ITEM 1. DESCRIPTION OF BUSINESS.
GENERAL
The mission of National Datacomputer, Inc. (the "Company") is to provide solutions to workplace problems through the use of mobile information systems. The Company designs, manufactures, sells and services computerized systems used to automate the collection, processing and communication of information related to product sales, distribution, and inventory control. The Company's products and services include data communication networks, application-specific software, hand-held computers and related peripherals, and associated training and support services. The Company's products facilitate rapid and accurate data collection, data processing and two-way communication of information with a customer's host information system.
The Company invests in technologies that support its systems solution approach, such as application software and network communication systems. The Company believes that its future success depends on superior marketing, service and solutions. The Company's goal is to be the leading supplier in selected market sectors. The key elements of the Company's strategy include: (i) performing effective market research to assess and identify market sectors that represent viable business opportunities; (ii) providing system communications to a customer's host information system in addition to data collection software and hardware; (iii) updating hardware and software solutions to remain current with customers' needs as well as existing technology; and (iv) maintaining superior software to run the Company's hardware and network communications in selected market segments.
On February 20, 1998, the Company announced the signing of a letter of intent, subject to a definitive agreement, to merge with Infos International, Inc. ("Infos"). Infos is a privately held company with operations currently in Germany, Italy, Portugal and Spain. Established in 1983, Infos designs, manufactures, sells and supports hardware and software systems for Route Accounting, Retail Applications and Sales Support. Infos's current hardware products are based on "Open Systems" architecture which promotes ease and speed of application development and provides for software portability and maintainability. Infos unaudited sales for 1997 are approximately $14,000,000.
The Company would be the surviving corporation of the merger while the shareholders of Infos would acquire a majority of the issued and outstanding capital stock of the combined entity.
INDUSTRY BACKGROUND
In the 1970s, the application of microprocessor-powered equipment began to find applications where portable, battery-powered units were required. These units found their largest applications in the retail industry for entering re-order information into the distribution systems to supply retail stores. A number of other data collection applications also began to appear in the inventory service industry.
The state of the art in microprocessors at the time was units with small memories and programs written in proprietary or machine languages contained in firmware. The applications were, by necessity, simple compared to other applications of computers in business and industry. As the need for more flexible and sophisticated programs grew, the use of units requiring firmware became less and less desirable. This situation existed until the mid-1980s when personal computers blossomed and the computer industry shifted to low-powered CMOS electronics (generally categorized as semiconductors requiring small power drain). At that point, the
opportunity to create software systems with the level of flexibility and sophistication available in other parts of the software industry presented itself and the hand-held personal computer was introduced.
Management believes that the future of hand-held computers is governed by the software or solutions industry, and the opportunity to design computers for "people who don't work at a desk" has opened up large new markets. The application of this software technology to industries involving distribution of products on routes is a good example of this opportunity as the distribution process can be highly automated capturing every transaction as well as supplying additional information for management controls not previously possible.
PRODUCTS
The Company designs, manufactures, markets and services rugged, hand-held computers, data collection devices and associated peripherals. The Company believes that its customers require products that allow flexible tailored software solutions in a cost-effective and timely manner.
HARDWARE
The Company's hand-held computers ("Datacomputers") include a microprocessor, keyboard, LCD displays and full alphabetic and numeric character sets. Application programs for the Datacomputer can be written on conventional desk-top computers with commonly-used programming languages and then executed on the Datacomputer. Application programs and data in Datacomputers are stored in random access memory ("RAM") and can be readily changed by communicating revisions or new programs to the Datacomputer through its industry standard serial port. Datacomputers can receive data through bar-code readers, cables from other computers (including other Datacomputers) and over telephone lines through a modem. The Company's Datacomputer product line includes three models of the Datacomputer, bar-code readers, printers, communication devices, carrying cases, cables and add-on memory boards.
Datacomputer Model DC4
The Datacomputer Model DC4 (the "DC4") is a hand-held computer that was introduced in late 1997 and which is designed for use by the Route Service market. The DC4 is an advanced version of the DC 3X described below in that it employs a faster processor and a faster internal modem. The DC4 also incorporates several significant features not available in the DC 3X, such as a touch-screen, a signature capture capability and two slots for PC-cards. The enhanced processing power and ruggedness of the DC4 is drawing interest from markets other than the Company's traditional markets, particularly in Europe. The DC4 is intended to complement rather than replace the DC 3X, which will continue be sold into its present markets. Several hundred DC4 units have been shipped to date and the Company estimates that approximately 15% of its 1997 total revenue in 1997 was attributable to sales of the DC4.
Datacomputer Model 3X
The Datacomputer Model 3X (the "DC 3X") is a hand-held "Intel(TM) based" computer designed for use by people whose jobs involve entry and access to a computer as they stand or move about. The DC 3X contains an industry standard bar-code port that allows quick and convenient scanning of bar-codes for accurate inventory management and supports fixed beam pencil wands, CCD and laser light beam readers for a multitude of scanning applications. The Company estimates that approximately 36% of its 1997 total revenue was attributable to the sale of the DC 3X.
The DC 3X is designed to be highly reliable, tolerant to human error and easy to use. The DC 3X is shock resistant, water tight and operates over a wide temperature range. In addition, the DC 3X's full-sized, numeric key pad is designed for fast and accurate data entry, even while a user is wearing gloves. The Company also offers optional accessories, such as an internal modem that allows communications over telephone lines.
The Company offers the DC 3X in two different sales packages. The Pre-Sales System (the "PSS") includes a DC 3X, software and various peripherals for sale to customers who sell their products on routes and
who book the sales orders through a dedicated sales force. The Driver-Sales System (the "DSS") is a packaged system that includes a DC 3X, one of several portable or truck-mounted printers, peripherals and software. The DSS is used by customers who sell their products through delivery drivers. The Company believes that the application software included in the PSS and DSS packages described above permits a high degree of customization for a variety of customer applications.
The PSS is typically purchased by distributors who sell products prior to actual shipment. Due to the fact that the salesman is not required to create and print out a delivery slip for any customer, there is no need for a printer. The PSS allows the salesman to access all of the distributor's information on the customer's account as well as to input the customer's next delivery order. The DSS, on the other hand, is typically purchased by distributors who do not sell products prior to actual shipment. Accordingly, a salesperson arriving at a stop performs an inventory check, determines how much inventory should be delivered and prints out the delivery slip for the customer.
The DC 3X has many industrial applications, where portability, access speed, ruggedness and small size are essential. Examples of two applications for the DC 3X are set forth below:
Delivery Routes. At the end of each day, a driver parks his truck and goes into the office where he connects his DC 3X to a host computer. The host computer extracts and processes the information entered into the DC 3X by the driver during his route. After processing the data, the host computer downloads the delivery schedule and inventory for the driver's next day, including account information about each customer. During the day, at each route stop, the driver takes the customer's inventory, calculates what new stock needs to be added and prints out a delivery slip for each customer. At the end of the day, a complete report of the driver's deliveries can be printed. According to many of the Company's customers, the implementation of the DC 3X has significantly improved driver efficiency.
Inspection Systems. Using a DC 3X, a railroad inspector checks the condition of railroad cars in the railroad yard. The DC 3X prompts the inspector by requesting that he respond to a number of pre-determined questions. By selecting specific answers to each question, the inspector reports a detailed condition of each railroad car. After completing his inspection, the DC 3X is connected to the railroad's repair center where the list of repairs and parts is reviewed and processed by repairmen. The implementation of the DC 3X has improved the effectiveness and efficiency of railroad car inspection and repair by reducing human error and accelerating data collection and analysis. DC 3Xs are presently in use at the Burlington Northern, Union Pacific, Illinois Central, and Atchison, Topeka and Santa Fe Railroads.
Datacomputer Model 2X
The Datacomputer Model 2X (the "DC 2X") is an advanced version of the DC 2.5 described below. It has not been introduced to inventory services marketplace, except to two companies. The DC 2X provides all the features of the DC 2.5, but, is also faster, has more memory and provides for a PC card slot option.
