-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VssvDzxIo6pRzfVVksnG5iuRoPTnGk+j5GeuN7kGYH83h/pOuMgDAcJiKUOZosiD IkAqt8aRD6MxO4vxLnwsgw== 0001005477-02-001250.txt : 20020415 0001005477-02-001250.hdr.sgml : 20020415 ACCESSION NUMBER: 0001005477-02-001250 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020315 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALADDIN SYSTEMS HOLDINGS INC CENTRAL INDEX KEY: 0001098875 STANDARD INDUSTRIAL CLASSIFICATION: BLANK CHECKS [6770] IRS NUMBER: 860866757 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-28099 FILM NUMBER: 02575928 BUSINESS ADDRESS: STREET 1: 165 WESTRIDGE DR CITY: WATSONVILLE STATE: CA ZIP: 95076 BUSINESS PHONE: 8317616200 MAIL ADDRESS: STREET 1: 165 WESTRIDGE DR CITY: WATSONVILLE STATE: CA ZIP: 95076 10KSB 1 d02-36536.txt FORM 10KSB U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-KSB |X| Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2001. Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from to . ---------- ALADDIN SYSTEMS HOLDINGS, INC. (Exact name of registrant as specified in its charter) NEVADA 86-0866757 (State or Other Jurisdiction of I.R.S. Employer Identification Incorporation or Organization) Number 245 WESTRIDGE DRIVE, WATSONVILLE, CALIFORNIA 95076 (Address of Principal Executive Offices and Zip Code) Issuer's Telephone Number: (831) 761-6200 Securities registered pursuant to Section 12(b) of the Act: Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.001 per share Indicate by mark (X) whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES |X| NO |_| Indicate by mark (X) if disclosure of delinquent filers pursuant to Item 405 of Regulation S-B is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. |_| Issuer's revenues for its most recent fiscal year: $7,627,386 - -------------------------------------------------------------------------------- Page 1 Aggregate market value of the voting stock held by non-affiliates of the registrant, based upon the closing price of the Common Stock on March 1, 2002: $733,251 Number of shares outstanding of each of the registrant's classes of common stock as of March 1, 2002: Common Stock: 9,792,635 DOCUMENTS INCORPORATED BY REFERENCE: List hereunder the following documents if incorporated by reference and the Part of the 10-KSB into which the document is incorporated. None - -------------------------------------------------------------------------------- Page 2 ALADDIN SYSTEMS HOLDINGS, INC. 2001 FORM 10-KSB ANNUAL REPORT Table of Contents Trademarks/Definitions PART I Item 1. Business 4 Item 2. Properties 15 Item 3. Legal Proceedings 15 Item 4. Submission of Matters to a Vote of Security Holders 15 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters 15 Item 6. Management's Discussion and Analysis of Financial Condition and Results of Operations 16 Item 7. Financial Statements 22 Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 34 PART III Item 9. Directors and Executive Officers of the Registrant 34 Item 10. Executive Compensation 36 Item 11. Security Ownership of Certain Beneficial Owners and Management 39 Item 12. Certain Relationships and Related Transactions 40 PART IV Item 13. Exhibits, Financial Statements, and Reports on Form 8-K Signatures 41 TRADEMARKS/DEFINITIONS "Aladdin", "Aladdin Systems", "StuffIt", "StuffIt Deluxe", "DropStuff", "Secure Delete", "DropZip", "StuffIt Expander", "Expander", "StuffIt Express", "InstallerMaker", "StuffIt InstallerMaker", "ShrinkWrap", "Flashback", "GoBar", "PrivateFile", and "iClean" are trademarks and service marks of Aladdin Systems, Inc. and Aladdin Systems Holdings, Inc. "Spring Cleaning" is a registered trademark of Aladdin Systems, Inc. All other trademarks, service marks or tradenames referred to in this Form 10-KSB are the property of their respective owners. Except as otherwise required by the context, all references in this Form 10-KSB to (a) "we," "us," "our," the "Company" or "Aladdin" refer to the consolidated operations of Aladdin Systems Holdings, Inc., a Nevada corporation, and its wholly-owned subsidiary, Aladdin Systems, Inc., a Delaware corporation, (b) "you" refers to the readers of this Form 10-KSB, (c) the "Web" refers to - -------------------------------------------------------------------------------- Page 3 the World Wide Web, and (d) the "sites" refer to our Web sites (www.aladdinsys.com and "www.stuffIt.com"). PART I Item 1: Business General Aladdin is a leader in software and technology solutions to help individuals and enterprises facilitate the transmission and access of information across the Internet, networks and mixed computing environments. Under the StuffIt brand, Aladdin has established a leading proprietary data compression standard. Aladdin Systems, Inc., our subsidiary, was formed in January 1989 to develop and publish software and has been located in Watsonville, California since 1991. In addition to StuffIt, we also publish several other popular software applications including Spring Cleaning with iClean, a software uninstaller package for the Macintosh; GoBar, a replacement application launcher for the Palm OS; and DragStrip, a quick launch application for both the Windows and Macintosh markets. The Company Aladdin Systems Holdings, Inc. owns 100% of the common stock of Aladdin Systems, Inc., a Delaware corporation. Aladdin Systems Holdings, Inc. exists primarily as a stock holding company, and accordingly, the operations described in this document, unless otherwise specified, are those of the subsidiary, Aladdin Systems, Inc. Our software products are all branded under the "Aladdin Systems" name and are either developed internally by our staff of software developers or are acquired or licensed from third party developers in exchange for royalty payments pursuant to publishing agreements. The publishing agreements we enter into either assign to us all rights in the software or give us a right to modify and publish the software, in exchange for royalties which have historically ranged from 3% to 20% of our net revenue from the sales and licensing of such software. We attempt to negotiate limits on the amounts of royalties that are to be paid to the developer of the product. Whether we create a product or acquire it from a developer, Aladdin assumes all costs associated with publishing, including the costs of producing documentation, packaging, marketing, advertising and distribution as well as the costs of technical support for the products. Business Overview In 2001, Aladdin launched a new product called StuffIt Express that allows enterprises and individuals to create custom drop box applications that can automate - -------------------------------------------------------------------------------- Page 4 virtually any file transfer task. We also launched the "OneSource" licensing program targeted at organizations that have a mixed computing environment. Additionally we launched StuffIt.com, a new web site dedicated to providing our customers with information about the StuffIt product line. Versions of StuffIt for Linux and Solaris were released and new versions to StuffIt for Windows and Macintosh, and Spring Cleaning and iClean were also released. Aladdin was not immune to the economic downturn of 2001 and as such the company made adjustments to the cost structure. We reduced our manufacturing costs by performing a portion of it in our corporate office instead of outsourcing it to a third party. We also returned approximately 8,000 sq. feet of office space. Combined with a reduction of staff of 15 people, 2001 was a year of cost restructuring. We also terminated and discontinued products for which the market conditions had changed. Products Our products are divided into two different product groups, StuffIt Products and General Utilities and Palm Products. All of the products below are sold through the retail software distribution channel or through our website except for StuffIt InstallerMaker and StuffIt Engine that are licensed directly from Aladdin. StuffIt Products StuffIt Deluxe (Macintosh) StuffIt for Windows StuffIt for Linux StuffIt for Solaris DropStuff (Windows and Macintosh) StuffIt Expander (Windows, Macintosh and Linux) StuffIt Lite (Macintosh) DropZip (Windows and Macintosh) StuffIt Express (Windows and Macintosh) StuffIt InstallerMaker (Macintosh) StuffIt Engine SDK (Windows, Linux, Solaris, and Macintosh) ShrinkWrap (Macintosh) General Utilities and Palm Products Spring Cleaning (Macintosh) DragStrip (Windows and Macintosh) iClean (Macintosh) HotTme (Palm) GoBar (Palm) - -------------------------------------------------------------------------------- Page 5 StuffIt Products The StuffIt product line runs on the following operating systems: Microsoft Corporation's Windows OS, Apple Computer, Inc.'s Mac OS, Sun Microsystems' Solaris OS and Linux. The StuffIt product line is based upon or includes Aladdin's data compression technology. This technology is a suite of compression standards including Aladdin's proprietary format. The StuffIt products are designed to help individuals and enterprises send and access information safely, securely, and quickly over the internet and networks. The software's basic function allows customers to compress files, directories, hard drives or other media for accelerated transmission over computer networks, the Internet, and for archival purposes. Because files encoded in a compressed format are smaller than ordinary files, compressed files can be transmitted faster than non-compressed files over computer networks and the Internet, regardless of connection type - dial-up modem, DSL, cable modem, etc. Aladdin commenced publishing StuffIt in 1989 when it acquired the publishing rights to the product in exchange for royalty payments. In 1995, we purchased all rights to StuffIt from the developer. Since we first published StuffIt in 1989, Aladdin has continually improved and updated the product. StuffIt was originally designed to run only on Macintosh computers. In 1995, Aladdin started to publish versions of some of our StuffIt products for the Microsoft Windows operating systems. StuffIt has been adopted as a worldwide compression standard for the Macintosh computer by Apple Computer and America Online. In 1990, America Online adopted StuffIt as their standard for compressing Macintosh files utilizing StuffIt to automatically compress files for transmission. StuffIt products have been shipped to over 15 million users worldwide over the last two years, including 11 million copies distributed by Apple Computer shipped pre-loaded on Apple Computer's products. While originally Apple Computer paid us for the right to distribute StuffIt products, currently, Aladdin receives no compensation for it. StuffIt Deluxe (Macintosh) - StuffIt Deluxe is a full featured product offering a complete compression and expansion solution to users. StuffIt Deluxe is sold commercially through Aladdin's worldwide network of distributors, resellers, catalogs, Internet retailers, and through our sites. StuffIt Deluxe was first released for commercial sale in 1990. The software is localized into Japanese, German, and French and is distributed through a distributor partner in the local country. StuffIt for Windows - Originally released in September 2000, a new version was released in October 2001. This new version has Windows XP logo certification. StuffIt for Windows is the complete compression and expansion solution for Windows users. It includes the most comprehensive set of compression, expansion, and decoding formats available for the Windows market. This software is available in English, French and German and distributed on our web sites and through our distribution partners. - -------------------------------------------------------------------------------- Page 6 StuffIt for Linux - Released in 2001, this product gives Linux users the ability to access StuffIt (.sit) compress files as well as create compress files on their Linux computers. This software is distributed direct from Aladdin. StuffIt for Solaris - Released in 2001, this product gives Solaris users the ability to access StuffIt compressed files as well as create compressed files on their Sun computers. This software is distributed direct from Aladdin. DropStuff (Windows and Macintosh) - DropStuff