (881)
--------- --------- ---------
(Continued)
<PAGE>
EXPERT SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Continued)
Years Ended December 31,
--------------------------
1996 1995 1994
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock...... -- 18,972 31
Costs associated with issuance of common
stock........................................ -- (1,017) --
Stock options exercised..................... 65 32 --
Payment of subordinated debt to related and
unrelated parties.......................... -- (4,400) --
Payment for redeemable preferred stock...... -- (2,200) --
Payments on note payable.................... -- (1,304) --
Payments on capital lease obligation........ (122) (3) --
Dividends paid on redeemable preferred stock -- (41) (288)
-------- -------- --------
Net cash provided by (used in) financing
activities............................... (57) 10,039 (257)
-------- -------- --------
Net increase (decrease) in cash and
equivalents.............................. 2,047 (2,641) 2,325
CASH AND EQUIVALENTS, beginning of period..... 912 3,553 1,228
-------- -------- --------
CASH AND EQUIVALENTS, end of period........... $2,959 $912 $3,553
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION :
Cash paid during the period for interest.... $26 $124 $913
======== ======== ========
Cash paid during the period for income taxes $2,555 $139 --
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
On November 2, 1995 the Company purchased
all of the capital stock
of Swfte International, Ltd. In connection
with the acquisition, the
following non cash transactions occurred:
Fair value of assets acquired............... -- $15,320 --
Liabilities assumed......................... -- (3,255) --
Issuance of common stock.................... -- (4,391) --
-------- -------- --------
Cash paid for acquisition and direct costs. -- 7,674 --
======== ======== ========
Fixed assets obtained under capital leases.. $102 -- --
======== ======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
<PAGE>
EXPERT SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES:
The Organization --
Expert Software, Inc. (the "Company") publishes and distributes computer
software under the "Expert" trade name. The Company's products address a broad
range of consumer interest and everyday tasks for the productivity, lifestyle,
small office/home office, entertainment and education market categories. The
Company's titles are primarily available on the Windows operating system, and
substantially all are available on CD-ROM. The Company sells its products
directly to retailers, as well as to distributors.
Principles of Consolidation --
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries, Swfte International, Ltd.
("Swfte") and ES International, Inc. All intercompany transactions and balances
have been eliminated in consolidation.
Use of Estimates --
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period. Actual results could differ from those estimates.
Financial Instruments --
The carrying amounts of cash and cash equivalents, marketable securities,
accounts receivable, accounts payable and accrued expenses reflected in the
consolidated financial statements approximate fair value.
Cash Equivalents --
The Company considers all highly liquid investment instruments with a
maturity of three months or less when purchased to be cash equivalents. Cash
equivalents include investments in repurchase agreements and tax-exempt bond
instruments.
Marketable Securities --
Marketable securities consist of investment grade municipal and tax free
bonds and tax exempt money market funds. The Company accounts for marketable
securities in accordance with Financial Accounting Standards Board Statement No.
115, "Accounting for Certain Investments in Debt and Equity Securities" and
accordingly, all such instruments are classified as "available for sale"
securities which are reported at fair value, with unrealized gains and losses
reported as a separate component of stockholders' equity, net of taxes. At
December 31, 1995, the cost of such instruments approximated fair value.
Accounts Receivable --
Accounts receivable are principally from retailers and distributors of the
Company's products. The Company performs periodic credit evaluations of its
customers and maintains allowances for potential credit losses and potential
returns of $5,061,000 and $1,659,000 at December 31, 1996 and 1995,
respectively.
The Company's customers are invoiced upon shipment, at which time a
provision is recorded for expected future returns. The Company estimates returns
based on management's evaluation of historical experience and current industry
trends and charges such estimates against gross revenues. The Company is subject
to rapid changes in technology and shifts in consumer demand which could result
in product returns in the near term that are materially different than the
Company's reserves at December 31, 1996.
Sales to the Company's customers which represented 10% or more of gross
sales less actual returns in any of the periods shown below are as follows:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Years Ended December 31,
-----------------------------
1996 1995 1994
-------- -------- --------
Customer A........... 19.6% 11.6% 8.8%
Customer B........... 10.4 14.4 14.6
Customer C........... 7.8 11.3 8.4
Customer D........... 5.8 1.3 14.6
Customer E........... 5.1 3.6 10.4
</TABLE>
The three major customers at December 31, 1996 and 1995 also account for
25.6% and 36.2% of gross outstanding accounts receivable at December 31, 1996
and 1995, respectively.
Inventories --
Inventories, which consist primarily of software media, manuals and related
packaging materials, are stated at the lower of cost or market with cost
determined on a first-in, first-out ("FIFO") basis. Management performs periodic
assessments to determine the existence of obsolete, slow-moving and nonsalable
inventories and records necessary provisions to reduce such inventories to net
realizable value.
During the years ended December 31, 1996 and 1995 the Company had one
supplier which accounted for approximately 32.8% and 26.4%, respectively, of
total purchases.
Property and Equipment --
Property and equipment are stated at cost less accumulated depreciation.
Property and equipment are depreciated using the straight-line method over the
estimated useful lives of the assets. Depreciation expense includes the
amortization of capital lease assets.
Maintenance and repairs are charged to expense when incurred; betterments
are capitalized. Upon the sale or retirement of assets, the cost and accumulated
depreciation are removed from the accounts and any gain or loss is recognized
currently.
Revenue Recognition --
Sales are recognized at the time the product is shipped, net of allowances
for returns, in accordance with the provisions of the AICPA Statement of
Position 91-1, "Software Revenue Recognition." While the Company has no other
obligation to perform future services subsequent to shipment, the Company
provides telephone customer support as an accommodation to purchasers of its
products as a means of fostering customer loyalty. Costs associated with this
effort are insignificant and immaterial to the financial statements, and
accordingly, are expensed as incurred.
Amortization --
Acquired software technology related to the 1995 acquisition of Swfte
discussed in Note 2 represents the fair value of certain software technology and
licenses acquired. The recorded value of $3,835,000 was based on independent
appraisal and was being amortized on a straight-line basis over two to two and
one-half years, the anticipated period of benefit. As discussed in Note 2, a
loss on impairment of these intangibles was recorded during the second quarter
of 1996. Additionally, amortization of $459,000 on these assets was recorded
during 1996. Accumulated amortization on such acquired software technology
totaled $3,672,000 and $260,000 at December 31, 1996 and 1995, respectively.
Royalties --
Royalties are accrued based on net sales pursuant to agreements with
external software developers of software products published by the Company.
Royalty costs, which are included in cost of sales, were $2,715,000, $2,575, 000
and $1,960, 000 during the years ended December 31, 1996, 1995 and 1994,
respectively.
Software Development Costs --
In accordance with Statement of Financial Accounting Standards No. 86 ("SFAS
86"), Accounting for the Cost of Capitalized Software to be Sold, Leased or
Otherwise Marketed, the Company examines its software development costs after
technological feasibility has been established to determine the amount of
capitalization that is required. For all periods presented herein, software
development costs incurred subsequent to the establishment of technological
feasibility have been immaterial and therefore expensed as incurred.
