UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-28330
LEGACY SOFTWARE, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 95-456-1156
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5757 W. Century Blvd., Suite 700
Los Angeles, California 90045
(Address of principal executive offices) (Zip Code)
(310) 348-7266
(Issuer's telephone number, including area code)
Indicate by check mark whether the issuer (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the past 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
There were 3,334,084 shares outstanding of the registrant's Common Stock, par
value $.001 per share, as of November 10, 1998.
<PAGE>
LEGACY SOFTWARE, INC.
INDEX
Page No.
--------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited):
Balance Sheets at September 30, 1998 and
December 31, 1997 3
Statements of Operations for the three
months ended September 30, 1998 and 1997 and
nine months ended September 30, 1998 and 1997. 4
Statements of Cash Flows for the nine
months ended September 30, 1998 and 1997 5
Notes to Condensed Financial Statements 7
Item 2. Management's Discussion and Analysis or Plan of Operations 10
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities and Use of Proceeds 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
Exhibits
Exhibit 11 19
Exhibit 27 20
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LEGACY SOFTWARE, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
1998 1997
----------- -----------
ASSETS (Unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 1,993,506 $ 14,464
Accounts receivable, net of allowances for doubtful accounts
of $12,500 39,381 148,606
Inventory 16,597 22,320
Other receivables 21,016
Other current assets 20,000 22,217
---------- -----------
Total current assets 2,069,484 228,623
---------- -----------
Product development costs, net 618,858 1,255,570
Property and equipment, net 67,366 128,910
Other assets 5,400 1,829
Investments in production joint venture 23,047
---------- -----------
Total assets $ 2,784,155 $ 1,614,932
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 160,308 $ 74,033
Advances for products and operations 44,317 -
Payable to former co-development partner 100,000 480,000
Deferred revenues 2,726 43,010
Notes payable and current portion of long-term debt 174,516 303,619
---------- -----------
Total current liabilities 481,867 900,662
---------- -----------
LONG-TERM DEBT PRIMARILY FROM RELATED PARTIES,
net of current portion 120,750 161,882
COMMITMENTS - -
STOCKHOLDERS' EQUITY
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; 3,334,084 and 2,655,002 shares issued and
outstanding 3,334 2,654
Additional paid in capital 9,440,108 7,060,788
Accumulated deficit (7,261,904) (6,511,054)
---------- -----------
Total stockholders' equity 2,181,538 552,388
---------- -----------
$ 2,784,155 $ 1,614,932
========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
3
<PAGE>
LEGACY SOFTWARE, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
--------------------------- -------------------------
1998 1997 1998 1997
--------- --------- --------- -----------
<S> <C> <C> <C> <C>
REVENUE
Royalties $ 11,216 $ 82,096 $ 203,726 $ 189,029
Software sales 22,830 33,718 38,587 49,969
Corporate services 18,500 - 80,000 -
--------- --------- --------- -----------
Total revenue 52,546 115,814 322,313 238,998
--------- --------- --------- -----------
COSTS AND EXPENSES
Cost of royalties 604,253 35,148 631,034 35,148
Cost of software sales 14,598 23,311 28,798 31,379
Product development 30,684 10,640 87,444 611,910
General & administrative 277,164 174,159 654,378 947,060
Selling 31,278 16,553 75,852 251,697
--------- --------- --------- -----------
Total costs and expenses 957,977 259,811 1,477,506 1,877,194
--------- --------- --------- -----------
LOSS FROM OPERATIONS (905,431) (143,997) (1,155,193) (1,638,196)
INTEREST EXPENSE (495) (12,147) (43,591) (43,340)
- -
INTEREST INCOME - 54 - 19,457
OTHER INCOME 147,935 - 147,935 -
--------- --------- --------- -----------
LOSS BEFORE EXTRAORDINARY ITEM (757,001) (156,090) (1,050,849) (1,662,079)
EXTRAORDINARY ITEM 300,000 - 300,000 -
--------- --------- --------- -----------
NET LOSS ($457,001) ($156,090) ($750,849) ($1,662,079)
========= ========= ========= ===========
NET LOSS PER COMMON SHARE
BASIC AND DILUTED
BEFORE EXTRAORDINARY ITEM ($0.63) ($0.18) ($1.06) ($1.96)
EXTRAORDINARY ITEM 0.25 - 0.30 -
AFTER EXTRAORDINARY ITEM ($0.38) ($0.18) ($0.76) ($1.96)
WEIGHTED AVERAGE COMMON STOCK
SHARES OUTSTANDING
BASIC AND DILUTED 1,206,403 864,326 993,310 849,173
</TABLE>
See accompanying notes to condensed financial statements
4
<PAGE>
LEGACY SOFTWARE, INC.
STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------
1998 1997
---------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss ($750,849) ($1,662,079)
Adjustments to reconcile net loss to net cash
used in operating activities:
Amortization of product development costs 636,712 -
Depreciation 60,596 74,776
Due former co-development partner (300,000) -
(Gain) loss on disposal of property and
equipment - (157)
(Gain) on sale of assets and assumption of
debt by third party (147,935) -
Increase (decrease) in cash from changes in:
Accounts receivable, net 109,225 (103,708)
Other receivables 21,016 102,700
Inventories 5,723 (70,600)
Other assets (1,354) (32,258)
Accounts payable and accrued expenses 86,276 (74,351)
Deferred revenues (40,284) (21,628)
---------- -----------
Net cash used in operating activities (320,874) (1,787,305)
---------- -----------
Cash flows from investing activities:
Note receivable - (50,000)
Purchase of property and equipment (4,617) (5,238)
Proceeds from the disposition of property and
equipment 1,364 7,438
Additions to product development costs - (171,253)
Investment in production joint ventures (78,647) -
---------- -----------
Net cash used in investing activities (81,900) (219,053)
---------- -----------
Cash flows from financing activities
Payments under line of credit - (35,250)
Note payable 75,000
Advances for product development and operations 44,317 -
Payments on notes payable and long term debt (42,501) (62,780)
Proceeds from private placements for Common
Stock 2,305,000 -
Exercise of Common Stock Warrants 75,000 162,500
Issuance of stock under Employee
Stock Purchase Plan - 23,526
---------- -----------
Net cash provided by financing activities 2,381,816 162,996
---------- -----------
Increase (decrease) in cash and cash equivalents 1,979,042 (1,843,362)
Cash and cash equivalents, at beginning of year 14,464 1,860,019
---------- -----------
Cash and cash equivalents, at end of period $1,993,506 $ 16,657
========== ===========
Supplemental disclosure of cash flow information
a. Cash paid during the period
for:
Interest $ 43,591 $ 43,340
---------- -----------
Income taxes $ - $ -
---------- -----------
5
<PAGE>
b. Non-cash transactions
Sale of assets of $59,800 and issue of a
note for $108,099 less assumption of $315,834 of
debt by a third party $ 147,935 $ -
---------- ------------
Reduction of debt by former co-development
partner $ 300,000 $ -
---------- ------------
</TABLE>
See accompanying notes to condensed financial statements
6
<PAGE>
LEGACY SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS
(1) Basis of presentation
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and the instructions to Form 10-QSB. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of only normal recurring accruals)
considered necessary for a fair presentation of the Company's financial position
at September 30, 1998, the results of operations for the three and nine months
ended September 30, 1998 and September 30, 1997, and the cash flows for the nine
months ended September 30, 1998 and September 30, 1997 are included. Operating
results for the three and nine month periods ended September 30, 1998 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1998.
The information contained in this Form 10-QSB should be read in
conjunction with audited financial statements as of December 31, 1997 filed as
part of the Company's Annual Report on Form 10-K.
(2) Proposed Acquisition of Videocall International Corporation
On September 8, 1998 the Company and Videocall International Corporation
("Videocall") announced that the two companies had entered into a Letter
of Intent for Legacy to purchase the common shares of Videocall in
exchange for Legacy common and preferred stock. On September 14, 1998 the
two companies signed an Agreement and Plan of Merger ("Merger Plan")
detailing the terms of the transaction. Videocall is a worldwide provider
of videocalling services to business and consumers. Videocall is in the
process of developing international locations through strategic
partnerships and, through a relationship with PictureTel Corporation,
using PictureTel's Swiftsites for the videocalling site hardware and
software. The Board of Directors of the Company and the Board of Directors
of Videocall have approved the acquisition. The parties are currently
preparing a definitive Proxy Statement and Registration Statement on Form
S-4 to be submitted for stockholder approval of the Merger Plan. Upon the
approval by stockholders it is the intent of Legacy to exit the CD-ROM
software development activities, to determine the economic value of sale
or retention of existing products and going forward to focus entirely on
Videocall operations.
Prior to stockholder approval of the acquisition of Videocall by the
Company Videocall has entered in Letters of Intent to purchase all of the
assets of two companies as explained below.
On September 28, 1998 Videocall signed a Letter of Intent to purchase all
the assets and assume all of the liabilities of Town and Country Village
West from Sacramento Results, Inc. of Mesa Arizona. The commercial
property comprises 130,000 square feet, with 114,000 net leasable feet on
6.36 acres of land with an appraised property value of $ 9.9 million.
Videocall will use a portion of the available office space to establish a
Western US operations center. It is intended that this transaction will be
consummated with stock of the Company and cash subsequent to the
stockholder approval of the Merger Plan.
On October 19, 1998 Videocall signed a Letter of Intent to acquire all the
assets and assume all the liabilities of Phobos Phone Bureaus Limited of
London, England (`Phobos"). Phobos is a provider of a proprietary
telecommunications calling system to UK based telephone-calling centers.
Phobos currently has 70 installations in operation in the UK. It is
intended that this transaction will be consummated with stock of the
Company subsequent to the stockholder approval of the Merger Plan.
In accordance with the terms of the September 8, 1998 Letter of Intent and
as provided in the Merger Plan Michael J. Zwebner was elected Chairman of
the Board of Directors of the Company and Ariella J. Lehrer, Ph.D.
resigned as Chairwoman of the Board. Dr. Lehrer resigned to form Legacy
Interactive, Inc. ("Interactive") and as a condition of the transaction
the Company entered into an agreement to sell certain assets to
Interactive and Interactive assumed certain debt from the Company. In
addition to Mr. Zwebner the Company elected Alexander H. Walker, Jr.,
Michael Cuzner-Charles and Eugene A. Rosov to fill existing vacancies on
the board.
7
<PAGE>
In order to insure a smooth transition of management and direction of the
merged companies C. Robert Kline, Jr., Ph.D., Ivan M. Rosenberg, Ph.D. and
William E. Sliney resigned as members of the Board of Directors effective
October 9, 1998. In addition on the same date Dr. Kline resigned as Chief
Executive Officer and Mr. Sliney resigned as Vice President and Chief
Financial Officer.
On November 6, 1998 the Company elected David B. Hurwitz to the Board of
Directors filling a vacancy. The Company also gave Eugene A. Rosov,
President the additional title of Chief Executive Officer and C. Harold
Snyder was named the Chief Financial Officer.
