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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
ANNUAL REPORT
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE EXCHANGE ACT
OF 1934
Commission File Number 0-28330
TALK VISUAL CORPORATION
(Exact name of registrant as specified in its charter)
LEGACY SOFTWARE, INC.
(Former name of registrant as specified in its charter)
Delaware 95-456-1156
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
One Canal Park - 3rd Floor
Cambridge, Massachusetts 0214
(Address of principal executive offices) (Zip Code)
5757 W. Century Boulevard, Suite 700
Los Angeles, California 90045
(Former address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (617) 679-0300
Registrant's former telephone number, including area code: (310) 348-7266
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Name of exchange on
Title of each class which registered
Common Stock, $.001 par value NASDAQ SmallCap Market
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act 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
[ ]
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B contained in this form, and no disclosure will 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. | |
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As of March 23, 1999, there were 3,714,435 shares of the registrant's Common
Stock outstanding. The aggregate market value (based on the average bid and
asked prices of the Common Stock on the NASDAQ Small Cap Market) of the voting
stock held by non-affiliates of the registrant on March 23, 1999 was $
11,816,924.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement for the registrant's
Annual Meeting of Stockholders which is scheduled for May 24, 1999 have been
incorporated by reference into Part III of this Report
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PART I
ITEM 1. Description of Business
Except for historical information contained herein, the statements in this
report (including without limitation, statements indicating that the registrant
"expects" "estimates" "anticipates" or "believes" and all other statements
concerning future financial results, product offerings 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 (the Exchange
Act), 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 registrant's actual results in future periods to differ materially
from forecasted results. Those factors, risks and uncertainties include, but are
not limited to: the registrant's ability to (i) consumate the proposed Merger
with Videocall International Corporation, in order to continue operating as a
going concern, and if such a business combination or strategic alliance is
effected, can the new entity achieve its' business plan; the registrant's
ability to effectively manage its various businesses in a rapidly changing
environment; the timing of new product introductions; retail acceptance of the
registrant's products; the registrant's ability to adapt and expand its product
offerings; growth rates of the registrant's market segments; variations in the
cost of, and demand for, customer service and technical support; price pressures
in the competitive environment; the consummation of possible acquisitions; and
the registrant's ability to integrate acquired operations into its existing
business and manage growth. Additional information on these and other risk
factors are included under "Risk Factors" and elsewhere in this Form 10-KSB.
Proposed Acquisition of Videocall International Corporation
On September 8, 1998 Legacy Software, Inc., renamed Talk Visual Corporation
February 26, 1999 (the "Company") and Videocall International Corporation
("Videocall") announced that the two companies had entered into a Letter of
Intent for the Company to purchase the common shares of Videocall in exchange
for the Company's 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, whereby Videocall will merge (the "Merger") with a
newly formed, wholly owned subsidiary of the Company. Videocall is a development
stage company formed to provide videocalling services to businesses and
consumers. Videocall is in the process of developing international locations
through strategic partnerships and wholy owned outlets. The Board of Directors
of the Company and the Board of Directors of Videocall have approved the Merger
Plan. The parties are currently preparing a definitive Proxy Statement and
Registration Statement on Form S-4 to be submitted for Company stockholder
approval of the Merger Plan. Upon the approval by stockholders it is the intent
of the Company to exit its' CD-ROM software development activities, to determine
the economic value of sale or retention of existing products and to focus
entirely on Videocall operations.
Prior to stockholder approval of the acquisition of Videocall by the
Company Videocall has entered into 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
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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.
The Company has agreed to issue 600,000 shares of stock and 1,800,000 options to
parties responsible for the introduction of the Company to Videocall. The
options are exercisable at twenty five cents per share and expire three years
from the issue date. Additionally, Videocall has agreed to issue 1,200,000
shares in connection with the Merger Plan to parties responsible for the
introduction of Videocall to the Company. Both equity obligations take effect on
the consumation of the Merger.
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 debts 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. Mr.
Zwebner is Chairman of the Board for Videocall and Mr. Rosov is President and
CEO of Videocall. Additionally, Mr. Zwebner, Mr. Rosov and Mr. Walker are
Directors of Videocall.
Cessation of Software Business; Infusion of Additional Capital
As of December 31, 1998, the Company had (i) never achieved operating profits,
(ii) ceased development of new titles, (iii) ceased its internet gaming
services, (iv) closed one of its business offices in California, (v) ceased
marketing and public relations efforts with respect to the software products,
and (vi) reduced its total number of employees to two. Revenues from the
Company's Emergency Room and DA Pursuit of Justice titles and derivatives
thereof are minimal and in light of the proposed Merger with Videocall, are
expected to cease.