allows users to quickly and easily compress a file by simply moving the file's icon directly over the DropStuff icon on the user's desktop. DropStuff is distributed as shareware. Shareware is generally recognized in the software industry as being on the "honor system" with the software freely distributed at no charge pursuant to a license agreement which requires payment as a condition of continued use after 30 days. We expect that the vast majority of shareware users will not register the software or pay the license fee. However, we believe that on a historical basis, the distribution of DropStuff as shareware has benefited Aladdin through an increase in the number of users of our StuffIt compression standard as well as increasing Aladdin's goodwill in the computer industry. In 1999, we started distributing DropStuff for both Macintosh and Windows versions. StuffIt Expander (Windows, Macintosh and Linux) - StuffIt Expander for Macintosh, Windows and Linux are corresponding products which automatically decompress files that are compressed. These products do not compress files themselves. Expander is distributed as freeware in order to encourage the wide distribution of files in StuffIt format and to seed the market for our commercial products. Despite being distributed free of charge, Expander is protected by copyright law and its use is subject to a license agreement. In addition to decoding files in StuffIt format, Expander also decodes files in other popular compression and encoding formats, including Zip, Binhex, Base64 (MIME) and TAR, further increasing its popularity and usefulness. We have entered into agreements allowing distribution of StuffIt Expander with third parties such as Apple Computer, Netscape, IDG Communications and PC Treasures, Inc. Generally, we receive no revenue from such agreements. We also distribute Expander free of charge, from our sites. StuffIt Lite (Macintosh) - StuffIt Lite is a shareware/trialware compression product designed to provide basic compression and expansion capabilities. The software is distributed electronically and is available for download through multiple sources. StuffIt Lite is primarily distributed via our sites. DropZip (Windows and Macintosh) -DropZip allows users to quickly and easily compress a file into the industry-standard "Zip" format by simply moving the file's icon directly over the DropZip icon on the user's desktop. DropZip is distributed as shareware. StuffIt Express (Windows and Macintosh) - StuffIt Express is designed to allow customers to create custom drop box applications that can automate virtually any file - -------------------------------------------------------------------------------- Page 7 transfer task. The product was launched in January 2001 at MacWorld San Francisco and was developed by Aladdin for the Enterprise, Government, and Educational marketplaces. In the third quarter of 2001, Aladdin released StuffIt Express Personnal Edition which is distributed with StuffIt Deluxe (Macintosh) and StuffIt for Windows. StuffIt InstallerMaker (Macintosh) - StuffIt InstallerMaker, first published in 1991, allows software developers to create custom installers for the distribution of their products. The software is licensed directly to developers. InstallerMaker's licensees include Apple Computer, Lexmark, the Learning Company and Real Networks. StuffIt Engine (Windows, Linux, Solaris and Macintosh) - The StuffIt Engine is licensed directly to software developers who wish to incorporate Aladdin's compression technology into their software. Companies that have licensed the StuffIt Engine are America Online and DataViz. ShrinkWrap (Macintosh) - Shinkwrap, which incorporates the StuffIt Engine, creates disk image files, allowing the users to create exact copies of their hard disk, floppies, or CD ROMs. ShrinkWrap's only competition is Disk Copy from Apple Computer. ShrinkWrap is distributed directly from Aladdin via our sites and by other Internet based retailers in a time-locked "trialware" format. ShrinkWrap is localized into Japanese and distributed by our Japanese distributor. General Utilities and Palm Products Spring Cleaning (Macintosh) - Spring Cleaning is a software uninstaller product for the Macintosh market which removes unwanted and unused software and related files from a user's computer. In May 2000, Aladdin purchased all rights to the software from The Excelsior Group, terminating the previous publishing agreement with The Excelsior Group. Spring Cleaning is sold commercially through Aladdin's worldwide network of distributors, resellers, mail order houses, Internet retailers, and through our sites. Spring Cleaning is localized into Japanese, German, French and Italian. The localized versions of the product are distributed by our international distributors. In November 2000, Aladdin entered into a bundling agreement for Spring Cleaning with Symantec Corporation to distribute the product with Norton SystemsWorks for the Macintosh. DragStrip (Windows and Macintosh) - DragStrip allows users to launch, find, organize, and access applications and documents quickly and efficiently, allowing users to become better organized. DragStrip is sold commercially through Aladdin's physical and electronic worldwide distribution network of resellers, and through our sites. iClean (Macintosh) - iClean allows a user to remove specific unwanted or unneeded files gathered by your Web browser every time you surf the Internet. Removing these files recovers disk space and helps ensure online privacy. iClean is included in our Spring Cleaning product but is also sold as a separate product. In November 2000, Aladdin entered into a bundling arrangement for the product with Symantec Corporation. The software is localized into Japanese, French, and German. - -------------------------------------------------------------------------------- Page 8 GoBar (Palm) - GoBar is an application launcher for the Palm OS. It is designed to allow users to organize Palm OS device similar to their Desktop computer. HotTime (Palm) - HotTime automatically adjusts the date and time on the Palm device to that of your desktop computer when you use HotSync. The primary method of distribution for Aladdin's Palm products is Aladdin's sites and Internet retailers like PalmGear and Handango and direct from Aladdin. Resale of Third Party Products In addition to publishing our own products, we utilize our resources and customer list to act as a reseller of software products published by other software companies. Historically, we resold limited numbers of third-party products through "bundling" offers with our products that were distributed via direct mail. In the last two years, we have been focusing on offering third party products for sale via our site, primarily through a download model, where the customer receives the product downloaded directly to their computer after credit card information is entered and verified. Our resale agreements run for a period of up to one year and all are non-exclusive. We receive a percentage of the net sales ranging from 3% to 70%. Royalty Payments Pursuant to our publishing agreements with third party developers, we have made total royalty payments in 2001 and 2000 totaling $19,420 and $60,430, respectively. The decrease in royalty payments in 2001 was due to the buyout of all rights to Spring Cleaning which terminated the previous royalty agreement and the termination of the previous royalty agreement for MacTicker. Product Support We believe that technical support is an important part of the Aladdin's overall performance and success. We employ 4 full-time support personnel. These employees provide technical support services to our customers by email, via our site, telephone, or fax. Support services include explaining how the customer's computer works, how the customer's other software works in relation to our products, solving problems with software operation and suggesting solutions to business and personal computing issues. We offer product support free of charge to registered users of our products. The majority of support calls from customers occur within 60 days of customers' purchases of our products. Distribution and Marketing Our products are marketed through independent distributors in the United States and Canada, through numerous resellers and mail order companies and distributors in other countries, directly to corporate and educational accounts under site - -------------------------------------------------------------------------------- Page 9 licensing agreements, volume purchasing agreements and directly to end-users through direct marketing campaigns and through our sites. Of the Company's total net revenues for 2001, approximately 22% was as a result of sales through independent, domestic, nonexclusive distributors. Sales to one such distributor, Ingram Micro, accounted for nearly 21% of total net revenues. Domestic distributors purchase product at a discount of approximately 20% to 23% from list prices. Of the Company's total net revenues for 2001, approximately 11% was as a result of sales made through independent, international distributors. Several of these distributors are limited by contract to distribution within a specified geographic area. We currently provide translations of certain products in Japanese, German, Dutch, French, and Italian languages. Sales to two of these distributors, Act2 (Japan), and Softline (United Kingdom), accounted for approximately 4%, and 1%, of total net revenues in 2001, respectively. International distributors generally require somewhat larger discounts in return for various advertising, customer service, and customer registration duties performed by them in connection with the software. This discount normally ranges from 40% to 60% off of the suggested retail price of the products. The Company gives its distributors industry-standard rights of return for stock balancing and for defective products and replacement rights when products are upgraded to new versions. A reserve for returns has been recorded and was $75,410 and $229,094 at December 31, 2001 and 2000, respectively. Returns exchanged for product upgrades and new version releases do not have a material impact on our financial results because of the Company's low cost to replace such returns. Returns from end users have not historically been significant. Product Development The personal computer software industry continues to undergo rapid technological change, requiring a continuous high level of enhancement of existing products and development of new products. We intend to continue the enhancement of our existing products and to develop additional products which we believe will be marketable to our existing customer base and new customers and which will extend our current products to new computing platforms. We regularly upgrade our existing products to add new features in response to customer requests for additional features and to match or exceed features contained in competing products. Historically, 10% to 50% of the registered users of a software product have purchased the upgraded version of the same product. During the years 2001 and 2000, we spent approximately $2,288,080 and $2,376,550, respectively, on research and development and enhancement activities, representing approximately 30%, and 23%, respectively, of net revenues in each of these periods. - -------------------------------------------------------------------------------- Page 10 Our future financial performance will depend in part on the successful development, completion, and introduction of such new software products, and on such enhanced versions of existing products, and customer acceptance of those products. There is no assurance that we will avoid difficulties that could delay or prevent the successful development of, or marketing of, new products and/or enhancements of existing products. There also can be no assurance that such products will yield positive results or that such results can be obtained on a timely basis or without the expenditure of substantial funds. Competition The personal computer software market is highly competitive and has been subject to rapid change, which is expected to continue. Different competitors exist for our