(3) Notification by NASDAQ of Failure to Maintain Minimum Listing Requirements
On February 26, 1998. the Company was notified by The Nasdaq Stock Market,
Inc. ("NASDAQ") that the Company is not in compliance with the net tangible
assets/market capitalization/net income requirement(s), pursuant to NASD
Marketplace Rule(s) 4310(c )(02) and the minimum bid price requirement, pursuant
to NASD Marketplace Rule 4310(c )(04) both of which became effective on February
23, 1998. Non-compliance with these and other rules adopted by NASDAQ at that
date, will result in the Company's stock being delisted from the NASDAQ SmallCap
Market. On July 20, 1998 NASDAQ notified the Company continuing failure to
comply with the rules would result in delisting of the Company's stock on July
28, 1998. The Company filed an appeal for an oral hearing on a date to be
determined by NASDAQ to stay the delisting. The Company appeared before a
hearing committee on September 18, 1998 and outlined the steps it has taken and
will subsequently take to maintain compliance:
1. At the Annual Meeting of Stockholders on June 18, 1998 the stockholders
approved a one for three (1:3) reverse split of the Legacy Common Stock.
2. On June 23, 1998 EBC Trust Company ("EBC") exercised 57,252 Warrants to
purchase Legacy Common Stock at $1.31 per share thereby generating
$75,000 for the Company.
3. On June 30, 1998 a private placement for 210,000 shares of Legacy
Common Stock was made by DK Trust at $0.50 per share generating $105,000
for the Company.
4. On September 4, 1998 a private placement of $200,000 for 400,000 shares
of Legacy Common Stock was made in accordance with the terms of the
Legacy/Videocall Letter of Intent signed on that date.
5. On September 14, 1998 the Company and IBM signed an agreement whereby
the $500,000 balance owed IBM was reduced to $200,000 and a payment of
$25,000 was made on that date. Subsequent payments of $25,000 will be
made in each calendar quarter until the debt of $175,000 is paid off. In
the event of a default in payment by the Company, not cured within a
thirty day period, an amount of $400,000, less any payments already made
under the agreement shall be immediately due and payable to IBM, with
interest accruing at the rate of ten percent per annum.
6. In addition on September 14, 1998 the Company entered into an Agreement
of Sale between the Company and Legacy Interactive Inc. ("Interactive"),
a company currently owned by the former Chairperson of Legacy, whereby
certain assets of the Company totaling $216,260 were sold to Interactive
and Interactive assumed $324,359 in debt from the Company. On September
14, 1998 the Company made a payment of $36,033 to Interactive as a
portion of the difference between the assets sold and debt assumed by
Interactive. The parties are currently in negotiations to determine a
plan of payment for the balance due of $72,066.
7. On September 22, 1998 a private placement of $2,000,000 for 1,960,000
shares of Legacy Common Stock was made by third party investors into the
Company to provide additional capital to the Company for use in the
merged Legacy/Videocall operations.
8
<PAGE>
(4) Financial Condition and Liquidity
Prior to the $2,200,000 private placements made in conjunction with the
proposed merger with Videocall and the reduction of indebtedness resulting from
the settlement with IBM and the sale of certain assets plus assumption of debt
by Interactive the Company (i) had never achieved operating profits, (ii) had
negative working capital and limited cash on hand, (iii) had significant short
and long term indebtedness, (iv) ceased development of new titles pending the
generation of additional working capital or the implementation of subcontractor
relationships on terms that permit payments to be made by the Company when it
has cash available to make such payments, (v) curtailed its internet gaming
services, (vi) closed one of its business offices, (vii) significantly reduced
marketing and public relations efforts, and (viii) reduced its total number of
employees to four. Revenues from the Company's Emergency Room title and
derivatives thereof are continuing to decrease, and revenues from the D.A.
Pursuit of Justice title have been lower than expected. The Company has incurred
net losses since inception and expects to continue to operate at a loss during
1998. The Company's prospects must be considered in light of the risks, expenses
and difficulties encountered by companies in the early stages of development,
particularly companies in new and rapidly evolving markets. The Company's
ability to maintain operations in the near term and to achieve positive cash
flow in the future depends on a variety of factors. Without the infusion of
funds in conjunction with the Videocall transaction and given the Company's
current working capital deficiency and lack of cash resources, should the
Company be unable to obtain additional funding to supply its near-term cash
requirements, there is substantial doubt as to the Company's ability to continue
as a going concern.
(5) Termination of Distribution Agreement
On July 31, 1997 the Company entered into a Distribution Agreement with
Alpha Software Corporation ("Alpha Soft") to distribute the Emergency Room
Intern and the three case pack of the DA Pursuit of Justice titles. By mutual
agreement the Company and Alpha Soft signed a Settlement Agreement and General
Release which will terminate the Distribution Agreement on December 31, 1998.
(6) Marketing Services Agreement
On May 12, 1998 the Company entered into a Marketing Services Agreement
with ROI, Inc. ("ROI") whereby ROI will function as a sales representative for
distribution of CD-ROM and DVD versions of the Company's individual cases of the
DA Pursuit of Justice title and the Best of Emergency Room title as well as
other titles which may be included during the term of the agreement. The
agreement is for eight months and may be extended for additional twelve month
periods.
The Company believes that, together with a successful effort to obtain
additional funding for its near-term cash needs, its proposed acquisition of
Videocall, its exit from the CD-ROM software development activities and focus
entirely on Videocall operations, its operating plan and efforts to reduce
operating expenses, in conjunction with acquisition of such additional funding
will be adequate to meet its fiscal 1998 working capital needs, however, there
can be no assurance that the Company will be able to obtain such funding, or
that it will not experience liquidity problems caused by adverse market
conditions and other unfavorable events. In addition, there can be no assurance
that the Company will be successful in maintaining compliance with the new
NASDAQ requirements and if it does maintain compliance that, in its current
financial condition, it can continue to be in compliance.
