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, 1997
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
North Tower, Sixth Floor
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 February 24, 1998 was approximately $20,767,000. For
purposes of this computation, all executive officers, directors and 5% owners of
the registrants have been deemed to be affiliates.
As of March 17, 1998, there were 7,606,342 shares of the Registrant's Common
Stock, $ .01 par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
None.
Page 1 of 48.
The exhibit index is on page 42.
<PAGE>
Index to Items
Part I Page
Item 1. Business.............................................3
Item 2. Properties...........................................8
Item 3. Legal Proceedings....................................8
Item 4. Submission of Matters to a Vote of Security
Holders..............................................8
Part II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters..........................9
Item 6. Selected Financial Data.............................10
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................11
Item 8. Consolidated Financial Statements and
Supplementary Data..................................18
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.................33
Part III
Item 10. Directors and Executive Officers of the
Registrant..........................................34
Item 11. Executive Compensation..............................37
Item 12. Security Ownership of Certain Beneficial Owners
and Management......................................40
Item 13. Certain Relationships and Related Transactions......42
Part IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K.................................42
Signatures...................................................44
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 16 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 170
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 $15, 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 23.9 million units of Expert products have been sold since 1989,
with more than 5.6 million units sold in 1997 and more than 4.8 million units
sold in 1996. Expert products are currently available at retailers such as
Babbages Etc, Best Buy, Computer City, CompUSA, Electronics Boutique, Micro
Center, Office Depot, OfficeMax, PriceCostco, Radio Shack, Sam's Club, and
Staples.
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").
"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. Such PCs have improved enabling technologies and standards, such as
graphical user interfaces and the Windows operating system, which have made PCs
easier to use for a broad range of applications resulting in the transformation
of PCs into general-purpose tools. These advanced capabilities have allowed
software developers to produce more engaging software with advanced
three-dimensional graphics, realistic sound and full motion video. Well-equipped
PCs are now available for $1,000 and less. Today's lower-priced PCs feature
high-speed microprocessors, large amounts of memory, high-speed CD-ROM
technology, and enhanced sound and graphics capabilities.
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 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 competition from large
consumer product 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 upgraded graphical user interfaces 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 170 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 is
further expanding its distribution in consumer-oriented channels such as
grocery, drug and convenience stores. 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 also promotes its
products via the Internet.
Promote Brand Names. Commencing in 1997 the Company promotes its products under
five brands: Expert, McDonaldland(R), Bicycle(R) ,Gamers' Choice(TM) and the
Sega PC Collection(TM). 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 six software titles in this line were
introduced during the second half of 1997. Seven titles within the Sega PC
Collection(TM) were introduced during the second half of 1997. 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), Gamers' Choice(TM)
and Sega PC Collection(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 to supplement its
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.
Products
The Expert product line addresses a wide range of interests and hobbies. The
Company's products sell in retail stores primarily for under $15, a price point
intended to generate impulse purchases in high-traffic mass market environments.
Currently, the Company's product line includes over 170 titles. Expert
introduced 63 new titles in 1997, and over 50 new titles in 1996.
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 81% and 84% of its sales in 1997 and
1996, respectively, 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. For example, 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)
and Sega PC Collection(TM) brands 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 personalized calendars, adding clip art to
an Internet web site, creating personalized greeting cards, or creating a family
newsletter. For example, Calendar Shopo allows users to organize events daily,
weekly, monthly or yearly for events related to home, business, school or clubs
and organizations.
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 home design
product, a wedding planner and engaging screen savers. 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.
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. For example, 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 Babbages Etc, Best Buy, Computer City, CompUSA,
Electronics Boutique, Micro Center, Office Depot, OfficeMax, PriceCostco, Radio
Shack, Sam's Club, and Staples.
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 1997, Office Depot represented more than 10% of the Company's sales. In 1996,
Office Depot and Ingram Micro 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.
International sales represented approximately 24%, 25%, and 15% of Expert's
sales in fiscal years ended 1997, 1996, and 1995, 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 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
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 depends primarily upon third
parties for the acquisition or licensing of software products or technologies.
Development costs associated with externally licensed technology are generally
paid by royalties based on sales, which are included in cost of revenues in the
accompanying consolidated financial statements. The Company may also acquire
products through the acquisition of other software companies. Development
expenses, including technical support to customers, totaled $2.7 million, $3.3
million, and $2.2 million in 1997, 1996, and 1995, 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.
The Company provides technical support to customers by telephone and facsimile
machine at no additional charge. The Company has a call handling center to
facilitate its response to customer inquiries. The Company offers technical
support on its web page on the Internet at http://www.expertsoftware.com.
There can be no assurance that the Company will be successful in developing and
marketing products for 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.
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.
The Company intends to manage and maintain inventory levels to support shipments
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.
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. 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 Cendant Corporation, GT Interactive Software Corp. and The Learning
Company, 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.
The Company licenses software from third party developers under standard format
software license agreements for multi-year terms, typically five years with
provisions for renewal. In a few instances, however, certain third party
developer licenses contain other provisions. For example, the Company's June,
1997 software license with Sega Entertainment, Inc. for seven titles provides
for (1) early termination by either party in the event the Company fails to
achieve aggregate sales targets as of March 31, 1998; and (2) provides the
Company the option to renew this license for a single one year term by
achievement of aggregate sales targets by August 31, 1998. Similarly, the
Company's January, 1997 license with McDonald's Corporation for use of
McDonald's Marks on family-oriented software has a five year term, and requires
the Company to pay minimum royalty guarantees during the term. The Company's
December 31, 1997 license with The United States Playing Card Company for use of
the trademark Bicycle(R) on software card games continues in effect until August
2001, with provisions for renewal.
Employees
As of December 31, 1997, the Company had 109 employees, including 33 in sales
and marketing, 19 in development, 18 in customer support and 39 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.
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 1998.
Item 3. Legal Proceedings
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. In June 1997, the IRS proposed
assessments for additional taxes of $412,000, $553,000 and $857,000 for the tax
years 1992, 1993 and 1994, respectively, plus interest to the date of payment.
The preliminary adjustments proposed by the IRS would also reduce the Company's
federal income taxes for the years 1995, 1996 and 1997 by $242,000, $68,000 and
$55,000, respectively. The Company believes that it has properly reported its
income and paid its taxes in accordance with applicable laws and intends to
contest the proposed adjustments vigorously. The Company believes that the
ultimate resolution of this matter will not have a material adverse effect on
its financial position.
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 Market under the
symbol XPRT. On February 24, 1998, there were approximately 100 registered
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. The following table sets forth the
high and low sales prices for the Common Stock as reported by the Nasdaq
National Market for each of the periods indicated.
<TABLE>
<CAPTION>
High Low
---------- ----------
<S> <C> <C>
Fiscal Year Ended December 31, 1997
Fourth Quarter ............... 8-1/4 2-7/8
Third Quarter ................ 7-11/16 3-3/4
Second Quarter ............... 4-5/8 1-1/2
First Quarter ................ 4-1/4 1-3/4
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
</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 should be read in conjunction with the
consolidated financial statements of the Company and the related notes.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
Statement of Operations
Data:
<S> <C> <C> <C> <C> <C>
Net revenues................ $33,208 $31,012 $27,638 $19,727 $12,555
-------- -------- -------- -------- --------
Operating costs and
expenses:
Cost of revenues (1)..... 12,985 16,420 10,121 8,066 9,352
Marketing and sales...... 10,489 9,888 6,180 4,303 2,493
General and
administrative.......... 4,554 10,124 4,293 2,824 1,631
Development.............. 2,744 3,320 2,192 1,328 545
Purchased research and
development............. -- -- 8,392 -- --
Loss on impairment of
assets.................. -- 5,700 -- -- --
Amortization of
non-compete agreement... -- -- 338 417 417
-------- -------- -------- -------- --------
30,772 45,452 31,516 16,938 14,438
-------- -------- -------- -------- --------
Operating income (loss).. 2,436 (14,440) (3,878) 2,789 (1,883)
Other income (expense), net 268 92 369 (366) (457)
-------- -------- -------- -------- --------
Income (loss) before
provision (benefit)
for income taxes........ 2,704 (14,348) (3,509) 2,423 (2,340)
Provision (benefit) for
income taxes............... 1,001 (4,067) (1,324) 90 --
-------- -------- -------- -------- --------
Net income (loss)........ $1,703 $(10,281) $(2,185) $2,333 $(2,340)
======== ======== ======== ======== ========
Diluted earnings (loss)
per share of
common stock............ $ .21 $ (1.37) $(.33) $ .38 $ (.49)
======== ======== ======== ======== ========
Balance Sheet Data:
Working capital.......... $7,916 $5,076 $10,651 $5,283 $2,825
Total assets............. 22,233 19,077 29,069 10,682 7,762
Subordinated debt........ -- -- -- 2,200 2,357
Total stockholders
equity (deficit)........ 12,532 10,425 20,634 355 (2,042)
<FN>
(1) Includes amortization of software technology which amounted to $98,000 in
1997, $404,000 in 1996, $283,000 in 1995, $477,000 in 1994, and $4,362,000
in 1993.