On September 22, 1998 a private placement subscription of $2,000,000 for
2,040,816 shares of the Company's Common Stock was made by third party
investors into the Company to provide additional capital to the Company for use
in the merged Company/Videocall operations. All monies due under the
subscriptions have been paid to the Company as of March 31, 1999. Separate from
the September 22, 1998 subscription, the Company has received $905,717 of
additional capital contributed from June 1, 1998 through December 31, 1998 in
the form of private placements, warrant exercise and debt exchange.
Subject to approval of the Merger Plan it is the intent of the Company to
reincorporate from Delaware to Nevada.
The Company believes that it will be able to consumate the Merger, and its
prospects for obtaining additional financing will improve as a result thereof.
Potential Delisting of the Company's Common Stock on NASDAQ
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
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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 Company's Common Stock.
All shares and prices have been adjusted for this reverse stock split.
2. On June 23, 1998 EBC Trust Company ("EBC") exercised 57,252 Warrants to
purchase Company's Common Stock at $3.93 per share thereby generating
$75,000 for the Company.
3. On June 30, 1998 a private placement for 70,000 shares of Company's Common
Stock was made by DK Trust at $1.50 per share generating $105,000 for
the Company.
4. On September 4, 1998 a private placement of $200,000 for 400,000 shares of
the Company's Common Stock was made in accordance with the terms of the
Company/Videocall Letter of Intent signed on that date.
5. On September 14, 1998 the Company and International Business Machines
Corporation ("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 Interactive, a company currently owned by the
former Chairperson of the Company, 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. As a result of the hearing NASDAQ granted the Company an exception to the
listing requirements if the Company complied with certain of the
requirements. This exception, originally granted through December 7, 1998,
was extended to January 29, 1999 and further extended to May 15, 1999.
General
Legacy Software, Inc. was organized in California in 1989 as a successor to a
partnership formed in 1986, and was reincorporated in Delaware in 1996. On
February 26, 1999, the Company was renamed Talk Visual Corporation. The
principal offices of the Company are located at One Canal Park - 3rd Floor,
Cambridge, Massachusetts 02142, and its telephone number is (617) 679-0300.
Prior to the signing of the Merger Plan, the Company developed mind
stimulating CD-ROM and Internet games which entertained as well as educated.
Since the signing of the Merger Plan, the Company has ceased activities related
to the software business. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations".
Upon the approval by stockholders of the Merger Plan, it is the intent of the
Company to exit its 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.
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Initial Public Offering
In May, 1996, the Company completed an initial public offering of 1,150,000
shares of its common stock, $.001 par value per share ("Common Stock"). Net
proceeds to the Company were $5,198,048 after deducting all offering-related
expenses. During 1996 and 1997, the Company used the majority of such proceeds
for the development of additional RealPlay(TM) titles, including the first three
episodes of the DA Pursuit of Justice title, the Emergency Room Intern title and
the Best of Emergency Room title, all of which were released by the Company in
1997, development of three additional episodes of the District Attorney title,
the launching of Passport2, the Company's internet gaming technology, repayment
of certain outstanding indebtedness and for working capital purposes.
Prior Business Affiliations
In January, 1998, the Company signed a non-binding Letter of Intent with Black
Tusk Medical, Inc. , a Nevada corporation ("BTI") to joint venture the
development and publishing of high production value educational software. BTI as
a part of a $3.5 million financing program was to make an equity investment in
the Company. The Letter of Intent was superseded by a revised Letter of Intent
dated March 25, 1998. Pursuant to the revised Letter of Intent BTI and Legacy
were to pursue joint venture programs for the development and distribution of up
to four product-oriented joint ventures. On April 29, 1998 the Company and BTI
mutually agreed to terminate negotiations.
Pending Business Acquisition
On September 8, 1998 the Company and 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 the Merger Plan detailing the terms
of the transaction.
On September 22, 1998 a private placement of $2,000,000 for 2,040,816 shares
of Company's Common Stock was subscribed to by third party investors to provide
additional capital to the Company for use in the merged Company/Videocall
operations.
Election of new Officers and Directors
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 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. Mr. Zwebner is Chairman of the Board for Videocall and Mr. Rosov is
President and CEO of Videocall. Additionally, Mr. Zwebner, Mr. Rosov and Mr.
Walker are Directors of Videocall.
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.
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Mr. Rosov serves as Chief Executive Officer of Videocall and Mr. Snyder serves
as Chief Financial Officer of Videocall.
Sale of Assets and Assumption of Debt by a Third Party
As a condition to the Merger Plan, the Company, on September 14, 1998,
entered into an Agreement of Sale between the Company and Interactive, a company
currently owned by the former Chairperson of the Company, 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.
See Item 3, Legal Proceedings for further information.
Events Subsequent to December 31, 1998
Property Acquisitions
The Company has acquired a 22,622 square foot property in Toronto, Canada in
exchange for 975,000 shares of Class A Preferred stock, $.001 par value, paying
dividends of $.095 per share per annum.