(7) Earnings Per Share
The Company adopted SFAS No. 128, "Earnings Per Share", during 1997. SFAS
No. 128 requires presentation of basic and diluted earnings per share. Basic
earnings per share is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding for the
reporting period. Diluted earnings per share reflects the potential dilution
that could occur if securities or other contracts, such as stock options, to
issue common stock were exercised or converted into common stock. For The three
and nine months ended September 30, 1998 and 1997 all outstanding options and
warrants were not included in diluted earnings per share since they were
antidilutive.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
Cautionary Note Regarding Forward-Looking Statements
Except for historical information contained herein, the statements in this
report (including without limitation, statements indicating that the Company
"expects," "estimates," anticipates," or "believes" and all other statements
concerning future financial results, product offerings, proposed acquisitions or
combinations or other events that have not yet occurred) are forward-looking
statements that are made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995, Section 21E of the Securities Exchange
Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as
amended. Forward-looking statements involve known and unknown factors, risks and
uncertainties which may cause the Company's actual results in future periods to
differ materially from forecasted results. Those factors, risks and
uncertainties include, but are not limited to the Company's ability to generate
or obtain additional capital resources to fund its operations and growth; the
consummation of possible acquisitions or combinations; the positioning of the
Company's products in the Company's market segments; the Company's ability to
effectively manage its various businesses in a rapidly changing environment; the
continued emergence of the internet resulting in new competition and changing
consumer demands; growth rates of the Company's market segments; variations in
the cost of, and demand for, customer service and technical support; price
pressures and competitive environment in the consumer software and edutainment
industry; the possibility of programming errors or other "bugs" in the Company's
software games and Internet technology; the Company's ability to establish
itself successfully as a software developer, publisher and distributor; the
emergence of competition from new and existing software and gaming internet
companies; and the timing and consumer acceptance of new product releases and
services (including current users' willingness to upgrade from older versions of
the Company's products). Additional information on these and other risk factors
are included under the headings "Risk Factors" and elsewhere in this Form
10-QSB.
Risk Factors
Need for Additional Capital; Uncertainty as a Going Concern. Prior to
the $2,200,000 private placements made in conjunction with the proposed merger
with Videocall and the reduction of indebtedness resulting from the settlement
with IBM and the sale of certain assets plus assumption of debt by Interactive
the Company (i) had never achieved operating profits, (ii) had negative working
capital and limited cash on hand, (iii) had significant short and long term
indebtedness, (iv) ceased development of new titles pending the generation of
additional working capital or the implementation of subcontractor relationships
on terms that permit payments to be made by the Company when it has cash
available to make such payments, (v) curtailed its internet gaming services,
(vi) closed one of its business offices, (vii) significantly reduced marketing
and public relations efforts, and (viii) reduced its total number of employees
to four. Revenues from the Company's Emergency Room title and derivatives
thereof are continuing to decrease, and revenues from the D.A. Pursuit of
Justice title have been lower than expected. The Company has incurred net losses
since inception and expects to continue to operate at a loss during 1998. The
Company's prospects must be considered in light of the risks, expenses and
difficulties encountered by companies in the early stages of development,
particularly companies in new and rapidly evolving markets. The Company's
ability to maintain operations in the near term and to achieve positive cash
flow in the future depends on a variety of factors. Without the infusion of
funds in conjunction with the Videocall transaction and given the Company's
current working capital deficiency and lack of cash resources, should the
Company be unable to obtain additional funding to supply its near-term cash
requirements, there is substantial doubt as to the Company's ability to continue
as a going concern.
On February 26, 1998. the Company was notified by The Nasdaq Stock Market, Inc.
("NASDAQ") that the Company is not in compliance with the net tangible
assets/market capitalization/net income requirement(s), pursuant to NASD
Marketplace Rule(s) 4310(c )(02) and the minimum bid price requirement, pursuant
to NASD Marketplace Rule 4310(c )(04) both of which became effective on February
23, 1998. Non-compliance with these and other rules adopted by NASDAQ at that
10
<PAGE>
date, will result in the Company's stock being delisted from the NASDAQ SmallCap
Market. On July 20, 1998 NASDAQ notified the Company continuing failure to
comply with the rules would result in delisting of the Company's stock on July
28, 1998. The Company filed an appeal for an oral hearing on a date to be
determined by NASDAQ to stay the delisting. The Company appeared before a
hearing committee on September 18, 1998 and outlined the steps it has taken and
will subsequently take to maintain compliance:
1. At the Annual Meeting of Stockholders on June 18, 1998 the stockholders
approved a one for three (1:3) reverse split of the Legacy Common Stock.
2. On June 23, 1998 EBC Trust Company ("EBC") exercised 57,252 Warrants to
purchase Legacy Common Stock at $1.31 per share thereby generating
$75,000 for the Company.
3. On June 30, 1998 a private placement for 210,000 shares of Legacy Common
Stock was made by DK Trust at $0.50 per share generating $105,000 for
the Company.
4. On September 4, 1998 a private placement of $200,000 for 400,000 shares
of Legacy Common Stock was made in accordance with the terms of the
Legacy/Videocall Letter of Intent signed on that date.
5. On September 14, 1998 the Company and IBM signed an agreement whereby
the $500,000 balance owed IBM was reduced to $200,000 and a payment of
$25,000 was made on that date. Subsequent payments of $25,000 will be
made in each calendar quarter until the debt of $175,000 is paid off. In
the event of a default in payment by the Company, not cured within a
thirty day period, an amount of $400,000, less any payments already made
under the agreement shall be immediately due and payable to IBM, with
interest accruing at the rate of ten percent per annum.