</FN>
</TABLE>
<PAGE>
Item 7.Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
The following table sets forth, for the periods indicated, the percentages of
net revenues represented by each item reflected in the Company's statements of
operations.
<TABLE>
<CAPTION>
Years Ended
December 31,
--------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Net revenues..................... 100.0% 100.0% 100.0%
Operating costs and expenses:
Cost of revenues................. 39.1 52.9 36.6
Marketing and sales.............. 31.6 31.9 22.4
General and administrative....... 13.7 32.7 15.5
Development...................... 8.3 10.7 7.9
Purchased research and
development..................... -- -- --
Loss on impairment of assets..... -- 18.4 --
Amortization of non-compete
agreement....................... -- -- 1.2
------ ------ ------
92.7 146.6 114.0
------ ------ ------
Operating income (loss).......... 7.3 (46.6) (14.0)
Other income (expense), net......... 0.8 0.3 1.3
------ ------ ------
Income (loss) before provision
(benefit) for income taxes.......... 8.1 (46.3) (12.7)
Provision (benefit) for income taxes 3.0 (13.1) (4.8)
------ ------ ------
Net income (loss)................ 5.1% (33.2)% (7.9)%
====== ====== ======
</TABLE>
Comparison of Years Ended December 31, 1997 and 1996
Net Revenues. Net revenues increased 7.1% to $33.2 million in 1997 from $31.0
million in 1996, due primarily to broader distribution of product, partially
offset by lower average sales prices. Average selling prices declined due to
increased competition for shelf space at retail outlets. Net revenues for the
fourth quarter of 1997 were affected by lower McDonaldland(R) software sales
than anticipated and higher returns of such products than usually experienced by
the Company's other brands. Management believes this does not reflect a trend as
the Company is undertaking additional marketing efforts to support the sales of
this product line. International sales were approximately 24% of net revenues
in 1997 and 25% of net revenues in 1996. CD-ROM products represented 91% of
net revenues in 1997 compared to 82% in 1996. 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.
Net revenues consist of gross sales net of allowances for returns and discounts,
and royalty income related to licensing of products, primarily to publishers in
Europe. 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, 1997, the Company's
allowance for potential returns and doubtful accounts was $4.4 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 Revenues. Cost of revenues decreased to $13.0 million in 1997 from $16.4
million in 1996 and decreased as a percentage of net revenues to 39.1% from
52.9%. This decrease was primarily due to the provisions of $2.6 million and
$1.4 million recorded in 1996 and discussed under Comparison of Years Ended
December 31, 1996 and 1995 below, partially offset by higher costs associated
with increased sales volume. The Company expects cost of revenues in future
periods will increase modestly over those in the current year due to more
product content provided with new and promotional items, and continued mix
changes favoring boxed products, which have higher packaging and freight costs.
The Company believes that retailers prefer such boxed products due to their
additional marketing content and appeal.
Cost of revenues consists primarily of product cost, freight charges, royalties
to outside programmers and content providers, as well as amortization of
software licenses and an inventory provision for damaged and obsolete products,
if any. 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).
Marketing and Sales. Marketing and sales expenses increased to $10.5 million in
1997 from $9.9 million in 1996 and decreased as a percentage of net revenues to
31.6% from 31.9%. 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 decreased to
$4.6 million in 1997 from $10.1 million in 1996 and decreased as a percentage of
net revenues to 13.7% from 32.7%. This decrease was primarily due to lower
provision for doubtful accounts and legal costs . Provisions for doubtful
accounts in 1996 included the additional $1.0 million adjustment discussed under
Comparison of Years Ended December 31, 1996 and 1995 below. Legal costs
decreased due to the settlement in the fourth quarter of 1996 of litigation
involving the former owners of Swfte.
Development. Development expenses decreased to $2.7 million in 1997 from $3.3
million in 1996 and decreased as a percentage of net revenues to 8.3% from
10.7%, mainly due to lower personnel costs. Development expenses include costs
relating to product upgrades, new products development activities, quality
control and expanded customer service support. During the fourth quarter of
1996, the Company reduced development personnel and did not renew the lease for
facilities previously occupied by Swfte, which contributed to the decrease in
expenses in 1997. The Company currently believes that development expenses will
increase in future periods due to additional costs to develop new brands and
titles, including the development of products to take advantage of the Internet
and other on-line capabilities, and the localization of product for
international sales.
Interest Income (Expense). Net interest income increased to $268,000 in
1997 from $92,000 in 1996, due primarily to higher balances of
interest-bearing assets.
Tax Provision (Benefit). 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. The effective tax rate used in recording the
provision for income taxes was approximately 37% in 1997.
Comparison of Years Ended December 31, 1996 and 1995
Net Revenues. Net revenues 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 25% of net revenues in 1996 from 15%
of net revenues 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 revenues in 1996 compared
to 46% in 1995.
Cost of Revenues. Cost of revenues increased to $16.4 million in 1996 from $10.1
million in 1995 and increased as a percentage of net revenues to 52.9% from
36.6%. The increase in cost of revenues 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 revenues. 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. 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. 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.
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 revenues 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.
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 revenues 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.
Purchased Research and Development. 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.
Development. Development expenses increased to $3.3 million in 1996 from $2.2
million in 1995 and increased as a percentage of net revenues 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.
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 then-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
determined their expected future sales to be minimal.
A significantly higher level of returns was 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 prompted
distributors and retailers to return these products. This overstock of product
and returns experience, 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 were determined not 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 indicated that the minimum
royalties required under certain contracts and prepaid royalties would not be
recouped in the ordinary course of business. Approximately $0.3 million of such
royalties were therefore 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.
<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 revenues. 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>
<CAPTION>
Three Months Ended
--------------------------------------------------------
Dec. Sept. June March Dec. Sept. June March
31, 30, 30, 31, 31, 30, 30, 31,
1997 1997 1997 1997 1996 1996 1996 1996
------ ------ ------ ------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues..........$9,071 $9,035 $7,075 $8,027 $8,234 $6,401 $6,435 $10,383
------ ------ ------ ------ ------ ------ ------ -------
Operating costs and
expenses:
Cost of revenues.... 3,699 3,503 2,649 3,134 3,268 2,408 6,851 3,893
Marketing and sales. 3,075 2,719 2,268 2,427 2,443 2,150 2,632 2,663
General and
administrative..... 1,068 1,162 1,109 1,215 1,389 3,953 3,029 1,753
Development......... 636 724 743 641 592 978 890 860
Loss on impairment of
assets............. -- -- -- -- -- -- 5,700 --
------ ------ ------ ------ ------ ------ ------ -------
8,478 8,108 6,769 7,417 7,692 9,489 19,102 9,169
------ ------ ------ ------ ------ ------ ------ -------
Operating income
(loss)............. 593 927 306 610 542 (3,448)(12,748) 1,214
Other (expense) income,
net............... 106 84 50 28 3 20 29 40
------ ------ ------ ------ ------ ------ ------ -------
Income (loss) before
provision (benefit)
for income taxes... 699 1,011 356 638 545 (3,428)(12,719) 1,254
Provision (benefit)
for income taxes... 259 374 132 236 201 -- (4,727) 459
------ ------ ------ ------ ------ ------ ------- -----
Net income (loss)... $440 $637 $224 $402 $344$(3,428)$(7,992) $795
====== ====== ====== ====== ====== ====== ======== =====
Diluted earnings (loss)
per share of
common stock......... $.05 $.08 $.03 $.05 $.04 $(.46) $(1.07) $.10
====== ====== ====== ====== ====== ====== ======== =====
As a Percentage of Net
Revenues:
Net revenues........ 100% 100% 100% 100% 100% 100% 100% 100%
Operating costs and
expenses:
Cost of revenues.... 41 39 37 39 40 37 108 38
Marketing and sales. 34 30 32 30 30 34 41 26
General and
administrative.... 12 13 16 15 17 62 48 17
Development......... 7 8 10 8 7 15 14 8
Loss on impairment of
assets............ -- -- -- -- -- -- 90 --
---- ---- ---- ---- ---- ---- ---- ----
94 90 96 88 93 148 301 88
---- ---- ---- ---- ---- ---- ---- ----
Operating income.... 6 10 4 12 7 (54) (201) 12
Other (expense)income,
net................. 1 1 1 -- -- -- -- --
---- ---- ---- ---- ---- ---- ---- ----
Income before
provision (benefit)
for income taxes.... 7 11 5 12 7 (54) (200) 12
Provision (benefit)
for income taxes.... 2 4 2 4 3 -- (74) 4
---- ---- ---- ---- ---- ---- ---- ----
Net income (loss)... 5% 7% 3% 8% 4% (54)% (126)% 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 revenues 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 revenues and operating results to continue
to reflect seasonality.