The third largest inventory service company in the United States is one of the Company's customers of the DC 2X, and formerly a customer of the DC 2.5. The Company estimates that approximately 3% of its 1997 total revenue was attributable to the sale of the DC 2X.
Datacomputer Model 2.5
The Datacomputer Model 2.5 (the "DC 2.5") is a hand-held computer designed primarily for use by inventory auditors who enter voluminous numeric data, mostly by touch keying. The Company offers utility software that includes a modem, printer, bar code wand and scanner interfaces, screen and keyboard routines, calculator functions and database functions. Due to the wide range of optional features, the user is able to control the creation, updating and cost of the DC 2.5's software.
The DC 2.5 is marketed primarily to inventory service companies. An inventory service company is an organization that contracts with businesses who maintain large inventories, such as department or retail stores. The Company estimates that approximately 21% of its 1997 total revenue was attributable to the sale of the DC 2.5.
ICAL Model 100R
The ICAL Model 100R (the "ICAL 100R") is designed and used for inventory taking for financial and control purposes. The ICAL 100R allows a user to divide a store's inventory into a maximum of 128 separate departments and keep a running total in each department. The ICAL 100R is a recent version of a hand-held product sold by the Company to the inventory audit market for the last 17 years. The Company estimates that approximately 6% of its 1997 total revenue was attributable to the sale of the ICAL 100R.
The primary customers for the ICAL 100R are inventory service companies, which perform inventory taking for retailers and other institutions on a contract basis, and retailers, primarily convenience store chains or others selling large quantities of relatively low priced items.
Revenues generated by the ICAL 100R are almost exclusively from current customers of the Company who wish to continue to use their installed base of ICAL devices. The Company intends to continue to support the ICAL product line to protect its customers' investments.
MARKETS
The Company currently focuses on the route accounting system market for hand-held computers and believes it is well positioned in this industry to become a leading provider. Route accounting involves concurrent order taking, product delivery and inventory tracking. Salespeople enter customer orders in hand-held computers and use the Company's portable printers to generate invoices that are left with the customers' orders at their locations. At the end of a route delivery day, information stored in hand-held computers is transferred to the host information system and instructional and control information for the next day's delivery routes is transferred back to the hand-held computer.
MARKETING AND DISTRIBUTION
The Company has separate marketing efforts for its Datacomputer products and its ICAL 100R. Management believes that the Datacomputer products have a wide variety of applications that have not yet been fully exploited by the Company or potential users of the Datacomputer.
Recognizing the need to focus the Company's limited resources, the Company has applied its business strategy for Datacomputers to a limited number of selected markets. The Company is currently focused in market sectors where businesses distribute their products on routes. The Company believes that the route sales and service market is attractive because (i) customer acceptance of hand-held computers has been established in several sectors; (ii) customers have realized a substantial return on their investment in hand-held computers; and (iii) the Company enjoys a competitive advantage in this market due to its software and related services. To date, the Company believes it has gained the leading positions in the office coffee service market sector, and has penetrated the beer distribution, bakery, snacks and dairy market sectors.
The ICAL 100R is sold principally to repeat customers who already have a sizable investment in their use of and applications for ICAL products. The Company devotes relatively few resources to generate additional sales of ICAL units above those demanded by past customers.
The Company primarily sells and distributes its systems and products through a direct sales force that concentrates on systems sales.
DIRECT SALES FORCE
The Company believes that the optimum method for the marketing and sale of its products is gained through direct sales. Therefore, direct selling is the Company's primary strategy in the route sales and service market. The Company believes that the key elements to successful direct selling include: (i) maintaining a well-qualified direct sales staff that is experienced in marketing and selling solutions to medium and large accounts; (ii) performing well-executed software solutions; (iii) offering excellent service; and (iv) maintaining good customer references.
SERVICE AND SUPPORT
The Company believes that superior service is a vital part of its competitive strategy and therefore emphasizes the quality of both hardware and software service. The Customer Service department manages all installations, preparations, and follow-up support with each customer.
The Company typically offers industry-standard 90 day warranties and offers several flexible service arrangements and maintenance contracts to meet customer needs. In addition to technical support of installed systems, the Company provides pre-installation site surveys, installation services, user training, technical training, application software support and host information system interface assistance.
SOURCES OF SUPPLY
The Company believes there is more than one supplier for all of its raw materials and maintains inventories and close working relationships with its suppliers to ensure timely and reliable delivery. Although the Company has not experienced major interruptions in production due to a shortage of raw materials, prolonged supply shortages would materially and adversely affect the Company's manufacturing operations, business and financial performance.
COMPETITION
The market for the Company's products is highly competitive and rapidly changing. The Company's competitors include Norand, Symbol Technologies, Telxon and related third-parties, all of which have greater financial, marketing and technical resources than the Company. In addition, larger corporations could enter into the route sales and service segment of the hand-held computer market. The Company competes on the basis of product features, software, quality, service and price.
EMPLOYEES
As of December 31, 1997, the Company had 44 full-time employees. Of these employees, 8 were engaged in sales and marketing, 11 in service and customer support, 6 in hardware and software development, 12 in manufacturing and 7 in administration and finance. The Company's employees are not represented by a labor union. Management believes that the Company's relationship with its employees is good.
ITEM 2.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company maintains its principal offices and manufacturing operations in a leased 19,000 square foot facility in Billerica, Massachusetts. The Company's lease expires on September 30, 2000. The annual base rent for the Company's leased facilities is approximately $123,300. The lease further provides that the Company will pay to its landlord as additional rent its pro rata share of certain operational and maintenance costs at the facility during the term of the lease. The Company believes that its facilities are adequate for its current needs and that additional space, if required, would be available at competitive rates.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not presently involved in any material pending litigation.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
None
PART II
ITEM 5.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Since March 7, 1997, the Company's Common Stock has traded on the NASDAQ Small Cap Market Quotation System ("NASDAQ") under the symbol "IDCP". From January 1, 1996 to March 6, 1997, the
Company's Common Stock was traded on the National Quotation Bureau Incorporated ("NQBI") under the symbol "NDCP." On March 20, 1998, the last sale price for the Common Stock as reported by NASDAQ was $1.00 per share.
For the periods indicated below, the table sets forth the range of high and low sale prices for the Common Stock as reported by NASDAQ and NQBI, as applicable.
As of March 20, 1998, there were approximately 2,400 stockholders of record of the Company's Common Stock.
DIVIDENDS
Since inception, the Company has not paid any dividends on its Common Stock and management does not anticipate the payment of any dividends to its stockholders in the foreseeable future. The Company currently intends to reinvest earnings, if any, in the development and expansion of its business. The declaration of dividends in the future will be at the election of the Board of Directors and will depend upon the earnings, capital requirements and financial position of the Company, general economic conditions and other pertinent factors. The Company's outstanding Preferred Stock also requires that holders of Preferred Stock be entitled to receive dividends prior to the payment of dividends on the Company's Common Stock.
ITEM 6.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion and analysis should be read in conjunction with the financial statements and notes thereto appearing elsewhere herein.
RESULTS OF OPERATIONS
Year Ended December 31, 1997 Compared with Year Ended December 29, 1996
Revenues increased approximately 16% to approximately $5,813,000 in 1997 from approximately $5,032,000 in 1996. The increase in revenues was primarily due to the introduction of Datacomputer model DC4, which contributed to an increase in sales of units of the Company's Datacomputers. Sales of the DC4 accounted for approximately 15% of the Company's total revenues.
Service and other revenue increased to approximately $1,168,000 in 1997 from approximately $1,029,000 in 1996, an increase of approximately 14%. The Company expects that service and other revenues will continue to rise as the Company's installed base of hand-held computers continues to expand, although no assurance of such a result can be given.