Stock-Based Compensation --
Beginning in 1996, the Company implemented the provisions of Statement of
Financial Accounting Standards No. 123 ("SFAS 123"), Accounting for Stock-Based
Compensation, in accounting for stock-based transactions with non-employees and
accordingly records compensation expense in the consolidated statements of
operations for such transactions. The Company continues to apply the provisions
of APB 25 for transactions with employees, as permitted by SFAS 123.
Income Taxes --
The Company accounts for income taxes under SFAS No. 109, Accounting for
Income Taxes, which requires that deferred income taxes be recognized for the
tax consequences in future years of differences between the tax basis of assets
and liabilities and their financial reporting basis at rates based on enacted
tax laws and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realized. Current income tax expense
represents the tax payable for the period. The deferred income tax expense
(benefit) represents the change during the period in the balance of deferred
taxes.
Net Income (Loss) Per Share of Common Stock --
Net income (loss) per share of common stock is determined by deducting
preferred dividends from net income for the years ended December 31, 1996, 1995
and 1994 of $0, $41,000 and $132,000, respectively, in order to determine net
income attributable to common stockholders. This amount is divided by the
weighted average number of shares of common stock and dilutive common stock
equivalents outstanding, after applying the treasury stock method. For periods
in which the Company reports a net loss, common stock equivalents do not include
stock options as their effect would be antidilutive. Primary and fully diluted
net income (loss) per share are the same for all periods presented.
For the period prior to the effective date of the Company's initial public
offering ("IPO") of common stock discussed in Note 9, common share equivalents
include the impact of the issuance of options within one year of the IPO, at
exercise prices less than the assumed IPO price whether or not the effects are
antidilutive.
2. ACQUISITION AND LOSS ON IMPAIRMENT OF ASSETS:
In November 1995, the Company acquired all of the outstanding common stock
of Swfte International, Ltd., a developer of consumer software for the education
and entertainment markets. Total consideration paid was $7.0 million in cash,
subject to post-closing adjustments, and 320,630 unregistered shares of the
Company's common stock which were independently valued at approximately $4.4
million. Additionally, the Company assumed $1.3 million of Swfte's bank debt
which was repaid by the Company subsequent to the consummation of the
transaction.
The acquisition of Swfte was accounted for using the purchase method of
accounting and, accordingly, the results of Swfte since November 2, 1995 are
included in the accompanying consolidated statements of operations. Based on an
independent appraisal, of the excess of purchase price over the fair value of
the net assets acquired, approximately $8.4 million or approximately 65% of the
purchase price was expensed during the Company's 1995 fourth quarter as
incomplete purchased research and development projects that had not reached
technological feasibility as defined by SFAS No. 86.
Swfte assets and liabilities are included in the accompanying consolidated
balance sheets at values representing an allocation of the purchase price,
adjusted in 1996 for the impairment of these assets discussed below.
The aggregate purchase price was allocated based upon the fair value of the
tangible and intangible assets and the liabilities acquired, summarized as
follows (in thousands):
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Current assets............ $1,952
Equipment................. 478
Purchased research and
development............... 8,392
Acquired intangibles...... 4,498
Current liabilities....... (1,951)
Notes payable............. (1,304)
-------
Total cost of
acquisition............... $12,065
=======
</TABLE>
The following summarized, unaudited pro forma results of operations for the
years ended December 31, 1995 and 1994 assume the acquisition occurred as of the
beginning of the respective periods (dollars in thousands, except per share
amounts):
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
1995 1994
-------- --------
Net sales..................$36,637 $25,177
Net income................. 3,116 1,031
Net income per common share 0.41 0.17
</TABLE>
This pro forma information has been prepared for comparative purposes only
and does not purport to be indicative of the results that actually would have
been achieved if the operations had been combined during the periods presented
and is not intended to be a projection of future results.
During the second quarter of 1996, management reevaluated the carrying value
of the intangible assets recorded in connection with the acquisition of Swfte.
This reevalution was necessitated by management's determination based on recent
results of operations that the expected sales and cash flows from the acquired
assets would be substantially lower than had been previously expected by
management. Since these factors were not expected to be short-term or temporary
in nature, the carrying value of the intangible assets was reduced by $3,478,000
in accordance with Statement of Financial Accounting Standards No. 121 ("SFAS
121"), Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of. Management also determined that the lower demand for
the acquired products and claims from customers arising during 1996 for
pre-acquisition cooperative marketing and price protection credits required an
additional provision for returns of $1,065,000 higher than originally provided
on the acquired accounts receivable; and a provision for reserves $150,000
higher than originally provided on the acquired inventories. The lower than
expected sales and higher than expected returns levels on the acquired products
indicate that the minimum royalties will not be recouped in the ordinary course
of business and $339,000 of such royalties were accrued as part of the loss on
impairment of intangibles during the second quarter. Similarly, losses totaling
$668,000 on fixed assets and certain other assets determined to have lower
values than originally assigned were accrued as part of the loss on impairment
of intangibles as of June 30, 1996. Such losses totaled $5,700,000 and are
reflected as "Loss on impairment of assets" in the accompanying consolidated
statements of operations.
3. INVENTORIES:
Inventories consisted of the following at December 31 (in thousands):
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
1996 1995
-------- --------
Finished goods...................... $1,101 $2,699
Raw materials....................... 155 1,263
======== ========
$1,256 $3,962
======== ========
</TABLE>
4. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following at December 31 (in
thousands):
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Useful
Life
1996 1995 in Years
-------- -------- ---------
Equipment........................... $3,199 $2,905 3-5
Furniture and fixtures.............. 607 474 5-10
-------- --------
3,806 3,379
Less: Accumulated depreciation...... (1,909) (804)
======== ========
$1,897 $2,575
======== ========
</TABLE>
Equipment includes $122,000 for capital lease assets. Amortization of such
costs is computed by the straight-line method over the primary lease terms and
is included in depreciation expense in the accompanying consolidated financial
statements.
5. ACCRUED EXPENSES:
Accrued expenses consisted of the following at December 31 (in thousands):
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
1996 1995
-------- --------
Royalties............................$1,110 $ 784
Marketing............................ 1,276 1,252
Income and other taxes............... 18 2,144
Legal fees........................... 113 547
Settlement costs (Note 12)........... 850 --
Other................................ 1,671 1,018
======== ========
$5,038 $5,745
======== ========
</TABLE>
6. REVOLVING LINE OF CREDIT
The Company has entered into a loan agreement with a bank (also a
shareholder of the Company) which provides for a revolving line of credit
collateralized by substantially all of the Company's assets. Borrowings under
the line of credit are limited to a percentage of eligible accounts receivable
as defined in the agreement and may not exceed $5,000,000 through May 31, 1998,
the maturity date. Interest is payable at the bank's base rate plus 1.5%. To
date, there have been no borrowings under the line.
The loan agreement contains restrictive covenants, including the achievement
of certain earnings, as defined in the agreement, and the maintenance of a
minimum net worth and various financial ratios. At December 31, 1996, the
Company was in compliance with the agreement.
7. SUBORDINATED DEBT:
Subordinated debt consisted of the following at December 31 (in thousands):
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
1995 1994
-------- ---------
Note payable to Bloc in connection
with the acquisition of assets as
described in Note 1.
Interest at 10% payable annually.
Principal payable December 31, 1997.. -- $ 500
Notes payable to stockholders.
Interest at 10% payable quarterly.