Liquidity and Capital Resources
As of December 31, 1997, the Company had $7.9 million in working capital,
including $5.7 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
provided by operating activities was $2.6 million for the year ended December
31, 1997.
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 loan agreement with a bank which provides for a revolving line of credit
collateralized by substantially all of the Company's assets. Borrowings under
the line are limited to a percentage of eligible receivables as defined in the
agreement and may not exceed $5.0 million through May 31, 1998, the maturity
date. The loan agreement contains restrictive covenants. 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, or that the line of credit would be otherwise
available to the Company.
Over the last year, the Company has increased its stockholders' equity, working
capital and ratio of current assets to current liabilities, primarily as a
result of profits realized during the period. With these developments,
management believes that it has adequate financial resources for its planned
operations through 1998. Longer term, management believes that its expense
reduction efforts, together with anticipated revenue increases, should provide
for positive cash flow to fund future operations.
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"). See Item 2, "Legal Proceedings", and Note 11 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. The
Company has also engaged a financial advisor to assist it in assessing strategic
alternatives to enhance shareholder value.
Factors Affecting Future Operating Results
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, the Company is providing the following cautionary
statements identifying important factors that could cause the Company's actual
results to differ materially from its historical operating results and from
those projected in any forward-looking statements made by, or on behalf of, the
Company.
The Company wishes to caution readers that the following important factors,
among others, in some cases have affected, and in the future could affect, the
Company's actual results and could cause the Company's future actual results to
differ materially from those expressed in any forward-looking statements made
by, or on behalf of, the Company.
<PAGE>
General Business and Economic Conditions
General business and economic conditions have an impact on the Company's
financial results. The Company's customer base, which is largely retailers and
distributors for resale to retailers, may be impacted by weak economic
conditions and, as a result, may reduce required inventory levels of products
purchased from the Company. 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. The Company's financial results could be affected by
the size and rate of growth of the consumer software market and consumer PC
market. The consumer software business is seasonal due primarily to the
increased demand for consumer software during the year-end holiday buying
season. General business and economic conditions and consumer confidence may
impact retail sales of consumer software. Currency fluctuations associated with
international sales and accounts receivable may also affect the Company's
financial results.
Competition
The market for the Company's products is intensely and increasingly competitive.
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 even greater competition for the Company. There has been a
consolidation among competitors in the market for the Company's products, and
many of the companies with which the Company currently competes or may compete
in the future have greater financial, technical, marketing, sales and customer
support resources, as well as greater name recognition and better access to
consumers, than the Company. The competition for retail space is also likely to
increase due to the proliferation of consumer software products and companies.
Dependence on Retailers and Distributors
Retailers and distributors compete in a volatile industry that is subject to
rapid change, consolidation, financial difficulty and increasing competition
from new distribution channels. Due to increased competition for limited shelf
space, retailers and distributors are increasingly in a better position to
negotiate favorable terms of sale, including price discounts, promotional
support and product return policies. The Company's financial results may be
impacted by the accuracy of retailers' forecasts of consumer demand, the timing
of the receipt of orders from major customers, account cancellations or delays
in shipment, competitors' marketing strategies and promotions, changes in
pricing strategies by the Company or its competitors and the collectibility of
accounts receivable. Furthermore, 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 is net revenues for the quarter or
to quickly adapt its spending levels within a quarter to reflect changes in
demand for its products.
Uncertainty of Market Acceptance; Changes in Technology and Industry
Standards
The consumer software industry is undergoing rapid changes, including evolving
industry standards, frequent product introductions and changes in consumer
requirements and preferences. Consumer preferences are difficult to predict, and
few consumer products achieve sustained market acceptance. The Company's
financial results will be impacted by market acceptance of the Company's
products and those of its competitors, development and promotional expenses
relating to the introduction of new products, new versions of existing products
or new operating systems, evolving distribution channels, and the growth in
popularity of the Internet and other new technologies which could impact the
distribution and purchase of software.
Other Factors
In addition to the important factors discussed above, the Company's financial
results, financial position and cash flows may be impacted by, among other
factors, future cash flow and working capital requirements, 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 the acquisitions of new businesses by the Company and
related charges and write-offs. 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.
<PAGE>
The Year 2000 Issue
The Company does not believe that it has material exposure to the Year 2000
issue with respect to its own information system as the supplier of its primary
systems has an updated release of the Company's applications software that
correctly identifies the year 2000. The Company plans to implement the new
release beginning in 1998 and to complete the implementation before the fourth
quarter of 1999. However, there can be no assurance that this software
implementation will be successfully completed, or that the implementation will
not have a material adverse impact on the Company's financial results, financial
position and cash flows. The Company is seeking to determine if the information
systems of its major customers and vendors (insofar as they relate to the
Company's business) comply with Year 2000 requirements, and there can be no
assurance that the Year 2000 issue will not affect the information systems of
the Company's major customers and vendors as they relate to the Company's
business, or that any such impact of a major customer's or vendor's information
system would not have a material adverse effect on the Company.
Item 8. Consolidated Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Certified Public Accountants................. 19
Consolidated Balance Sheets as of December 31, 1997 and December
31, 1996........................................................... 20
Consolidated Statements of Operations for the Years Ended December
31, 1997, 1996 and 1995............................................ 21
Consolidated Statements of Stockholders' Equity for the Years
Ended December 31, 1997, 1996 and 1995............................. 22
Consolidated Statements of Cash Flows for the Years Ended December
31, 1997, 1996 and 1995............................................ 23
Notes to Consolidated Financial Statements......................... 25
<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) and subsidiaries as of December 31, 1997 and 1996
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended December 31, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Expert Software,
Inc. and subsidiaries, as of December 31, 1997 and 1996, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Miami, Florida,
February 6, 1998.
<PAGE>
<TABLE>
<CAPTION>
EXPERT SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
(in thousands, except share data)
1997 1996
------- -------
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents........................... $5,685 $2,959
Accounts receivable, net............................ 4,636 3,775
Income taxes receivable............................. 1,924 2,397
Inventories......................................... 2,922 1,256
Prepaid expenses.................................... 834 425
Deferred income taxes............................... 1,616 2,616
------- -------
Total current assets............................... 17,617 13,428
PROPERTY AND EQUIPMENT, net........................... 1,270 1,897
ACQUIRED SOFTWARE TECHNOLOGY, net..................... 30 163
DEFERRED INCOME TAXES................................. 3,311 3,586
OTHER ASSETS.......................................... 5 3
======= =======
Total assets....................................... $22,233 $19,077
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.................................... $4,755 $3,226
Accrued expenses.................................... 4,900 5,038
Current portion of capital lease obligations........ 46 88
------- -------
Total current liabilities.......................... 9,701 8,352
------- -------
NONCURRENT LIABILITIES................................ -- 300
------- -------
COMMITMENTS and CONTINGENCIES (Note 12)
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; 7,604,775 and 7,507,804 76 75
shares issued and outstanding in 1997 and 1996,
respectively..........................................
Additional paid-in capital.......................... 23,601 23,198
Accumulated deficit................................. (11,145) (12,848)
------- -------
Total stockholders' equity......................... 12,532 10,425
------- -------
Total liabilities and stockholders' equity......... $22,233 $19,077
======= =======
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these balance sheets.
<PAGE>
<TABLE>
<CAPTION>
EXPERT SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Years Ended December 31,
----------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
NET REVENUES ................. $ 33,208 $ 31,012 $ 27,638
-------- -------- --------
OPERATING COSTS AND EXPENSES:
Cost of revenues ............. 12,985 16,420 10,121
Marketing and sales .......... 10,489 9,888 6,180
General and administrative ... 4,554 10,124 4,293
Development .................. 2,744 3,320 2,192
Purchased research and
development .................. -- -- 8,392
Loss on impairment of assets . -- 5,700 --
Amortization of non-compete
agreement .................... -- -- 338
-------- -------- --------
30,772 45,452 31,516
-------- -------- --------
Operating income (loss) ...... 2,436 (14,440) (3,878)
-------- -------- --------
OTHER INCOME (EXPENSE):
Interest expense ............. (5) (26) (121)
Interest income .............. 273 118 490
-------- -------- --------
268 92 369
-------- -------- --------
Income (loss) before
provision (benefit)
for income taxes ............. 2,704 (14,348) (3,509)
PROVISION (BENEFIT) FOR INCOME
TAXES ........................ 1,001 (4,067) (1,324)
-------- -------- --------
Net income (loss) ............ $ 1,703 $(10,281) $ (2,185)
======== ======== ========
Earnings (Loss) per Share:
Basic ........................ $ .23 $ (1.37) $ (.33)
======== ======== ========
Diluted ...................... $ .21 $ (1.37) $ (.33)
======== ======== ========
</TABLE>
The accompanying notes to consolidated financial
statements are an integral part of these statements.