Cost of sales and services increased approximately 3% to $3,265,000 in 1997 from approximately $3,155,000 in 1996. As a percentage of sales, however, cost of sales and services decreased to approximately 56% in 1997 from approximately 63% in 1996. This decrease is primarily due to the institution of the Company's quality control programs, which improved the quality of the Company's products and led to fewer field support demands and, thereby, lower field support costs.
Research and development expenses decreased to approximately $1,276,000 in 1997 from approximately $1,303,000 in 1996, a decrease of approximately 2%. The decrease resulted primarily from a reduction in the Company's research and development staff and an increase in the percentage of research and development conducted by the Company internally, which has reduced the level of third-party development costs in many areas. Although no assurance can be given, the Company expects to maintain research and development spending necessary to enhance current products and to develop future products.
Selling, general and administrative expenses decreased to approximately $2,373,000 in 1997 from approximately $2,624,000 in 1996, a decrease of approximately 10%. The lower level of costs, resulted primarily from the Company's ongoing evaluation of its operations and organizational structure.
The Company's operating loss was approximately $1,101,000 in 1997 as compared to a loss from operations of approximately $2,051,000 in 1996. The decreased loss was primarily attributable to the increase in the Company's sales and the decrease in the expenses discussed above.
The Company had interest income in 1997 of approximately $13,000 compared to approximately $34,000 in 1996. The decrease was primarily a result of lower cash balances during 1997.
Interest expense was approximately $125,000 in 1997 as compared to approximately $26,000 in 1996. This increase resulted primarily from the amortization of approximately $81,000 to interest expense related to the discount on the convertible debt obtained in 1997 (Note 5).
LIQUIDITY AND CAPITAL RESOURCES
During fiscal 1997, net cash used for operating activities decreased to $1,786,353, as compared to net cash used in operating activities of $2,592,528 in fiscal 1996. During fiscal 1997 and fiscal 1996, net cash used for investing activities were $143,774 and $8,645, respectively. In fiscal 1997, net cash provided by financing activities was $1,416,573, consisting primarily of the issuance of preferred stock and a convertible note. In fiscal 1996, net cash provided by financing activities was $3,322,988. In fiscal 1997, the Company incurred interest of $404,750 on its Series B, C and D Convertible Preferred Stock as compared to $208,000 with respect to the Series B Convertible Preferred Stock in fiscal 1996. In fiscal 1997, the Company also issued Common Stock valued at $386,000 in satisfaction of interest due on Series B, C, and D Convertible Preferred Stock, as compared to $124,000 in fiscal 1996.
In March 1998, the Company designated and sold 500 shares of Series E Convertible Preferred Stock with a warrant to purchase up to 700,000 shares of common stock at an exercise price of $.75 per share, for net proceeds of $497,900. The warrant expires in March 2000. The Series E Convertible Preferred Stock was sold to the same stockholder of the previously issued Series B, Series C and Series D Convertible Preferred Stock. The proceeds of this financing were allocated to the preferred shares and warrant based on management's estimate of their fair values. This resulted in $214,000 being ascribed to the warrant which was recorded as additional paid-in-capital and $283,900 being recorded as preferred stock. Series E Convertible Preferred Stock has voting rights, dividend preference, liquidation preference, mandatory conversion and Company redemption terms similar to the Company's existing Series B, Series C and Series D Convertible Preferred Stock. The Subscription Agreement for Series E Convertible Preferred Stock offers anti-dilution protection to its shareholders. Series E Convertible Preferred Stock is convertible into shares of common stock at a conversion price of $.75.
Also in March 1998, the Company refinanced the $250,000 convertible debt by making a principal payment of $75,000 and issuing a convertible note payable for $175,000. The note bears interest at a rate of 6% per annum, matures in March 1999, and is convertible into shares of the Company's common stock at a conversion price equal to the average closing bid price for the Company's common stock for the five days ending March 6, 1998. The note can be converted at the option of the holder after January 1, 1999.
The Company, in conjunction with the issuance of the Series E Convertible Preferred Stock, canceled its previously issued warrants to purchase 700,000 shares of common stock for $4.00 per share. Additionally, the Company changed the conversion price on Series B and Series C Convertible Preferred Stock to $2.74 and offered anti-dilution protection to these shareholders. In addition, the holder of the Series E Convertible
Preferred Stock agreed to place into escrow 2,100 shares of the Series B Convertible Preferred Stock that is also owned by this shareholder. The Company may at its option and at any time through January 31, 2000 redeem the escrowed shares of Series B Convertible Preferred Stock at a price of $1,250 per share.
At December 31, 1997, the Company had cash of $208,731 and a current ratio of 2.1:1. The Company anticipates that available cash, together with cash flow from anticipated operations, will be sufficient to meet its working capital needs for the remainder of fiscal 1998. However, unanticipated adverse results of operations could impact anticipated cash flows and, as a result, there can be no assurance that the Company will not be required to raise additional capital or that the Company will be able to raise additional capital on favorable terms, if at all.
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 Issue refers to potential problems with computer systems or any equipment with computer chips or software that uses dates where the date has been stored as just two digits (e.g., 97 for 1997). On January 1, 2000, any clock or date recording mechanism incorporating date sensitive software which uses only two digits to represent the year may recognize a date using 00 as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruption of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar business activities.
The Company is in the process of conducting a review of its internal information systems to determine the extent of any Year 2000 problem. Such review includes specific inquiries about the Year 2000 issue posed to the vendors of its software programs. The Company is still gathering information, but although there exists the possibility that Year 2000 issues will be identified, based on such a review to date, the Company does not currently expect that any such problems will have a material adverse effect on the Company's future operating results or financial condition.
The Company is in the process of contacting its major suppliers and customers in an effort to determine the extent to which the Company may be vulnerable to those parties' failure to timely correct their own Year 2000 problems. To date, the Company is unaware of any situations of noncompliance that would materially adversely affect its operations or financial condition. There can be no assurance, however, that instances of noncompliance which could have a material adverse effect on the Company's operations or financial condition will not be identified; that the systems of other companies with which the Company transacts business will be corrected on a timely basis; or that a failure by such entities to correct a Year 2000 problem or a correction which is incompatible with the Company's information systems would not have a material adverse effect on the Company's operations or financial condition.
NEW ACCOUNTING PRONOUNCEMENT
In October 1997, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position ("SOP") 97-2, "Software Revenue Recognition." SOP 97-2 provides guidance on the timing and amount of revenue recognition when licensing, selling, leasing or otherwise marketing computer software. SOP 97-2 supersedes SOP 91-1 (also entitled "Software Revenue Recognition") and is effective for transactions entered into during fiscal years beginning after December 15, 1997. The Company will be required to adopt SOP 97-2 for its fiscal year ending December 31, 1998. The adoption of SOP 97-2 is not expected have a material effect on the Company's financial position or its results of operations.
ITEM 7.
ITEM 7. FINANCIAL STATEMENTS.
See Item 13 below and the Index therein for a listing of the financial statements and supplementary data filed as part of this report.
ITEM 8.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 9.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
Each Director of the Company is elected for a period of one year and holds office until his successor is elected and qualified. Vacancies may be filled by a majority vote of Directors then remaining in office. Officers are elected by and serve at the discretion of the Board of Directors. The following table sets forth the year each Director was elected a Director and the age, positions and offices currently held by each Director. For information about ownership of the Company's voting securities by each Director, see "Security Ownership of Certain Beneficial Owners and Management."
Section 16(a) ("Section 16(a)") of the Securities Exchange Act of 1934, as amended, requires executive officers, Directors, and persons who beneficially own more than ten percent (10%) of the Company's Common Stock to file initial reports of ownership on Form 3 and reports of changes in ownership on Form 4 with the Securities and Exchange Commission (the "SEC") and any national securities exchange on which the Company's securities are registered. Executive officers, Directors and greater than ten percent (10%) beneficial owners are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file.
Based solely on a review of copies of such forms furnished to the Company and written representations from executive officers and Directors, the Company believes that all Section 16(a) filings applicable to its executive officers, Directors and ten percent (10%) beneficial owners were complied with during the fiscal year ended December 31, 1997.
