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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
OR
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-28330
LEGACY SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
California 95-4221982
(State or other jurisdiction of (I.R.S. Employer
information or organization) Identification No.)
8521 Reseda Boulevard
Northridge, California 91324
(Address of principal executive offices) (Zip Code)
(818) 885-5773
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes No X
------- -------
There were 2,432,551 shares outstanding of the registrant's Common Stock, par
value $.001 per share, as of June 26, 1996.
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LEGACY SOFTWARE, INC.
INDEX
Page No.
--------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited):
Balance Sheets at March 31, 1996 and
December 31, 1995 3
Statements of Operations for the three months
ended March 31, 1996 and 1995 5
Statements of Cash Flows for the three months
ended March 31, 1996 and 1995 6
Notes to Condensed Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations for the
three months ended March 31, 1996 7
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 10
Item 2. Changes in Securities 10
Item 3. Defaults Upon Senior Securities 10
Item 4. Submission of Matters to a Vote of Security Holders 10
Item 5. Other Information 10
Item 6. Exhibits and Reports on Form 8-K 10
Signatures 11
Exhibit 27
2
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LEGACY SOFTWARE, INC.
BALANCE SHEETS
March 31, December 31,
1996 1995
----------- ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . $ 355,863 $ 365,190
Accounts receivable, net. . . . . . . . . . . 128,674 2,951
------------- --------------
Total current assets . . . . . . . . . . . 484,537 368,141
Software development costs . . . . . . . . . . . . 51,007 76,507
Property and equipment, net. . . . . . . . . . . . 92,165 84,097
Other Assets:
Deferred loan fees. . . . . . . . . . . . . . - 17,505
Deferred offering costs . . . . . . . . . . . 631,933 157,541
Other . . . . . . . . . . . . . . . . . . . . 10,816 7,099
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Total assets . . . . . . . . . . . . . . . $ 1,270,458 $ 710,890
------------- --------------
------------- --------------
See accompanying notes to condensed financial statements.
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LEGACY SOFTWARE, INC.
BALANCE SHEETS
March 31, December 31,
1996 1995
----------- ------------
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . $ 9,435 $ 9,952
Accrued expenses . . . . . . . . . . . . . . . . 502,660 32,807
Development expense co-funding
billings in excess of development
co-funding recognized . . . . . . . . . . . . 233,540 54,637
Deferred revenues. . . . . . . . . . . . . . . . 306,082 -
Accrued compensation . . . . . . . . . . . . . . 100,000 100,000
Notes payable and current portion
of long term debt, primarily related parties. 390,664 332,842
------------ ------------
Total current liabilities . . . . . . . . . 1,542,381 530,238
Long term debt and accrued interest,
primarily from related parties, net of current
portion. . . . . . . . . . . . . . . . . . . . . 1,285,222 1,005,242
Commitments
Shareholders' deficit
Preferred Stock, par value $.001 per share,
5,000,000 shares authorized; none issued and
outstanding. . . . . . . . . . . . . . . . . . . - -
Common Stock, par value $.001 per share, 10,000,000
shares authorized; 748,000 and 741,000 shares
issued and outstanding . . . . . . . . . . . . 748 741
Additional paid in capital . . . . . . . . . . . 560,475 546,082
Accumulated deficit. . . . . . . . . . . . . . . (2,118,368) (1,371,413)
------------ ------------
Total shareholders' deficit. . . . . . . . . . (1,557,145) (824,590)
------------ ------------
Total liabilities and shareholders' deficit. . . . $1,270,458 $ 710,890
------------ ------------
------------ ------------
See accompanying notes to condensed financial statements.
4
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LEGACY SOFTWARE, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended March 31,
----------------------------
1996 1995
---- ----
Revenue:
Royalties . . . . . . . . . . . . . . . . . . $ - $ 4,100
Software sales. . . . . . . . . . . . . . . . 4,053 16,379
---------- ------------
Total revenue. . . . . . . . . . . . . . . 4,053 20,479
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Costs and expenses
Cost of royalties . . . . . . . . . . . . . . 25,500 -
Cost of software sales. . . . . . . . . . . . 3,850 14,185
Product development . . . . . . . . . . . . . 35,294 -
Selling, general and administrative . . . . . 293,900 51,054
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358,544 65,239
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Income (loss) from operations. . . . . . . . . . . (354,491) (44,760)
Interest expense . . . . . . . . . . . . . . . . . 392,464 13,076
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Net loss . . . . . . . . . . . . . . . . . . . . . $ (746,955) $ (57,836)
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Net loss per common share. . . . . . . . . . . . . $ (0.53) $ (0.04)
---------- ------------
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Weighted average common stock
shares outstanding . . . . . . . . . . . . . . . 1,396,218 1,396,218
---------- ------------
---------- ------------
See accompanying notes to condensed financial statements.