different products. For our StuffIt product line for the Macintosh, we believe that our long history of publishing compression software for the Macintosh, the goodwill associated with our "Aladdin" and "StuffIt" brands, our large installed base of users as well as our strategic relationships with Apple Computer and America Online make StuffIt for the Macintosh the leading product in its category. However, our attempts to extend the StuffIt line of products to the Windows market face strong competition from the many Windows-based compression products that use the "Zip" compression standard. There are several major and numerous minor companies currently publishing "Zip" products which directly compete with our StuffIt products in the Windows market. In addition, certain computer manufacturers may devote significant resources to creating software, directly competitive with our products, for inclusion with their computers and computer systems without additional charge to consumers such as the Microsoft inclusion of a compression utility in its Windows operating systems. Our competitors include many independent software vendors that have financial, marketing, and technological resources far in excess of ours. Some of these include Microsoft, Apple Computer Inc., Symantec Corporation, Network Associates Technology, Inc., WinZip Computing, Inc. and OnTrack Corporation. Aladdin's software products are marketed through multiple distribution channels. All of these products face competing products offering many similar features. Aladdin believes that the principal competitive factors in the market include product features and functions, ease of understanding and operating the software, product reliability, price/performance characteristics, name recognition, and availability and quality of support and training services. Price competition could become an increasing factor in the personal computer software market, which could, in turn, be expected to increase pressures on profit margins in the future. As the Internet and e-commerce become an increasing important channel for the distribution and sales of software products, the Company has increased its efforts to sell both our products and third-party products to consumers via our sites. In order to continue this effort, we may need to invest money, effort and other resources into our - -------------------------------------------------------------------------------- Page 11 Web efforts that may divert attention and resources from our traditional sales channels. In addition, we may be competing against existing and new companies that have financial, marketing, and technological resources far in excess of Aladdin's. In the event that we are not able to successfully compete against such companies it could have a material adverse effect upon our business, results of operations and financial condition. Intellectual Property The Company regards the protection of our copyrights, service marks, trademarks, trade dress and trade secrets as critical to our future success. We rely on a combination of copyright, trademark, service mark and trade secret laws, patents and contractual restrictions to establish and protect our proprietary rights in products and services. Software products are generally protected against copying pursuant to the Copyright Act and license agreements. In addition, many software companies implement schemes designed to reduce unauthorized copying by requiring that users enter a unique registration code to activate the software. Where applicable, some companies also seek for patent protection for specific technologies embodied in their products. Aladdin regards its software as proprietary and attempts to protect it with copyrights, patents, trade secret laws, and internal nondisclosure safeguards, as well as restrictions on disclosure and transferability that are incorporated into our software license agreements. The copyrights on our products run for a period of at least 95 years from the first creation of the work in accordance with the provisions of the Copyright Act. None of Aladdin's products lack the necessary copyright or trademark protection. Aladdin licenses its software products to customers rather than transferring title. Despite these restrictions, it may be possible for competitors or users to copy aspects of the Aladdin's products or to obtain information which Aladdin regards as trade secrets. Computer software generally can be patented only with difficulty, and existing copyright laws afford only limited practical protection. On a regular basis, we evaluate our development efforts to determine if patent protection would be applicable. In 2000, we filed for two patents. Aladdin products require that a product registration number be entered in order for the product to be activated. It is our belief that this system helps to reduce unauthorized copying of our products. The range of product registration numbers distributed is changed from time to time in order to further deter copying of the software. However, because of the rapid pace of technological change in its industry, we believe that such protections are less significant than factors such as frequent product enhancements, and the timeliness and quality of Aladdin support services. Policing unauthorized use of such a broadly disseminated product as computer software is difficult, and software piracy can be expected to be a persistent problem for the packaged software industry. These problems may be particularly acute in international markets. We do not have specific information regarding how unauthorized copying affects our sales in either the United States or foreign markets; however, we believe that such unauthorized copying has had limited effects on our revenues. - -------------------------------------------------------------------------------- Page 12 Although we do not believe that any of our products infringe the proprietary rights of third parties, there can be no assurance that third parties will not claim infringement by us with respect to past, current or future technologies. The Company expects that participants in our markets will be increasingly subject to infringement claims as the number of software products and competitors in our industry segment grows. Any such claim, whether meritorious or not, could be time-consuming, result in costly litigation, cause software upgrade delays or require us to enter into royalty or licensing agreements. Such royalty or licensing agreements might not be available on terms acceptable to us or at all, as a result, any such claim could have a material adverse effect upon our business, results of operations and financial condition. Employees As of December 31, 2001, the Company employed 44 full-time employees. We started the year with 59 employees but during 2001, the Company reduced its workforce by 15 as part of our cost cutting program. The future success of the Company will depend in part on our continued ability to attract, integrate, retain and motivate highly qualified technical and managerial personnel, and upon the continued service of our senior management and key technical personnel. The competition for qualified personnel in our industry and geographical location is intense, and there can be no assurance that we will be successful in attracting, integrating, retaining and motivating a sufficient number of qualified personnel to conduct our business in the future. From time to time, the Company also employs independent contractors to support our research and development, marketing, sales, support and administrative organizations. The Company has never had a work stoppage, and no employees are represented under collective bargaining agreements. We consider our relations with our employees to be good. Subsidiaries The Company currently has two subsidiaries, Aladdin Systems, Inc., a Delaware Corporation, wholly-owned by the Company, and Transaction Services, Inc. ("TSI"), a California corporation, which was incorporated in 1996 and is a wholly owned subsidiary of Aladdin Systems, Inc. TSI was formed in order to provide technology and services to other software publishers that allowed such companies to make trial versions of their software available. In 2000, Aladdin discontinued its trialware software technology business so there is no current business activity in TSI. Forward-looking statements The Company or management may make or may have made certain forward-looking statements, orally or in writing, such as those within Management's Discussion and Analysis contained in its various SEC filings. The Company wishes to ensure that such statements are accompanied by meaningful cautionary statements, so as to ensure to the fullest extent possible the protections of the safe harbor established in the Private - -------------------------------------------------------------------------------- Page 13 Securities Litigation Reform Act of 1995. Such statements are therefore qualified in their entirety by reference to and are accompanied by the following discussion of certain important factors that could cause actual results to differ materially from those described in such forward-looking statements. The Company cautions the reader that this list of factors is not intended to be exhaustive. The Company operates in a continually changing business environment, and new risk factors emerge from time to time. Management cannot predict such factors, nor can it assess the impact, if any, of such factors on the Company's business or the extent to which any factors may cause actual results to differ materially from those described in any forward-looking statement. None of the Company's forward-looking statements should be relied upon as a prediction of actual results. The Company faces risks and uncertainties that could render actual events materially different than those described in our forward-looking statements. These risks and uncertainties include, but are not limited to: o Products and product upgrades may not be released on a timely basis due to technological difficulties o Products and product upgrades may not achieve market acceptance within the desired markets o The prevalence and functionality of available free compression software may erode revenues o The Company might not be able to fund its working capital needs from cash flows The Company's products are sold in markets that change rapidly and the Company must continually anticipate and adapt its products to emerging computer technologies and capabilities. The Company may not be able to successfully adapt to these changing markets. The Company may experience material fluctuations in future revenues and operating results on a quarterly or annual basis resulting from a number of factors, including but not limited to the risks discussed above. Item 2: Properties In November 2000, the Company moved to a new office facility located at 245 Westridge Drive, Watsonville, California 95076. In January 2002, the Company returned 8,150 square feet of this new facility to the building owner. Our executive offices now comprise of approximately 17,230 square feet and our subsidiaries, Aladdin Systems, Inc. and Transactions Services, Inc. are housed in this location. This facility is leased pursuant to a lease expiring October 2010. The monthly rent is currently $22,891 and our leased space is still sufficient to cover future growth. - -------------------------------------------------------------------------------- Page 14 Item 3: Legal Proceedings In October 31, 2001, a former distribution partner, Merisel Americas, Inc., filed a suit against Aladdin in the Superior Court of California, Southwest Unlimited District, seeking to collect $66,103 for returned product and marketing services. Aladdin believes there is no outstanding balance due to Merisel since all payments due to Merisel were made for marketing services and returned product in 2000 before the termination of the distribution agreement. The Company intends to contest this claim and at this time cannot estimate the outcome. Item 4: Submission of Matters to a Vote of Security Holders None PART II Item 5: Market for Registrant's Common Equity and Related Stockholder Matters As of December 31, 2001, there were 57 stockholders of record. The Company