Business Alliances
On February 19, 1999 the Company signed a Placement and Fee Agreement with
Red Laguna Trading Company, Inc.("Red Laguna") for 500,000 Warrants to purchase
the Company's Common Stock, at the exercise price of $5.00 per share, to employ
Red Laguna to find strategic business alliances for the Company over the period
of the next three years.
On February 23, 1999 the Company and Infochannel Limited
("Infochannel"), a Jamaican corporation signed a Memorandum of Understanding
whereby the Company will purchase a 23% interest in Infochannel for 78,823
shares of the Company's Common Stock valued at $4.17 per share. The Company and
Infochannel will in turn form a joint venture, Videocall Jamaica, Limited, to
operate the videocalling outlets in the Jamaican market.
Business Acquisitions
On March 22, 1999 the Company and Proximity Inc., ("Proximity"), a
Vermont corporation, signed a Letter of Intent whereby, subject to due diligence
by both parties, the Company will purchase the outstanding stock of Proximity
for $4 million dollars in common stock of the Company valued at $4.00 per share.
In addition the Company will pay Proximity shareholders the sum of $250,000 in
10 equal monthly installments and subject to receiving audited financials and
pro forma operating reports will make available $200,000 for working capital
purposes. Proximity provides international full spectrum videoconferencing
services with public access to over 2,000 videoconferencing sites.
Facilities
On February 24, 1999 the Company closed the Los Angeles office and
consolidated its operations with Videocall at One Canal Park, Cambridge, MA.
Corporate Name and Trading Symbol
Effective March 1, 1999, the Company changed its name to Talk Visual
Corporation. On the same date, the Company's trading symbol on the Nasdaq
SmallCap Stock Market was changed to TVCPC.
Stockholder Public Relations Services
The Company issued 150,000 shares of common stock on January 25, 1999, to a
public relations firm for representation services.
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Pending Lawsuit
The Company has filed a lawsuit (the "Complaint") in Los Angeles,
California against the former Chairperson, Ariella Lehrer, the D&A Lehrer
Children Trust and other related entities. In that action, the Company alleges
that Lehrer breached her fiduciary duties to the Company through various actions
that, according to the Complaint, "undertook to burden an already weakened
Legacy with unreasonable, unnecessary and unfair obligations that primarily
benefited her personally." The Company also claims that Lehrer's actions were
"taken in bad faith and were... not in the best interest of Plaintiff Legacy or
its shareholders." The Company also alleges that Lehrer fraudulently backdated
documents for her personal benefit, and "deliberately and maliciously
misrepresented the financial condition of plaintiff Legacy..." The company
claims that the misrepresentations created substantial and unnecessary legal
exposure for the Company, particularly with the Company's listing on the Nasdaq
SmallCap Stock Market. The Company seeks to recover substantial damages, to be
proved at trial, for Lehrer's actions and also seeks injunctive relief requiring
Lehrer to return to the Company significant assets.
Videocall Subsequent Events
Videocall as a part of its videocalling expansion plans has signed
Letters of Intent or Leases providing for Videocall outlets to be opened in the
following locations in 1999:
Retail Stores
Boston, Massachusetts
Miami, Florida
Sacramento, California
Hotels
The Hyatt Regency, Hong Kong
Newspapers
The Philippine News - offices in San Francisco, Los Angeles, New
York City, San Diego, Toronto, Manila, Hawaii, Guam and Malaysia
Videocall has signed the following service agreements
Page Mart Wireless, Inc. - pager services for the Americas and the Caribbean
Cable & Wireless - utilization of internet global network. Global
Exchange -utilization of network system
Marketing and Distribution Agreements
On July 31, 1997, the Company and Alpha Software Corporation ("Alpha Soft")
entered into a Distribution Agreement for DA Pursuit of Justice cases 1 through
3 and the Emergency Room Intern titles. Under the terms of the Distribution
Agreement, Alpha Soft produced, marketed and distributed the titles and the
Company received a royalty on each sale. The Distribution Agreement was
terminated on December 31, 1998.
On June 5, 1997, the Company entered into an Information Provider Commission
Agreement with AT & T WorldNet Service ("WorldNet") whereby customers of
WorldNet were offered the opportunity to participate in Passport2Network
interactive games. The Passport2Network paid WorldNet a percentage of
advertising revenue. This Agreement was terminated on December 31, 1998.
On October 14, 1997, the Company signed an Information Provider Commission
Agreement with The New York Times Electronic Media Company ("Times on Line")
whereby subscribers of the Times On Line Bridge and Chess columns had the
opportunity to participate in
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Passport2Network interactive games under terms similar to the WorldNet
agreement. This Agreement was terminated on August 31, 1998.
On January 8, 1998, the Company signed an Information Provider Commission
Agreement with Earthlink Networks, Inc. whereby subscribers had the opportunity
to participate in Passport2Network interactive games under terms similar to the
WorldNet agreement. This Agreement was terminated on December 31, 1998.