<PAGE>
EXPERT SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except share data)
<TABLE>
<CAPTION>
Common Stock Additional
--------------- Paid-in Accumulated
Shares Amount Capital Deficit Total
---------- ------ --------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Balance, December 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, December 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, December 31, 1996.. 7,507,804 75 23,198 (12,848) 10,425
Issuance of common stock in
connection with exercise of
stock options.............. 96,971 1 349 -- 350
Compensation expense on
stock option grants........ -- -- 54 -- 54
Net income.................. -- -- -- 1,703 1,703
---------- ------ --------- --------- ---------
Balance, December 31, 1997.. 7,604,775 $76 $23,601 $(11,145) $12,532
========== ====== ========= ========= =========
</TABLE>
The accompanying notes to consolidated financial statements are
an integral part of these statements.
<PAGE>
EXPERT SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................ $1,703 $(10,281) $(2,185)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating
activities:
Depreciation of property and equipment..... 817 1,105 496
Amortization of acquired software technology 133 544 283
Amortization of acquired intangibles....... -- -- 55
Amortization of non-compete agreement...... -- -- 338
Compensation expense on stock option grants 54 7 --
Loss on impairment of assets............... -- 5,700 --
Purchased research and development......... -- -- 8,392
Deferred income tax provision (benefit).... 1,275 (2,100) (3,583)
Changes in net assets and liabilities :
(Increase) decrease in accounts receivable. (861) 1,899 (1,901)
(Increase) decrease in income taxes
receivable............................... 473 (2,397) --
(Increase) decrease in inventories......... (1,666) 2,556 (1,759)
(Increase) decrease in prepaid expenses.... (409) (31) (124)
(Increase) decrease in other assets........ (2) 10 (1)
Increase (decrease) in accounts payable.... 1,529 405 (28)
Increase (decrease) in accrued expenses.... (138) 934 644
Increase (decrease) in income taxes payable -- (2,125) 2,270
Increase (decrease) in noncurrent
liabilities............................... (300) 300 --
-------- -------- --------
Net cash provided by (used in) operating
activities............................... 2,609 (3,474) 2,897
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment......... (191) (644) (1,681)
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............................... (191) 5,578 (15,577)
-------- -------- --------
</TABLE>
(Continued)
<PAGE>
EXPERT SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Continued)
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock....... -- -- 18,972
Costs associated with issuance of common -- -- (1,017)
stock........................................
Stock options exercised...................... 350 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......... (42) (122) (3)
Dividends paid on redeemable preferred stock. -- -- (41)
-------- -------- --------
Net cash provided by (used in) financing
activities................................... 308 (57) 10,039
-------- -------- --------
Net increase (decrease) in cash and
equivalents.................................. 2,726 2,047 (2,641)
CASH AND EQUIVALENTS, beginning of period.... 2,959 912 3,553
-------- -------- --------
CASH AND EQUIVALENTS, end of period.......... $ 5,685 $ 2,959 $ 912
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION :
Cash paid during the period for interest..... $ 5 $ 26 $ 124
======== ======== ========
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, 1997 and 1996
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, 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.
Accounts Receivable and Concentration of Credit Risk--
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 $4,361,000 and $5,061,000 at December 31, 1997 and 1996,
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. Retailers and distributors
compete in a volatile industry that is subject to rapid change, consolidation,
financial difficulty and increasing competition from new distribution channels.
Due to increased competition for limited shelf space, retailers and distributors
are increasingly in a better position to negotiate favorable terms of sale,
including price discounts, promotional support and product return policies. The
Company's financial results may be impacted by the accuracy of retailers'
forecasts of consumer demand, the timing of the receipt of orders from major
customers, account cancellations or delays in shipment, competitors' marketing
strategies and promotions, changes in pricing strategies by the Company or its
competitors and the collectibility of accounts receivable. Furthermore, 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 revenues for the quarter or to quickly adapt its spending levels
within a quarter to reflect changes in demand for its products.
<PAGE>
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>
<CAPTION>
Years Ended December 31,
--------------------------------
1997 1996 1995
---------- --------- ---------
<S> <C> <C> <C>
Customer A........... 15.2% 19.6% 11.6%
Customer B........... 4.5 10.4 14.4
Customer C........... 4.8 7.8 11.3
</TABLE>
The two major customers at December 31, 1997 and 1996 also account for 10.5% and
22.1% of gross outstanding accounts receivable at December 31, 1997 and 1996,
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, 1997 and 1996 the Company had one supplier
which accounted for approximately 42.8% and 32.8%, respectively, of total
purchases. A second supplier accounted for 22.3% of total purchases in 1997.
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
97-2, "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 $98,000 and $459,000 on these assets was recorded
during 1997 and 1996, respectively. Accumulated amortization on acquired
software technology totaled $4,454,000 and $3,672,000 at December 31, 1997 and
1996, respectively.
Royalties --
Royalties are accrued based on net revenues pursuant to agreements with external
software developers of software products published by the Company. Royalty
costs, which are included in cost of revenues, were $3,012,000, $2,715,000, and
$2,575,000 during the years ended December 31, 1997, 1996 and 1995,
respectively.
<PAGE>
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 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 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.
Earnings Per Share of Common Stock --
In February 1997, the Financial Accounting Standards Board (the "FASB") issued
SFAS 128, Earnings Per Share. This statement simplifies the standards for
computing and presenting earnings per share ("EPS") and makes them comparable to
international EPS standards. SFAS 128 replaces the presentation of primary EPS
with a presentation of basic EPS. It also requires dual presentation of basic
and diluted EPS on the face of the income statement for all entities with
complex capital structures. SFAS 128 became effective for financial statements
issued for periods after December 15, 1997 and requires restatement of all prior
periods presented. Basic EPS is calculated by dividing income available to
common shareholders by the weighted average number of common shares outstanding
during each period. Diluted EPS includes the potential impact of convertible
securities and dilutive common stock equivalents using the treasury stock method
of accounting. For periods in which the Company reports a loss from continuing
operations, diluted earnings per share do not include stock options as their
effect would be 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.
<PAGE>
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>
<CAPTION>
<S> <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>
During the second quarter of 1996, management reevaluated the carrying value of
the intangible assets recorded in connection with the acquisition of Swfte. This
reevaluation 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 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>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Finished goods...................... $2,439 $1,101
Raw materials....................... 483 155
======== ========
$2,922 $1,256
======== ========
</TABLE>
4. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following at December 31 (in thousands):
<TABLE>
<CAPTION>
Useful
Life
1997 1996 in Years
-------- -------- ---------
<S> <C> <C> <C>
Equipment........................... $3,280 $3,199 3-5
Furniture and fixtures.............. 716 607 5-10
-------- --------
3,996 3,806
Less: Accumulated depreciation...... (2,726) (1,909)
-------- --------
$1,270 $1,897
======== ========
</TABLE>
Equipment includes $147,000 of 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>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Royalties........................ $1,271 $1,110
Marketing........................ 1,953 1,276
Settlement costs (Note 10)....... 300 850
Other............................ 1,376 1,802
------- -------
$4,900 $5,038
======= =======
</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, 1997, the Company was in
compliance with the agreement.
7. 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.
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, $0.01 par value, none of which are outstanding at December 31,
1997 or 1996.
In March 1997, pursuant to its obligations under the Swfte acquisition
agreement, the Company completed a registration with the Securities and Exchange
Commission of substantially all the shares of Company common stock issued in
connection with the Swfte acquisition.
8. STOCK OPTIONS:
The Company has reserved 2,250,000 shares of its common stock for issuance under
its 1992 Stock Option Plan (the "1992 Plan"), 1,000,000 shares under its 1997
Stock Option Plan for Officers and Employees (the "1997 Plan"), and 250,000
shares under the 1997 Stock Option Plan for Directors (the "Directors' Plan"),
(the 1992 Plan, the 1997 Plan and the Directors' Plan are referred to herein
collectively as the "Plans").Under the Plans, options may be granted to purchase
common stock at exercise prices generally determined by a committee of the Board
of Directors. Incentive stock options may be granted at exercise prices not less
than the fair market value of the common stock at the date of grant, and in
certain instances, at prices in excess of the current fair market value.