BUSINESS EXPERIENCE AND BACKGROUNDS OF THE DIRECTORS
The background of each of the Company's current Directors is as follows:
DR. MALCOLM M. BIBBY has served as a Director of the Corporation since January 1996 and was elected Chairman of the Board in July 1996. Dr. Bibby has also served as President and Chief Executive Officer of the Company since April 1996. He was President of LXE Inc. ("LXE"), a diversified wireless data communications products company, from 1983 to December 1994. During this period LXE's annual revenues grew from approximately $600,000 to approximately $63,000,000. Prior to LXE, Dr. Bibby was an Executive Assistant to the President at Ciba Vision Care, a Vice President of Product Development at Wesley-Jessen, Inc. and a Project Manager/Group Leader for hardware and software development at Monsanto Co. Dr. Bibby holds a Bachelor of Science degree and a Ph.D. both in Electrical Engineering from the University of Liverpool and an Master of Business Administration from the University of Chicago.
WILLIAM R. SMART has served as a Director of the Company since December 1989. He spent 32 years with the General Electric Company where his responsibilities included distribution and marketing management and general management as a Division Vice President. He spent nine years with Honeywell, Inc. where he served as Vice President in charge of European operations and Senior Vice President of Honeywell Information Systems, responsible for international operations as well as for the corporate staff. Mr. Smart currently serves as a Senior Vice President of the Cambridge Strategic Management Group, a privately-held
management consultant company. Mr. Smart holds a Bachelor of Science degree in Electrical Engineering from Princeton University. Mr. Smart is also the non-executive Chairman of 1st Carolina Corporation (the "Corporation"). The Corporation filed a Chapter 7 bankruptcy petition in the United States Bankruptcy Court for the District of South Carolina on August 16, 1994 (Case Number 94-73884).
JOHN P. WARD has served as a Director of the Company since its founding in 1967. Since February 1996, Mr. Ward has served as the Chief Executive Officer of Midas Vision Systems, Inc., a privately held company specializing in machine vision systems for automatic optical inspections. From 1990 to 1996 Mr. Ward was the Chief Executive Officer and Director of Vanzetti Vision Systems, Inc., a privately-held company specializing in infrared systems. Mr. Ward was Vice President of Engineering, co-founder and Clerk of the Company from its founding until December 1986. From 1953 to 1968 Mr. Ward was a Design Section Manager at the Raytheon Company. Mr. Ward holds a Bachelor of Science degree in Electrical Engineering from the Massachusetts Institute of Technology and a Master of Science degree in Electrical Engineering from Northeastern University.
EXECUTIVE OFFICERS
The executive officers of the Company, their ages and positions held in the Company are as follows:
BUSINESS EXPERIENCE AND BACKGROUNDS OF THE EXECUTIVE OFFICERS
The following is a brief summary of the background of each executive officer of the Company other than Dr. Malcolm M. Bibby, whose background is summarized above.
GERALD S. EILBERG joined the Company in September 1988 as Vice President of Finance and Administration and Chief Financial Officer. From October 1986 to August 1988, Mr. Eilberg served as a financial consultant to small private and public companies. From September 1982 to September 1986, he was President of Direct Marketing Inc. Previous positions included Division and Corporate Controller positions with large public companies. Mr. Eilberg is a graduate of the Boston University School of Management and the Columbia University Graduate School of Business.
JOSEPH C. PINTO joined the Company in March 1984 as Materials Manager, advanced into the position of Manufacturing Manager in September 1986 and was appointed Vice President of Manufacturing in January 1988. Prior to joining the Company, Mr. Pinto had been Production Control Manager at BLH Electronics, a manufacturer of process control systems, since January, 1979. Mr. Pinto holds a Bachelor of Science degree in Industrial Technology from Northeastern University and a Master of Science degree in Systems Management from Western New England College.
LARRY F. YEAGER has served as Vice President of Research and Development since joining the Company in December 1985. Prior to that, Mr. Yeager was Vice President of Software Development at the Saddlebrook Corporation, a turnkey systems company. During eight years at Saddlebrook Corporation, Mr. Yeager developed various software products, including Pro-Forma Modeling, System M, Client Controllable software products and numerous financial applications programs. Prior to joining Saddlebrook, Mr. Yeager worked at the State Street Bank and Trust Company of Boston, Massachusetts where he held the positions of Manager of Capital Planning and Manager of Management Sciences. Mr. Yeager holds a Bachelor of Science degree from Massachusetts Institute of Technology's Sloan School of Management as well as a Masters degree in Business Administration from Northeastern University.
None of the Company's executive officers or Directors are related to any other executive officer or Director.
ITEM 10.
ITEM 10. EXECUTIVE COMPENSATION.
EXECUTIVE OFFICERS' COMPENSATION
The following table sets forth the compensation paid during the fiscal years ended December 31, 1997, December 29, 1996, and December 31,1995 ("Fiscal 1997, 1996 and 1995", respectively) to Dr. Malcolm M. Bibby, the Company's President and with the other current executive officers of the Company, who earned total compensation in excess of $100,000 during Fiscal 1997.
SUMMARY COMPENSATION TABLE
- --------------- (1) On February 28, 1996, May 31, 1996, and November 30, 1996, Incentive Stock Options to purchase 5,250, 48,000, 65,500 shares of Common Stock, respectively, at an exercise price of $6.00 were granted to Mr. Bibby. Such options were subsequently repriced on August 14, 1997 at an exercise price of $1.47 per share. See "Report on Repricing of Options". The options granted to Dr. Bibby have the following vesting periods: (i) 6,000 options were fully vested upon grant (ii) 16,250 vested fully in 1996 (iii) 23,000 vested fully in 1997 (iv) 750 will vest fully in 1998 and (v) the remaining 72,750 vest fully in ten years, but contain the following acceleration clauses: (a) 2,750 will vest 50% if net income before taxes for the five year period ended December 31, 1999 exceeds $1,000,000 and 100% if net income for the five year period exceeds $2,000,000; (b) 25,000 will vest if net income before taxes exceeds $750,000 and sales exceed $8,500,000 in any four consecutive quarters prior to December 31, 1997; (c) up to 45,000 options will vest if sales during any four consecutive quarters exceed $8,500,00 and the following amounts of net income before taxes are exceeded:
(2) Dr. Bibby commenced employment with the Company in April 1996.
(3) On August 1, 1996, Incentive Stock Options to purchase 5,000 shares of Common Stock at an exercise price of $5.00 were granted to each of Messrs. Eilberg and Yeager. Such options were subsequently
repriced on August 14, 1997 at an exercise price of $1.47 per share. See "Report on Repricing of Options". The options granted to Messrs. Eilberg and Yeager vest 25% in each of 1998, 1999, 2000 and 2001.
(4) On November 26, 1996, Incentive Stock Options to purchase 75,000 shares of Common Stock at an exercise price of $5.00 were granted to Mr. Calcaterra. Such options were subsequently repriced on August 14, 1997 at an exercise price of $1.47 per share. See "Report on Repricing of Options". The options granted to Mr. Calcaterra have the following vesting periods: (i) 25,000 options vest 25% in each of 1997, 1998, 1999 and 2000 (ii) the remaining 50,000 vest fully in ten years, but contain the following acceleration clauses: (a) 12,500 vest 100% if break-even level is reached in 1998; (b) 25,000 will vest at the rate of 1,250 options per $100,000 of net income before taxes in 1998; (c) 12,500 will vest 50% if net income before taxes for the five year period ended December 31, 1999 exceeds $1,000,000 and 100% if net income for the five year period exceeds $2,000,000.