6. In addition on September 14, 1998 the Company entered into an Agreement
of Sale between the Company and Legacy Interactive Inc. ("Interactive"),
a company currently owned by the former Chairperson of Legacy, whereby
certain assets of the Company totaling $216,260 were sold to Interactive
and Interactive assumed $324,359 in debt from the Company. On September
14, 1998 the Company made a payment of $36,033 to Interactive as a
portion of the difference between the assets sold and debt assumed by
Interactive. The parties are currently in negotiations to determine a
plan of payment for the balance due of $72,066.
7. On September 22, 1998 a private placement of $2,000,000 for 1,960,000
shares of Legacy Common Stock was made by third party investors into the
Company to provide additional capital to the Company for use in the
merged Legacy/Videocall operations.
Based on instructions provided by NASDAQ the Company has initiated steps to
maintain compliance. There can be no assurance that the Company will be
successful in maintaining compliance with the new NASDAQ requirements and if it
does maintain compliance that, in its current financial condition, it can
continue to be in compliance.
Dependence on Alpha Software Corporation for Substantially All the
Company's Revenues. For the nine months ended September 30, 1998, approximately
63% of the Company's total revenue was derived from Alpha Soft on royalty
revenue generated by the D.A. Pursuit of Justice and Emergency Room Intern
titles. The royalty revenue from the Emergency Room title, a DOS-based product,
diminished significantly over the course of 1997, as it faced increased
competition from Windows-based products, and the royalty revenue from the D.A.
Pursuit of Justice and Emergency Room Intern titles increased as these products
entered the market in larger numbers. The Company and IBM have terminated their
co-development relationship with respect to future RealPlay(TM) titles,
including, but not limited to, the D.A. Pursuit of Justice title. If the Company
is unable to develop other CD-ROM titles or other services, if the Company
cannot find alternative distribution arrangements for its present or future
titles, or if the Company's other products and services, if any, do not receive
market acceptance, there will be a material adverse effect on the Company's
business, financial condition and results of operations. The agreement with
Alpha Soft terminates on December 31, 1998. The Company's revenues will be
11
<PAGE>
significantly reduced if the Company is unable to enter into an agreement with
other distributors due to its dependence on Alpha Soft. The termination of the
distribution agreement with Alpha Soft may have a material adverse effect on the
Company's business, financial condition and results of operations.
Significant Quarterly Fluctuations in Revenue and Operating Results and
Related Factors. The Company's quarterly operating results have fluctuated
significantly in the past, and are likely to fluctuate significantly in the
future based on a number of factors. Such factors include, but are not limited
to, the size and rate of growth of the consumer edutainment and gaming software
market, uncertainties relating to acquisitions and business combinations, market
acceptance of the Company's products and those of its competitors, competition
for shelf space and promotional support, development and promotional expenses
relating to the introduction of new products or enhancements of existing
products, projected and actual changes in computer formats and platforms and the
internet, the timing and success of product introductions, product returns,
changes in pricing policies by the Company and its competitors, the accuracy of
retailers' forecasts of consumer demand, the timing of orders from major
customers, order cancellations, delays in shipment, delays in royalty revenue
received from Alpha Soft or other distributors, the effect of personal computer
sales, risks from limited protection of proprietary rights and significant price
reductions in personal computer software, and consignment shipments of the
Company's products. The Company expects to experience significant fluctuations
in its quarterly operating results as a result of changes in the mix of products
with varying profit margins sold by the Company from quarter to quarter and the
timing of product introductions. In response to competitive pressures, the
Company may take certain pricing or marketing actions that could materially
adversely affect the Company's business, financial condition and results of
operations in any quarter. The Company's expense levels are based, in part, on
its expectations regarding future sales. As a result, operating results would be
disproportionately adversely affected by a decrease in quarterly sales, the
failure to meet the Company's sales expectations for any quarter or costs
associated with sales of defective products, higher customer support costs and
product returns.
Competition. Each of the computer software development, internet technology
and software retail distribution industries is intensely competitive. The
Company's competitors in each industry range from small companies with limited
resources to large, more established companies which have significantly greater
assets and greater financial, technical and personnel resources than those of
the Company. The Company expects competition to continue and increase in each of
these market segments. The Company in its current financial condition cannot
successfully compete in its market industries. Upon the approval by stockholders
of the Merger Plan it is the intent of the Company to exit the CD-ROM software
development activities and focus entirely on the Videocall teleconferencing
industry.
Seasonality. Typically, revenues are highest during the fourth fiscal
quarter, decline in the first fiscal quarter and are lowest in the second and
third fiscal quarters. This seasonal pattern is due primarily to the increased
demand for the Company's products during the calendar year-end holiday selling
season. There can be no assurance that the Company will achieve profitability
and, even if achieved, that such profitability will be consistent on a quarterly
or annual basis.
Results of Operations
For the three months ended September 30, 1998 compared to the three months
ended September 30, 1997.
For the three months ended September 30, 1998, revenues decreased from
$115,814 for the three months ended September 30, 1997 to $52,546 for the three
months ended September 30, 1998. This $63,268 decrease was due primarily to a
$70,880 decrease in royalty revenue due to lower sales of ER Intern and DA
Pursuit of Justice by Alpha Soft, and a decrease of $10,888 in software sales
offset by an increase of $18,500 in corporate services revenue, a division
formed in January 1998.
Total cost of revenue for the three months ended September 30, 1998
increased by $560,392 compared to the three months ended September 30, 1997.