Principal payable September 30, 1997. -- 3,900
======== =========
-- $4,400
======== =========
</TABLE>
In February 1995, the Company repaid the $500,000 note payable to Bloc,
released Bloc from its non-compete agreement and terminated its consulting
agreement with Bloc for a termination fee of $50,000. The repayment of the
$500,000 note and the write-off of the non-compete agreement was accounted for
in the first quarter of 1995. Additionally, the Company repaid the $3,900,000
note payable to stockholders, including accrued interest, with proceeds from the
initial public offering discussed in Note 9.
8. REDEEMABLE PREFERRED STOCK:
In October 1992, the Company issued 2,200 shares of redeemable preferred
stock at $1,000 per share and received total cash proceeds of $2,200,000. As
required, the Company redeemed the preferred stock at $1,000 per share
immediately upon the closing of the initial public offering of common stock on
April 19,1995 described in Note 9. The holders of the redeemable preferred stock
were entitled to an annual cumulative cash dividend of $60 per share, payable
quarterly.
<PAGE>
9. COMMON STOCK:
In February 1995, in connection with its initial public offering, the
Company increased the amount of authorized common stock to 30,000,000 shares,
authorized the issuance of up to 1,000,000 shares of $.01 par value, preferred
stock and increased the shares of common stock reserved for issuance under the
Company's 1992 stock option plan to 2,250,000.
In April 1995, the Company completed an initial public offering of
3,105,000 shares of its common stock of which 1,700,000 were sold by the Company
and 1,405,000 shares were offered by certain of the Company's stockholders. The
offering price was $12.00 per share and the proceeds to the Company, net of the
underwriters discount of $1,428,000, were $18,972,000. Costs associated with the
offering include legal, accounting and other direct costs of $1,017,000. The
Company used $2,241,000 of net proceeds to redeem preferred stock, including
interest and dividends, and $4,019,000 including interest to repay subordinated
debt. Assuming the issuance only of sufficient shares to repay the subordinated
debt plus accrued interest and redeem the preferred shares plus related
dividends, supplementary proforma net income (loss) per share of common stock
and common stock equivalents would be $(0.33) and $0.41 for the years ended
December 31, 1995 and 1994, respectively.
In November 1995, the Company adopted a Shareholder Rights Plan and the
Board of Directors declared a dividend distribution of one preferred stock
purchase right for each outstanding share of common stock to stockholders of
record as of the close of business on November 29, 1995. Initially, these rights
will not be exercisable and will trade with the shares of the Company's common
stock. Under the Shareholder Rights Plan, the rights become exercisable if a
person becomes an "acquiring person" by acquiring 15% or more of the common
stock of Expert Software, if a person who owns 10% or more of the common stock
of the Company is determined to be an "adverse person" by the Board of
Directors, or if a person commences a tender offer that would result in that
person owning 15% or more of the common stock of the Company. In the event that
a person becomes an "acquiring person" or is declared an "adverse person" by the
Board, each holder of a right (other than the acquiring person or the adverse
person) would be entitled to acquire such number of shares of preferred stock
which are equivalent to Expert Software common stock having a value of twice the
then-current exercise price of the right. If the Company is acquired in a merger
or other business combination transaction after any such event, each holder of a
right would then be entitled to purchase, at the then current purchase price,
shares of the acquiring company's common stock having a value of twice the
exercise price of the right. The rights will expire at the close of business on
November 9, 2005, unless previously redeemed or exchanged by the Company. In
connection with the Shareholder Rights Plan, the Board of Directors authorized
the designation of 25,000 shares of Series A Junior Participating Cumulative
Preferred Stock, $0.01 par value, none of which are outstanding at December 31,
1996 or 1995.
In March 1997, pursuant to its obligations under the Swfte acquisition
agreement, the Company completed a registration with the Securities and Exchange
Commission of substantially all the shares of Company common stock issued in
connection with the Swfte acquisition.
<PAGE>
10. STOCK OPTIONS:
The Company has reserved 2,250,000 shares of its common stock for issuance
under its 1992 Stock Option Plan (the "Plan"). Under the Plan, options may be
granted to purchase common stock at exercise prices generally determined by a
committee of the Board of Directors. Incentive stock options may be granted at
exercise prices not less than the fair market value of the common stock at the
date of grant, and in certain instances, at prices in excess of the current fair
market value. Non-employee members of the Board of Directors are granted
non-qualified options annually at a price equal to the fair market value of the
common stock at the date of the grant. Incentive stock options are available to
officers, directors who are also employees and other full-time employees and
non-qualified options are available to the same group and consultants and other
key persons who provide services to the Company. The terms of each option
agreement are determined by the Board of Directors. All options expire on the
date specified in the agreement and in no event later than the tenth anniversary
of the date which the option was granted. A summary of stock option activity is
as follows:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Number of Exercise
Shares Price
---------- ----------
Options outstanding, December 31, 1993.. 752,500 0.10-0.85
Granted................................. 390,000 0.85-2.76
Exercised............................... (313,193) 0.10
Canceled................................ (57,742) 0.10-0.85
---------- ----------
Options outstanding, December 31, 1994.. 771,565 0.10-2.76
Granted................................. 130,000 7.70-20.75
Exercised............................... (136,628) 0.10-9.35
Canceled................................ (79,167) 0.10-20.75
---------- ----------
Options outstanding, December 31, 1995.. 685,770 0.10-20.75
Granted................................. 544,000 5.38-13.25
Exercised............................... (37,353) 0.85-12.25
Canceled................................ (137,000) 0.85-20.75
---------- ----------
Options outstanding, December 31, 1996..1,055,417 0.10-15.25
========== ==========
Outstanding options exercisable at
December 31, 1996....................... 555,500 0.10-15.25
========== ==========
</TABLE>
At December 31, 1996, options to purchase 707,409 shares of common stock
were available for grant under the Plan. Canceled options increase the amount of
options available to be granted under the Plan.
In December 1994, the Company issued options to purchase 60,000 shares of
common stock in connection with the employment of two key officers, at an
exercise price subsequently determined to be below fair market value at the date
of grant. The Company recorded compensation expense of $165,000 for financial
reporting purposes, to reflect the difference between the exercise price and the
fair market value, as determined by management.
The Company applied APB Opinion 25 and related interpretations in accounting
for its stock option plans. Accordingly, no compensation cost for stock options
granted to employees has been recognized under the Plan. Had compensation been
recorded based on the fair value at the grant dates for awards under the Plan
consistent with the method of SFAS 123, the Company's proforma net loss and loss
per share would have been as follows (in thousands, except per share data):
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
1996 1995
--------- ---------
Net Loss
--------
As reported..$(10,281) $(2,185)
Proforma.....$(10,469) $(2,243)
Loss Per Share
--------------
As reported..$(1.33) $ (.31)
Proforma... $(1.35) $ (.32)
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Sholes option pricing model with the following weighted average
assumptions: expected volatility ranging from 40.0% to 70%, risk-free interest
rate of 5%, expected dividends of $0 and expected lives of five years. In 1996,
the Company recorded compensation expense of $7,000 related to options to
purchase 8,000 shares of common stock granted in October 1996 to non-employees
of the Company.