believes that it has approximately 300 beneficial stockholders. The Company's common stock trades on the NASD's Over The Counter Bulletin Board under the symbol: ALHI. The following table sets forth the range of high and low bid prices per share of common stock as provided by Commodity Systems, Inc. The quotations shown below reflect inter-dealer prices, without mark-up, mark-down or commissions and may not present actual transactions. Common Stock Low High ------------------------- Quarter ended: March 31, 2000 $4.00 $5.13 June 30, 2000 $3.13 $5.00 September 30, 2000 $2.19 $4.31 December 31, 2000 $0.50 $2.31 March 31, 2001 $0.56 $0.94 June 30, 2001 $0.51 $0.84 September 30, 2001 $0.24 $0.75 December 31, 2001 $0.30 $0.70 - -------------------------------------------------------------------------------- Page 15 The Company has never declared, nor has it paid, any cash dividends on its Common Stock. The Company currently intends to retain any earnings to finance future growth and does not anticipate paying any cash dividends on its Common Stock in the foreseeable future. Item 6: Management's Discussion and Analysis of Financial Condition and Results of Operations RESULTS OF OPERATIONS The following discussion should be read in conjunction with the consolidated financial statements and related notes included elsewhere herein. Historical results and percentage relationships are not necessarily indicative of the operating results for any future period. Within this discussion and analysis, all dollar amounts (except for per share amounts) have been rounded to the nearest thousand. The following table sets forth certain data derived from the consolidated statements of operations, expressed as a percentage of net revenues for each of the years in the two-year period ended December 31, 2001. Years ended December 31, 2001 2000 ---- ---- Percentage of sales: Sales 100% 100% Cost of sales 20% 16% ----------------------- Gross profit 80% 84% Sales, marketing and support 50% 50% Research and development 30% 23% General and administrative 15% 16% ----------------------- Total operating expenses 95% 89% Loss from operations (15%) (5%) Other (expense) income, net 0% 0% Loss before income taxes (15%) (5%) Income tax benefit 0% (1%) Net loss (15%) (4%) ======================= - -------------------------------------------------------------------------------- Page 16 NET REVENUES Overall revenues decreased from $10,168,755 in 2000 to $7,627,386 in 2001 mostly due to the weakness in the economy for the year. In 2001, we decided to change our product strategy and exit the internet information utility market to focus on our core products. We therefore discontinued the following products: MacHeadlines, WeatherTracker, and AladdinTuner. We also terminated the publishing agreement for MacTicker. While we shipped more units of StuffIt Deluxe in 2001, we dropped the average selling price and therefore the total revenue for our top selling product dropped. Revenues from sales over our sites accounted for 42% of revenue in 2001 as compared with 35% of revenue in 2000. The Company believes that sales over its sites will represent an increasingly important component of the Company's sales strategy and will allow the Company to reach a large number of potential consumers at lower costs than sales through distributors. Third-party product sales decreased to $446,610 for the year ended December 31, 2001 from $661,383 for the year ended December 31, 2000. COST OF REVENUES AND GROSS MARGIN The Company's cost of revenues is composed primarily of: o the cost of product materials such as CD-ROMS and packaging o amortization of capitalized purchased software o royalties paid to outside developers o amortization of capitalized manufacturing overhead o shipping expenses Cost of revenues, as a percentage of net revenues increased to 20% in 2001 from 16% in 2000. This increase in costs was mostly due to additional amortization expense of approximately $200,000 for MacTicker to completely amortize the capitalized software since the Company stopped developing it. There were also additional amortization expenses recorded for Spring Cleaning and StuffIt Express to match expected revenues for the next 3 years. An increase in promotional rebates and a decrease in the average selling price for StuffIt Deluxe also contributed to the decrease in the gross margin in 2001. MARKETING, SALES AND SUPPORT Marketing, sales and support expenses decreased to $3,814,337 in 2001 from $5,048,095 during 2000. This decrease was mostly due to spending less in product advertising and promotion, to $847,459 in 2001 from $1,510,159 in 2000. We also decreased our sales and marketing staff by three and this decreased the payroll and related sales commissions. Sales commissions decreased because of this reduction in staff and we also terminated two external commission contracts. - -------------------------------------------------------------------------------- Page 17 RESEARCH AND DEVELOPMENT Research and development expenses were $2,288,080 and $2,376,550 in 2001 and 2000, respectively. These expenses were 30% and 23% of net revenues, respectively. Although we had a decrease of 7 in our staff and therefore a decrease in payroll, we were still able to continue the development on the major products with the remaining staff plus one outside contractor. There was an increase of $104,230 in facilities related expenses from moving into the new facility that partially offset the decrease in payroll from the reduced staff. GENERAL AND ADMINISTRATIVE General and administrative expenses are composed principally of salaries of administrative personnel, fees for professional services and facilities. These expenses decreased to $1,108,674 in 2001 from $1,577,814 during 2000. This decrease was mostly related to a decrease in legal fees and investor relations fees, although we also reduced the staff by two. INCOME TAXES The Company's effective tax rate was 0.5% for fiscal 2001 and (26%) for fiscal 2000. The Company has a valuation allowance of $612,450, covering all of its deferred tax assets as of December 31, 2001 due to the uncertainty of realizing the deferred tax assets, consisting primarily of loss and credit carry forwards. LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities during 2001 was $276,673, an increase of $148,595 compared with net cash provided by operating activities of $128,078 in 2000. Cash provided by accounts receivable increased in 2001 mostly due to the collection of one payment of $523,000 in January from a sale in December 2000. Cash provided by inventory also increased due to bringing a portion of our production in house and keeping lower levels of inventory in stock. Net cash used in investing activities in 2001, primarily for the acquisition of software rights, was $121,339, a decrease of $448,481 compared with net cash used in investing activities of $569,820 in 2000. In 2000, we purchased the rights to Spring Cleaning which included a cash payment of $382,500 made to its developer. Net cash used in financing activities in 2001 was $324,251 for payments on capital leases, demand notes and the Spring Cleaning note, as compared with $400,713 used in 2000. In 2000, the balance of $94,517 for the StuffIt note was paid. During 1997, certain Stockholders, the Company's former President, a key employee, and a relative of a stockholder lent the Company a total of $225,062, in the form of demand notes with interest payable monthly at 8.92%. The notes are convertible into common stock at the - -------------------------------------------------------------------------------- Page 18 lesser of $1.74 per share or at the lowest price shares of common stock are sold after the date the notes were issued. The notes are payable upon thirty (30) days notice by the holder. During 1999, the Company paid $65,000 against these notes, and during 2001, the company paid $50,000 against these notes, resulting in a balance remaining of $110,062 as of December 31, 2001. Our capital requirements are dependent on several factors, including market acceptance of our software and services, timely updating of the Company's existing software products, developing new software products or acquiring the rights to existing software products from third parties, the resources devoted to marketing and selling the Company's services and brand promotions and other factors. At December 31, 2001, the Company had cash and cash equivalents totaling $96,973. We believe that our current cash and cash equivalents along with cash to be generated by operations in 2002 will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for the next fiscal year. We expect our sales revenue in 2002 to be consistent with 2001 levels and the Company believes that sales of its core StuffIt products and other general utility products will be sufficient to maintain revenues through 2002. If our revenues decrease, if product returns increase, or if our customers fail to make timely payments on open receivables, our cash generated from operations will likely not be sufficient to fund operations. If this occurs, we may need to reduce operating expenses or raise additional capital through debt or equity financing. We currently have available credit of $300,000 through our facility with Merrill Lynch that is renewable on a monthly basis. If cash generated from operations is insufficient to satisfy our liquidity requirements, we may seek to sell additional equity or debt securities or obtain a larger credit facility. The sale of additional equity or convertible debt securities could result in additional dilution to our stockholders. The incurrence of indebtedness would result in an increase in our fixed obligations and could result in borrowing covenants that would restrict our operations. There can be no assurance that financing will be available in amounts or on terms acceptable to us, if at all. If financing is not available when required or is not available on acceptable terms, we may be unable to develop or enhance our products or services. In addition, we may be unable to take advantage of business opportunities or respond to competitive pressures. Any of these events could have a material and adverse effect on our business, results of operations and financial condition. RISKS AND UNCERTAINTY Our business is subject to the effects of general economic conditions, and in particular, market conditions in the software and computer industries. Our operating results have been and continue to be affected as a result of the recent unfavorable global economic conditions and reduced consumer spending. This slowdown and the recent tragic events of September 11, 2001 amplified the weakness in the United States and global economy and in the software business overall. If these economic conditions do not improve, or if we experience a continued - -------------------------------------------------------------------------------- Page 19 weakening, we may experience material adverse impacts on our business operating results and financial condition. For the foreseeable future, we expect sales in the consumer retail channel to continue to be weak. The economic downturn has also put financial pressure on our distribution and retail partners for software products worldwide. This could result in potential financial risk to Aladdin by affecting our ability to collect our receivables. The preceding statements under "Management's Discussion and Analysis of Financial Condition and Results of Operations" which are not historical facts are forward-looking statements. These forward-looking statements involve risks and uncertainties that could render them materially different, including, but not limited to, the risk that new products and product upgrades may not be available on a timely basis, the risk that such products and upgrades may not achieve market acceptance, the risk that competitors will develop similar products and reach the market first, and the risk that the Company would not be able to fund its working capital needs from cash flow. CRITICAL ACCOUNTING POLICIES Revenue Recognition and Returns The Company's revenues from our distribution channels and through our sites are recognized when products are shipped or downloaded to the customer. Our