Re: ALYD 10-K - Part 2
- Dependence on Acquisitions
In order for the Company to sustain its growth and viability after the year 2000, the Company intends to acquire companies which offer a broader range of computer services and products. There can be no assurance that the Company will be able to complete any such acquisitions. Moreover, the Company will require additional capital to finance such acquisitions and there can be no assurance that the Company will be successful in raising additional capital. (See "Business - Future Plans and Strategy.")
- Inability to Protect Proprietary Rights
The Company regards its software products and solutions as proprietary and attempts to protect them under a combination of copyright, trade secret and trademark laws as well as by contractual restrictions on employees and third parties. Despite these precautions, it may be possible for unauthorized parties to copy the Company's software or to reverse engineer or otherwise obtain and use information the Company regards as proprietary. The Company has no patents, and existing trade secret and copyright laws provide only limited protection. Certain provisions of the client agreements generally used by the Company, including provisions protecting against unauthorized use, copying, transfer and disclosure, may be unenforceable under the laws of certain jurisdictions, and the Company is required to negotiate limits on these provisions from time to time. In addition, the laws of some foreign countries do not protect the Company's proprietary rights to the same extent as do the laws of the United States. There can be no assurance that the steps taken by the Company will be adequate to deter misappropriation of proprietary information or that the Company will be able to detect unauthorized use and take appropriate steps to
enforce its intellectual property rights.
Significant and protracted litigation may be necessary to protect the Company's intellectual property rights, to determine the scope of the proprietary rights of others or to defend against claims for infringement. Although the Company is not currently involved in any litigation with respect to intellectual property rights, infringement claims against software developers are likely to increase as the number of functionally similar products in the market increases. There can be no assurance that third-party claims, with or without merit, alleging infringement will not be asserted against the Company in the future. Such assertions can be time consuming and expensive to defend and could require the Company to cease the use and sale of infringing products and services, to incur significant litigation costs and expenses and to develop or acquire non-infringing technology or to obtain licenses to the alleged infringing technology. If an infringement claim against the Company were successful, there can be no assurance that the Company would be able to develop or acquire alternative technologies or to obtain such licenses on commercially acceptable terms. (See "Business - Patents, Trademarks and
Intellectual Property.")
- Dependence on Major Customers
During fiscal 1997, 3M Corporation, Science Applications International Corporation (SAIC) and GE Capital Global Consumer Finance LTD accounted for 14%, 12% and 9% of the Company's revenues, respectively. The Company believes that these customers may require additional Remediation services for other divisions in the future, but these companies are not obligated to use the Company's services exclusively. As such, the Company may not receive future work orders from those customers, which could affect the Company's future revenues. However, at the present time, the Company's customer base has broadened. Therefore, the dependence on these large customers is decreasing, but the loss of these relationships could affect Alydaar's future strategy after the year 2000.
- Risks from International Operations
Approximately 32% of the Company's total consolidated revenues for the year ended December 31, 1997 were attributable to international sales. The Company believes that international business will account for a significant portion of its revenues in the future. International operations are subject to a number of risks, including possible exchange rate fluctuations and difficulty in enforcing agreements and collecting accounts receivable. The Company intends to mitigate its exchange rate risk by requiring payment in US dollars. In addition, the laws of certain countries do not protect the Company's products and intellectual property rights to the same extent as do the laws of the United States. There can be no assurance that the factors described above will not have an adverse effect on the Company's future international revenues and, consequently, on the Company's business, results of operations and financial condition. (See "Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations" and "Business - Sales, Marketing and Distribution.")
- Dependence on Key Personnel
The Company's success will depend, in part, upon the retention of key senior management and technical personnel. At the present time the Company does not have employment agreements with its key personnel, nor does it maintain key man life insurance on any of these persons. Further, the Company's success will also depend in part on its ability to hire and retain skilled technical personnel. Although the Company believes it will be able to hire such skilled technical personnel, an inability to do so could materially adversely affect the Company's ability to deliver and enhance its services.
- Ability to Manage Change and Rapid Growth
The Company expects its business to continue to undergo rapid growth and expansion. If the Company experiences such rapid growth and expansion, the Company's profitability will depend on, among other things, its ability to manage a larger number of personnel and to handle those problems normally associated with rapid growth.
- Possible Volatility of Stock Price
The Company's stock price has been highly volatile since it first started trading. The Company believes that factors such as awareness of the Y2K Problem, quarterly fluctuations in results of operations, announcements of new acquisitions by competitors, change in revenue or earnings estimates by securities analysts or other factors may cause the market price of the Company's stock to continue to fluctuate, perhaps substantially. In addition, stock prices for many technology companies fluctuate widely for reasons that may be unrelated to operating results. Due to market and securities analysts' expectations of continued growth and the higher price/earnings ratio at which the Company's stock may trade, any shortfall in meeting such expectations may have a rapid and significant adverse effect on the trading price of the Company's stock. Fluctuations in the market price of the Company's stock may, in turn, adversely affect the Company's ability to complete any targeted acquisitions, its access to capital and financing and its ability to attract and retain qualified personnel. (See "Market for the Company's Common Stock.")
- Influence by Existing Shareholder
Mr. Gruder, the Chief Executive Officer and President, is presently the beneficial owner of approximately 40% of the outstanding shares of the Company's Common Stock. As such, Mr. Gruder is in a position to influence the election of directors and generally to direct the affairs of the Company.