Non-employee members of the Board of Directors are granted non-qualified options
annually at a price equal to the fair market value of the common stock at the
date of the grant. Incentive stock options are available to officers, directors
who are also employees and other full-time employees and non-qualified options
are available to the same group and consultants and other key persons who
provide services to the Company. The terms and vesting schedule of each option
agreement are determined by the Board of Directors; vesting typically is ratably
over four years. All options expire on the date specified in the agreement and
in no event later than the tenth anniversary of the date which the option was
granted. A summary of stock option activity is as follows:
<TABLE>
<CAPTION>
Weighted
Average
Number of Exercise Exercise
Shares Price ($) Price ($)
----------- ---------- ----------
<S> <C> <C> <C>
Options outstanding, December 31, 1994. 771,565 0.10- 2.76 0.67
Granted................................ 130,000 7.70-20.75 16.92
Exercised.............................. (136,628) 0.10- 9.35 0.23
Canceled............................... (79,167) 0.10-20.75 13.14
----------
Options outstanding, December 31, 1995. 685,770 0.10-20.75 2.40
Granted................................ 544,000 5.38-13.25 9.80
Exercised.............................. (37,353) 0.85-12.25 1.76
Canceled............................... (137,000) 0.85-20.75 12.49
----------
Options outstanding, December 31, 1996. 1,055,417 0.10-15.25 4.97
Granted................................ 605,000 2.00-6.625 2.44
Exercised.............................. (96,971) 0.85-5.375 3.60
Canceled............................... (364,556) 0.85-15.25 10.75
----------
Options outstanding, December 31, 1997. 1,198,890 0.10-6.625 2.05
==========
</TABLE>
A summary of currently outstanding and exercisable options is as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ------------------------------------------- --------------------
Weighted
Average
Remaining Weighted Weighted
Range of Number Contractual Average Number Average
Exercise Out- Life Exercise Exercis- Exercise
Prices standing (Years) Price able Price
---------- --------- ----------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C>
$0.10-$0.85 480,070 5.6 $0.49 446,737 $0.46
$2.00 443,505 6.8 $2.00 61,087 $2.00
$3.38-$3.80 60,000 9.0 $3.52 12,500 $3.55
$4.10-$6.63 215,315 8.8 $5.23 37,065 $5.23
--------- ----------- ---------- -------- ---------
1,198,890 6.8 $2.05 557,389 $1.03
--------- ----------- ---------- -------- ---------
</TABLE>
At December 31, 1997, options to purchase 1,716,965 shares of common stock were
available for grant under the Plans. Canceled options increase the amount
of options available to be granted under the Plans.
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 Plans. Had compensation been
recorded based on the fair value at the grant dates for awards under the Plans
consistent with the method of SFAS 123, the Company's proforma net income (loss)
and diluted income (loss) per share would have been as follows (in thousands,
except per share data):
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Net income (loss), as reported. $1,703 $(10,281) $(2,185)
Net income (loss), proforma.... $1,237 $(10,469) $(2,243)
Diluted earnings per share, as reported $ .21 $(1.37) $ (.33)
Diluted earnings per share, proforma $ .15 $(1.40) $ (.34)
</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% to 70%, risk-free interest
rate of 5%, expected dividends of $0 and expected lives of five years. In 1997
and 1996, the Company recorded compensation expense of $54,000 and $7,000,
respectively, related to options to purchase common stock granted to
non-employees of the Company accounted for under the provisions of SFAS 123.
9. INCOME TAXES:
The components of the provision (benefit) for income taxes are as follows (in
thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------ ------- ------
<S> <C> <C> <C>
Current:
Federal........................ $(243) $(1,711) $1,931
State.......................... (31) (256) 328
------ ------- ------
(274) (1,967) 2,259
------ ------- ------
Deferred:
Federal........................ 1,132 (1,930) (3,292)
State.......................... 143 (170) (291)
------ ------- ------
1,275 (2,100) (3,583)
------ ------- ------
$1,001 $(4,067) $(1,324)
====== ======= =======
</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>
<CAPTION>
1997 1996 1995
------ ------ -------
<S> <C> <C> <C>
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) (3.6)
Tax exempt interest income........ -- -- (3.7)
Increase in valuation allowance.. -- 7.4 --
Other, net........................ (0.6) 1.9 3.6
------ ------ -------
37.0% (28.3)% (37.7)%
====== ====== =======
</TABLE>
<PAGE>
The components of the net deferred tax asset recorded in the accompanying
consolidated balance sheets are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
------ -------
<S> <C> <C>
Acquired software and intangibles... $ -- $4,406
Allowance for doubtful accounts and
potential returns................... 905 1,279
Inventory reserves.................. 1,029 866
Net operating loss carryforward..... 4,311 1,825
Other, net.......................... (158) 349
------- -------
Gross deferred tax assets......... 6,087 8,725
Valuation allowance................. (1,160) (2,523)
------- -------
Net deferred tax assets........... $4,927 $6,202
======= =======
</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.
10. EARNINGS PER SHARE
Basic earnings per common share were computed by dividing income available to
common shareholders by the weighted average number of shares of common stock
outstanding during the year. Diluted earnings per share were determined by
including assumptions of stock option conversions, except for periods in which
the Company reported a loss from continuing operations. Effective December 31,
1997, the Company adopted SFAS 128. As a result, the earnings (loss) per share
of common stock for the years ended December 31, 1996 and 1995 have been
restated in accordance with the requirements of SFAS 128.
<TABLE>
<CAPTION>
(In thousands, except per share amounts) Income Per-Share
Year Ended December 31, (Loss) Shares Amount
- -------------------------------------------- -------- --------- -----------
<S> <C> <C> <C>
1997
Basic Earnings Per Share
Income available to common shareholders.. $1,703 7,533 $ .23
Options assumed to be converted.......... 635 ======
------- ------
Diluted Earnings Per Share
Income available to common shareholders
plus assumed conversions................. $1,703 8,168 $ .21
======= ====== =====
1996
Basic and Diluted Earnings Per Share
(Loss) available to common shareholders..$(10,281) 7,480 $(1.37)
======= ====== =====
1995
Net (Loss)................................. $(2,185)
Less: Preferred stock dividends........... (41)
-------
Basic and Diluted Earnings Per Share
(Loss) available to common shareholders. $(2,226) 6,688 $ (.33)
======= ====== =====
</TABLE>
Options to purchase approximately 172,300 shares of common stock at prices from
$5.375 to $6.625 were outstanding during 1997 but were not included in the
computation of diluted EPS because the options' prices were greater than the
average market price of the common shares. The options, which expire between
January 1999 and December 2001, were still outstanding at December 31, 1997.
11. 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.
12. COMMITMENTS AND CONTINGENCIES:
The Company leases office space under operating leases. Rent expense under
operating leases was $510,000, $661,000, and $368,000 for the years ended
December 31, 1997, 1996 and 1995, 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, 1997 are as
follows (in thousands):
<TABLE>
<CAPTION>
Operating Capital
Leases Leases
--------- -------
<S> <C> <C>
1998................................ $558 $ 47
1999................................ 389 --
2000................................ 201 --
--------- -------
Total future minimum payments....... $1,148
=========
Less: Interest..................... (1)
-------
Present value of future minimum
lease payments...................... $ 46
=======
</TABLE>
The Company is subject to minimum royalty guarantees under certain agreements
with developers and licensers. Minimum royalty guarantees under such contracts
are approximately $125,000, $150,000, $175,000 and $200,000 for the years ended
December 31, 1998, 1999, 2000 and 2001, respectively.
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. In June 1997, the IRS proposed
assessments for additional taxes of $412,000, $553,000 and $857,000 for the tax
years 1992, 1993 and 1994, respectively, plus interest to the date of payment.
The preliminary adjustments proposed by the IRS would also reduce the Company's
federal income taxes for the years 1995, 1996 and 1997 by $242,000, $68,000 and
$55,000, respectively. The Company believes that it has properly reported its
income and paid its taxes in accordance with applicable laws and intends to
contest the proposed adjustments vigorously. The Company believes 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.
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
Information Regarding Directors
Set forth below is certain information regarding the Directors of the Company,
based on information furnished by them to the Company.
<TABLE>
<CAPTION>
Director
Name Age Since
------------------------------------- ------ ---------
<S> <C> <C>
Class I -- Term Expires 1999
Kenneth P. Currier.................. 49 1992
A. Bruce Johnston................... 38 1992
Class II-Term Expires 2000
Stephen J. Clearman................. 47 1992
Charles E. Noell III................ 46 1992
Class III-Term Expires 1998
Susan A. Currier.................... 48 1992
William H. Lane III................. 59 1997
-------------------------------------
</TABLE>
The principal occupation and business experience during at least the last five
years for each Director of the Company is set forth below.
Kenneth P. Currier, a co-founder of the Company, has served as a
Director, Chief Executive Officer and Secretary of the Company since its
inception in October 1992. Mr. Currier also co-founded the Company's
predecessor, Softsync, Inc. ("Softsync") a publisher of consumer
software, in 1982, and served as President of Softsync from 1990 until
formation of the Company in 1992. Mr. Currier is the spouse of Susan A.