Products and Services
In connection with the proposed acquisition of Videocall, the Company intends
to exit the business of developing CD-ROM and Internet games and to concentrate
solely on the business of Videocall. Accordingly, to the extent that the
following information relates to the business of developing CD-ROM and Internet
games, it may be of limited relevance to the Company in the event that the
Merger is consummated.
CD-ROM Titles
Emergency Room, an interactive game which the Company co-developed with IBM,
is the first RealPlay(TM) title designed to give teenagers and adults a
realistic experience of a particular career. In this game, the player begins as
a medical student who can work his or her way up the ranks to become the
attending physician by successfully completing 400 different medical cases. The
player examines, diagnoses and treats patients whose problems range from simple
broken bones to gunshot wounds. From October, 1995, to summer, 1997, IBM
distributed over 160,000 units of this DOS-based title through the consumer
retail channel. In addition, from September 1997 through December 31, 1998,
Alpha Soft had distributed over 76,000 units of Emergency Room Intern. See
"Management's Discussion and Analysis or Plan".
Research and Development
Prior to the signing of the Merger Plan, the Company's research and
development program consisted primarily of activity relating to the early
development stages of game titles and the development of new product concepts.
Product development expenses are presented in the Company's financial statements
net of co-funded development expenses and primarily include personnel expenses
associated with both creative developers and programmers, and costs associated
with external video production for use in the Company's software titles. For the
years ended December 3l, 1998, 1997, and 1996 net product development expenses
were $1,008,640, $619,516, and $1,664,478, respectively. For the year ended
December 31, 1998, development expenses totaled $1,008,640 of which $112,504
were actual costs of development, $36,712 amortization of development costs
based on unit sales and the remaining $859,424 represented the write off of
capitalized product development costs to net realizable value. See "Management's
Discussion and Analysis or Plan of Operation".
Competition
Prior to the signing of the Merger Plan, the Company competed in the computer
software industry. Each of the computer software development, Internet
technology and software retail distribution industries is intensely competitive.
The Company's former competitors in each industry ranged 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.
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Company Strategy
Prior to the signing of the Merger Plan, the Company's objective was to
establish itself as a leading developer of edutainment, infotainment, and
simulation software products.
Upon shareholder approval of the Merger Plan, the Company will concentrate on
the establishment of videocalling operations through strategic partnerships and
development of retail outlets.
Seasonality; Shelf Life, Quarterly Fluctuations in Revenue and Operating Results
The Software Marketplace - Estimates indicate that the entire interactive
software market, all areas, will be approximately $8 billion in 1998; of that,
the consumer software market (i.e., retail sales of non-utility, interactive
units) is approximately $5.5 billion. The edutainment marketplace is expected to
round-out at approximately $1.8 billion in 1998 and is growing at an annually
compounding rate of 17%. This slice of the market is expected to represent about
27% of the total marketplace.
Fourth quarter holiday sales represent a significant amount of sales that can
be expected in the retail channel from an edutainment software product.
Typically, sales are highest during the fourth quarter, decline in the first
quarter and are lowest in the second and third quarters. This seasonal pattern
is due primarily to the increased demand for the Company's products during the
calendar year-end holiday selling season. Other fluctuations in retail sales are
related to the school market, which generally purchases most products at the
beginning of the school year in September or in late spring, when software
budgets must be expended. The Company believes that potential OEM or hardware
and software bundling opportunities exist year round. The average entertainment
title has a product life span of approximately 18 months. The average
educational title has a product life span of approximately three years. The
Company believes that the shelf life of the RealPlay(TM) titles will be longer
than the typical entertainment title because of the sophisticated and
educational content of such products.
The Company's quarterly operating results have fluctuated significantly in the
past, based on a number of factors. In addition to the seasonal factors
discussed above, the Company's quarterly operating results can be affected
significantly by the number and timing of new product releases by the Company,
the Company's ability to recognize revenue in accordance with SFAS 48,
expenditures and a variety of non-recurring events, such as acquisitions.
Proprietary Rights
The Company regards its technology as proprietary and relies primarily on a
combination of trademark, copyright, trade secret laws, employee and third-party
non-disclosure agreements and other methods to protect its proprietary rights.
The source code for the Company's proprietary software is protected both as a
trade secret and as an unpublished and unregistered copyrighted work.
Products in the market and under development contain proprietary software
which is comprised of the manager routines and system code for such products. In
addition, since the release of Emergency Room the Company has made improvements
in the software manager routines and system code for use in its products. The
Company has registered trademarks in the United States for both the Legacy name
and certain of its product names and has pending trademarks and copyrights for
certain additional product names. The Company believes that trademarks and
copyrights are important and significant assets owned by the Company.