distributors and resellers have the right to return products so long as the products are in the original packaging. Revenues are booked net of estimated returns and rebates, and the allowance for returns is established based on the determination of excess inventory in the channel, estimated product sell-through and expected future product upgrades. We believe our estimate for future returns is adequate. However, because of factors outside the Company's control such as changes in customer demand, new product releases from our competitors or changes in the purchasing practices of our distributors, actual returns may exceed our estimates. If this were to occur, we would be required to increase our return reserve, lowering our earnings. Capitalized Software The Company's capitalized software costs include the acquisition of software rights as well as external contracting fees paid to developers once the point of technological feasibility is reached. The amortization charged to each product is the greater of the amount computed using (a) the ratio of current gross revenues to the total of current and anticipated future gross revenues for the product or (b) 60 months. Our estimates of total revenues are based on sales forecasts for the products. If sales volumes were to unexpectedly decrease for reasons such as changes in customer demand or the introduction of new products by our competitors, we would need to increase the amortization of our capitalized software, decreasing our earnings. Item 7: Financial Statements - -------------------------------------------------------------------------------- Page 20 Index to Item 7: Financial Statements Page Report of Independent Certified Public Accountants 20 Consolidated Balance Sheet 21 Consolidated Statements of Operations 22 Consolidated Statement of Stockholders' Equity 23 Consolidated Statements of Cash Flows 23 Notes to Consolidated Financial Statements 25 - -------------------------------------------------------------------------------- Page 21 Report of Independent Certified Public Accountants Board of Directors and Stockholders Aladdin Systems Holdings, Inc. We have audited the accompanying consolidated balance sheet of Aladdin Systems Holdings, Inc., and Subsidiaries (the "Company") as of December 31, 2001, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the two years then ended. 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 auditing standards generally accepted in the United States of America. 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 the Company as of December 31, 2001, and the consolidated results of its operations and its consolidated cash flows for each of the two years then ended, in conformity with accounting principles generally accepted in the United States of America. /s/ Grant Thornton LLP San Jose, California February 14, 2002 - -------------------------------------------------------------------------------- Page 22 Aladdin Systems Holdings, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEET December 31, 2001 ASSETS Current assets: Cash $ 96,973 Accounts receivable, net of allowance of $75,410 916,298 Inventories 39,866 Prepaid expenses and other current assets 147,377 Income tax receivable 195,499 ----------- Total current assets 1,396,013 Capitalized software, net 289,339 Property and equipment, net 345,230 ----------- $ 2,030,582 =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current maturities of long-term debt $ 93,355 Related party notes 110,062 Accounts payable 488,808 Accrued expenses and other liabilities 249,856 ----------- Total current liabilities 942,081 Long-term debt 78,035 Commitments and contingencies -- Stockholders' equity: Preferred stock, $.001 par value; 1,000,000 shares authorized; none issued and outstanding -- Common stock, $.001 par value; 50,000,000 shares authorized; 9,792,635 issued and outstanding 9,793 Paid-in capital 1,581,751 Retained deficit (581,078) ----------- Total stockholders' equity 1,010,466 ----------- $ 2,030,582 =========== See accompanying notes to consolidated financial statements. - -------------------------------------------------------------------------------- Page 23 Aladdin Systems Holdings, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF OPERATIONS Year ended December 31, 2001 2000 ---- ---- Sales $ 7,627,386 $ 10,168,755 Cost of sales 1,529,780 1,655,059 ---------------------------- Gross profit 6,097,606 8,513,696 Operating expenses: Marketing, sales and support 3,814,337 5,048,095 Research and development 2,288,080 2,376,550 General and administrative 1,108,674 1,577,814 ---------------------------- Total operating expenses 7,211,091 9,002,459 Loss from operations (1,113,485) (488,763) Other income (expense): Interest expense (36,164) (40,743) Other 7,064 39,424 ---------------------------- Loss before income taxes (1,142,585) (490,082) Income tax expense (benefit) 5,736 (127,339) ---------------------------- Net loss ($1,148,321) ($362,743) ============================ Loss per share - basic and diluted ($0.12) ($0.04) Shares used in computing loss per share 9,792,635 9,792,635 See accompanying notes to consolidated financial statements. - -------------------------------------------------------------------------------- Page 24 Aladdin Systems Holdings, Inc. and Subsidiaries CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Retained Common Stock Paid-in Earnings/ Shares Amount Capital (Deficit) Total ----------- ----------- ----------- ----------- ----------- Balance at January 1, 2000 9,778,117 $ 9,779 $ 1,304,321 $ 929,986 $ 2,244,086 Issuance of common stock pursuant to employee stock option plan 4,215 4 7,295 -- 7,299 Issuance of common stock for products 10,303 10 42,490 -- 42,500 Compensation expense on issuance of stock options to third parties -- -- 221,045 -- 221,045 Net loss -- -- -- (362,743) (362,743) -------------------------------------------------------------------- Balance at December 31, 2000 9,792,635 9,793 1,575,151 567,243 2,152,187 Compensation expense on issuance of stock options to third parties -- -- 6,600 -- 6,600 Net loss -- -- -- (1,148,321) (1,148,321) -------------------------------------------------------------------- Balance at December 31, 2001 9,792,635 $ 9,793 $ 1,581,751 ($581,078) $ 1,010,466 ====================================================================
See accompanying notes to consolidated financial statements. - -------------------------------------------------------------------------------- Page 25 Aladdin Systems Holdings, Inc. and Subsidiary CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31, ---------------------- 2001 2000 ---- ---- Cash flows from operating activities: Net loss ($1,148,321) ($362,743) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 668,802 605,820 Compensation expense on stock options granted to third parties 6,600 221,045 Loss on disposal of property and equipment 8,267 -- Deferred income taxes 198,835 (104,466) Changes in operating assets and liabilities: Accounts receivable 674,502 (238,313) Inventories 273,326 (209,290) Prepaid expenses and other current assets 39,435 92,586 Income tax receivable (170,227) -- Accounts payable (220,657) 155,121 Accrued expenses and other liabilities (53,889) 37,594 Income tax payable -- (69,276) -------------------------- Cash provided by operating activities 276,673 128,078 Cash flows from investing activities: Acquisition of property and equipment (24,112) (133,211) Proceeds from sales of property and equipment 4,000 -- Acquisition of software rights (101,227) (436,609) -------------------------- Cash used in investing activities (121,339) (569,820) Cash flows from financing activities: Net proceeds from issuance of common stock -- 7,299 Net payment on line of credit (5,523) -- Repayment of long-term debt (268,728) (408,012) Repayment of related party notes (50,000) -- -------------------------- Cash used in financing activities (324,251) (400,713) Net decrease in cash and cash equivalents (168,917) (842,455) Cash and cash equivalents at beginning of period 265,890 1,108,345 -------------------------- Cash and cash equivalents at end of period $ 96,973 $ 265,890 ==========================
- -------------------------------------------------------------------------------- Page 26 Cash paid during the period for: Interest $ 36,164 $ 40,743 ========================== Income taxes -- $ 69,276 ==========================
Noncash Transactions: During 2001, the Company financed $31,251 for its Directors' and Officers' insurance premium. During 2000, the Company acquired assets under capital leases in the amount of $123,641. During 2000, the Company issued 10,303 shares of common stock as partial payment on the purchase of Spring Cleaning software rights. At the time of issuance, the value of the shares was $42,500. See accompanying notes to consolidated financial statements. - -------------------------------------------------------------------------------- Page 27 Aladdin Systems Holdings, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001 NOTE 1 -ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization Aladdin Systems Holding, Inc. ("Holdings") and its wholly owned subsidiaries (collectively the "Company"), develop, publish, and distribute computer software for the Macintosh, Windows, Solaris, Linux, and Palm software market. Products are marketed through independent distributors in the United States and Canada, through resellers and mail order companies in other countries, directly to corporate accounts under site licensing agreements, and directly to end-users through direct marketing and the Internet. Principles of Consolidation The consolidated financial statements include the accounts of Holdings and its wholly owned subsidiaries, Aladdin Systems, Inc. and Transaction Services, Inc. All significant intercompany transactions and balances are eliminated in consolidation. Revenue recognition Revenues and accounts receivable are principally derived from: o Distributors and resellers of the Company's products o Our sites o Third party products o Licensing contracts Sales to distributors and resellers are subject to agreements permitting rights of return for stock balancing. These revenues are recognized net of reserves for returns and rebates. Return reserves are based on actual inventory held by distributors or resellers that is in excess of levels appropriate for that channel and is likely to be returned. Based on our estimated release dates for the next versions, we monitor the channel inventory and only ship product when the sell through to the customer will be probable. The Company recognizes revenue, net of estimated returns and rebates, upon shipment or - -------------------------------------------------------------------------------- Page 28 delivery of the product, when no significant obligations remain and collectability is probable. Revenues from our internet sales are recognized when the software is downloaded or shipped to the customer. Revenues from third party products make up a portion of our internet sales and we recognize as revenue the net fee we collect for facilitating the sale. Licensing fees are recognized when the customer has committed to renew their annual fee, as we are not obligated to provide any other deliverables or customer support in connection with these licenses. Capitalized Software Costs incurred in the initial design phase of software development are expensed as incurred as research and development. Once the point of technological feasibility is reached, direct production costs are capitalized. The Company ceases capitalizing computer software costs when the product is available for general release to customers. Costs associated with acquired completed software are capitalized. Total capitalized software development costs at December 31, 2001 were $2,061,187 less accumulated amortization of $1,771,849. The Company amortizes capitalized software development costs on a product-by-product basis. The amortization charged to operations in each period for each product is the greater of the amount computed using (a) the ratio of current gross revenues to the total of current and anticipated future gross revenues for the product or (b) 60 months. In addition, the Company evaluates the net realizable value of each software product at each balance sheet date and records write-downs to net realizable value for any products for which the carrying value is in excess of the estimated net realizable value. Total amortization expense for capitalized software, all of which was charged to cost of sales, was $472,093 and $397,629 in fiscal years 2001 and 2000, respectively. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, 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. Inventories Inventories are valued at the lower of cost or market and are accounted for on the first-in, first-out basis. Management performs periodic assessments to determine the existence of obsolete, slow moving and non-salable inventories, and records necessary provisions to reduce such inventories to net realizable value. - -------------------------------------------------------------------------------- Page 29 Property and Equipment Property and equipment are stated at cost. Capital leases are recorded at the present value of the minimum lease payments at the date of acquisition. Depreciation is computed on a straight-line basis over the estimated useful lives of the assets or lease term, whichever is shorter. Research and Development Research and development costs are charged to operations when incurred. Advertising The Company expenses advertising costs as they are incurred. Advertising and related promotion expenses for fiscal years 2001 and 2000 were $847,459 and $1,510,159 respectively. Income Taxes Income taxes are computed using the asset and liability method in Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes." Deferred income tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities and are measured using the currently enacted tax rates and laws. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. Stock-Based Compensation The Company accounts for stock-based employee compensation arrangements in accordance with the provisions of Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees", and complies with the disclosure provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." Under APB No. 25, compensation cost is recognized over the vesting period based on the difference, if any, on the date of grant between the quoted market price of the Company's stock and the amount an employee must pay to acquire the stock. Earnings Per Share Basic and diluted earnings per share is computed using the weighted average number of common shares outstanding during the period. Potentially dilutive securities consist of - -------------------------------------------------------------------------------- Page 30 the incremental common shares issuable upon conversion of convertible debt (using the if-converted method) and shares issuable upon the exercise of stock options and warrants (using the treasury stock method). A total of 2,473,528 shares issuable upon the exercise of outstanding stock options as of December 31, 2001 and 2,048,835 shares issuable upon the exercise of outstanding stock options as of December 31, 2000 have been excluded from the diluted earnings per share calculation, as the inclusion would be anti-dilutive. In addition, shares issuable upon the conversion of convertible debt totaling 220,123 shares as of December 31, 2001 and 134,990 shares as of December 31, 2000 were excluded from the diluted earnings per share calculation as the inclusion would be anti-dilutive. Fair Value of Financial Instruments The fair value of accounts receivable and accounts payable approximate carrying value due to the short term nature of such instruments. The fair value of long term obligations with third-parties approximates carrying value based on terms available for similar instruments. The fair value of debt with related parties is not determinable due to the terms of the debt and no comparable market for such debt. Segment reporting The Company's business is conducted in a single operating segment. The Company's chief operating decision maker is the Chief Executive Officer who reviews a single set of financial data that encompasses the Company's entire operations for purposes of making operating decisions and assessing performance. NOTE 2 - PROPERTY AND EQUIPMENT Property and equipment at December 31, 2001 consist of: Useful lives (years) ------------------- Computer equipment 5 $ 880,598 Office equipment 5 172,033 Furniture and fixtures 5 304,734 Displays 5-7 121,306 ---------- 1,478,671 Less accumulated depreciation 1,133,441 ---------- $ 345,230 ========== - -------------------------------------------------------------------------------- Page 31 NOTE 3 - CREDIT LINE In September 2000, the Company was approved for a $300,000 line of credit with Merrill Lynch. Interest is variable at a per annum rate equal to the sum of 3.15% plus the 30-Day Commercial Paper Rate. The line of credit is renewable monthly and has currently been renewed through February 28, 2002. The credit line contains two covenants: (1) the line of credit may not be used to purchase or carry securities, and (2) the Company will continue and maintain its business, existences, ownership and good standing. At December 31, 2001, the full amount of the credit line was available to the Company. NOTE 4 - LONG-TERM DEBT AND RELATED PARTY NOTES Long-term debt at December 31, 2001 consists of: Capital lease obligations $149,245 Other 22,145 -------- 171,390 Less current portion 93,355 -------- $ 78,035 ======== Fixed installments due on debt principal are as follows: Year ending December 31, ----------------------- 2002 $ 93,355 2003 68,355 2004 9,680 -------- $171,390 ======== Notes Payable to Related Parties Notes payable to related parties are payable on demand. Interest is compounded daily and is payable monthly at an annual rate of 8.92%. The notes are convertible into common stock at the lesser of $1.74 per share or at the lowest price shares of common stock are sold. At December 31, 2001 notes payable to related parties are convertible at $0.50 per share. - -------------------------------------------------------------------------------- Page 32 NOTE 5 - INCOME TAXES Income tax expense (benefit) for the years ended December 31, consists of: 2001 2000 ---- ---- Current Federal ($195,499) ($ 25,273) State 2,400 2,400 ------------------------------ Total current (193,099) (22,873) Deferred Federal 153,389 (72,729) State 45,446 (31,737) ------------------------------ Total deferred 198,835 (104,466) ------------------------------ $ 5,736 ($127,339) ============================== The tax effect of temporary differences that give rise to significant portions of net deferred tax assets at December 31, 2001 is presented below: Net operating loss carry forwards $ 200,972 Tax credit carry forwards 246,902 Depreciation and amortization 136,050 Other 28,526 --------- Net deferred tax asset 612,450 Less valuation allowance (612,450) --------- -- ========= A valuation allowance is required for those deferred tax assets that are not likely to be realized. Realization is dependent upon future earnings during the period that temporary differences and carry forwards are expected to be available. Because of the uncertain nature of their ultimate realization, a full valuation allowance is recorded against these deferred tax assets. - -------------------------------------------------------------------------------- Page 33 The effective tax rate as a percentage of income before income taxes differs from the statutory federal income tax rate (when applied to income before income taxes) for the years ended December 31, as follows: 2001 2000 ---- ---- Statutory federal income tax (benefit) rate (34%) (34%) Increase (decrease) resulting from: Expenses not deductible for taxes 0.3 15.8 State income taxes, net of federal tax benefit 2.8 (5.8) Increase in valuation allowance 31.4 -- Other -- (2.0) ----------------- Effective tax (benefit) rate 0.5% (26.0%) ================= NOTE 6 - MAJOR CUSTOMERS The Company has one major customer that accounted for $1,597,746 or 21% and $2,176,551 or 21% of revenues in 2001 and 2000, respectively. NOTE 7 - STOCKHOLDERS' EQUITY Stock Options The Aladdin Systems Holdings, Inc. 1999 Stock Option Plan allows for the issuance of incentive stock options and non-qualified stock options to purchase shares of the Company's common stock. The option plan has authorized 3,000,000 shares of which 526,472 remain available for granting at December 31, 2001. Under the option plan, incentive stock options may be granted to employees, directors, and officers of the Company and non-qualified stock options may be granted to consultants, employees, directors, and officers of the Company. Options granted under the option plan are for periods not to exceed ten years, and must be issued at prices not less than 100% of the fair market value of the stock on the date of grant. Options granted to shareholders who own greater than 10% of the outstanding stock are for periods not to exceed five years and must be issued at prices not less than 110% of the fair market value of the stock on the date of grant. Options granted under the option plan generally vest within 4 years. - -------------------------------------------------------------------------------- Page 34 Stock option activity is summarized as follows:
Shares Weighted Average Exercise Price Balance at January 1, 2000 1,653,810 $1.35 Granted 521,397 2.86 Cancelled (122,157) 1.62 Exercised (4,215) 1.07 ---------------------------- Balance at December 31, 2000 2,048,835 $1.72 Granted 691,126 .70 Cancelled (266,433) 1.29 ---------------------------- Balance at December 31, 2001 2,473,528 $1.48 ============================
The following table summarizes information about stock options outstanding as of December 31, 2001:
Weighted Average Weighted Remaining Weighted Number Average Contractual Term Number Average Exercise Range of Exercise Price Outstanding Exercise Price (Years) Exercisable Price - ------------------------------------------------------------------------------------------------------------------------- $0.50 - $1.07 1,210,004 $0.86 7.39 889,944 $0.94 $1.15 - $1.85 832,928 $1.35 6.56 660,900 $1.31 $1.91 - $4.87 430,596 $3.48 5.44 329,667 $3.38 ---------- --------- 2,473,528 1,880,511 ========= =========
The fair value of option grants has been determined using the Black-Scholes option pricing model with the following weighted average assumptions: expected life of 10 years; interest rate of 5.0%, volatility of 95% in 2001 and 96% in 2000 and no dividend yield. The weighted average fair value of options granted to employees was $0.68 and $0.63 for 2001 and 2000, respectively. - -------------------------------------------------------------------------------- Page 35 The following table depicts the pro forma results of operations had compensation expense for employee options been determined based on the fair value at the grant dates, as prescribed in SFAS No. 123. Year Ended December 31, ----------------------- 2001 2000 ---- ---- Net loss As reported ($1,148,321) ($362,743) Pro forma ($1,489,254) ($576,042) Basic and diluted net loss per share As reported ($0.12) ($0.04) Pro forma ($0.15) ($0.06) NOTE 8 - RETIREMENT PLAN The Company has established a 401(k) retirement plan for all employees. Employees may elect to contribute up to 15% of their gross salary not to exceed federal tax law limitations. The Company may elect to match a portion of the employee contributions. No matching contributions were made for the years ended December 31, 2001 and 2000. NOTE 9 - COMMITMENTS AND CONTINGENCIES Leases The Company conducts its operations from one facility that is leased under an operating lease expiring October 2010. Rent expense was $383,439 and $187,290 in 2001 and 2000, respectively. The Company also has furniture and equipment under capital leases. The cost of assets acquired under capital leases is $500,070. Accumulated amortization on these assets at December 31, 2001 was $335,551. - -------------------------------------------------------------------------------- Page 36 Future minimum commitments under capital leases and non-cancelable operating leases as of December 31, 2001 are as follows: Capital Operating Year ending December 31, Leases Leases ------ ------ 2002 $ 88,051 $ 274,692 2003 70,363 274,692 2004 7,860 