Currier, President and a Director of the Company.
A. Bruce Johnston has served as a Director of the Company since October
1992. Mr. Johnston has been a Principal of TA Associates, a private
equity investor, since January 1996 and was a Vice President of TA
Associates from June 1992 to December 1995. Prior to that, Mr. Johnston
was a General Manager of Lotus Development Corporation, a software
publisher, from June 1988 to June 1992. Mr. Johnston serves as a
director of Restrac, Inc., a client-server application company, as well
as a number of privately-held companies.
Stephen J. Clearman has served as a Director of the Company since October
1992. Mr. Clearman has been a general partner of Geocapital Partners, a
venture capital management firm, since he co-founded that firm in 1984.
Mr. Clearman also serves as a director of World Access, Inc., a repair
and manufacturing services provider to the telecommunications industry,
Memberworks, Inc., a consumer credit card membership services company,
and SeaMED, Corp., a designer and manufacturer of medical instruments.
Mr. Clearman also serves as a director of a number of privately-held
companies.
Charles E. Noell III has served as a Director of the Company since October 1992.
Mr. Noell has been President and Chief Executive Officer of JMI, Inc., a private
holding company, since January 1992. Prior to that, Mr. Noell was a Managing
Director of Alex. Brown & Sons Incorporated from 1981 to 1992. Mr. Noell also
serves as a director of Transaction Systems Architects, Inc., an electronic
funds transfer software company, Homegate Hospitality, Inc., a provider of
services to the hotel industry, Peregrine Systems Inc., a developer of
infrastructure and network systems management software, and a number of
privately-held companies.
Susan A. Currier, a co-founder of the Company, has served as a Director
and President of the Company since its inception in October 1992. Ms.
Currier also co-founded the Company's predecessor, Softsync, in 1982, and
served as Vice President responsible for sales and marketing of Softsync
from 1990 until formation of the Company in 1992. Ms. Currier is the
spouse of Kenneth P. Currier, Chief Executive Officer and a Director of
the Company.
William H. Lane III has served as a Director of the Company since his
appointment by the Board of Directors on January 29, 1997. Mr. Lane
retired as Vice President, Chief Financial Officer, Secretary and
Treasurer of Intuit, Inc. a software publisher, in July 1996. He held the
same positions at ChipSoft, Inc. from July 1991 until Intuit acquired
ChipSoft in December 1993. He also served as Vice President, Finance and
Administration for Honeywell Information Systems. Mr. Lane also serves
as a director of MetaCreations Corporation, a visual computing software
publisher, Quarterdeck Corp., a PC utility software company, and Storm
Technology, Inc., a scanner device and software company.
Executive Officers
The names and ages of all current executive officers of the Company and the
principal occupation and business experience during at least the last five years
for each are set forth below.
<TABLE>
<CAPTION>
Name Age Position
---------------------------- ----- -----------------------
<S> <C> <C>
Kenneth P. Currier......... 49 Chief Executive Officer and Secretary
Susan A. Currier .......... 48 President
Charles H. Murphy.......... 53 Chief Financial Officer and Treasurer
Timothy R. Leary........... 46 Executive Vice President of Sales
Michael A. Appel........... 53 Vice President of Operations
Anne E. Aitken............. 39 Vice President of Marketing
David R. Turner............ 32 Vice President of Development
Katherine A. Brunn......... 50 Vice President of North American Sales
</TABLE>
Mr. Currier has held the positions of Chief Executive Officer and
Secretary of the Company since the Company's inception in October 1992.
Mr. Currier has also been a Director of the Company since 1992. See
"Information Regarding Directors" above.
Ms. Currier has held the position of President of the Company since the
Company's inception in October 1992. Ms. Currier has also been a
Director of the Company since 1992. See "Information Regarding
Directors" above.
Charles H. Murphy has served as Chief Financial Officer of the Company since
April 1996. Prior to that, Mr. Murphy was Chief Financial Officer at Mergent
International, Inc., a company which specializes in desktop and enterprise
security software applications, from 1995 to 1996. Prior to Mergent, Mr. Murphy
was Vice President of Finance, Secretary and Director at Package Machinery
Company, a manufacturer of specialty machinery, from 1986 to 1995.
Timothy R. Leary has served as Executive Vice President of Sales of the Company
since January 1998, and as Vice President of Sales of the Company from its
formation in October 1992 until December 1997.
Michael A. Appel has served as Vice President of Operations of the Company since
March 1996. Prior to that, Mr. Appel was Director of Manufacturing for Bleyer
Industries from January 1992 through February 1996. Prior to that, Mr. Appel was
Vice President of Operations for Superior Toy from June 1990 through December
1991.
Anne E. Aitken has served as Vice President of Marketing of the Company
since March 1997. Prior to that, Ms. Aitken served as Senior Director of
Marketing at Blockbuster Entertainment Inc. from September 1995 to
January 1997. Prior to Blockbuster, Ms. Aitken was Director of
Advertising with Burger King Corporation from September 1992 to September
1995.
David R. Turner has served as Vice President of Development of the Company since
December 1997. Prior to that, Mr. Turner was Director, External Applications
Engineering for Walt Disney Interactive from April 1995 to December 1997. Prior
to Disney, Mr. Turner was Vice President and Director of Development for
IntraCorp, Inc., from October 1987 to March 1995.
Katherine A. Brunn has served as Vice President of North American Sales of the
Company since January 1998. Prior to that, Ms. Brunn was the President and Chief
Executive Officer of MicroTech Marketing Services, Inc., a sales, marketing and
consulting firm serving the computer industry, since June 1984.
Each of the officers holds his respective office until the regular annual
meeting of the Board of Directors following the annual meeting of stockholders
and until his successor is duly elected and qualified or until his earlier
resignation or removal.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and persons who own more than 10% of the Company's
outstanding shares of Common Stock, to file reports of ownership and changes in
ownership with the Securities and Exchange Commission and Nasdaq. Officers,
directors and greater than ten percent stockholders are required by SEC
regulations to furnish the Company with copies of all Section 16(a) forms they
file.
Based solely on its review of the copies of such forms received by it, or
written representations from certain reporting persons that no Section 16(a)
reports were required for those persons, the Company believes that during the
fiscal year ended December 31, 1997, all filing requirements were complied with,
except in the case of Susan A. Currier who failed to timely file one report
regarding a scheduled sale of the Common Stock.
<PAGE>
Item 11. Executive Compensation
The following sections of this Annual Report set forth and discuss the
compensation paid or awarded during the last three years to the Company's Chief
Executive Officer and the four other most highly compensated executive officers
who earned in excess of $100,000 during the year ended December 31, 1997
(collectively, the "Named Executives").
Summary Compensation Table
The following table shows for the fiscal years ended December 31, 1995, 1996,
and 1997 compensation paid by the Company to the Named Executives.
<TABLE>
<CAPTION>
Long Term
Compensation
-----------------------
Annual Compensation Awards Payouts
-------------------- -------------------- ------
Other Restric All
Annual -ted Securities Other
Name and Compen- Stock Underlying LTIP Compen
Principal Salary Bonus -sation Awards Options Payout -sation
Position Year ($) ($) ($) ($) (#) ($) ($) (4)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Kenneth P. 1997 170,000 -- -- -- 70,000 -- 5,579
Currier 1996 170,000 -- -- -- 130,000(1) -- --
Chief 1995 125,000 50,000 -- -- -- -- --
Executive
Officer
and Secretary
Susan A. 1997 170,000 -- -- -- 70,000 -- 5,579
Currier 1996 170,000 -- -- -- 130,000(1) -- --
President 1995 125,000 50,000 -- -- -- -- --
Charles H. 1997 143,333 26,509 -- -- 50,000 -- 4,536
Murphy 1996 90,167 20,000 48,122 (2)-- 50,000 -- --
Chief
Financial
Officer
and Treasurer
Timothy R. 1997 100,000 7,551 -- -- 65,000 -- --
Leary 1996 100,000 26,332 -- -- 10,000 -- --
Executive 1995 90,000 71,820 -- -- 5,000 -- --
Vice President
of Sales
Michael A. 1997 110,000 19,176 -- -- 25,000 -- 3,900
Appel 1996 85,297 17,750 14,876 (3)-- 25,000 -- --
Vice
President of
Operations
<FN>
- ----------------
(1) The options granted to Mr. and Mrs. Currier during 1996 were canceled
by the Board of Directors in April 1997.
(2) For 1996, consists of reimbursed moving costs paid upon Mr. Murphy's
relocation in connection with beginning employment with the Company in April
1996.
(3) For 1996, consists of reimbursed moving costs paid upon Mr. Appel's
relocation in connection with beginning employment with the Company in March
1996.
(4) Represents matching contributions to the accounts of each Named Executive
participating under the Company's 401(k) savings plan, which was
implemented January 1, 1997.