<PAGE>
11. INCOME TAXES:
The components of the provision (benefit) for income taxes are as follows (in
thousands):
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
1996 1995 1994
-------- -------- --------
Current:
Federal..... ...................$(1,711) $1,931 $272
State........ .................. (256) 328 46
-------- -------- --------
(1,967) 2,259 318
-------- -------- --------
Deferred:
Federal..........................(1,930) (3,292) (201)
State............................ (170) (291) (27)
-------- -------- --------
(2,100) (3,583) (228)
-------- -------- --------
$(4,067) $(1,324) $90
======== ======== ========
</TABLE>
A reconciliation of the provision for income tax expense (benefit) with the
expected income tax (benefit) computed by applying the federal statutory income
tax rate to income (loss) before income taxes is as follows:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
1996 1995 1994
------- ------- -------
Income tax (benefit) computed at
federal statutory tax rate..........(34.0)% (34.0)% 34.0%
State and local taxes (net of
federal benefit)... ................ (3.6) (3.6) 3.5
Tax exempt interest income.......... -- (3.7) --
Increase (Decrease) in valuation
allowance........................... 7.4 -- (34.0)
Other, net.......................... 1.9 3.6 0.2
------- ------- -------
(28.3)% (37.7)% 3.7%
======= ======= =======
</TABLE>
The components of the net deferred tax asset recorded in the accompanying
consolidated balance sheets are as follows (in thousands):
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
1996 1995
------- -------
Acquired software and intangibles... $4,406 $3,301
Allowance for doubtful accounts and
potential returns................... 1,279 612
Inventory reserves.................. 866 183
Net operating loss carryforward..... 1,825 --
Other, net.......................... 349 6
------- -------
Gross deferred tax assets......... 8,725 4,102
Valuation allowance................. (2,523) --
------- -------
Net deferred tax assets........... $6,202 $4,102
======= ======
</TABLE>
A valuation allowance is provided to reduce the deferred tax assets to a
level which, more likely than not, will be realized. The net deferred assets
reflects management's estimate of the amount which will be realized from future
profitability which can be predicted with reasonable certainty.
12. LEGAL PROCEEDINGS:
In October 1996, the Company settled litigation with David H. Goodman, the
former Chairman and Chief Executive Officer of Swfte International, Ltd., and
others. The original dispute involved the contingent purchase price to the
Agreement and Plan of Merger among Expert, ES I Acquisition Corp., Swfte and the
Stockholders of Swfte, dated as of October 16, 1995. The results for the third
quarter of 1996 include expenses of $1,900,000 for the settlement, as well as
related legal and associated costs. A portion of the settlement will be paid in
agreed-upon installments through April 1, 1998.
13. COMMITMENTS AND CONTINGENCIES:
The Company leases office space under operating leases. Rent expense under
operating leases was $661,000, $368,000 and $178,000 for the years ended
December 31, 1996, 1995 and 1994, respectively. The Company leases certain
equipment under capital leases, which are recorded at the present value of
future minimum lease payments. Future minimum lease payments under
non-cancelable operating leases and capital leases at December 31, 1996 are as
follows (in thousands):
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Operating Capital
Leases Leases
-------- --------
1997................................ $546 $ 54
1998................................ 558 41
1999................................ 389 --
2000................................ 201 --
-------- --------
Total future minimum payments.......$1,694 95
========
Less: Interest..................... (7)
========
Present value of future minimum $ 88
lease payments...................... ========
</TABLE>
The Company's federal tax filings with respect to the year ended December
31, 1992 and subsequent years are presently being reviewed by the Internal
Revenue Service ("IRS"). The IRS has questioned the allocation of the purchase
price made by the Company in connection with the acquisition of assets and
business of the Predecessor from Bloc in October 1992, and related amortization
and other deductions with respect to the acquired assets. The IRS has not
proposed any assessment from their review, but it is expected to conclude its
audit in the near future and has indicated that it intends to propose
adjustments to the Company's federal income tax returns claiming additional tax
due. At this time, it is not possible to quantify the amount of additional taxes
the IRS will claim are due. However, the Company expects to contest vigorously
any proposed IRS deficiency and believes that it has strong defenses against any
such claim. The Company continues to expect that the ultimate resolution of this
matter will not have a material adverse effect on its financial position.
Item 9.Changes and Disagreements With Accountants on Accounting and Financial
Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required in this section is incorporated by reference from
the portion of the Company's definitive proxy statement for its 1997 Annual
Meeting of the Stockholders to be filed with the Securities and Exchange
Commission (the "Proxy Statement") captioned "Proposal I Election of Directors".
Item 11. Executive Compensation
The information required in this section is incorporated by reference from
the portion of the Proxy Statement captioned "Executive Compensation".
Item 12.Security Ownership of Certain Beneficial Owners and Management
The information required in this section is incorporated by reference from
the portion of the Proxy Statement captioned "Principal Stockholders and
Management".
Item 13. Certain Relationships and Related Transactions
The information required in this section is incorporated by reference from
the portion of the Proxy Statement captioned "Certain Transactions".
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (1) Financial statements:
Reference is made to the Index set forth on page 25 of this Annual Report
on Form 10-K.
(2) Financial Statements Schedules:
Page
Report of Independent Certified Public Accountants
on Schedules.................................................S-1
Schedule II- Valuation and Qualifying Accounts...............S-2
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are not applicable and
therefore have been omitted.
(3) Exhibits
Exhibit Description
No.
3.1 Restated Articles of Incorporation of the Company (5)
3.2 Amended and Restated By-Laws of the Company (5)
10.1 Employment Agreement between the Company and Kenneth
Currier dated as of February 23, 1995 (2)
10.2 Employment Agreement between the Company and Susan
Currier dated as of February 23, 1995 (2)
10.3 Amended and Restated Stockholders Agreement among
the Company and certain stockholders dated as of
October 31, 1995 (5)
10.4 Lease between the Company and Douglas Entrance
Holdings Limited Partnership dated February 25, 1994
(3)
10.5 Sublease Agreement between the Company and Commodore
Cruise Line, Limited dated May 9, 1994 (3)
10.6 1992 Stock Option Plan, as amended (3)
10.7 Revolving Credit Agreement between the Company and
the First National Bank of Boston dated as of October 23,
1992, as amended in December 1993 and on May 19, 1994, June
30, 1994 and August 1, 1994 (3)
10.8 Summary of the Company's Management Incentive Plan
(3)
10.10 Agreement and Plan of Merger among the Company, ESI
Acquisition Corp., Swfte and the stockholders of Swfte dated
as of October 16, 1995 (5) (U)
10.11 Registration Rights Agreement by and among the
Company and certain stockholders dated as of
November 2, 1995 (5)
10.12 Shareholders Rights Agreement between the Company
and The First National Bank of Boston dated November
9, 1995 (4)
10.13 Amended and Restated Licensing Agreement between Swfte and
The United States Playing Card Company dated as of May 1993,
as amended on July 14, 1994, July 7, 1995 and July 21, 1995
(5) (U)
10.14 Licensing and Royalty Agreement between the Company
and McDonald's Corporation dated as of January 2,
1997 (6)
10.15 Sublease Agreement Between the Company and
Enterprise Consulting, Inc. dated as of May 1, 1996
(1)
11.1 Computation of Earnings Per Share (1)
21 Subsidiaries of the Company (5)
23.1 Consent of Arthur Andersen LLP (1)
27 Financial Data Schedule (EDGAR filing only)
----------
(1) Filed herewith.