This increase is primarily a result of the Company recording a charge of
$600,000 to the product development costs associated with the DA Pursuit of
Justice title based on lower forecasted sales of the title in CD-ROM form by the
Company and the termination of the Distribution Agreement with Alpha Soft on
December 31, 1998. The Company has been developing a DVD version of the DA
Pursuit of Justice title and is currently in negotiations with third parties to
sell the title or to enter into a licensing distribution agreement to market the
DVD version through a third party. This was offset by a decrease of in cost of
royalties associated with sales of the DA Pursuit of Justice and ER Intern
titles of $30,895 from the three months ended September 30, 1997 due to lower
sales of the titles. Cost of software sales decreased by $8,713 as a result of
the decrease in software sales by the Company through distributors during the
three month period ended September 30, 1998.
Product development expenses, which are net of co-funded development
expenses, increased from $10,640 for the three months ended September 30, 1997
to $30,684 for the three months ended September 30, 1998. The increase in
12
<PAGE>
development expense is the result of costs associated with the development of a
DA - DVD version of current DA Pursuit of Justice title costs associated with
the Corporate Services contracts.
General and administrative expenses for the three months ended September
30, 1998 increased by $103,005 to $277,164 from $174,159 for the three months
ended September 30, 1997. This increase is primarily due to an increase in
professional fees, the costs related to public companies and funds spent on
potential acquisitions.
Selling expenses of $31,278 for the three months ended September 30, 1998
increased $14,725 from the $16,553 in the three month period ended September 30,
1997. This increase is primarily related to customer service and technical
support expenses associated with ER Intern and other Company supported products.
Interest expense decreased from $ 12,147 to $(495) for the three months
ended September 30, 1998 compared to the three months ended September 30, 1997
due to the assumption of debt by Interactive in the month of September and the
settlement agreement with IBM. The Company had no interest income for the three
months ended September 30, 1998 compared to $ 54 for the three months ended
September 30, 1997 primarily as a result of a decrease in funds available for
investment since the Company's initial public offering in May 1996.
Other income of $147,935 for the three months ended September 30, 1998 is
due to the net amount of the sale of certain assets to Interactive and the
assumption of certain debt by Interactive on September 14, 1998.
Extraordinary income for the three months ended September 30, 1998 is due
to the cancellation of debt of $ 300,000 as a result of the Company and IBM
signing a Payment Agreement relating to the licensing and distribution
agreements between the two companies for the Emergency Room and District
Attorney titles formerly co-developed with IBM. In the event of a default in
payment by the Company, not cured within a thirty day period, an amount of
$400,000, less any payments already made under the agreement shall be
immediately due and payable to IBM, with interest accruing at the rate of ten
percent per annum.
For the nine months ended September 30, 1998 compared to the nine months ended
September 30, 1997.
For the nine months ended September 30, 1998, revenues increased from
$238,998 for the nine months ended September 30, 1997 to $322,313, an increase
of 35% for the nine months ended September 30, 1998. This $83,315 increase was
due primarily to a $80,000 increase in corporate services revenue, a division
formed in January 1998. Royalty revenue increased from $189,029 for the nine
months ended September 30, 1997 to $203,726 for the nine months ended September
30, 1998 due to sales of the Emergency Room Intern and DA Pursuit of Justice
titles by Alpha Soft in the first nine months of 1998. Software sales decreased
by $11,382 in the nine months ended September 30, 1998 to $38,587 from $49,969
for the nine months ended September 30, 1997 due to decreasing sales of products
sold by the Company through distributors.
Total cost of revenue for the nine months ended September 30, 1998
increased by $593,305 compared to the nine months ended September 30, 1997. This
increase is primarily a result of the Company recording a charge of $600,000 to
the product development costs associated with the DA Pursuit of Justice title
based on lower forecasted sales of the title in CD-ROM form by the Company and
the termination of the Distribution Agreement with Alpha Soft on December 31,
1998. The Company has been developing a DVD version of the DA Pursuit of Justice
title and is currently in negotiations with third parties to sell the title or
to enter into a licensing distribution agreement to market the DVD version
through a third party.. This was offset by a decrease of $4,114 in cost of
royalties associated with sales of the D.A. Pursuit of Justice and ER Intern
titles and a decrease of $2,581 in the cost of Company distributed products.
Product development expenses, which are net of co-funded development
expenses, decreased from $611,910 for the nine months ended September 30, 1997
to $87,444, a decrease of 86%, for the nine months ended September 30, 1998. The
decrease in development expense is the result of the completion of the Best of
Emergency Room titles in July, 1997 and the Company's cessation of future
product development at that time.
General and administrative expenses for the nine months ended September 30,
1998 decreased by $292,682 or 31% to $654,378 from $947,060 for the nine months
ended September 30, 1997. This decrease is primarily due to the Company ceasing
all costs associated with development of new titles; significantly curtailing
its internet gaming services; closing one business office; significantly
reducing marketing and public relations efforts; reducing the total Company
staff to four administrative personnel and implementing other operating cost
reductions.
13
<PAGE>
Selling expenses of $75,852 for the nine months ended September 30, 1998
decreased $175,845 or 70% from the $251,697 in the nine month period ended
September 30, 1997. This decrease is primarily related to decreases in salaries
and promotional expenses related to the introduction of the D.A. Pursuit of
Justice, the Best of Emergency Room and ER Intern titles and the
Passport2Network all introduced in 1997.
Interest expense increased from $43,340 to $43,591 for the nine months
ended September 30, 1998 compared to the nine months ended September 30, 1997.
The Company had no interest income for the nine months ended September 30, 1998
compared to $19,457 for the nine months ended September 30, 1997 primarily as a
result of a decrease in funds available for investment since the Company's
initial public offering in May 1996.
Other income of $147,935 for the nine months ended September 30, 1998 is
due to the net amount of the sale of certain assets to Interactive and the
assumption of certain debt by Interactive on September 14, 1998.