AGGREGATED OPTION EXERCISES IN FISCAL YEAR 1997 AND FY-END OPTION VALUES
- --------------- (1) In-the-Money options, are those options for which the fair market value of the underlying shares of Common Stock is greater than the exercise price of the option. As of December 31, 1997, Messrs. Bibby, Eilberg, Yeager and Calcaterra had exercisable options to purchase 45,250, 15, 15, and 6,250 shares of Common Stock, respectively, at share exercise prices of $1.47. See "Security Ownership of Certain Beneficial Owners and Management". The fair market value of the Company's Common Stock underlying the options as of December 31, 1997 was $0.56 (NASDAQ Small Cap Market Quotation System closing bid price on December 31, 1997).
COMPENSATION OF DIRECTORS
During Fiscal 1997, the Company's Directors received an aggregate cash compensation of $9,000 for their services as Directors. Messrs. Ward and Smart received $4,500, respectively.
REPORT ON REPRICING OF OPTIONS
On August 14, 1997, the Board of Directors approved the repricing of certain options that had been granted previously pursuant to the Company's 1986, 1989, 1994 and 1995 Stock Option Plans. Certain outstanding options of the Company were repriced at $1.47 per share. With the exception of the decrease in the per share exercise price, all other terms of the previously granted options, including original vesting provisions, remained unchanged.
The Board of Directors approved the repricing of options to reflect the fair market value of the Company's Common Stock based on its current trading activities and to strengthen employee morale by providing an increased incentive for all employees to continue their efforts. At its meeting on August 14, 1997, the Board noted that the options were significantly out-of-the-money and, therefore, ceased to be an employee incentive. The Board believes that the repricing will renew the incentive feature.
ITEM 11.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth, as of March 20, 1998, certain information concerning stock ownership of the Company by (i) each person who is known by the Company to own beneficially 5% or more of the Company's voting securities, (ii) each of the Company's Directors, and (iii) all Directors and officers as a group. Except as otherwise indicated, the stockholders listed in the table have sole voting and investment powers with respect to the shares indicated. For purposes of this table, the Common Stock and the Series B Convertible Preferred Stock, Series C Convertible Preferred Stock, Series D Convertible Preferred Stock and Series E Convertible Preferred Stock (collectively, the "Preferred Stock") are treated as one class. As of
March 20, 1998, the Company had 1,628,341 shares of Common Stock outstanding and approximately 2,400 stockholders of record. In addition, the Company had 5,950 shares of Preferred Stock outstanding. Each share of Preferred Stock, which has a face value of $1,000, is convertible into Common Stock at a conversion price of $2.74 per share for the Series B, C and D, and $0.75 per share for Series E. Based upon the conversion prices, the Preferred Stock would be convertible into a total of 2,655,718 shares of Common Stock. Each holder of Preferred Stock is entitled to the number of votes equal to the number of shares of Common Stock into which such Preferred Stock is convertible. The Company has no other voting securities.
- --------------- * Less than 1%.
(1) The address for all of the named persons is c/o National Datacomputer, Inc., 900 Middlesex Turnpike, Bldg. 5, Billerica, Massachusetts 01821.
(2) Pursuant to the rules of the Securities and Exchange Commission, shares of Common Stock that an individual or group has a right to acquire within 60 days pursuant to the exercise of options or warrants are deemed to be outstanding for the purpose of computing the percentage ownership of such individual or group, but are not deemed to be outstanding for the purpose of computing the percentage ownership of any other person shown in the table. This table reflects the ownership of all shares of Common Stock and the Preferred Stock voting as a single class.
(3) Includes an aggregate of 45,250 shares of Common Stock underlying vested options to purchase Common Stock.
(4) Includes 10,137 shares held by Mr. Ward's wife for which Mr. Ward disclaims beneficial ownership.
(5) Includes 15 shares of Common Stock underlying vested options to purchase Common Stock.
(6) Includes 15 shares of Common Stock underlying vested options to purchase Common Stock.
(7) Includes an aggregate of 45,420 shares of Common Stock underlying vested options to purchase Common stock held by four of the Company's officers.
All of the Preferred Stock is registered in the name of RBB Bank AG ("RBB Bank"). RBB Bank is not included in the table above because the Company has been informed that RBB Bank holds such Preferred Stock solely in the capacity of custodian for the benefit of numerous other investors. The Company has been further informed that none of such investors, either individually or in the aggregate with affiliated entities, beneficially owns more than five percent (5%) of the Company's issued and outstanding capital stock.
ITEM 12.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None
ITEM 13.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a)(1) Financial Statements. The financial statements required to be filed by Item 7 herewith are as follows:
(a)(2) Exhibits.
(i) The following exhibits are filed herewith:
- ---------------
Where a document is incorporated by reference from a previous filing, the Exhibit number of the document in that previous filing is indicated in parentheses after the description of such document.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the last quarter of the period covered by this report.
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
NATIONAL DATACOMPUTER, INC.
By: /s/ MALCOLM M. BIBBY
------------------------------------ Malcolm M. Bibby President
Date: March 30, 1998
In accordance with the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of National Datacomputer, Inc.
In our opinion, the accompanying balance sheet and the related statements of operations, of stockholders' equity (deficit) and of cash flows present fairly, in all material respects, the financial position of National Datacomputer, Inc. at December 31, 1997 and December 29, 1996, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. 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 of these financial statements in accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Boston, Massachusetts March 30, 1998
NATIONAL DATACOMPUTER, INC.
BALANCE SHEET
The accompanying notes are an integral part of these financial statements.
NATIONAL DATACOMPUTER, INC.
STATEMENT OF OPERATIONS
The accompanying notes are an integral part of these financial statements.
NATIONAL DATACOMPUTER, INC.
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
The accompanying notes are an integral part of these financial statements.
NATIONAL DATACOMPUTER, INC.
STATEMENT OF CASH FLOWS INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
The accompanying notes are an integral part of these financial statements.
NATIONAL DATACOMPUTER, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION
National Datacomputer, Inc. (the "Company") designs, develops, manufactures, markets and services a line of hand-held battery powered microprocessor-based data collection products and computers and associated peripherals for use in mobile operations.
In 1997 and 1996, the Company used cash for operations of $1.8 million and $2.6 million, respectively. The Company has financed its operations primarily through the issuance of preferred stock and convertible debt totaling $1.5 million in 1997 and $3.7 million in 1996. The Company expects to finance its short-term and long-term operating and financing requirements from cash generated from operations and with the proceeds from the issuance of the Series E Preferred Stock in March 1998 which generated $498,000. If the Company is not successful in attaining and sustaining sufficient cash from operations, it will need to reduce operating costs and or raise additional financing to maintain its operations.
On December 28, 1997, the Board of Directors of the Company voted to change the end of the Company's fiscal year from the last Sunday in December to December 31.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. The Company invests its excess cash in US Treasury securities, and accordingly, these instruments are subject to minimal credit and market risk. These investments, which totaled $0 and $199,255 at December 31, 1997 and December 29, 1996, respectively, are classified as held to maturity and have been recorded at amortized cost, which approximates their fair market value. No realized or unrealized gains or losses have been recognized.
Revenue Recognition
The Company recognizes revenue for products upon shipment. Revenue from installation and training is recognized upon completion of the project. Service revenue is recognized ratably over the contractual periods.
Concentration of Credit Risk
The Company sells its products to customers in diverse industries nationwide, particularly delivery based services such as bakeries and beer distributors. The Company performs on-going credit evaluations of its customers, provides credit on an unsecured basis, and maintains reserves for potential credit losses. Such losses, in the aggregate, have not exceeded management's expectations. Accounts receivable from two customers accounted for approximately 48% of total accounts receivable at December 31, 1997. Management does not believe that the Company is subject to any unusual credit risk beyond the normal credit risk attendant to operating its business.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method.
Fixed Assets
Fixed Assets are recorded at cost and depreciated over the estimated useful lives of the assets principally using accelerated methods. Leasehold improvements are amortized over the shorter of the useful lives or the remaining terms of the related leases. Maintenance and repair costs are expensed as incurred.