The technology in which the Company has proprietary rights is embodied in its
software. This includes (i) the Emergency Room title software, (ii) the improved
software which the Company is using in its current products and its off-line
tools for translating
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data and (iii) the software being utilized for the development of the Company's
Internet game server network. A competitor could independently develop software
which produces the same results as the Company's software without copying the
Company's software and without violating the Company's proprietary rights.
Employees
As of March 23, 1999 the Company had one full-time employee. The Company's
employee is not covered by a collective bargaining agreement and the Company has
experienced no work stoppages. The Company believes that its relationship with
its employee is good.
ITEM 2. Description of Property
In February 1998, the Company terminated its lease for the facility at 5340
Alla Road, Los Angeles, CA and negotiated a month-to-month lease for a smaller
portion of space at a reduced rental rate in the same building, and in March
1998 the Company terminated its lease for office property located in Oakhurst,
CA. In October 1998 the Company moved to smaller facilities at 5757 W. Century
Boulevard, Los Angeles, CA under a month-to- month rental agreement. On February
24, 1999 the Company closed the Los Angeles office and consolidated its
operations with Videocall at One Canal Park, Cambridge, MA. The Company
believes that the new space is adequate and suitable for its needs.
Subsequent to December 31, 1998 the Company acquired a 22,622 square foot
property in Toronto, Canada in exchange for 975,000 shares of Class A Preferred
stock, $.001 par value, paying dividends of $.095 per share per annum.
ITEM 3. Legal Proceedings
On August 18, 1997, the U.S. Securities and Exchange Commission ("SEC") issued
subpoenas 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 has filed a lawsuit (the "Complaint") in Los Angeles, California
against the former Chairperson, Ariella Lehrer, the D&A Lehrer Children Trust
and other related entities. In that action, the Company alleges that Lehrer
breached her fiduciary duties to the Company through various actions that,
according to the Complaint, "undertook to burden an already weakened Legacy with
unreasonable, unnecessary and unfair obligations that primarily benefited her
personally." The Company also claims that Lehrer's actions were "taken in bad
faith and were... not in the best interest of Plaintiff Legacy or its
shareholders." The Company also alleges that Lehrer fraudulently backdated
documents for her personal benefit, and "deliberately and maliciously
misrepresented the financial condition of plaintiff Legacy..." The company
claims that the misrepresentations created substantial and unnecessary legal
exposure for the Company, particularly with the Company's listing on the Nasdaq
SmallCap Stock Market. The Company seeks to recover substantial damages, to be
proved at trial, for Lehrer's actions and also seeks injunctive relief requiring
Lehrer to return to the Company significant assets.
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.
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ITEM 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MARKET INFORMATION FOR COMMON STOCK
The Company's Common Stock, is currently traded on the NASDAQ SmallCap Market
under the symbols TVCPC. After the Company began public trading on May 14, 1996,
and until December 31, 1998, the Common Stock was traded in the over-the-counter
market and was quoted on the NASDAQ SmallCap Market under the symbol LGCY. Prior
to May 14, 1996, there was no public trading market for the Common Stock. The
following table sets forth for each period indicated the high and low bids for
the Common Stock as reported by the NASDAQ SmallCap Market.
Price
-----
<TABLE>
<CAPTION>
CALENDAR YEAR 1998 High Low
-------- -------
<S> <C> <C>
First Quarter.... $ 3 3/4 $ 1 1/8
Second Quarter... 3 3/8 5/16
Third Quarter.... 1 25/32 15/16
Fourth Quarter... 4 13/16
CALENDAR YEAR 1997 High Low
-------- -------
First Quarter.... $ 1 1/2 $ 5/8
Second Quarter... 1 1/3 9/16
Third Quarter.... 1 1 5/16
Fourth Quarter... 7/8 1/16
</TABLE>
Market prices have been adjusted for the 1:3 reverse split of the Company's
Common Stock on September 6, 1998.
HOLDERS
As of March 23, 1999, there were 3,714,435 shares of the Common Stock
outstanding, representing approximately 800 beneficial holders.
TRANSFER AGENT AND REGISTRAR
The Nevada Agency and Trust Company, Suite 880 Valley Bank Plaza, 50 West
Liberty, Reno, NV 89501, is the Transfer Agent and Registrar for the Common
Stock.
DIVIDENDS
The Company has not paid any cash dividends on its capital stock to date. The
Company currently anticipates that it will retain all future earnings, if any,
for use in its
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business and does not anticipate paying any cash dividends on its
capital stock in the foreseeable future. In addition, the payment of cash
dividends may be limited by financing agreements entered into by the Company in
the future.
In connection with the acquisition of real estate on February 24, 1999, the
Company issued 975,000 shares of Class A Preferred stock, $.001 par value,
paying a dividend of $095 per share per annum.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
GENERAL
The Company was organized in California in 1989, as a successor to a
partnership formed in 1986 and was reincorporated in Delaware in March, 1996.