(2) Incorporated by reference to the designated exhibit
of Amendment No. 1 to the Registration Statement on
Form S-1 (No. 33-89758 filed March 30, 1995).
(3) Incorporated by reference to the designated exhibit
of the Registration Statement on Form S-1 (No.
33-89758 filed February 24, 1995).
(4) Incorporated by reference to the designated exhibit of
registrant's Form 8-K (filed November 12, 1995).
(5) Incorporated by reference to the designated exhibit of
registrant's Annual Report on Form 10-K for the year ended
December 31, 1995
(6) Incorporated by reference to the designated exhibit
of Form 8-K filed February 26, 1997
(U) Confidential treatment granted as to portions of
this document.
(b) Reports on Form 8-K
On October 23, 1996, the Company filed a report on Form 8-K in regard to
the settlement of the Swfte litigation (see Part I, Item 3).
(c) Exhibits required by Item 601 of Regulation S-K
The index to exhibits that are listed in Item 14(a)(3) of this report and
not incorporated by reference follows the "Signatures" section hereof and
is incorporated by reference.
(d) Financial Statement Schedules required by Regulation S-X
Reference is made to Item 14(a)(2).
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
EXPERT SOFTWARE, INC.
Date: March 27, 1997 By: /s/ KENNETH P. CURRIER
----------------------
Kenneth P. Currier
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities and on the dates indicated.
Signature Title Date
Director, Chief March 27, 1997
/s/ KENNETH P. CURRIER Executive Officer and
------------------- Secretary (Principal
Kenneth P. Currier Executive Officer)
Chief Financial March 27, 1997
/s/ CHARLES H. MURPHY Officer and Treasurer
------------------- (Principal Financial
Charles H. Murphy Officer and Principal
Accounting Officer)
/s/ Director March 27, 1997
---------------------
Stephen J. Clearman
/s/ SUSAN A. CURRIER Director, President March 27, 1997
---------------------
Susan A. Currier
/s/ A. BRUCE JOHNSTON Director March 27, 1997
---------------------
A. Bruce Johnston
/s/ Director March 27, 1997
----------------------
William H. Lane III
/s/ CHARLES E. NOELL III Director March 27, 1997
----------------------
Charles E. Noell III
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON SCHEDULES
To the Stockholders
of Expert Software, Inc.:
We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements included in this Form 10-K and have issued our
report thereon dated February 12, 1997. Our audit was made for the purpose of
forming an opinion on those statements taken as a whole. The schedule listed
under Item 14(a) of this Form 10-K is the responsibility of the Company's
management and is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in the audit
of the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Miami, Florida,
February 12, 1997.
S-1
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
EXPERT SOFTWARE, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(in thousands)
Balance at Charged to Balance at
Description Beginning Costs and End of
of Period Expenses Deductions Period
- ------------------------------ ----------- ----------- ----------- -----------
Allowance for doubtful
accounts and returns:
Fiscal year ended December
31,1996........................ $1,659 $7,311 $(3,909) $5,061
=========== =========== =========== ============
Fiscal year ended December 31,
1995........................... $2,099 $3,171 $3,611 $1,659
=========== =========== =========== ============
Fiscal year ended December 31,
1994........................... $933 $4,561 $3,395 $2,099
=========== =========== =========== ============
</TABLE>
S-2
<PAGE>
INDEX TO EXHIBITS
Sequential
Page
Exhibit Description Number
No.
10.15 Sublease Agreement Between the Company and
Enterprise Consulting, Inc. dated as of May 1,
1996............................................... 44
11.1 Computation of Earnings Per Share.................. 50
23.1 Consent of Arthur Andersen LLP..................... 51
SUBLEASE FOR OFFICE SPACE THIS SUBLEASE is entered into as of the 1st day
of May, 1996, by and between ENTERPRISES CONSULTING, INC-, a Delaware
corporation whose address is 800 Douglas Road, North Tower, Suite 700, Coral
Gables. FL 33134 ('ECI') and EXPERT SOFTWARE, INC.. Delaware corporation whose
address is 800 Douglas Road, Executive Tower, Coral Gables, FL 33134 ("Expert")
(SUBLESSEE") with reference to the following facts: A. Pursuant to an April 25,
1990 Lease Agreement (the "Main Lease") between DOUGLAS ENTRANCE HOLDINGS
LIMITED PARTNERSHIP ("Landlord') and COMMODORE- CRUISE LINE, LIMITED, a Cayman
islands corporation, now known as EFFJOHN NORTH AMERICA LIMITED ('Sublessor')
and an August 10, 1994 Sublease agreement (the "ECI Sublease") between Sublessor
and ECI, ECI has leased office space on the sixth (6th) and seventh (7th) floors
of the building located at 800 Douglas Road, Coral Gables. Florida 33134 (the
'Building'), and desires to sublease a portion of that space to Sublessee, and
B. Sublessee desires to sublease a portion of the office space. NOW. THEREFORE,
the parties agree as follows: 1. Demise and Description of Property. ECI hereby
leases to Sublessee, and Sublessee hereby leases from ECI, for the term, and
subject to the conditions and covenants hereinafter set forth, the portion of
the sixth (6th) floor of the Building demised to ECI in the ECI Sublease and
shown on Exhibit "A" attached hereto and made a part hereof, hereinafter
referred to as the "subleased premises". The subleased premises contains 7,152
rentable square feet, 1,045 square feet of which shall be provided rent free. 2.
Term. The term of this Sublease shall commence on May 1. 1996 or on the date of
occupancy by Sublessee, whichever is sooner, provided the consent of Landlord
and Sublessor to this fully-executed Sublease has been obtained, and shall end
on the first to occur of (i) the expiration date of the ECI Sublease or (ii) on
August 29, 2000. 3. Rent. (a) For and during the term of this Sublease,
Sublessee shall pay to ECI for he subleased premises a fixed rental of $15.50
per rentable square foot per year, i.e., $94,658.50 per year, payable monthly
beginning on the commencement date in the amount of $7,888.21. ECI shall pay the
applicable sales or other taxes on such rentals. The rental payment includes all
charges (except telephone) for the furnished space as offered to Sublessee on
the commencement date, all office services received from or through the
Landlord, and building charges or assessments for the subleased premises (such
as utilities, cleaning and maintenance. plant care, security system equipment
and monitoring, etc.). All requests and payment for additional HVAC shall be
made by Sublessee through ECI. Sublessee shall pay ECI for telephone charges to
be billed separately from the above services. (b) For and during the term of
this Sublease, Sublessee will pay its proportionate share (Sublessee's square
footage of 6,107 over ECI's total square footage of 19,254 under the EC[
Sublease) of increases in operating expenses and real estate taxes over 1995
base year. Calculations will be made in accordance with the ECI Sublease and
Sublessee shall be entitled to its proportionate share of any credits or refunds
pursuant to Section 4.07 of the Main Lease. :: (c) Sublessee shall pay the rent
to ECI, at the address set forth above, or at such address as ECI may from time
to time designate. Sublessee agrees to pay all such sums monthly, in advance.
and without demand. If the term of this Sublease commences on a day other than
the first day of the month or terminates on a day other than the last day of a
month, then the installments of rent and any adjustments thereto for such month
or months shall BE prorated, based on the number of days in such month. 4. Use
of Premises. The subleased premises shall be used by Sublessee for office
purposes and for uses normally incident thereto and for no other purpose. 5.