NATIONAL DATACOMPUTER, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Loss Per Share
Loss per share is determined by dividing net loss, after deducting certain amounts associated with the Company's preferred stock, by the weighted average number of common shares outstanding during the year.
Interest payable to preferred stockholders, the fair value of inducements to convert preferred stock into common stock, and any discounts implicit in the conversion terms upon issuance of preferred stock (Note 7) are added to the net loss to determine the amount of net loss attributable to common stockholders.
During the fourth quarter of 1997, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share". The new standard replaces the presentation of primary and fully diluted earnings per share as prescribed in Accounting Principles Board Opinion No. 15, "Earnings per Share", with a presentation of basic and diluted earnings per share on the face of the statement of operations. Basic earnings per share is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share is computed using the weighted average number of common shares outstanding and gives effect to all dilutive common share equivalents outstanding during the period.
Common share equivalents consist of 2,625,444 and 1,436,472 shares of common stock which may be issuable upon exercise of outstanding stock options and warrants and the conversion of preferred stock and convertible debt (Notes 5 and 7) at December 31, 1997 and December 29, 1996, respectively. All common share equivalents have been excluded from the calculation of weighted average shares outstanding as their inclusion would be anti-dilutive. The adoption of SFAS No. 128 had no effect on the Company's per share calculation as the Company incurred net losses for the years ended December 31, 1997 and December 29, 1996.
Stock Compensation
The Company's employee stock option plans are accounted for in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", ("APB 25"). In January 1996, the Company adopted SFAS No. 123, "Accounting for Stock Based Compensation", for disclosure purpose only (Note 7).
Research and Development and Computer Software Development Costs
Research and development costs, other than software development costs, have been charged to operations as incurred. SFAS No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed", requires the capitalization of certain computer software development costs incurred after technological feasibility is established. No software development costs have been capitalized at December 31, 1997 or December 29, 1996.
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 amount of assets and liabilities and disclosure of contingencies at December 31, 1997 and December 29, 1996, and the reported results of operations during the two years in the period ended December 31, 1997. Actual results could differ from those estimates.
New Accounting Pronouncement
In October 1997, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position ("SOP") 97-2, "Software Revenue Recognition." SOP 97-2
NATIONAL DATACOMPUTER, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
provides guidance on the timing and amount of revenue recognition when licensing, selling, leasing or otherwise marketing computer software. SOP 97-2 supersedes SOP 91-1 (also entitled "Software Revenue Recognition") and is effective for transactions entered during fiscal years beginning after December 15, 1997. The Company will be required to adopt SOP 97-2 for its fiscal year ending December 31, 1998. The adoption of SOP 97-2 is not expected to have a material effect on the Company's financial position or its results of operations.
Reclassifications
Customer service support costs in the amount of $709,505 have been reclassified from selling, general and administrative costs to cost of sales and services in the fiscal 1996 statement of operation to conform with the current year presentation.
3. INVENTORIES
Inventories consist of the following:
4. FIXED ASSETS
Fixed assets consists of the following:
At December 31, 1997, office and engineering equipment under capital lease totaled $156,998. Related accumulated amortization of equipment under capital lease totaled $77,100 at December 31, 1997. At December 29, 1996, office and engineering equipment under capital lease totaled $142,813, with related accumulated amortization of $28,563.
5. CONVERTIBLE DEBT TO RELATED PARTY
In March 1997, the Company issued an unsecured Convertible Promissory Note for $250,000 to the majority stockholder. The note bears interest at the rate of 6% per annum and had an original maturity date of March 1998. In March 1998, $175,000 of this note was refinanced and will mature in March 1999.
The note is convertible at the option of the holder into shares of the Company's common stock at a price of $2.74 per share. The discount of $97,626 implicit in the conversion terms at the date of issuance, based upon the market price for the Company's common stock on that date, was recorded as a debt discount and
NATIONAL DATACOMPUTER, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
additional paid in capital. The debt discount is being amortized over the term of the note as a charge to interest expense. Amortization of the debt discount totaled $81,356 and was recorded in the fourth quarter of 1997.
As payment for certain issuance costs associated with the issuance of the convertible debt, the Company issued 12,153 shares of unregistered common stock at a value of $9,115. The Company has capitalized these costs in addition to $4,000 of issuance costs paid in cash, as deferred debt issuance costs. Amortization is provided using the straight-line method over the term of the note. Amortization of debt issuance costs totaled $10,596 in 1997.
6. INCOME TAXES
Deferred tax assets are comprised of the following at December 31, 1997 and December 29, 1996:
The Company's effective tax rate differs from the statutory U.S. federal tax rate as follows:
The Company has generated losses from operations in each of the last two years and has no taxable income available to offset the carryback of net operating losses. In addition, although management's operating plans anticipate taxable income in future periods, such plans make significant assumptions, including continued development and market acceptance of new products and expansion of the Company's customer base. Based on the weight of all available evidence, the Company has provided a full valuation allowance for deferred tax assets since the realization of these future benefits is not sufficiently assured. As the Company achieves profitability, these deferred tax assets would be available to offset future income tax liabilities and expense.
At December 31, 1997, the Company has net operating loss and tax credit carryforwards for federal tax purposes of $11,402,000 and $296,000, respectively, which expire in various years through 2012 and 2004, respectively. The Company has state net operating loss carryforwards for tax purposes of $4,976,000, which expire in various years through 2002.
Any significant change in ownership, as defined in the Internal Revenue Code, may result in an annual limitation on the amount of the net operating loss and credit carryforwards which could be utilized.
NATIONAL DATACOMPUTER, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. STOCKHOLDERS' EQUITY
Stock Options
In 1989, 1994 and 1995, the Board of Directors approved the 1989 Stock Option Plan, the 1994 Stock Option Plan and the 1995 Stock Option Plan (the "Plans"), respectively. The Plans provide for the granting of incentive stock options and non-qualified stock options to purchase up to 323,685 shares of common stock of the company to employees, officers, directors and consultants. The exercise price for incentive stock options granted may not be less than 100% of the fair market value per share of the common stock on the date granted (110% for options granted to holders of more than 10% of the voting stock of the Company). The exercise price per share for non-qualified options may not be less than the lesser of 50% of the fair market value per share of the common stock on the date of grant or the book value per share of common stock as of the end of the fiscal year immediately preceding the date of grant. The term of options granted under the Plans cannot exceed ten years (five years for options granted to holders of more than 10% of the voting stock of the Company). Outstanding options are written generally with five to ten year vesting periods, some with acceleration if certain profitability levels are reached, and are fully exercisable by 2007.
On August 19 1997, the Board of Directors, subject to approval of the stockholders, adopted the 1997 stock option plan which provides for issuance of both incentive stock options and non-qualified options to employees. A maximum of 200,000 shares of common stock of the Company will be reserved for issuance in accordance with the terms of the 1997 Plan.
A summary of the status of the Company's stock option plans as of December 31, 1997 and December 29, 1996 are summarized as follows:
On August 14, 1997, the Board of Directors approved the repricing of certain outstanding options with original exercise prices ranging from $4.00 - $20.00 to a $1.47 exercise price. The exercise price of the repriced options equaled the fair market value of the Company's common stock on the date of repricing.
NATIONAL DATACOMPUTER, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information about stock options outstanding at December 31, 1997:
The Company did not recognize any compensation expense under APB No. 25 during the years ending December 31, 1997 and December 29, 1996.
As discussed in Note 2, the Company elected to adopt SFAS No. 123 through disclosure only. Had compensation cost for the Company's option plans been determined based on the fair value of the options at the grant dates, as prescribed by SFAS No. 123, the Company's net loss and net loss per share would have been as follows:
The fair value of each option grant under SFAS No. 123 was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions used for grants in 1997 and 1996, respectively:
Because options vest over several years and additional options grants are expected to be made in subsequent years, the above pro forma disclosures are not necessarily representative of the pro forma effects on reported net income (loss) for future years.