The Company completed an initial public offering of 1,150,000 shares of its
common stock, par value $.0001 per share ("Common Stock"), in May of 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. The Emergency Room title,
the Company's first RealPlay(TM) (formerly Career Sim(TM)) series title, is a
multimedia computer simulation designed to provide a realistic and involving
experience of what it is like to be an emergency room doctor. The second title
in the Company's RealPlay(TM) series, DA Pursuit of Justice, is a multimedia
computer simulation designed to provide a realistic and involving experience of
what it is like to be a district attorney. The first three episodes were
released in 1997. In addition the Company released The Best of Emergency Room
consisting of 50 of the original Emergency Room cases in DOS and Emergency Room
Intern consisting of 50 new cases in a DOS/Win95 enhanced CD-ROM. The Company
also operates Passport2, its Internet gaming technology, with five interactive
games, whereby users were able to compete with one another via the Internet. See
"Risk Factors--Management of Growth; Uncertainties Relating to Acquisitions and
New Businesses" and "--Competition"
In 1996 and for six months of 1997 IBM marketed the Emergency Room title which
the Company co-developed with IBM. Due to the Company's inability to reasonably
estimate returns on the Emergency Room title, the Company did not recognize
royalty revenue on this product on the accrual basis of accounting until the
fourth quarter of 1996 when the amount of returns could be reasonably estimated
in accordance with Statement of Financial Accounting Standards No. 48 ("SFAS
48").
The Company and IBM entered into a Development and Licensing Agreement (the
"DA License Agreement") on November 16, 1995. The DA Pursuit of Justice title is
the Company's second RealPlay(TM) title. In the fourth quarter of 1996 the
Company and IBM mutually agreed to terminate the DA License Agreement with
respect to the DA Pursuit of Justice title. As consideration for the termination
and for acquisition of IBM's rights under the DA License Agreement, the Company
was obligated to pay IBM an aggregate sum of $400,000, which sum represents the
total amount of milestone payments made by IBM to the Company under the DA
License Agreement. The final termination agreement, effective January 3, 1997,
provides for payment to IBM based upon a fixed percentage of royalty payments
received, or net revenue generated if the Company distributes the software
directly, with payment in full required by December 15, 1997. In the event that
the Company breaches its obligation to pay IBM the aggregate sum of $400,000 by
December 15, 1997, as royalties and final payment, the total amount due IBM will
be increased by interest at an annual rate of 10% and continuing on the unpaid
balance until paid in full. The Company recorded a $400,000 current liability at
December 31, 1996 to account for the payments under the termination agreement
which effectively increased the capitalized software development costs related
to the DA Pursuit of Justice title. On December 15, 1997 the Company was unable
to make the payment to IBM. The Company and IBM reached an agreement on
September 14, 1998 whereby the Company will pay $200,000 to IBM in quarterly
payments of $25,000 commencing with the fiscal quarter ended September 30, 1998.
13
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PROPOSED ACQUISITIONS
In January, 1998, the Company signed a non-binding Letter of Intent with Black
Tusk Medical, Inc., a Nevada corporation ("BTI") to joint venture the
development and publishing of high production value educational software. BTI as
a part of a $3.5 million financing program was to make an equity investment in
the Company. The Letter of Intent was superseded by a revised Letter of Intent
dated March 25, 1998. Pursuant to the revised Letter of Intent BTI and Legacy
were to pursue joint venture programs for the development and distribution of up
to four product-oriented joint ventures, including new titles in the Company's
RealPlay(TM) series--Emergency Room and DA Pursuit of Justice. BTI advanced the
Company $30,000 toward two of the proposed joint ventures. Utilizing the joint
venture vehicle the Company and BTI intended to obtain funding from third
parties to produce, market and distribute the Company's titles in the retail,
OEM, educational and professional markets worldwide. The Company and BTI would
share in any revenue received from each joint venture after the initial funding
from the third party investors had been repaid. Additionally, BTI was to
purchase 260,000 shares of the Company's Common Stock for $130,000 within five
days following execution of a definitive Merger Agreement. If the Merger was
consummated, the foregoing 260,000 shares would become authorized but unissued
shares of Common Stock and the shareholders of BTI would receive 1,922,588
shares of the Company's Common Stock, at a valuation of $0.40 per share. As a
result, following the Merger, the shareholders of BTI would hold approximately
42% of the outstanding shares of the Company. On April 29, 1998 the Company and
BTI mutually agreed to terminate negotiations.
On September 8, 1998 the Company and Videocall announced that the two
companies had entered into a Letter of Intent for the Company to purchase the
common shares of Videocall in exchange for the Company's common and preferred
stock. On September 14, 1998 the two companies signed the Merger Plan detailing
the terms of the transaction whereby Videocall will merge with a newly formed
wholly owned subsidiary of the Company.