Compliance with ECI Sublease; Representations, Warranties, Covenants and
lndemnity. (a) Except as provided herein, the Sublessee shall be entitled to all
rights, benefits and privileges of ECI and Sublessor and shall comply with and
assume all provisions of the ECI Sublease and the Main Lease as the same apply
to the subleased premises as the tenant thereunder during the term hereof and
ECI shall perform or cause to be performed all obligations and shall have all
rights and remedies of the landlord thereunder. Notwithstanding the foregoing,
the payment of rent shall be governed by the provisions of Paragraph 3, above.
Without in any way limiting the generality of the foregoing, Sublessee
acknowledges that ECI is relying upon the timely payment of rental by Sublessee
hereunder in order for ECI to make its payments of rental under the ECI
Sublease. Accordingly, in the event Sublessee defaults in the payment of rent
hereunder and such default remains uncured after expiration of the applicable
cure period, if any, and should the penalty set forth in 3.02 of the Main Lease
be imposed upon ECI, in addition to other liability that may be imposed upon
Sublessee, Sublessee agrees to indemnify and hold harmless ECI from the penalty
set forth in 3.02 of the Main Lease on the prorata basis calculated by dividing
Sublessee's leased square footage of 6,107 by ECI's total square footage of
19,254 under the ECI Sublease and multiplying the quotient by the amount of the
penalty. Sublessee is assuming no obligations under 3.02 of the Main Lease
except as set forth above. (b) ECI represents, warrants and covenants to
Sublessee that (i) it has the power to execute, deliver and perform this
Sublease and has duly authorized, executed and delivered this Sublease; (ii)
this Sublease constitutes the legal. valid and binding obligation of ECI
enforceable against it in accordance with its terms; (iii) attached hereto as
Exhibits "B" and "C" respectively, are true and correct copies of the Main Lease
and the ECI Sublease, in each with all amendments thereto; (iv) each of the Main
Lease and the ECI Sublease is in full force and effect, and there exists no
event of default or event or act (including, without limitation, the execution,
delivery or performance of this Sublease), which, with the giving of notice, the
lapse of time or the happening of any other event or condition would become a
default thereunder; (v) except for the consents of the Landlord and Sublessor
set forth below, no consent of any other person or entity is required in
connection with ECI's execution, delivery and performance of the Sublease; (vi)
ECI has not violated any of the terms and conditions of the Main Lease or the
ECI Sublease and, to the best of ECI's knowledge, all of the covenants to be
performed by every other party to the Main Lease and the ECI Sublease as of the
date hereof have been fully performed in all material respects: (viii) it will
comply with the provisions of the ECI Sublease and cause Sublessor to comply
with the provisions of the Main Lease, except and solely to the extent any
non-compliance is caused by Sublessee's non-compliance with the terms of this
Sublease. 2 (c) ECI agrees to indemnify and hold the Sublessee harmless from and
against any loss, cost, damage or expense arising from or in connection with any
breach by ECI of any representation, warranty or covenant contained herein. (d)
Sublessee agrees to indemnify and hold ECI harmless from and against any loss,
cost, damage or expense arising from or in connection with any breach by
Sublessee of any representation, warranty or covenant contained herein. 6.
Furniture and Fixtures. Sublessee shall have the utilization of the furniture in
place. with the exception of a few "persona1" pieces of furniture which will be
identified in a list of excluded inventory. which shall be attached as Exhibit
"D" and by this reference incorporated herein. Furniture is not deemed to
include any office equipment, telephone system or telephones. Sublessee may use
the furniture located in the subleased premises free of charge for the duration
of this Sublease. and such furniture will be relinquished to ECI upon completion
of this Sublease, reasonable wear and tear excepted. 7. Assignment and
Subletting. No assignment or subletting of the subleased premises or any part
thereof shall be made by Sublessee. 8. Quiet Possession Sublessee, upon full
performance of all provisions herein shall peaceably and quietly have hold and
enjoy the subleased premises throughout the term hereof without any disturbance
from ECI or any person claiming through ECI. 9. Insurance. Sublessee agrees
that, at all times during the Sublease Term, it will keep in force and effect
all insurance as is required under the Main Lease and name Landlord, Sublessor
and ECI as additional insureds. 10. Parking. Sublessee shall have no obligations
concerning parking under the ECI Sublease. 11. No Obligation to Restore.
Sublessee shall have no obligation to restore the subleased premises to their
original condition at the expiration or termination of this Sublease pursuant to
Section 7.01 of the Main Lease. 12. General Provisions. (a) This Sublease
embodies the entire agreement between the parties hereto relative to the subject
matter hereof and shall not be modified, changed, or altered in any respect
except in writing. (b) The covenants, agreements. and obligations herein
contained shall extend to, bind. and inure to the benefit not only of the
parties hereto but their successors and assigns; and where more than one party
shall be ECI under this Sublease, the word "ECI" whenever used in this Sublease
shall be deemed to include all such parties jointly and severally. (c) Whenever
under this Sublease. a provision is made for notice of any kind, such notice
shall be in writing and signed by or on behalf of the party giving or making the
same, and it shall be deemed sufficient notice and service thereof if such
notice is sent by registered or certified mail, postage prepaid, to the address
furnished for such purpose. Copies of any notices to ECI shall also be sent to
(1) Coca-Cola Enterprises. Inc., P.O. Box 723040, Atlanta. GA 31139-0040, Attn:
Matt Fanoe, Real Estate Manager, and (2) Coca-Cola Enterprises, Inc.. P. 0. Box
723040, Atlanta. GA 31139-0040, Attn: Lowry F. Kline, General Counsel. 3 Copies
of any notices to Sublessee shall be sent to Kenneth F. Currier, CEO. All
notices to be given to the parties shall be given at the addresses stated above
unless and until some other place is designated in writing by the respective
party and in accordance with the ECI Sublease and the Main Lease. (d) Nothing in
this Sublease Agreement is intended to conflict with the terms of the Main Lease
or the ECI Sublease, or with any of the rights granted to Landlord in the Main
Lease or with any of the rights granted to Sublessor in the ECI Sublease, which
shall remain in full force and effect throughout the term of this Sublease. (e)
The subleased premises shall be designated as a non-smoking area and no smoking
shall be permitted upon the subleased premises. (f) This Sublease is contingent
upon the execution by the Landlord and the Sublessor of the Consents attached
hereto. (g) This Sublease may be executed in any number of counterparts, each of
which shall be deemed to be an original document and all of which taken
together. shall constitute one and the same instrument. Executed so as to be
effective on the day and year first above written. ENTERPRISES CONSULTING, INC.,
a Delaware corporation By: /s/ Michael W. McNally Title: Senior Vice President
EXPERT SOFTWARE, INC. a Delaware corporation By: /s/ Kenneth P. Currier Title-.