COMMON STOCK
In January 1996, the Company entered into an agreement with a consulting firm, whereby the Company would compensate the firm for their services through the issuance of 31,192 shares of the Company's common stock. The value of these shares at the time of issuance was estimated by management to be approximately
NATIONAL DATACOMPUTER, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
$156,000, which is being amortized to expense over the five year term of the agreement. Unamortized amounts are presented as a reduction of stockholders' equity in the accompanying balance sheet.
On October 4, 1996, the Board of Directors approved an increase in the number of authorized shares of Common Stock to 5,000,000 shares.
At December 31, 1997, the Company had reserved 2,648,596 shares of common stock for issuance upon the exercise of common stock options and warrants and the conversion of preferred stock and convertible debt.
SERIES B CONVERTIBLE PREFERRED STOCK
On April 19, 1996, the Board of Directors approved the designation of 3,000 shares of the Company's unissued preferred stock, $.001 par value, as Series B Convertible Preferred Stock. On June 23, 1996, the Board of Directors approved the designation of an additional 1,200 shares of Preferred Stock as Series B Convertible Preferred Stock. During 1996, 4,200 shares were sold for net proceeds of approximately $3,685,200. Each share of the Series B Convertible Preferred Stock has the same number of common stock votes as its conversion rights provide.
Each share of the Series B Convertible Preferred Stock is convertible at any time at the option of the holders into shares of common stock pursuant to a ratio based upon the quoted market price of the Company's common stock. The Series B Convertible Preferred Stock will convert into a number of shares of common stock computed by dividing the stated value of preferred stock to be converted by the average bid price for the Company's common stock for the five days prior to the conversion, discounting the average bid price by forty percent. However, in no event will the conversion price exceed $6.00 or be lower than $4.00 per share.
The minimum conversion price of $4.00 will be eliminated if, at any time prior to March 31, 1999, the Company's stockholders' equity, as reported in any annual report filed on Form 10-KSB, or quarterly report on Form 10-QSB, is below $1,000,000. The Company can require conversion on the above terms at any time after March 31, 1999.
The estimated discount of $5,200,000 implicit in the conversion terms at the dates of issuance of the Series B Convertible Preferred Stock, based upon the quoted bid price for the Company's common stock on those dates, has been included in the computation of net loss per share (Note 2) for the year ended December 29, 1996.
In addition, the Series B Convertible Preferred Stock has preference over the common stock with respect to the payment of dividends. The amount of the dividend for each share of Series B Convertible Preferred Stock, when and if declared by the Company's Board of Directors, is equal to the amount of the per share dividend of common stock declared multiplied by the number of shares of common stock into which the Series B Convertible Preferred Stock is then convertible.
In addition to the dividend preference, the holders of Series B Convertible Preferred Stock shall receive interest equal to 8% per annum of the stated value of such Series B Convertible Preferred Stock. Such interest will accrue from the original issuance date, and shall be payable in cash or common stock, at the Company's option, on a quarterly basis, commencing with the fiscal quarter ended June 30, 1996. Payment of interest due with respect to those shares of Series B Convertible Preferred Stock that remain issued and outstanding at the end of each of the Company's fiscal quarters shall be made within 15 days after the filing with the Securities and Exchange Commission of the applicable report.
During the year ended December 31, 1997 and December 29, 1996, the Company incurred interest in the amount of $336,000 and $208,000 respectively, which has been recorded as a charge to accumulated deficit. During 1997, 230,340 shares of common stock were issued in satisfaction of the accrued interest for 1997 and 26,886 shares of common stock were issued in satisfaction of the accrued and unpaid interest due for 1996. In addition $84,000 of interest remains unpaid, and is included in accrued interest at December 31, 1997.
NATIONAL DATACOMPUTER, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Upon liquidation of the Company, the holders of Series B Preferred Stock have preference over the common stockholders to receive liquidating distributions which equal the stated value of such shares of Series B Convertible Preferred Stock, plus all dividends which have been accrued and are unpaid.
In the event that the price of the Company's common stock, as reported by the NASDAQ SmallCap Market or the National Association of Securities Dealers Electronic Bulletin Board, equals or exceeds $20.00 per share for a period of twenty consecutive trading days, the Company may redeem the Series B Convertible Preferred Stock at a price of $1,000 per share.
Series C Convertible Preferred Stock
In February 1997, the Board of Directors approved the designation of 900 shares of the Company's unissued preferred stock, $.001 par value, as Series C Convertible Preferred Stock. During 1997, the Company sold 900 shares of newly designated Series C Convertible Preferred Stock for net proceeds of $867,183. As payment of certain offering costs associated with the issuance of the Series C Convertible Preferred stock, the Company issued 43,751 shares of unregistered common stock for a value of $32,813 based on the quoted market price.
The holders of Series C Convertible Preferred Stock are entitled to receive dividends, when and if declared by the Board of Directors before any cash dividend is declared and paid to common stockholders, payable in cash or common stock.
The holders of Series C Convertible Preferred Stock are entitled to receive interest equal to 6% per annum of the stated value. Such interest shall be payable in cash or common stock at the Company's option, on a quarterly basis commencing on March 31, 1997. Payment of interest due with respect to those shares of Series C Convertible Preferred Stock that remain issued and outstanding at the end of each of the Company's fiscal quarters shall be made within 15 days after the filing with the Securities and Exchange Commission of the applicable report.
During the year ended December 31, 1997, the Company incurred interest in the amount of $49,500 which has been recorded as a charge to accumulated deficit. During 1997, 33,311 shares of common stock were issued in satisfaction of the accrued interest for 1997. In addition, $13,500 of interest remains unpaid, and is included as accrued interest at December 31, 1997.
Upon liquidation of the Company, the holders of Series C Convertible Preferred Stock have preference over common stockholders to receive liquidating distributions which equal the stated value of such shares of Series C Convertible Preferred Stock, plus all dividends which have been accrued and are unpaid.
The Series C preferred stockholders are entitled to a number of votes equal to the number of whole shares of common stock into which the shares of Series C Convertible Preferred Stock are convertible on the record date established. The Series C shareholders are entitled to vote with the holders of all other classes of securities as a single class.
Each share of the Series C Convertible Preferred Stock is convertible into common stock, at the option of the shareholder, at a rate equal to the stated value of Series C convertible shares divided by the conversion price of $3.20. Holders of Series C Convertible Preferred Stock may not convert for a period of 365 days from the date of issuance.
The discount of $172,266 implicit in the conversion terms at the date of issuance of the Series C Convertible Preferred Stock, based upon the market price for the Company's common stock on the date of issuance, has been recorded as a discount on the preferred stock and an increase to additional paid in capital. The amortization of the conversion discount of $146,308 has been included in the computation of net loss per share (Note 2) for the year ended December 31, 1997.
NATIONAL DATACOMPUTER, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
In the event that the price of the Company's common stock, as reported by the NASDAQ SmallCap Market or the National Association of Securities Dealers Electronic Bulletin Board, equals or exceeds $20.00 per share for a period of twenty consecutive trading days, after the lock-up period expires, the Company may redeem the Series C Convertible Preferred Stock at a price of $1,000 per share.
Series D Convertible Preferred Stock
In February 1997, the Board of Directors approved the designation of 350 shares of the Company's unissued preferred stock, $.001 par value, as Series D Convertible Preferred Stock. During 1997, the Company sold 350 shares of newly designated Series D Convertible Preferred Stock for net proceeds of $337,400. As payment of certain offering costs associated with the issuance of the Series D Convertible Preferred Stock, the Company issued 17,013 shares of unregistered common stock for a value of $12,761 based upon the quoted market price.
The holders of Series D Convertible Preferred Stock are entitled to receive dividends, when and if declared by the Board of Directors before any cash dividend is declared and paid to common stockholders, payable in cash or common stock.