On September 22, 1998 a private placement of $2,000,000 for 2,040,816 shares
of Common Stock was subscribed to by third party investors to provide additional
capital to the Company for use in the merged Company/Videocall operations. Of
the $2,000,000 due under the subscription, $1,843,000 has been received in cash;
the balance of $157,000 has been received in assets as of March 31, 1999.
Videocall is a development stage company in the area of providing
videocalling services to businesses and consumers. Videocall is in the process
of developing international locations through strategic partnerships and through
vendor relationships. The Board of Directors of the Company and the Board of
Directors of Videocall have approved the Merger Plan. The parties are currently
preparing a definitive Proxy Statement and Registration Statement on Form S-4 to
be submitted for Company stockholder approval of the Merger Plan. Upon the
approval by stockholders it is the intent of the Company to exit 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.
Also, subject to approval of the Merger Plan it is the intent of the Company to
reincorporate from Delaware to Nevada. See "Risk Factors--Management of Growth;
Uncertainties Relating to Acquisitions and New Businesses; Management's
Discussion and Analysis of Financial Condition and Results of Operations"
The Company has agreed to issue 600,000 shares of stock and 1,800,000 options
to parties responsible for the introduction of the Company to Videocall. The
options are exercisable at twenty five cents per share and expire three years
from the issue date. Additionally, Videocall has agreed to issue 1,200,000
shares in connection with the Merger Plan to parties responsible for the
introduction of Videocall to the Company. Both equity obligations take effect on
the consummation of the Merger
14
<PAGE>
Although the Company believes that the proposed Merger is in the best
interests of the Company and its stockholders, there are significant risks
associated with these transactions. The Company's ability to integrate and
organize new businesses and successfully manage growth requires significant
expansion in its operational, financial and management systems. There is no
assurance that the Company will be able to address these requirements in a
satisfactory manner, and the failure to do so could have a material adverse
effect on the Company's results of operations, financial condition and business.
RESULTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR ENDED DECEMBER 31,
1997.
For the twelve months ended December 31, 1998 revenue decreased $157,776 from
the twelve months ended December 31, 1997. Royalty revenue decreased $205,013
or 50% from the twelve months ended December 31, 1997 principally due to
decreased sales of the Company's ER Intern and DA Pursuit of Justice titles.
Software sales decreased $32,763 or 38%, due to decreasing sales of The Best of
ER and other offerings of the Company's DOS products. Corporate services, a
division formed in January 1998, recorded $80,000 in revenue for the year ended
December 31, 1998. The Corporate Services division was formed to separate the
development of new software titles with programming services offered to
commercial enterprises.
Cost of royalties decreased $201,750 for the twelve months ended December 31,
1998 from the $211,308 recorded in the twelve months ended December 31, 1997.
The decrease was caused primarily by the lower royalty sales in 1998 and a
reclassification of a reduction in product development costs of $859,424 based
on lower forecasted sales associated with the DA Pursuit of Justice title from
cost of royalties to product development expense. Cost of software sales
decreased from $98,881 in the twelve months ended December 31, 1997 to $33,254
for the twelve months ended December 31, 1998 due to a lower sales volume of all
software products.
Product development costs increased $389,124 for the twelve months ended
December 31, 1998 primarily caused by the charge of $859,424 associated with
the DA Pursuit of Justice title in 1998 which was offset by a decrease in
production development expenses due to the cessation of development of new
titles by the Company.
General and administrative costs decreased from $1,351,127 in the twelve
months ended December 31, 1997 to $941,667 for the twelve months ended December
31, 1998, a decrease of 30%. This decrease is due to the Company in June 1997
implementing cost reduction programs by ceasing all costs associated with
development of new titles; discontinuing its Internet gaming services; closing
one business office; significantly reducing marketing and public relations
efforts; reducing the total Company staff to two personnel and implementing
other operating cost reductions.
Selling expenses decreased $190,067 to $77,309 for the twelve months ended
December 31, 1998 from $267,376 for the twelve months ended December 31, 1997.
This decrease resulted from the elimination of all selling and public relations
efforts by the Company in 1998 with the 1998 expense primarily associated with
customer service and technical support of titles currently in the market.
Interest expense in the twelve months ended December 31, 1998 was $47,626
compared to $123,571 for the twelve months ended December 31, 1997 with the
reduction attributed to a decrease in the amount of outstanding debt during
1998. Other expenses of $32,862 in 1998 are due to the reduction of the fixed
assets of the Company to net realizable values and miscellaneous adjustments;
other income of $192,798 in 1998 primarily results from the sale of certain
assets to, and the assumption of certain liabilities by, Interactive.
The extraordinary item of $300,000 in the twelve months ended December 31,
1998, is due to the cancellation of debt of $300,000. This resulted from the
Company and IBM signing a Payment Agreement relating to the licensing and
distribution agreements for the
15
<PAGE>
Emergency Room and DA Pursuit of Justice titles formerly co-developed with IBM.