274,692 2005 -- 274,692 2006 -- 274,692 Thereafter -- 1,052,986 -------------------------------- Total minimum lease payment 166,274 2,426,446 Less amount representing interest 17,029 -- -------------------------------- $ 149,245 $2,426,446 ================================ Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None PART III Item 9: Directors and Executive Officers of the Registrant The following table sets forth the names and positions of our directors and executive officers: Name Age Position - ---- --- -------- Jonathan Kahn 44 Chairman, President, Chief Executive Officer, Treasurer and Director Darryl Lovato (1) 35 Chief Technology Officer and Director Brad Peppard (2)(3) 46 Director Paul Goodman (2)(3) 42 Director David Schargel (2)(3) 37 Director Benna Lovato (1) 35 Director (1) Darryl Lovato and Benna Lovato are married (2) Member of the Compensation Committee (3) Member of the Audit Committee The following sets forth biographical information concerning our directors and executive officers for at least the past five years: - -------------------------------------------------------------------------------- Page 37 JONATHAN KAHN is currently Chairman, President and CEO of Aladdin. Mr. Kahn is one of the original founders of Aladdin Systems and has served as a Director since 1988. Prior to becoming CEO in 1998, he served as President, and Vice President of Sales. Mr. Kahn has extensive expertise in software industry sales, marketing, business development and licensing arrangements. Mr. Kahn is a graduate of the University of Rhode Island with a B.A. in Economics. DARRYL LOVATO has been Chief Technology Officer of Aladdin since 1997. In February 2002, Mr. Lovato resigned the title of President to focus on the technology of the Company. Mr. Lovato is a co-founder of Aladdin Systems and has been responsible for overseeing the Company's technical operations and leading research on new technologies and products. Mr. Lovato has served as a Director since the company's founding in 1988. Prior to holding his current title, Mr. Lovato was Aladdin's Vice President and Chief Technology Officer. Prior to co-founding Aladdin, Mr. Lovato worked at Apple Computer as a Senior Software Engineer. Mr. Lovato has over fifteen-years of software programming and development experience. BRAD PEPPARD is President of CinemaScore Online, Inc. a leading Internet Web site providing ratings of top Hollywood movies through its weekly E-newsletter. Prior to that, Mr. Peppard served as Vice President of Marketing at Aladdin Systems from 1996 through 1998. In 1998, Mr. Peppard became a Director of Aladdin. Prior to joining Aladdin, Mr. Peppard was responsible for worldwide marketing at Quarterdeck Office Systems, during which time the company grew from $20 million to $120 million in revenue. He was also Vice President of Marketing at Software Publishing Corporation, as well as President and founder of SoftMail Corporation, a leading direct marketing agency, and president of Monogram Software. Mr. Peppard has an MBA from Stanford University and a B.A. from Amherst College. DAVID SCHARGEL is the Chairman and President of Aportis Technologies Corp., a leader in software for carryable and wearable computers (focusing on Palm Pilot and Window CE computers), which he founded in 1997. Mr. Schargel is one of the co-founders of Aladdin and served as its President from 1988 to 1994. Mr. Schargel has served as a Director since 1988. From 1994 through 1997, he performed various executive roles at Aladdin. Prior to co-founding Aladdin, Mr. Schargel was Vice President at Olduvai Corporation, a publisher of software for the Macintosh computer and also had served as Technical Editor at MacUser Magazine. Mr. Schargel has extensive experience in software product management and marketing. PAUL GOODMAN has been a partner in the New York City law firm of Ellenoff, Grossman, Schole & Cyruli, LLP, and its predecessor firm, Elias, Goodman and Shanks for over 5 years. He concentrates on representing software and Web companies in a wide range of business and financing transactions. He has represented Aladdin since its inception. In addition to a Juris Doctor degree, Mr. Goodman holds a BA and MA degree in Computer Science. He was a former member of the Computer Science faculty of Queens College, is the author of five books on microcomputer programming. - -------------------------------------------------------------------------------- Page 38 BENNA LOVATO is one of the co-founders of Aladdin. She was a past President and has been a current board member of Nurture for the past 5 years. Nurture is a non-profit organization located in Santa Cruz county, devoted to the goal that all woman have education, advocacy and support in the child-bearing years. She is also a member of the Board of Directors of the Birth Network of Santa Cruz County. Item 10: Executive Compensation COMPENSATION SUMMARY The following table sets forth the compensation earned by our Chief Executive Officer and all our other executive officers who earned in excess of $100,000 in salary and bonus (collectively the "Named Executives") for services rendered to us during the fiscal year. SUMMARY COMPENSATION TABLE (1) Long term compensation Number of securites Name and position Year Salary Underlying options (2) - ----------------- ---- ------ ---------------------- Jonathan Kahn, President and CEO 1999 $164,120 20,000 2000 147,933 0 2001 137,866 48,407 Darryl Lovato, CTO 1999 161,420 20,000 2000 148,433 0 2001 $137,866 48,407 (1) The columns for "Bonus", "Other Annual Compensation", "Restricted Stock Awards", "LTP Payouts" and "All other Compensation" have been omitted because there is no such compensation to be reported. (2) Represents options granted to such executives. The following table sets forth certain information concerning options granted to the named executives. - -------------------------------------------------------------------------------- Page 39 OPTION GRANTS DURING YEAR ENDED DECEMBER 31, 2001
Number of % of Total Securities Options Exercise Price Underlying Granted to Per Share Name Year Options (1) Employees (2) ($/SH) Expiration Date (3) - ---- ---- ----------- ------------- ------ ------------------- Jonathan Kahn 2001 26,591 3.8 $0.84 April 2006 2001 21,816 3.2 0.63 June 2006 Darryl Lovato 2001 26,591 3.8 0.84 April 2006 2001 21,816 3.2 $0.63 June 2006
(1) Each option represents the right to purchase one share of our common stock. (2) We granted officers, employees and consultants options to purchase an aggregate of 691,126 shares of our common stock in 2001. (3) Options may terminate before their expiration dates if the optionee's status as an employee or consultant is terminated or upon the optionee's death or disability. OPTION EXERCISES AND YEAR-END OPTION VALUES The following table sets forth certain information with respect to the named executives concerning exercisable and unexercisable stock options held by them as of December 31, 2001. None of these executive officers exercised options to purchase common stock in 2001. AGGREGATE OPTION EXERCISES AND YEAR END OPTION VALUES (1)
Number of Unexercised Value of Unexercised In-the- Options At year End Money Options at Year End ------------------- ------------------------- Name Year Exercisable Unexercisable Exercisable Unexercisable - ---- ---- ----------- ------------- ----------- ------------- Jonathan Kahn 2001 268,668 51,144 $174,634 $ 33,244 Darryl Lovato 2001 274,080 51,144 $178,152 $ 33,244
(1) Based on a per share fair market value of our common stock equal to $0.65 per share, the trading price market value of our common stock on December 31, 2001. - -------------------------------------------------------------------------------- Page 40 COMPENSATION OF DIRECTORS In 2001, Benna Lovato, Brad Peppard, David Schargel and Paul Goodman, each received options to purchase up to 25,000 shares of Common Stock, respectively, with exercise prices of $0.75 per share. The options were granted for board services and were immediately vested. EMPLOYMENT AGREEMENTS AND TERMINATION OF EMPLOYMENT AND CHANGE OF CONTROL ARRANGEMENTS On October 25, 1999, we entered into an employment agreement with Jonathan Kahn (the "Kahn Employment Agreement"). Under the Kahn Employment Agreement, Jonathan Kahn is to serve as our Chief Executive Officer and perform such duties as may be reasonably assigned to him by the Board of Directors. The Kahn Employment Agreement provides for an annual base salary of $150,000. The Kahn Employment Agreement also provides that Jonathan Kahn is to receive options to purchase shares of our Common stock in an amount as to be determined, from time to time, by the Board of Directors of the Company, and that he is eligible to receive vacation in accordance with the Company's policies. He is also eligible to participate in the health, life insurance, medical, retirement and other benefit programs which we may offer from time to time. The term of the Kahn Employment Agreement lasts until October 24, 2002 unless terminated pursuant to the terms thereof. We may terminate the Kahn Employment Agreement only for cause. The term "cause" is defined in the Kahn Employment Agreement as: (i) the willful neglect of duties reasonably assigned by the Board of Directors; (ii) material breach of the agreement; or (iii) willful gross misconduct. If Jonathan Kahn is terminated without cause or in the event of a change of control of the Company, defined as a change in control of at least 40% of the voting shares of the Company, he is to receive severance pay through September 30, 2002 equal to: (i) the base salary; (ii) bonus compensation; (iii) vested options to purchase Common stock; (iv) health insurance; and (v) any unused vacation time. If Jonathan Kahn resigns from his position for good cause, including a substantial reduction in his position, duties or a material breach of the agreement by us, he is to be deemed terminated without cause and is eligible to receive severance. On October 25, 1999, we entered into an employment agreement with Darryl Lovato (the "Lovato Employment Agreement"). Under the Lovato Employment Agreement, Darryl Lovato is to serve as our President and Chief Technology Officer and perform such duties as may be reasonably assigned to him by the Board of Directors. The Lovato Employment Agreement provides for an annual base salary of $150,000. The Lovato Employment Agreement also provides that Darryl Lovato is to receive options to purchase shares of our Common stock, in an - -------------------------------------------------------------------------------- Page 41 amount as to be determined, from time to time, by the Board of Directors of the Company, and that he is eligible to receive vacation in accordance with the Company's policies. He is also eligible to participate in the health, life insurance, medical, retirement and other benefit programs which we may offer from time to time. The term of the Lovato Employment Agreement lasts until October 24, 2002 unless terminated pursuant to the terms thereof. We may terminate the Lovato Employment Agreement only for cause. The term "cause" is defined in the Lovato Employment Agreement as: (i) the willful neglect of duties reasonably assigned by the Board of Directors; (ii) material breach of the agreement; or (iii) willful gross misconduct. If Darryl Lovato is terminated without cause or in the event of a change of control of the Company, defined as a change in control of at least 40% of the voting shares of the Company, he is to receive severance pay through September 30, 2002 equal to: (i) the base salary; (ii) bonus compensation; (iii) vested options to purchase Common stock; (iv) health insurance; and (v) any unused vacation time. If Darryl Lovato resigns from his position for good cause, including a substantial reduction in his position, duties or a material breach of the agreement by us, he is to be deemed terminated without cause and is eligible to receive severance. Item 11: Security Ownership of Certain Beneficial Owners and Management The following tables shows all directors and officers of the Company and all persons known to the Company to be the beneficial owner of more than five percent of the Company's common stock as of December 31, 2001.