The holders of Series D Convertible Preferred Stock are entitled to receive interest equal to 6% per annum of the stated value. Such interest shall be payable in cash or common stock at the Company's option, on a quarterly basis commencing on March 31, 1997. Payment of interest due with respect to those shares of Series D Convertible Preferred Stock that remain issued and outstanding at the end of each of the Company's fiscal quarters shall be made within 15 days after the filing with the Securities and Exchange Commission of the applicable report.
During the year ended December 31, 1997, the Company incurred interest in the amount of $19,250, which has been recorded as a charge to accumulated deficit. During 1997, 12,953 shares of common stock were issued in satisfaction of the accrued interest. In addition, $5,250 of interest remains unpaid, and is included as accrued interest at December 31, 1997.
Upon liquidation of the Company, the holders of Series D Convertible Preferred Stock have preference over common stockholders to receive liquidating distributions which equal the stated value of such shares of Series D Convertible Preferred Stock, plus all dividends which have been accrued and are unpaid.
The Series D preferred stockholders are entitled to a number of votes equal to the number of whole shares of common stock into which the shares of Series D Convertible Preferred Stock are convertible on the record date established. The Series D shareholders are entitled to vote with the holders of all other classes of securities as a single class.
Each share of the Series D Convertible Preferred Stock is convertible into common stock, at the option of the shareholder, at a rate equal to the stated value of Series D convertible shares divided by the conversion price of $2.74. Stockholders of Series D Convertible Preferred Stock may not convert for a period of 365 days from the date of issuance.
The discount of $136,998 implicit in the conversion terms at the date of issuance of the Series D Convertible Preferred Stock, based upon the market price for the Company's common stock on the date of issuance, has been recorded as a discount on the preferred stock and an increase to additional paid in capital. The amortization of the conversion discount of $116,354 has been included in the computation of net loss per share (Note 2) for the year ended December 31, 1997.
In the event that the price of the Company's common stock, as reported by the NASDAQ SmallCap Market or the National Association of Securities Dealers Electronic Bulletin Board, equals or exceeds $20.00 per share for a period of twenty consecutive trading days, after the lock-up period expires, the Company may redeem the Series D Convertible Preferred Stock at a price of $1,000 per share.
NATIONAL DATACOMPUTER, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Reverse Stock Split
On October 4, 1996, the stockholders approved a 1:4 reverse stock split of the Company's common stock ("the Reverse Split"). Accordingly, all shares, per share amounts, conversion ratios, stock option and warrant data have been restated to retroactively reflect the reverse split.
Issuance of Warrants
On January 17, 1996, the Company issued warrants to purchase 90,000 shares of the Company's common stock at $5.24 per share to all of the former holders of the Company's Series A Convertible Preferred Stock. These warrants were immediately exercisable and expire after three years. These warrants were issued in consideration of the conversion of the Series A Convertible Preferred Stock. The fair value of these warrants was estimated by management and determined to be materially consistent with the amount of dividends waived by the holders of Series A Convertible Preferred Stock.
In July 1996, the Company also issued warrants to purchase a total of 7,500 shares of the Company's common stock at $6.00 per share to two unrelated parties. These warrants were immediately exercisable and expire after three years. The value of these warrants at the time of issuance has been estimated by management and determined not to be material to the Company's financial position and results of operations.
In September 1997, the Company issued warrants to purchase 700,000 shares of the Company's common stock at $4.00 per share to the Series B stockholders. These warrants are exercisable immediately and expire on September 30, 2000. The value of these warrants at the time of issuance was estimated by management to be negligible, based primarily upon the market price of the Company's stock, accordingly, no compensation cost has been recorded. In March 1998, these warrants were canceled in conjunction with the issuance of the Series E Convertible Preferred Stock (Note 10).
Cashless Option Exercise Program
On March 1, 1994, the Board of Directors approved the 1994 cashless option exercise program for all employees. The program allows employees to purchase shares of common stock, payable with both recourse and non-recourse long term promissory notes receivable. Under the above program, employees purchased a total of 87,817 shares of common stock at a price of $4.00 per share. The notes receivable, plus accrued interest, are due in March 2004, and are presented as a reduction of stockholders' equity in the accompanying balance sheet.
8. COMMITMENTS
The Company leases its office facilities under an operating lease expiring September 30, 2000. The lease contains an option for renewal and requires the payment of taxes and other operating costs. At December 31, 1997, future minimum rental payments under the operating lease amounted to $471,000 payable as follows:
Rent expense totaled $171,376 and $167,080 during the years ended December 31, 1997 and December 29, 1996, respectively.
NATIONAL DATACOMPUTER, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company also leases certain equipment under capital leases expiring at various dates through the year 2001. Future minimum lease payments under capital leases, with remaining terms of one year or more, consist of the following at December 31, 1997:
9. FINANCIAL INSTRUMENTS
The Company enters into various types of financial instruments in the normal course of business. Fair values are estimated based on assumptions concerning the amount and timing of estimated future cash flows and assumed discount rates reflecting varying degrees of perceived risk. Accordingly, the fair values may not represent actual values of the financial instruments that could have been realized as of year end or that will be realized in the future.
Fair values for cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and convertible debt approximate their carrying values at December 31, 1997 and December 29, 1996.
10. SUBSEQUENT EVENTS
In March 1998, the Company designated and sold 500 shares of Series E Convertible Preferred Stock with a warrant to purchase up to 700,000 shares of common stock at an exercise price of $.75 per share, for net proceeds of $497,900. The warrant expires in March 2000. The Series E Convertible Preferred Stock was sold to the same stockholder of the previously issued Series B, Series C and Series D Convertible Preferred Stock. The proceeds of this financing were allocated to the preferred shares and warrant based on management's estimate of their fair values. This resulted in $214,000 being ascribed to the warrant which was recorded as additional paid-in-capital and $283,900 being recorded as preferred stock. Series E Convertible Preferred Stock has voting rights, dividend preference, liquidation preference, mandatory conversion and Company redemption terms similar to the Company's existing Series B, Series C and Series D Convertible Preferred Stock. The Subscription Agreement for Series E Convertible Preferred Stock offers anti-dilution protection to its shareholders. Series E Convertible Preferred Stock is convertible into shares of common stock at a conversion price of $.75.
Also in March 1998, the Company refinanced the $250,000 convertible debt by making a principal payment of $75,000 and issuing a convertible note payable for $175,000. The note bears interest at a rate of 6% per annum, matures in March 1999, and is convertible into shares of the Company's common stock at a conversion price equal to the average closing bid price for the Company's common stock for the five days ending March 6, 1998. The note can be converted at the option of the holder after January 1, 1999.
The unaudited pro forma balance sheet reflects the financial position of the Company at December 31, 1997 as if the transactions in the preceding two paragraphs had taken place on that date.
The Company, in conjunction with the issuance of the Series E Convertible Preferred Stock, canceled its previously issued warrants to purchase 700,000 shares of common stock for $4.00 per share. Additionally, the Company changed the conversion price on Series B and Series C Convertible Preferred Stock to $2.74 and
NATIONAL DATACOMPUTER, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
offered anti-dilution protection to these shareholders. In addition, the holder of the Series E Convertible Preferred Stock agreed to place into escrow 2,100 shares of the Series B Convertible Preferred Stock that is also owned by this shareholder. The Company may at its option and at any time through January 31, 2000 redeem the escrowed shares of Series B Convertible Preferred Stock at a price of $1,250 per share.
PROPOSED TRANSACTION
On February 20, 1998, the Company announced the signing of a letter of intent, subject to a definitive agreement, to merge with Infos International, Inc. ("Infos"). Infos is a privately held company with operations currently in Germany, Italy, Portugal and Spain. Established in 1983, Infos designs, manufactures, sells and supports hardware and software systems for Route Accounting, Retail Applications and Sales Support. Infos's current hardware products are based on "Open Systems" architecture which promotes ease and speed of application development and provides for software portability and maintainability. Infos' unaudited sales for 1997 are approximately $14,000,000.
The Company would be the surviving corporation of the merger while the shareholders of Infos would acquire a majority of the issued and outstanding capital stock of the combined entity.