Chief Executive Officer
<PAGE>
CONSENT OF LANDLORD The undersigned hereby (i)
confirms that (a) that certain Lease Agreement dated April 25, 1990 executed by
the undersigned and by COMMODORE CRUISE LINE, LIMITED, now known as EFFJOHN
NORTH AMERICA LIMITED (the "Main Lease") is in full force and effect and other
than the entering into of the ECI Sublease, the Expert Software Sublease, and as
amended by the First Amendment to Lease Agreement dated August 10, 1990, which
served to amend Section 32.01(a), the Expansion Option, the Main Lease has not
been otherwise amended or modified and (b) to the best of the undersigned's
knowledge, COMMODORE CRUISE LINE, LIMITED, now known as EFFJOHN NORTH AMERICA
LIMITED is not currently in default of any of the provisions of the Main Lease;
and (ii) consents to the above May 1, 1996 Sublease for Office-e Space (the
'Sublease') by and between ENTERPRISES CONSULTING, INC. ("ECI") and EXPERT
SOFTWARE, INC. ("Sublessee") pursuant to Article 12.01 of the Main Lease. The
undersigned has executed this consent to indicate approval of Sublessee but in
no way shall this consent be construed as a modification, amendment or
supplement to the April 25, 1990 lease agreement between Sublessor and the
undersigned, nor shall the execution of this consent by the undersigned be
deemed to make the undersigned a party to this Sublease. All capitalized terms
used in the foregoing consent shall have the meanings given to them in the
Sublease. DOUGLAS ENTRANCE HOLDINGS LIMITED PARTNERSHIP, a Delaware limited
partnership By: DWS Florida holdings, Inc,, a Delaware corporation, General
Partner By: /s/ Ron N. Paul Ron N. Paul Title: Vice President CONSENT OF
SUBLESSOR The undersigned hereby (i) certifies that (a) attached hereto is a
true and correct copy of the ECI Sublease, with all amendments thereto through
the date hereof and (b) to the best of the undersigned's knowledge, ECI is not
in default of any of the terms and conditions of the ECI Sublease. and (ii)
consents to the terms and conditions of the above May 1, 1996 Sublease for
Office Space (the "Sublease') by and between ENTERPRISES CONSULTING, INC.
("ECI") and EXPERT SOFTWARE, INC. ("Sublessee"). The undersigned has executed
this consent to indicate approval of Sublessee but in no way shall this consent
be construed as a modification, amendment or supplement to the August 10, 1994
lease agreement between ECI and the undersigned, nor shall the execution of this
consent by the undersigned be deemed to make the undersigned a party to this
Sublease. All capitalized terms used in the foregoing consent shall have the
meanings given them in the Sublease. EFFJOHN NORTH AMERICA LIMITED, formerly
known as Commodore Cruise Line, Limited, a Cayman Islands corporation By:
Patrick Doyle Title: Chief Financial Officer
<PAGE>
SUBLEASE FOR OFFICE SPACE This
Sublease is entered into this l0th day of August, 1994, by and between Commodore
Cruise Line, Limited, a Cayman Islands corporation authorized to transact
business in the state of Florida,. with an office at 800 Douglas Entrance, Suits
700, Coral Gables,. Florida 33134 ('Sublessor") and Enterprises Consulting,
Inc., a Delaware corporation, whose address is 100 Galleria Parkway Suite 220,
Atlanta GA 30339. ("Sublessee") with reference to the following facts: A.
Pursuant to an April 25, 1990, Lease Agreement (the "Main Lease") between
Douglas Entrance Holdings Limited Partnership ("Landlord") and Sublessor,
Sublessor has leased office space on the sixth (6th) and seventh (7th) floors of
the building located at 800 Douglas Road, Coral Gables, Florida 33134 (the
"Building"), and desires to sublease a portion of that space to Sublessee, and
B. Sublessee desires to sublease the off ice space. NOW, THEREFORE, the parties
agree as follows: 1. Demise and Description of Property Sublessor hereby leases
to Sublessee, and Sublessee hereby leases from Sublessor, for the term, and
subject to the conditions and covenants hereinafter set forth, the property,
hereinafter referred to as the "subleased premises", located in Dade County,
Florida, described as follows: All of the seventh (7th) floor, shown on Exhibit
"A" attached hereto and made a part hereof, and a portion of the sixth (6th)
floor, shown hatched and cross-hatched on Exhibit "B" attached hereto and made a
part hereof. The subleased premises contain 20,299 rentable square feet, with
1,045 square feet on the sixth (6th) floor shown cross-hatched on Exhibit "B"
being provided rent free by Sublessor to Sublessee. At any time during the term
of this Sublease, and at Sublessor's expense, Sublessor may request that
Sublessee relocate its subleased premises to other comparable space leased by
sublessor under he Main Lease. 2. Term The term of this Sublease shall commence
on September 1, 1994 or on the date of occupancy by sublessee, whichever is
sooner, provided Landlord's consent to this fully-executed Sublease has been
obtained, and shall end on August 29, 2000. 3. Rent For and during the term of
this Sublease, Sublessee shall pay to Sublessor for the subleased premises
(exclusive of the 1,045 square feet which are rent free) a fixed rental of
$15.50 per rentable square foot per year, i.e.,. $298,437.00 per year; payable
monthly in the amount of $24,869.75. The Sublessor shall pay all applicable
sales or other taxes on such rentals. The rental payment Includes all charges
(except telephone) for the furnished space as offered to Sublessee on the
commencement date, all. office services received from or through the Landlord,,
and building charges or assessments for the subleased premises (such as
utilities, cleaning and maintenance, plant care, security system equipment and
monitoring, etc.) All requests and payment for additional HVAC shall be made by
Sublessee through Sublessor. Sublessee shall pay Sublessor for telephone charges
to be billed separately from the above services. Sublessee will pay its
proportionate share (Sublessee's square footage of 19,254 over Sublessor's total
square footage under the Main Lease) of increases in operating expenses and real
estate taxes over a 1994 base year. Calculations will be made in accordance with
the Main Lease. Sublessee shall pay the rent to Sublessor, at the address set
forth above, or at such address as Sublessor may from time to time designate.
Sublessee agrees to pay all such sums monthly, in advance, and without demand.