Amount and Nature of Percent of Name of Beneficial Owner Beneficial Ownership (1) Class - ------------------------ ------------------------ ----- EXECUTIVE OFFICERS AND DIRECTORS Jonathan Kahn (2) 2,010,388 20.53% David Schargel (3) 1,666,921 17.02% Darryl Lovato (4) 1,955,363 19.97% Brad Peppard (5) 77,400 0.79% Benna Lovato (6) 1,699,407 17.35% Paul Goodman (7) 25,000 0.26% ----------------------------- All directors and executive officers As a group (6 persons) 7,434,479 75.92% OTHER 5% STOCKHOLDERS Marco Gonzalez 697,812 7.13 ----------------------------- All directors, excutive officers and 5% stockholders as a group 8,132,291 83.04%
- -------------------------------------------------------------------------------- Page 42 (1) Calculated pursuant to Rule 13d-3(d) of the Exchange Act. Under Rule 13d-3(d), shares not outstanding which are subject to options, warrants, rights or conversion privileges exercisable within 60 days are deemed outstanding for the purpose of calculating the number and percentage owned by such person, but are not deemed outstanding for the purpose of calculating the percentage owned by each other person listed. (2) Includes 268,668 shares of Common Stock subject to options that are exercisable at December 31, 2001 and 6,950 shares of Common Stock subject to options that are exercisable within 60 days of the date hereof. (3) Includes 25,132 shares of Common Stock subject to options that are exercisable at December 31, 2001. (4) Includes 274,080 shares of Common Stock subject to options that are exercisable at December 31, 2001 and 6,950 shares of Common Stock subject to options that are exercisable within 60 days of the date hereof. (5) Includes 77,400 shares of Common Stock subject to options that are exercisable at December 31, 2001. (6) Includes 25,074 shares of Common Stock subject to options that are exercisable at December 31, 2001. (7) Includes 25,000 shares of Common Stock subject to options that are exercisable at December 31, 2001. Item 12: Certain Relationships and Related Transactions In 2001, Brad Peppard received options to purchase up to 20,000 shares of Common Stock with an exercise price of $0.63, in exchange for marketing work. These options were immediately vested. PART IV Item 13: Exhibits, Financial Statements, and Reports on Form 8-K (a) The following documents are filed as a part of this Report: 1. Financial Statements The following consolidated financial statements of Aladdin Systems Holdings, Inc., and Subsidiaries, and the Independent Auditors' Report issued thereon, - -------------------------------------------------------------------------------- Page 43 are incorporated by reference in Part II, Item 7: Report of Independent Certified Public Accountants Consolidated Balance Sheet Consolidated Statements of Operations Consolidated Statement of Stockholders' Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements 2. Exhibits The following exhibits are filed as part of, or incorporated by reference into, this Report: 2.1 Agreement and Plan of Reorganization dated as of October 12, 1999 by and among FGT, Gary Ulmer, Aladdin Systems, Inc. and the shareholders of Aladdin Systems, Inc.* 3.1 Articles of Incorporation of the Registrant.* 3.2 Certificate of Amendment to the Articles of Incorporation of the Registrant.* 3.3 By-Laws of Registrant.* 4.1 Sample Stock Certificate of the Registrant.* 10.1 Letter Agreement, dated July 14, 1999 by and between Bay Tree Capital Associates, LLC and the Registrant.** 10.2 Employment Agreement dated October 25, 1999 by and between Mr. Jonathan Kahn and the Registrant. ** 10.3 Employment Agreement dated October 25, 1999 by and between Mr. Darryl Lovato and the Registrant. ** 10.4 Stock Option Plan of the Registrant. ** 10.5 Form of Stock Option Agreement issued under the Stock Option Plan of the Registrant. ** 21.1 Subsidiaries of Registrant 23.1 Consent of Grant Thornton LLP Legend * Incorporated into this Report by reference to the Registrant's Registration Statement on Form 10 dated November 15, 1999. ** Incorporated into this Report by reference to the Registrant's Amendment No. 2 to the Registration Statement on Form 10 dated March 13, 2000. - -------------------------------------------------------------------------------- Page 44 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. ALADDIN SYSTEMS HOLDINGS, INC. (Registrant) By /s/ Jonathan Kahn ------------------------------ (Jonathan Kahn, President, Chief Executive Officer, and Director) By /s/ Alexandra Gonzalez ------------------------------ (Alexandra Gonzalez, Principal Accounting Officer, Secretary) 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 and in the capacities and on the dates indicated below. Signature Title Date /s/ Jonathan Kahn President, Chief Executive 3/15/02 - ------------------------- Officer and Director (Jonathan Kahn) /s/ Darryl Lovato Chief Technology Officer and Director 3/15/02 - ------------------------- (Darryl Lovato) /s/ Brad Peppard Director 3/15/02 - ------------------------- (Brad Peppard) /s/ David Schargel Director 3/15/02 - ------------------------- (David Schargel) /s/ Benna Lovato Director 3/15/02 - ------------------------- (Benna Lovato) /s/ Paul Goodman Director 3/15/02 - ------------------------- (Paul Goodman) - -------------------------------------------------------------------------------- Page 45 EXHIBIT INDEX Exhibit Reference (*) Number or Page # 2.1 Agreement and Plan of Reorganization dated as of October 12 1999 by and among FGT, Gary Ulmer, Aladdin Systems, Inc. and the shareholders of Aladdin Systems, Inc.* 3.1 Articles of Incorporation of the Registrant.* 3.2 Certificate of Amendment to the Articles of Incorporation of the Registrant.* 3.3 By-Laws of Registrant.* 4.1 Sample Stock Certificate of the Registrant.* 10.1 Letter Agreement, dated July 14, 1999 by and between Bay Tree Capital Associates, LLC and the Registrant. ** 10.2 Employment Agreement dated October 25, 1999 by and between Mr. Jonathan Kahn and the Registrant. ** 10.3 Employment Agreement dated October 25, 1999 by and between Mr. Darryl Lovato and the Registrant. ** 10.4 Stock Option Plan of the Registrant. ** 10.5 Form of Stock Option Agreement issued under the Stock Option Plan of the Registrant*. 21.1 Subsidiaries of Registrant 23.1 Consent of Grant Thornton LLP Legend * Incorporated into this Report by reference to the Registrant's Registration Statement on Form 10 dated November 15, 1999. ** Incorporated into this Report by reference to the Registrant's Amendment No. 2 to the Registration Statement on Form 10 dated March 13, 2000. - -------------------------------------------------------------------------------- Page 46 EX-21.1 3 ex21.txt EXHIBIT 21.1 SUBSIDIARIES OF REGISTRANT* EXHIBIT 21.1 ALADDIN SYSTEMS HOLDINGS, INC. SUBSIDIARIES OF THE REGISTRANT NAME STATE OF INCORPORATION Aladdin Systems, Inc. ..................................................Delaware Transaction Services, Inc. ...........................................California EX-23 4 ex23-1.txt EXHIBIT 23.1 CONSENT OF GRANT THORNTON LLP EXHIBIT 23.1 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We have issued our report dated February 14, 2002, accompanying the consolidated financial statements of Aladdin Systems Holdings, Inc. and Subsidiaries (the "Company") included in the Company's Annual Report on Form 10-KSB for the year ended December 31, 2001. We hereby consent to the incorporation by reference of said report in the Company's Registration Statement on Form S-8 (File No. 333-46712). /s/ GRANT THORNTON LLP San Jose, California February 14, 2002 -----END PRIVACY-ENHANCED MESSAGE-----