Extraordinary income for the nine months ended September 30, 1998 is due to the
cancellation of debt of $ 300,000 as a result of the Company and IBM signing a
Payment Agreement relating to the licensing and distribution agreements between
the two companies for the Emergency Room and District Attorney titles formerly
co-developed with IBM. In the event of a default in payment by the Company, not
cured within a thirty day period, an amount of $400,000, less any payments
already made under the agreement shall be immediately due and payable to IBM,
with interest accruing at the rate of ten percent per annum.
Liquidity and Capital Resources
The Company had $320,874 in cash outflows from operating activities for the
nine months ended September 30, 1998 compared to cash outflows of $1,787,305 for
the nine months ended September 30, 1997. The decrease in net operating cash
outflows of $1,466,431 between 1998 and 1997 primarily resulted from the
following: a decrease in the net loss from operations after adjustments for
non-cash items of $1,233,919; an decrease in the change of deferred revenue of
$40,284; an decrease in the change in accounts receivable and other receivables
of $130,241; an decrease in inventory of $5,723; an increase in other assets of
$1,354 and a increase in the change of accounts payable and accrued expenses of
$86,275. This decrease is primarily due to the Company ceasing all costs
associated with development of new titles; significantly curtailing its internet
gaming services; closing one business office; significantly reducing marketing
and public relations efforts; reducing the total Company staff to four
administrative personnel and implementing other operating cost reductions.
Investing activities in the nine months ended September 30, 1998 consisted
of purchases of computer equipment totaling $4,617, disposals of computer
equipment of $1,364 and an investment in a production joint ventures of 78,647.
In the nine months ended September 30, 1997 additions to product development
costs of $171,253, purchase of computer equipment of $5,238 and a note
receivable of $50,000 were offset by $7,438 in disposition of property and
equipment.
The Company has cash inflows of $2,381,616 from financing activities for
the nine months ended September 30, 1998 compared to inflows of $162,996 for the
nine months ended September 30, 1997. Financing activities for the nine months
ended September 30, 1998 included advances of $44,317 for use in project joint
ventures and operations, three private placements for Common Stock for
$2,305,000, the exercise of Warrants for Common Stock for $75,000 offset by
payments on notes payable of $42,501. This compares to payments under the
Company's line of credit of $35,250 and payments of notes payable of $62,780
offset by a $75,000 note payable, exercise of common stock warrants of $162,500
and $23,526 of Common Stock purchases under the Employee Stock Purchase Plan for
the nine months ended September 30, 1997.
Prior to the $2,200,000 private placements made in conjunction with the proposed
merger with Videocall and the reduction of indebtedness resulting from the
settlement with IBM and the sale of certain assets plus assumption of debt by
Interactive the Company (i) had never achieved operating profits, (ii) had
negative working capital and limited cash on hand, (iii) had significant short
and long term indebtedness, (iv) ceased development of new titles pending the
generation of additional working capital or the implementation of subcontractor
relationships on terms that permit payments to be made by the Company when it
has cash available to make such payments, (v) curtailed its internet gaming
services, (vi) closed one of its business offices, (vii) significantly reduced
marketing and public relations efforts, and (viii) reduced its total number of
employees to four. Revenues from the Company's Emergency Room title and
derivatives thereof are continuing to decrease, and revenues from the D.A.
Pursuit of Justice title have been lower than expected. The Company has incurred
net losses since inception and expects to continue to operate at a loss during
1998. The Company's prospects must be considered in light of the risks, expenses
and difficulties encountered by companies in the early stages of development,
particularly companies in new and rapidly evolving markets. The Company's
ability to maintain operations in the near term and to achieve positive cash
flow in the future depends on a variety of factors. Without the infusion of
funds in conjunction with the Videocall transaction and given the Company's
14
<PAGE>
current working capital deficiency and lack of cash resources, should the
Company be unable to obtain additional funding to supply its near-term cash
requirements, there is substantial doubt as to the Company's ability to continue
as a going concern.
On February 26, 1998. the Company was notified by The Nasdaq Stock Market, Inc.
("NASDAQ") that the Company is not in compliance with the net tangible
assets/market capitalization/net income requirement(s), pursuant to NASD
Marketplace Rule(s) 4310(c )(02) and the minimum bid price requirement, pursuant
to NASD Marketplace Rule 4310(c )(04) both of which became effective on February
23, 1998. Non-compliance with these and other rules adopted by NASDAQ at that
date, will result in the Company's stock being delisted from the NASDAQ SmallCap
Market. On July 20, 1998 NASDAQ notified the Company continuing failure to
comply with the rules would result in delisting of the Company's stock on July
28, 1998. The Company filed an appeal for an oral hearing on a date to be
determined by NASDAQ to stay the delisting. The Company appeared before a
hearing committee on September 18, 1998 and outlined the steps it has taken and
will subsequently take to maintain compliance:
1. At the Annual Meeting of Stockholders on June 18, 1998 the stockholders
approved a one for three (1:3) reverse split of the Legacy Common Stock.
2. On June 23, 1998 EBC Trust Company ("EBC") exercised 57,252 Warrants to
purchase Legacy Common Stock at $1.31 per share thereby generating
$75,000 for the Company.
3. On June 30, 1998 a private placement for 210,000 shares of Legacy Common
Stock was made by DK Trust at $0.50 per share generating $105,000 for
the Company.
4. On September 4, 1998 a private placement of $200,000 for 400,000 shares
of Legacy Common Stock was made in accordance with the terms of the
Legacy/Videocall Letter of Intent signed on that date.
5. On September 14, 1998 the Company and IBM signed an agreement whereby
the $500,000 balance owed IBM was reduced to $200,000 and a payment of
$25,000 was made on that date. Subsequent payments of $25,000 will be
made in each calendar quarter until the debt of $175,000 is paid off. In
the event of a default in payment by the Company, not cured within a
thirty day period, an amount of $400,000, less any payments already made
under the agreement shall be immediately due and payable to IBM, with
interest accruing at the rate of ten percent per annum.