If the term of this Sublease commences on a day other than the first day of the
month or terminates on a day other than the last day of the month, then the
installments of rent and any adjustments thereto for such month or months shall
be prorated, based on the number of days in such month. 4. Use of Premises The
subleased premises shall be used by sublessee for office purposes and for uses
normally incident thereto and for no other purpose. 5. Assumption Agreement and
Covenants Except as modified herein, the Sublessee shall comply with all
provisions of the Main Lease during the term hereof by the Sublessor as Tenant
thereunder and Sublessor shall have all rights and remedies of the Landlord
thereunder. Notwithstanding the foregoing, the payment of rent shall be governed
by the provisions of Paragraph 3, above. 6. Furniture and fixtures Sublessee
shall have the utilization of the furniture in place with the exception of a few
"personal" pieces of furniture which will be identified in a list' of excluded
inventory, which shall be attached as Exhibit "C" and by this reference
incorporated herein. Furniture is not deemed to include any off ice equipment,
telephone system or telephones. Sublessee may use the furniture located in the
subleased premises free of charge, for the duration of this Sublease, and such
furniture will be relinquished to the Sublessor upon completion of this
Sublease, reasonable wear and tear excepted. 7. Assignment and Subletting No
assignment or subletting of the subleased promises or any part thereof shall be
made by Sublessee. 8. Quiet Possession Sublessee, upon full performance of all
provisions herein, shall peaceably and quietly have, hold and enjoy the
subleased premises throughout the term hereof without any disturbance from
Sublessor or any person claiming through Sublessor. 9. Insurance Sublessee
agrees that, at all times during the Sublease Term, it will keep in force and
effect all insurance as is required under the Main Lease and name Landlord and
Sublessor additional insureds. 10. Parking Sublessee will lease up to sixty-six
(66) garage parking spaces as needed at a monthly rate of $45.00 per space for
the duration of the Sublease Term. At Sublessee's option, Sublessee may convert
up to fifty (50) garage spaces to open lot spaces which would be available at
$20.00 per space, per month. Visitor parking is available in the garage from the
Landlord currently at $.75 per half hour. 11. Right of First Refusal If at any
time during the term of this Sublease, Sublessor desires to sublease any other
space Sublessor has remaining under the Main Lease, and receives a bona fide
offer from a third party that Sublessor is willing and proposes to accept,
Sublessor shall give sublessee the right of first refusal to sublease such space
an terms and conditions not less favorable to Sublessee than those contained in
the bond fide offer. Upon receipt of such offer (which can be a letter of
intent), Sublessor shall immediately notify Sublessee in writing of the rental
price and terms of the bona fide offer along with the name and address of the
offeror and Sublessee shall have five (5) business days within which to elect to
exercise its right to sublease the space. If, during this five (5) day period,
Sublessee elects to sublease the space, Sublessee shall so notify Sublessor in
writing and the parties shall execute a sublease of the space within ten (10)
business days immediately following the expiration of the five (5) day option
period. Should Sublessee fail to notify Sublessor in writing during the five (5)
day option period, then Sublessor may sublease to the third party at the rental
price and on the terms set forth in the bona fide offer. 12. General (a) This
Sublease embodies the entire agreement between the parties hereto relative to
the subject matter hereof and shall not be modified, changed, or altered in any
respect except in writing. (b) The covenants agreements, and obligations herein
contained shall extend to, bind, and inure to the benefit not only of the
parties hereto but their successors and assigns; and where more than one party
shall be Sublessor under this Sublease, the word "Sublessor" whenever used in
this Sublease shall be deemed to include all such parties jointly and severally.
(c) Whenever under this Sublease, a provision is made for notice of any kind,
such notice shall be in writing and signed by or on behalf of the party giving
or making the same, and it shall be deemed sufficient notice and service thereof
if such notice is sent by registered or certified mail, postage prepaid, to the
address furnished for such purpose. Copies of any notices to the Sublessee shall
also be sent to (1) Coca-Cola Enterprises Inc., P.0. Box 723040, Atlanta,
Georgia 31139-0040, Attn: Matt Fanoe, Real Estate Manager, and (2) Coca-Cola
Enterprises Inc., P.0. Box 723040, Atlanta, Georgia 31139-0040 Attn: Lowry P.
Kline, General Counsel. All notices to be given to the parties shall be given at
the addresses stated above unless and until some other place is designated in
writing by the respective party and in accordance with the Main Lease. (d)
Nothing in this Sublease Agreement is intended to conflict with the terms of the
Main Lease, or with any of the rights granted to Landlord in the Main Lease,
which shall remain in full force and effect throughout the term of this
Sublease. (e) The subleased premises shall be designated as a non-smoking area
and no smoking shall be permitted upon the subleased premises. (t) This
:Sublessee is contingent upon the execution by the Sublessor, Sublessee, Cushman
& Wakefield and Mary Ann Andrews of a Release substantial in the form attached
hereto as Exhibit "D" on or before August 10, 1994 at 5:00 p.m. eastern daylight
savings time.
<PAGE>
Executed on the day and year first above written. COMMODORE
CRUISE LINE, LIMITED ENTERPRISES CONSULTING, INC. By: /s/ Lourdes Padilla for
By: /s/ Michael W. McNally Name: Patrick Doyle Name: Michael W. McNally Title:
Corp. Controller Title: Senior Vice President Consent Douglas Entrance Holdings
Limited Partnership ("Douglas Entrance") hereby consents to the terms and
conditions of the above August 10, 1994 Sublease for Office Space by and between
Commodore Cruise Line, Limited ("Sublessor") and Enterprises Consulting, Inc.
("Sublessee). Douglas Entrance has executed this consent to indicate approval of
Sublessee, but in no way shall this consent be construed as a modification,
amendment or supplement to the April 25, 1990 lease agreement between Sublessor
and Douglas Entrance, nor shall the execution of this consent by Douglas
Entrance be deemed to make Douglas Entrance a party to the Sublease. DOUGLAS
ENTRANCE HOLDINGS LIMITED PARTNERSHIP, a Delaware limited partnership By: DWS
Florida Holdings, Inc., a Delaware corporation, general partner By: /s/ Ron N.
Paul
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
EXHIBIT 11.1
EXPERT SOFTWARE, INC.
STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE
FOR THE YEARS ENDED DECEMBER 31,1996, 1995 AND 1994
(in thousands, except per share data)
1996 1995 1994
---------- ---------- ----------
Net income (loss)................... $(10,281) $(2,185) $2,333
Less preferred stock dividends...... -- (41) (132)
---------- ---------- ----------
Income (loss) applicable to common
stock............................... $(10,281) $(2,226) $2,201
========== ========== ==========
Weighted average common shares
outstanding......................... 7,482 6,708 5,105
Dilutive stock options.............. 268 445 690
---------- ---------- ----------
Weighted average number of common
stock and common stock equivalents
for primary earnings per share...... 7,750 7,153 5,795
========== ========== ==========
Net income (loss) per share......... $(1.33) $(.31) $.38
========== ========== ==========
</TABLE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As independent certified public accountants, we hereby consent to the
incorporation of our reports included in this Form 10-K, into the Company's
previously filed Form S-8 Registration Statement File No.33-93920.
ARTHUR ANDERSEN LLP
Miami, Florida,
March 27, 1997.
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE REGISTRANT'S 1996 AUDITED CONSOLIDATED BALANCE SHEETS AND
STATEMENTS OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000939730
<NAME> EXPERT SOFTWARE, INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 2,959
<SECURITIES> 0
<RECEIVABLES> 3,775
<ALLOWANCES> 5,061
<INVENTORY> 1,256
<CURRENT-ASSETS> 13,428
<PP&E> 1,897
<DEPRECIATION> (1,909)
<TOTAL-ASSETS> 19,077
<CURRENT-LIABILITIES> 8,352
<BONDS> 0
0
0
<COMMON> 75
<OTHER-SE> 10,350
<TOTAL-LIABILITY-AND-EQUITY> 19,077
<SALES> 31,012
<TOTAL-REVENUES> 31,012
<CGS> 16,420
<TOTAL-COSTS> 45,452
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,364
<INTEREST-EXPENSE> (92)
<INCOME-PRETAX> (14,348)
<INCOME-TAX> (4,067)
<INCOME-CONTINUING> (10,281)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,281)
<EPS-PRIMARY> (1.33)
<EPS-DILUTED> (1.33)
</TABLE>