</FN>
</TABLE>
<PAGE>
Option Grants in Last Fiscal Year
The following table sets forth each grant of stock options during 1997 to the
Named Executives. No stock appreciation rights ("SARs") have been granted.
<TABLE>
<CAPTION>
Potential
Realizable
Value at
Assumed Annual
Rates of Stock
Price
Appreciation
for Option
Individual Grants Term (3)
--------------------------------------------- ---------------
% of
Total
Number of Options/SARs
Securities Granted
Underlying to Exercise
Options Employees or Base Expir-
Granted in Fiscal Price ation
Name (#) (1) Year (2) ($/Sh) Date 5%($) 10%($)
- ----------- ------------- ------------ -------- ----------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Kenneth P. 70,000 15.2% 2.000-- 01/01/07-- 105,340 266,952
Currier 3.375 04/17/07
Susan A. 70,000 15.2 2.000-- 01/01/07-- 105,340 266,952
Currier 3.375 04/17/07
Charles H. 50,000 10.8 2.000 04/17/07 62,889 159,374
Murphy
Timothy R. 65,000 14.1 2.000-- 04/17/07-- 125,386 317,752
Leary 4.100 11/07/07
Michael A. 25,000 5.4 2.000 04/17/07 31,445 79,687
Appel
<FN>
- --------------
(1) All options were granted pursuant to the Amended and Restated 1992 Stock
Option Plan (the "1992 Option Plan") and vest in equal quarterly increments
over a four year period. Unvested shares accelerate and become vested upon
a change of control of the Company.
(2) Percentages are based on a total of shares of Common Stock underlying all
options granted to employees of the Company in 1997.
(3) This column shows the hypothetical gains or option spreads of the options
granted based on assumed annual compound stock appreciation rates of 5% and
10% over the full 10-year terms of the options. The 5% and 10% assumed
rates of appreciation are mandated by the rules of the Securities and
Exchange Commission and do not represent the Company's estimate or
projection of future Common Stock prices.
</FN>
</TABLE>
<PAGE>
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End Values
The following table sets forth the shares acquired and the value realized upon
exercise of stock options during 1997 by the Named Executives and certain
information concerning the number and value of unexercised options.
<TABLE>
<CAPTION>
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Shares Options at Options at
Acquired FY-End (#) FY-End ($) (1)
on Value ------------------ ------------------
Exercise Realized Exercis- Unexer- Exercis- Unexer-
Name (#) ($) able cisable able cisable
- -------------- --------- ---------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Kenneth P. -- -- 214,624 74,126 633,099 112,682
Currier
Susan A. -- -- 214,624 74,126 633,099 112,682
Currier
Charles H. 26,200 62,519 91 41,209 142 64,410
Murphy
Timothy R. -- -- 57,849 64,721 161,160 64,410
Leary
Michael A. 14,742 37,066 -- 35,258 -- 29,710
Appel
<FN>
- ---------------
(1) Based on the fair market value of the Common Stock on December 31, 1997
($3.563 per share), less the aggregate option exercise price. Options are
in-the-money if the market value of the shares covered thereby is greater
than the option exercise price.
</FN>
</TABLE>
Compensation of Directors
The compensation plan for non-employee directors was amended by the Board on
February 3, 1997. In accordance with the plan, such outside directors receive an
annual retainer of $5,000, $1,500 per Board meeting except for telephonic
meetings, $250 per each telephonic Board meeting, and additional compensation to
members of the Audit and Compensation Committees in the amount of $500 per
meeting attended in person, and $250 per each telephonic committee meeting. All
directors are reimbursed for expenses incurred in connection with attendance at
meetings.
The Company has an Amended and Restated 1992 Stock Option Plan (the "1992 Option
Plan") pursuant to which eligible non-employee directors are entitled to receive
options to purchase shares of Common Stock in accordance with the formula
provisions thereof. Although the non-employee directors are eligible to receive
options pursuant to certain formula provisions of the 1992 Option Plan, no
options have been granted to date pursuant to such formula provisions.
The Company also has the 1997 Stock Option Plan for Directors (the "1997
Directors Plan") pursuant to which eligible non-employee directors receive
non-qualified options to purchase 30,000 shares of Common Stock upon their
election or appointment as a director, which options shall vest in calendar
quarterly installments over four years; and options to purchase 5,000 shares of
Common Stock each January 1 during his/her service as a director, which options
shall vest in quarterly installments over one year. All options granted under
the 1997 Directors Plan have a per share exercise price equal to the per share
fair market value of the Common Stock on the date of grant.
Employment Agreements and Change-in-Control Arrangements
As of February 23, 1995, the Company entered into employment agreements with
each of Kenneth P. Currier and Susan A. Currier pursuant to which they are
employed as Chief Executive Officer and President of the Company, respectively.
These employment agreements currently provide for the payment of an annual
salary to each of the Curriers, which is subject to change by the Compensation
Committee of the Board of Directors.
These employment agreements also entitle each of the Curriers to receive annual
cash bonuses in amounts, and based upon the achievement of Company objectives,
established from year-to-year by the Compensation Committee. These agreements
are subject to automatic one-year extensions on each December 31st unless
earlier terminated by either the executive or the Company. Under the employment
agreements, each of the Curriers is entitled to severance benefits equal to six
months salary and benefits plus a pro rated cash bonus in the event of either a
termination of their employment by the Company without cause or a termination by
the executive in response to certain changes in the executive's employment
circumstances, subject to increase to one-year's salary and benefits plus a pro
rated cash bonus after a change in control of the Company (as defined in the
agreements) in the event of either a termination of employment by the Company
without cause or a termination by the executive in response to certain changes
in the executive's employment circumstances. On February 25, 1998, the
Compensation Committee also approved a bonus equal to one-year's salary to each
of the Curriers in the event the Company is sold during 1998, and the
transaction closes at terms acceptable to the Board of Directors.
Under the terms of his employment, Mr. Murphy would receive six months'
severance pay in the event his employment is terminated without cause, or
one-year's salary in the event his employment is terminated due to change of
control.
Effective February 18, 1998, all employees of the Company qualify under a
program which entitles any employee who might lose their employment as a result
of a change in control to receive three months base compensation at the time of
separation, provided the employee has performed their duties to the date of
separation. This policy is in effect for all employees until February 17, 1999.
Since April 1997, options granted to officers, employees and directors under the
Company's stock option plans have provided for acceleration of unvested shares
in the event of a change of control of the Company (as defined in the option
plans). At December 31, 1997, there were options to purchase approximately
443,000 shares of the Company's common stock that would become vested in the
event of such a change in control of the Company.
Compensation Committee Interlocks and Insider Participation
During 1997, the members of the Compensation Committee of the Board of Directors
were Stephen J. Clearman and A. Bruce Johnston. Messrs. Clearman and Johnston
are each associated with an investment partnership which owns Common Stock and
which previously held shares of preferred stock of the Company and subordinated
notes issued by the Company. During 1995, the Company redeemed all of the
outstanding preferred stock and repaid all of its subordinated indebtedness. See
"Certain Relationships and Related Transactions". No executive officers of the
Company serve on the Compensation Committee.
Item 12.Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, to the best knowledge and belief of the Company,
certain information regarding the beneficial ownership of the Company's Common
Stock as of February 24, 1998 by (i) each person known by the Company to be the
beneficial owner of more than 5% of the outstanding Common Stock, (ii) each of
the Company's Directors, (iii) each of the Named Executive Officers and (iv) all
of the Company's executive officers and Directors as a group.
<TABLE>
<CAPTION>
Shares Percent
Directors, Executive Officers Beneficially of
and 5% Stockholders Owned (1) Class (2)
--------------------------------------- ------------ --------
<S> <C> <C>
TA Associates Group.................... 1,989,25(3) 26.2%
High Street Tower, Suite 2500
125 High Street
Boston, MA 02110
Geocapital II, L.P..................... 691,545 9.1%
One Bridge Plaza
Fort Lee, NJ 07024
Waddell & Reed, Inc.................... 640,000 (4) 8.4%
2001 Third Avenue South
Birmingham, AL 35233
Hambrecht & Quist Group................ 452,242 (5) 5.9%
One Bush Street
San Francisco, CA 94104
Kenneth P. Currier..................... 741,892 (6) 9.2%
Susan A. Currier....................... 741,892 (7) 9.2%
A. Bruce Johnston...................... 13,392 (8) *
Stephen J. Clearman.................... 701,720 (9) 9.2%
William H. Lane III.................... 14,275 (10) *
Charles E. Noell III................... 41,438 (11) *
Charles H. Murphy...................... 12,591 (12) *
Timothy R. Leary....................... 105,279 (13) 1.4%
Michael A. Appel....................... 4,654 (14) *
All directors and executive officers 1,663,62 (15) 20.2%
as a group (13 persons)................