6.In addition on September 14, 1998 the Company entered into an Agreement
of Sale between the Company and Legacy Interactive Inc. ("Interactive"),
a company currently owned by the former Chairperson of Legacy, whereby
certain assets of the Company totaling $216,260 were sold to Interactive
and Interactive assumed $324,359 in debt from the Company. On September
14, 1998 the Company made a payment of $36,033 to Interactive as a
portion of the difference between the assets sold and debt assumed by
Interactive. The parties are currently in negotiations to determine a
plan of payment for the balance due of $72,066.
7. On September 22, 1998 a private placement of $2,000,000 for 1,960,000
shares of Legacy Common Stock was made by third party investors into the
Company to provide additional capital to the Company for use in the
merged Legacy/Videocall operations.
Based on instructions provided by NASDAQ the Company has initiated steps to
maintain compliance. There can be no assurance that the Company will be
successful in maintaining compliance with the new NASDAQ requirements and if it
does maintain compliance that, in its current financial condition, it can
continue to be in compliance.
The Company believes that, together with a successful effort to obtain
additional funding for its near-term cash needs, its proposed acquisition of
Videocall, its exit from the CD-ROM software development activities and focus
entirely on Videocall operations, its operating plan and efforts to reduce
operating expenses, in conjunction with acquisition of such additional funding
will be adequate to meet its fiscal 1998 working capital needs, however, there
15
<PAGE>
can be no assurance that the Company will be able to obtain such funding, or
that it will not experience liquidity problems caused by adverse market
conditions and other unfavorable events. In addition, there can be no assurance
that the Company will be successful in maintaining compliance with the new
NASDAQ requirements and if it does maintain compliance that, in its current
financial condition, it can continue to be in compliance.
16
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On August 18, 1997, the U.S. Securities and Exchange Commission ("SEC")
issued a subpoena deces tecum to the Custodian of Records of the Company and
other parties. The subpoenas were issued in connection with the SEC's formal
investigation entitled In the Matter of Reynolds Kendrick Stratton, Inc., File
No. LA-752 (the "Investigation"). The Investigation appears to center around
activities of JB Oxford Holdings, Inc., a broker-dealer, which is the successor
to Reynolds Kendrick Stratton, Inc., and was the underwriter of the Company's
initial public offering. The SEC has indicated that it expects to take the
testimony of the Company and other parties at some point in the future. The
Company has no reason to conclude that it is a target of the Investigation.
The Company is not currently involved in any litigation that is expected to
have a material adverse effect on the Company's business or financial position.
There can be no assurance, however, that third parties will not assert
infringement or other claims against the Company in the future which, regardless
of the outcome, could have an adverse impact on the Company as a result of
defense costs, diversion of management resources and other factors.
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 11 - Computation of Weighted Average Common Stock Share
Outstanding
Exhibit 27 - Financial Data Schedule
(b) The Company filed a Form 8-K on September 14, 1998 under Item 5.
17
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: November ____, 1998 LEGACY SOFTWARE, INC.
/s/ C. Harold Snyder
--------------------
C. Harold Snyder
Chief Financial Officer
(Duly Authorized Officer and Principal
Financial and Accounting Officer)
18
EXHIBIT 11
LEGACY SOFTWARE, INC.
COMPUTATION OF WEIGHTED AVERAGE
COMMON STOCK SHARES OUTSTANDING
<TABLE>
<CAPTION>
Three Months Nine Months
Total Number Ended Ended
of Shares September 30, 1998 September 30, 1998
------------ ------------- -------------
<S> <C> <C> <C>
Outstanding shares as of January 1, 1998 885,000 885,000 885,000
Exercise of 19,084 Warrants on 6/23/98 19,084 6,431
Issue of 66,666 shares in a private placement
on 6/30/98 - 66,667 22,466
Issue of 400,000 shares in a private placement on
9/14/98 - 65,217 21,978
Issue of 1,960,000 shares in a private placement on
9/22/98 170,435 57,435
------------ ------------- -------------
Total Weighted Average Shares Outstanding 885,000 1,206,403 993,310
============ ============= =============
Net loss before extraordinary item $ (757,001) $(1,050,849)
Extraordinary item $ 300,000 $ 300,000
Net loss after extraordinary item $ (457,001) $ (750,849)
Net loss per common share before extraordinary item $ (0.63) $ (1.06)
Extraordinary item $ 0.25 $ 0.31
Net loss $ (0.38) $ (0.76)
</TABLE>
(1) The effect of common stock options and warrants are excluded from diluted
earnings per share as their inclusion would be anti-dilutive for the three
month and nine month periods ending September 30, 1998.
19
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,993,506
<SECURITIES> 0
<RECEIVABLES> 51,881
<ALLOWANCES> 12,500
<INVENTORY> 16,597
<CURRENT-ASSETS> 2,069,484
<PP&E> 240,165
<DEPRECIATION> 172,799
<TOTAL-ASSETS> 2,784,155
<CURRENT-LIABILITIES> 481,867
<BONDS> 0
0
0
<COMMON> 3,334,084
<OTHER-SE> 2,184,872
<TOTAL-LIABILITY-AND-EQUITY> 2,784,155
<SALES> 322,313
<TOTAL-REVENUES> 322,313
<CGS> 659,832
<TOTAL-COSTS> 1,455,506
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 43,591
<INCOME-PRETAX> (1,050,849)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 300,000
<CHANGES> 0
<NET-INCOME> (750,849)
<EPS-PRIMARY> (1.06)
<EPS-DILUTED> (1.06)
</TABLE>