- Unlikely to Declare Dividends
The Company has never declared or paid cash dividends on its capital stock and does not anticipate paying any cash dividends in the foreseeable future. The Company currently anticipates that it will retain future earnings, if any, to fund the development and growth of its business.
- Forward-Looking Statements and Associated Risks
This Annual Report on Form 10-K contains certain forward-looking statements, including (i) the potential size of and anticipated growth in the Y2K compliance market; (ii) anticipated trends in the Company's financial condition and results of operations (including expected changes in the Company's gross margin and general, administrative and selling expenses); (iii) the Company's business strategy for growth in its business for Y2K compliance, and (iv) the Company's ability to distinguish itself from its current and future competitors. These forward-looking statements are based largely on the Company's current expectations and are subject to a number of risks and uncertainties. In addition to the other risks described elsewhere in the "Risk Factors" discussion, important factors to consider in evaluating such forward-looking statements include (i) the shortage of reliable market data regarding the market for Y2K solutions; (ii) changes in external competitive market factors which might impact trends in the Company's results of operations; (iii) unanticipated working capital or other cash requirements; (iv) changes in the computer hardware and software industries and the Y2K solutions market; and (v) various competitive factors that may prevent the Company from competing successfully in the marketplace. In light of these risks and uncertainties, many of which are described in greater detail elsewhere in this "Risk Factors" discussion, actual results could differ materially from the forward-looking statements contained in this Annual Report on Form 10-K.
Item 2. Properties
The Company presently leases office space to house its operations under four different leases in two office complexes, one located at 2101 Rexford Road, Charlotte, North Carolina and the other located at 2201 Water Ridge Parkway, Charlotte, North Carolina. The leases at 2101 Rexford Road all expire between August 31, 1998 and November 15, 1998. The Company has made arrangements to extend these leases through January 31, 1999. The lease at 2201 Water Ridge Parkway expires October 31, 2000. The Company intends to relocate to one central location by January 31, 1999 and is currently in negotiations to sublet the 2201 Water Ridge Parkway facilities after February 1, 1999. The Company is currently paying a total annual rent under all of these leases of $799,276.00.
In addition, the Company leases space for twelve sales offices located throughout the United States and in England. The following is a description of the leases and annual rent:
Location Expires 1 Annual Rent
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1. Atlanta, GA 6-30-98 $ 7,800.00
2. Denver, CO 7-31-98 $ 16,800.00
3. Detroit, MI 9-14-98 $ 10,908.00
4. Los Angeles, CA Month to Month $ 11,340.00
5. Minneapolis, MN 8-30-98 $ 13,800.00
6. Oakbrook Terrace, IL 7-31-98 $ 14,376.00
7. Reston, VA 9-14-98 $ 17,160.00
8. Salem, NH 9-30-98 $ 6,000.00
9. San Francisco, CA 8-31-98 $ 16,800.00
10. Tampa, FL 7-31-98 $ 9,276.00
11. Surrey, UK 7-6-2000 $ 87,244.00
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Total $211,504.00
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1 All of these leases, with the exception of the Surrey, UK, lease, expire in 1998. It is the Company's intention to renew these leases for a fixed period or continue the leases on a month-to-month basis.
Item 3. Litigation
During the year ended December 31, 1997, there were two lawsuits pending against the Company's Chief Executive Officer, Robert F. Gruder ("Gruder") and the Company: Robert Colby v. Robert Gruder et al., Index No. CV 96 02542045, Superior Court (Conn.), Judicial District of New Haven at Meriden (the "Colby Lawsuit") and Andrew Kaplan et al. v. Robert F. Gruder et al., Index No. CV 96 03343085, Superior Court (Conn.), Judicial District of Fairfield at Bridgeport (the "Kaplan Lawsuit").Thomas J. Dudchik, Senior Vice President of the Company, is also named as a defendant in the Kaplan lawsuit.
The Colby Lawsuit involved allegations that Mr. Gruder promised to provide Colby with shares of stock in Alydaar as reimbursement for a prior investment in GEM Technologies, Inc. ("GEM"), a company founded by Mr. Gruder and of which he was the principal shareholder. This matter was settled by Mr. Gruder on July 25, 1997, and the Company was released from any further liability. In connection with this lawsuit, Mr. Gruder had entered into an agreement to indemnify and hold harmless the Company from any liability. The agreement also provided that the Company would bear Mr. Gruder's and its own legal expenses, which the Company paid. (See "Certain Relationships and Related
Transactions.")
The Kaplan Lawsuit involves allegations by a group of former creditors of GEM of breach of contract and misrepresentations. The plaintiffs claim they were fraudulently induced to invest in GEM; that GEM wrongfully transferred assets to Alydaar and Alydaar promoted products based on technology misappropriated from GEM. The plaintiffs are seeking unspecified damages, but claim they are entitled to damages equal to a nine percent interest in GEM, and as such, some interest in Alydaar. This matter is expected to go to trial in April 1998. Both Mr. Gruder and the Company intend to vigorously defend this action and believe they have meritorious defenses to the action. Mr. Gruder has agreed to indemnify and hold harmless the Company in the event of a judgement against the Company. The Company has agreed to bear all costs of the litigation for itself and Mr. Gruder. Company's litigation counsel is of the opinion that in view of Mr. Gruder's agreement to indemnify the Company, the likelihood of a materially adverse outcome against the Company is remote. (See "Certain Relationships and Related Transactions.")
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to shareholders during the year ended December 31, 1997.
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