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.
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.
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.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5.
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.
Item 6.
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.
Item 7.
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.
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.
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.
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
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.
The accompanying notes to consolidated financial statements are an integral part of these balance sheets.
The accompanying notes to consolidated financial statements are an integral part of these statements.
EXPERT SOFTWARE, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (in thousands, except share data)
The accompanying notes to consolidated financial statements are an integral part of these statements.
EXPERT SOFTWARE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
(Continued)
EXPERT SOFTWARE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
(Continued)
The accompanying notes to consolidated financial statements are an integral part of these statements.
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.
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:
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.
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.
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):
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):
4. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following at December 31 (in thousands):
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):
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:
A summary of currently outstanding and exercisable options is as follows:
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):
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):
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:
The components of the net deferred tax asset recorded in the accompanying consolidated balance sheets are as follows (in thousands):
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.
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):
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.
Item 9. Changes and Disagreements With Accountants on Accounting and Financial Disclosure
None.
PART III
Item 10.
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.
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.
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.
Item 11.
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.
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.
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.
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.
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.
Item 13.
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.
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).
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
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
EXPERT SOFTWARE, INC.
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (in thousands)
S-2
INDEX TO EXHIBITS
Sequential Page Exhibit No. Description Number ----------- -------------------------------------------- ----------
23.1 Consent of Arthur Andersen LLP.............. 50
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.