<FN>
----------------------------------------
* Represents less than 1% of the
outstanding shares.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Shares of Common Stock subject
to options that are currently exercisable or exercisable within 60 days of
February 24, 1998 are deemed to be beneficially owned by the person holding
such options for the purpose of computing the percentage of ownership of
such person, but are not treated as outstanding for the purpose of computing
the purpose of an other person.
(2) Applicable percentage of ownership is based on 7,605,025 shares of Common
Stock outstanding as of February 24, 1998 together with applicable options
for each stockholder.
(3) Includes 1,136,310 shares of Common Stock held by Advent VI L.P., 510,064
shares held by Advent Atlantic and Pacific II L.P., 184,181 shares held by
Advent Industrial II L.P., 141,685 shares held by Advent New York L.P., and
17,002 shares held by TA Venture Investors, L.P. The respective general
partners of Advent VI L.P., Advent Atlantic and Pacific II L.P., Advent
Industrial II L.P., Advent New York L.P. and TA Venture Investors L.P.
(collectively, the "TA Associates Group") exercise sole investment and
voting power with respect to shares of Common Stock held by such entities.
A. Bruce Johnston, a Director of the Company, is a Principal of TA
Associates.
(4) As reported in a Schedule 13G dated January 30, 1998 and filed with the
Securities and Exchange Commission jointly by Waddell & Reed, Inc., Waddell
& Reed Investment Management Company, Waddell & Reed Asset Management
Company, Waddell & Reed Financial Services, Inc., Torchmark Corporation,
United Investors Management Company, and Liberty National Life Insurance
Company.
(5) As reported in a Schedule 13D dated April 7, 1997 and filed with the
Securities and Exchange Commission jointly by Hambrecht & Quist Group,
Hambrecht & Quist California, Hambrecht & Quist L.L.C. and Daniel H.
Case III. On March 23, 1998, Hambrecht & Quist Group filed a Schedule
13-D/A reporting ownership of 352,242 shares of Common Stock, which
represents approximately 4.6% of the Common Shares outstanding as of
February 24, 1998.
(6) Includes 335,296 shares of Common Stock beneficially owned by Mr. Currier's
wife, Susan A. Currier, as to which Mr. Currier disclaims beneficial
ownership, 76,000 shares beneficially owned by Mr. and Ms. Currier jointly,
and 233,096 shares which Mr. Currier may acquire upon the exercise of stock
options within 60 days of February 24, 1998.
(7) Includes 330,596 shares of Common Stock beneficially owned by Ms. Currier's
husband, Kenneth P. Currier, as to which Ms. Currier disclaims beneficial
ownership, 76,000 shares beneficially owned by Mr. and Ms. Currier jointly,
and 233,096 shares which Ms. Currier may acquire upon the exercise of stock
options within 60 days of February 24, 1998.
(8) Includes 3,117 shares of Common Stock beneficially owned by A. Bruce
Johnston through TA Venture Investors L.P. which are included in the 17,002
shares described in footnote (3) above as being owned by TA Venture
Investors L.P. Does not include any shares beneficially owed by Advent VI
L.P., Advent Atlantic and Pacific II L.P., Advent Industrial II L.P. or
Advent New York L.P., or the remainder of the shares described in footnote
(2) above as being owned by TA Venture Investors L.P., as to which Mr.
Johnston disclaims beneficial ownership. Also includes 10,275 shares of
Common Stock which Mr. Johnston may acquire upon the exercise of stock
options within 60 days of February 24, 1998.
(9) Includes 691,545 shares of Common Stock held by Geocapital II, L.P. Stephen
J. Clearman, BVA Associates, James Harrison and Irwin Lieber are the general
partners (the "Geocapital General Partners") of Softven Management which is
the sole general partner of Geocapital II, L.P., and share voting and
investment power with respect to these shares. The Geocapital General
Partners disclaim beneficial ownership of such shares, except to the extent
of each partner's proportionate pecuniary interest therein. Also includes
10,275 shares of Common Stock which Mr. Clearman may acquire upon the
exercise of stock options within 60 days of February 24, 1998.
(10)Includes 10,275 shares of Common Stock which Mr. Lane may acquire upon the
exercise of stock options within 60 days of February 24, 1998, and 4,000
shares of Common Stock owned by Mr. Lane's wife and grandchildren.
(11)Includes 10,275 shares of Common Stock which Mr. Noell may acquire upon the
exercise of stock options within 60 days of February 24, 1998.
(12)Consists of 12,591 shares of Common Stock which Mr. Murphy may acquire upon
the exercise of stock options within 60 days of February 24, 1998.
(13)Includes 67,849 shares which Mr. Leary may acquire upon the exercise of
stock options within 60 days of February 24, 1998.
(14)Consists of 4,654 shares of Common Stock which Mr. Appel may acquire upon
the exercise of stock options within 60 days of February 24, 1998.
(15)Includes approximately 620,670 shares which may be acquired upon the
exercise of stock options within 60 days of February 24, 1998.
</FN>
</TABLE>
Item 13. Certain Relationships and Related Transactions
A. Bruce Johnston, a Director of the Company, is a Principal of TA Associates.
Stephen J. Clearman, a Director of the Company, is a general partner of the
general partner of Geocapital II, L.P. Charles E. Noell III, a Director of the
Company, is a general partner of the general partner of JMI Equity Fund, L.P.
Kenneth and Susan Currier, who are married to one another, are Directors and the
Chief Executive Officer and President of the Company, respectively.
The Company has a policy whereby all transactions between the Company and its
officers, directors and affiliates (other than employment and compensation
matters) will be reviewed by the Audit Committee of the Company's Board of
Directors or a comparable committee.
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 No. Description
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 (7)
10.16 Announcement of Preliminary Fourth-Quarter Results (8)
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
(7) Incorporated by reference to the designated exhibit of
registrant's Annual Report on Form 10-K for the year ended
December 31, 1996
(8) Incorporated by reference to the designated exhibit of
Form 8-K filed February 10,1998
(U) Confidential treatment granted as to portions of this
document.
(b) Reports on Form 8-K
On February 10, 1998, the Company filed a report on Form 8-K in regard to
its announcement of preliminary results for the fourth quarter of 1997.
On February 13, 1998, the Company filed a report on Form 8-K in regard to
its announcement of results for the quarter and the year ended December
31, 1997.
(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 30, 1998 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 30, 1998
/s/ KENNETH P. CURRIER Executive Officer and
Kenneth P. Currier Secretary (Principal
Executive Officer)
Chief Financial March 30, 1998
/s/ CHARLES H. MURPHY Officer and Treasurer
Charles H. Murphy (Principal Financial
Officer and Principal
Accounting Officer)
/s/ STEPHEN J. CLEARMAN Director March 26, 1998
Stephen J. Clearman
/s/ SUSAN A. CURRIER Director, President March 30, 1998
Susan A. Currier
Director March __, 1998
---------------------
A. Bruce Johnston
/s/ WILLIAM H. LANE III Director March 26, 1998
William H. Lane III
Director March __, 1998
---------------------
Charles E. Noell III
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON SCHEDULE
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 6, 1998. 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 6, 1998.
S-1
<PAGE>
EXPERT SOFTWARE, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(in thousands)
<TABLE>
<CAPTION>
Balance Charged
at to Costs Balance at
Beginning and End
Description of Period Expenses Deductions of Period
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Allowance for doubtful
accounts and returns:
Fiscal year ended
December 31, 1997........... $ 5,061 $6,868 $ 7,568 $ 4,361
============================================
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
============================================
</TABLE>
S-2
<PAGE>
INDEX TO EXHIBITS
Sequential
Page
Exhibit No. Description Number
----------- -------------------------------------------- ----------
23.1 Consent of Arthur Andersen LLP.............. 50
<PAGE>
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, 1998.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE REGISTRANT'S 1997 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-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1.00
<CASH> 5,685
<SECURITIES> 0
<RECEIVABLES> 4,636
<ALLOWANCES> 4,361
<INVENTORY> 2,922
<CURRENT-ASSETS> 17,617
<PP&E> 3,996
<DEPRECIATION> (2,726)
<TOTAL-ASSETS> 22,233
<CURRENT-LIABILITIES> 9,701
<BONDS> 0
0
0
<COMMON> 76
<OTHER-SE> 12,456
<TOTAL-LIABILITY-AND-EQUITY> 22,233
<SALES> 33,208
<TOTAL-REVENUES> 33,208
<CGS> 12,985
<TOTAL-COSTS> 30,772
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 346
<INTEREST-EXPENSE> 5
<INCOME-PRETAX> 2,704
<INCOME-TAX> 1,001
<INCOME-CONTINUING> 1,703
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,703
<EPS-PRIMARY> 0.23
<EPS-DILUTED> 0.21
</TABLE>