5
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LEGACY SOFTWARE, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended March 31,
----------------------------
1996 1995
---- ----
Cash flows from operating activities:
Net loss. . . . . . . . . . . . . . . . . . . . .$ (746,955) $ (57,836)
Adjustments to reconcile net loss to net
cash used for operating activities:
Amortization of software development costs. . . 25,500 -
Amortization of deferred loan fees and
original issue discount. . . . . . . . . . . . 355,307 -
Depreciation. . . . . . . . . . . . . . . . . . 5,840 5,290
Issuance of common stock in exchange for
services . . . . . . . . . . . . . . . . . . . 14,400 -
Increase (decrease) in cash from changes in:
Accounts receivable, net. . . . . . . . . . . . (125,723) 92
Other assets. . . . . . . . . . . . . . . . . . (3,717) -
Accounts payable and accrued expenses . . . . . 469,336 323
Development expense co-funding billings in
excess of development expense co-funding
recognized . . . . . . . . . . . . . . . . . . 178,903 14,470
Deferred revenues . . . . . . . . . . . . . . . 306,082 -
------- ------
Net cash provided by (used for) operating
activities. . . . . . . . . . . . . . . . . . 478,973 (37,661)
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Cash flows from investing activities:
Purchase of property and equipment. . . . . . . . (13,908) -
Software development costs. . . . . . . . . . . . - (39,836)
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Net cash used in investing activities . . . . (13,908) (39,836)
------ ------
Cash flows from financing activities:
Borrowings on notes payable . . . . . . . . . . . - 61,540
Payments on notes payable . . . . . . . . . . . . - -
Increase in deferred offering costs . . . . . . . (474,392) -
------- ------
Net cash provided by (used in) financing
activities. . . . . . . . . . . . . . . . . . (474,392) 61,540
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(Decrease) in cash and cash equivalents. . . . . . (9,327) (15,957)
Cash and cash equivalents, at beginning of period. 365,190 20,750
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Cash and cash equivalents, at end of period. . . . $ 355,863 $ 4,793
--------- ---------
--------- ---------
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest. . . . . . . . . . . . . . . . . . . $ 54,682 $ 4,112
--------- ---------
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See accompanying notes to condensed financial statements.
6
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LEGACY SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The financial information included herein is unaudited; however, such
information reflects all adjustments, consisting of only normal recurring
accruals, which are, in the opinion of management, necessary to present fairly
the Company's financial position at March 31, 1996, the results of operations
for the three months ended March 31, 1996 and 1995, and the cash flows for the
three months ended March 31, 1996 and 1995. Operating results for the three-
month period ended March 31, 1996, are not necessarily indicative of the results
that may be expected for the year ending December 31, 1996.
The information contained in this report on Form 10-Q should be read
in conjunction with the audited financial statements as of December 31, 1995
filed as part of the Company's Registration Statement on Form S-1 (File No. 333-
1054).
(2) DEFERRED REVENUES
The Company has recorded $306,082 in deferred revenues relating to
amounts received from IBM relating to the EMERGENCY ROOM title co-developed with
IBM. The Company will not recognize royalty revenue relating to the EMERGENCY
ROOM title until it can reasonably estimate future product returns and comply
with Statement of Accounting Standards No. 48.
(3) SUBSEQUENT EVENT
In May 1996, the Company completed an initial public offering of
1,150,000 shares of its common stock. Net proceeds to the Company were
$5,175,000 after deducting all offering-related expenses. The Company expects
to use the majority of the net proceeds to develop additional CAREER SIMS -TM-
titles.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
SAFE HARBOR STATEMENT.
This report includes certain forward-looking statements regarding the
Company's expectations about growth, new and existing products, technologies and
opportunities that involve risks and uncertainties. These risks are discussed
in this report and in the Company's Registration Statement on Form S-1 (File
No. 333-1054) filed with the Securities and Exchange Commission on February 7,
1996.
GENERAL
The Company completed an initial public offering of 1,150,000
shares of its common stock, par value $.001 per share (the "Common Stock"),
on May 17, 1996. The Company was incorporated in California in 1989 and
reincorporated in Delaware in March 1996. The Company develops edutainment
CD-ROM computer software. An edutainment product combines entertainment and
education content for home and educational use, in which learning is an
integral part of playing a game.
RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 COMPARED TO THE THREE MONTHS
ENDED MARCH 31, 1995
For the three months ended March 31, 1996, revenues decreased by 80%,
from $20,479 to $4,053. This $16,426 decrease is due primarily to a decrease in
software sales as unit sales of the Company's self-developed software titles
continue to decrease due to the introduction of competing software titles
designed to better take
7
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advantage of the new personal computer hardware available. No royalty revenue
from the EMERGENCY ROOM title developed with IBM has been recognized in either
period presented. In May 1996, the Company received a royalty check from IBM in
the amount of $93,620, for shipments of EMERGENCY ROOM made during the first
quarter of 1996. The Company will not recognize royalty revenue from IBM unless
it can comply with Statement of Financial Accounting Standards No. 48 ("SFAS
48"). There can be no assurance, however, that IBM will provide the Company
with sufficient financial data and information in order for the Company to
recognize royalty revenue on the accrual basis in accordance with SFAS 48.
Royalty revenues on consignment shipments made by IBM will only be recognized
when both (i) the Company receives evidence of product sell-through from IBM
and (ii) the Company can comply with SFAS 48. Royalty revenue recognized during
the three months ended March 31, 1995 related to other software titles.
Cost of royalties increased from $0 to $25,500. The increase is due
to the amortization of capitalized software development costs associated with
the development of the EMERGENCY ROOM title. Cost of software sales decreased
by $10,335 or 73% during the three months ended March 31, 1996, due to a decline
in sales of the Company's self-developed software titles during the three months
ended March 31, 1996 compared to 1995.
Product development expenses, which are net of co-funded development
expenses, increased by $35,294. This increase was primarily due to the Company
capitalizing product development expenses incurred during the three months ended
March 31, 1995 since technological feasibility had been attained. All product
development expenses incurred during the three months ended March 31, 1996
related to the contemplated DISTRICT ATTORNEY title and were expensed since
technological feasibility had not yet been attained.
Selling, general and administrative expenses increased by 476%, from
$51,054 to $293,900. This $242,846 increase was almost entirely due to the
increase in the Company's overhead structure resulting from an increase in the
number of employees.
Interest expense increased from $13,076 to $392,464. This $379,388
increase related primarily to the interest expense and the amortization of the
original issue discount and loan costs incurred relating to that certain
convertible promissory note of the Company, dated as of November 21, 1995 (the
"Convertible Note"), payable to E.B.C. Trust Corporation ("EBC") in the
original principal amount of $1,000,000.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1996, the Company had a working capital deficit of
$1,057,844, as compared to a working capital deficit of $162,097 as of December
31, 1995. The Company's independent certified public accountants included an
explanatory paragraph in their December 31, 1995 report with respect to the
Company's ability to continue as a going concern.
The Company generated $478,973 in cash flow from operating activities
during the 1996 first quarter compared to using $37,661 for operating activities
in the 1995 first quarter. The $516,634 increase in 1996 over 1995 cash flow
from operating activities primarily resulted from an increase of $469,013 in the
change in accounts payable and accrued expenses, an increase of $306,082 in the
change in deferred revenues, and an increase of $164,433 in the change in
development expense co-funding billings in excess of development expense co-
funding recognized. These were offset by an increase of $293,362 in the net
loss after adjustments for non-cash items in operations and a $125,815 increase
in the change in accounts receivable.
Investing activities in the first quarter of 1996 consisted of
purchases of computer equipment totalling $13,908. In the first quarter of 1995
investing activities consisted of $39,836 in software development costs.
The Company used $474,392 for financing activities for the first
quarter 1996 compared to $61,540 provided from financing activities during the
first quarter of 1995. The financing activities during the first quarter 1996
consisted primarily of payment of deferred offering costs of $474,392. First
quarter 1995 financing activities consisted solely of $61,540 in borrowings.
8
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In May 1996, the Company completed an initial public offering of
1,150,000 shares of its Common Stock. Net proceeds to the Company were
$5,175,000 after deducting all offering-related expenses. The Company expects
to use the majority of the net proceeds to develop additional CAREER SIMS -TM-
titles.
9
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company is neither currently a party to nor is any of its property
the subject of any legal proceedings which would be material to the business or
financial condition of the Company.
ITEM 2. CHANGES IN SECURITIES.
Not Applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not Applicable.
ITEM 5. OTHER INFORMATION.
Not Applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The following exhibits are included herewith:
Exhibit 27 - Financial Data Schedule.
(b) The Company filed no reports on Form 8-K during the quarter for
which this report is filed.
10
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SIGNATURES
Pursuant to the requirements 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.
Date: June 26, 1996 LEGACY SOFTWARE, INC.
/s/ WILLIAM E. SLINEY
---------------------------------------
William E. Sliney
Vice President and Chief Financial Officer
(Duly Authorized Officer and Principal Financial and Accounting
Officer)
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Balance
Sheets as of March 31, 1996, (unaudited) and December 31, 1995, Statements of
Operations (unaudited) for the three months eneded March 31, 1996 and 1995 and
Statements of Cash Flows (unaudited) for the three months ended March 31, 1996
and 1995 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 355,863
<SECURITIES> 0
<RECEIVABLES> 128,674
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 484,537
<PP&E> 92,165
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,270,458
<CURRENT-LIABILITIES> 1,542,381
<BONDS> 0
0
0
<COMMON> 748
<OTHER-SE> (1,557,893)
<TOTAL-LIABILITY-AND-EQUITY> (1,270,458)
<SALES> 4,053
<TOTAL-REVENUES> 4,053
<CGS> 3,850
<TOTAL-COSTS> 29,350
<OTHER-EXPENSES> 35,294
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 392,464
<INCOME-PRETAX> (746,955)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (746,955)
<EPS-PRIMARY> (.53)
<EPS-DILUTED> 0
</TABLE>