In the event of a default in payment by the Company, which is not cured within a
thirty day period, an amount of $400,000, less any payments already made under
the agreement, will be immediately due and payable to IBM, with interest
accruing at the rate of ten percent per annum.
As of December 31, 1998, the Company has federal and state net operating loss
carryforwards of approximately $6,851,000 and $3,333,600, respectively,
available to offset taxable income through the year 2013. The Company's net
deferred tax assets of approximately $2,790,900 and $2,253,000 as of December
31, 1998 and 1997, respectively, consisted primarily of net operating losses.
The Company has established a valuation allowance equal to the net deferred tax
asset for each period, as the Company could not conclude, based upon prior
recurring operating losses, that it was more likely than not that the Company
will generate sufficient taxable income before 2013 to utilize all of the
Company's deferred tax assets.
FOR THE YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR ENDED DECEMBER 31,
1996.
For the twelve months ended December 31, 1997 revenue decreased by $297,154
from $794,342 for the twelve months ended December 31, 1996 to $497,188 for the
twelve months ended December 31, 1997. This decrease was primarily due to a
decrease in royalty revenue related to sales of the Emergency Room title by IBM
in the twelve months ended December 31, 1997 compared to the twelve months ended
December 31, 1996, partially offset by increases in royalty revenue of $343,447
related to sales of the DA Pursuit of Justice and Emergency Room Intern titles
by Alpha Soft during the six months ended December 31, 1997. As disclosed in the
Company's Annual Report on Form 10-K for 1996, in accordance with SFAS 48 the
Company was able to reasonably estimate the returns and recognize royalty
revenue during the fourth quarter of 1996. Software sales increased from $13,501
for the twelve months ended December 31, 1996 to $85,723 for the twelve months
ended December 31, 1997 primarily from sales of the Best of Emergency Room title
which began shipping in June, 1997 and individual cases of the DA Pursuit of
Justice title which began shipping in July, 1997, both directly marketed by the
Company.
For the twelve month period ended December 31, 1997 cost of royalties was
$211,308 compared to $76,507 for the twelve months ended December 31, 1996. The
increase is the result of amortization of the capitalized product development
costs of $134,279 during the year ended December 31, 1997 from sales of the DA
Pursuit of Justice and Emergency Room Intern titles by Alpha Soft. The cost of
software sales increased from $9,745 in the twelve-month period ended December
31, 1996 to $98,881 in the twelve-month period ended December 31, 1997 as a
result of sales of the Best of Emergency Room title and individual cases of the
DA Pursuit of Justice in the twelve months ended December 31, 1997 compared to
sales of older Company software products in 1996, as the Best of Emergency Room
and the DA Pursuit of Justice titles were not available in 1996.
Product development expenses, which are net of co-development expenses, for
the twelve months ended December 31, 1997 decreased by $1,044,962, or 63%, to
$619,516 compared to $1,664,478 for the twelve months ended December 31, 1996.
The decrease was primarily due to completion of the DA Pursuit of Justice,
Emergency Room Intern and the Best of Emergency Room titles in July 1997 and the
Company's cessation of development of future products at that time.
General and administrative expense decreased from $1,585,084 for the twelve
months ended December 31, 1996 to $1,351,127, a decrease of $233,957, or 15%,
for the twelve months ended December 31, 1997. This decrease is due to the
Company in June 1997 implementing cost reduction programs by 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 personnel
and implementing other operating cost reductions.
Selling expenses for the twelve months ended December 31, 1997 increased by
$175,381 to $267,376 from $91,995 for the twelve months ended December 31, 1996.
The increase is
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primarily related to the increases in Company public relations efforts and
promotional expenses related to the Passport2Network and promotion of The Best
of Emergency Room, DA Pursuit of Justice and Emergency Room Intern titles which
were incurred during the first six months of 1997 compared to the prior year
when primarily all selling costs were incurred by IBM.
Interest expense decreased from $459,315 for the twelve months ended December
31, 1996 to $123,571 for the twelve months ended December 31, 1997, resulting
primarily from that certain convertible note in the original principal amount of
$1,000,000 payable to EBC Trust Corporation that was retired in May of 1996.
Interest income decreased to $19,942 for the twelve months ended December 31,
1997 compared to $108,240 for the twelve months ended December 31, 1996, due to
use of the proceeds of the initial public offering in Company operations during
1997.
As of December 31, 1997, the Company had federal and state net operating loss
carryforwards of approximately $5,533,000 and $2,696,000, respectively,
available to offset taxable income through the year 2012. The Company's net
deferred tax assets of approximately $2,253,000 and $1,290,500 as of December
31, 1997 and 1996, respectively, consisted primarily of net operating losses.
The Company has established a valuation allowance equal to the net deferred tax
asset for each period, as the Company could not conclude, based upon prior
recurring operating losses, that it was more likely than not that the Company
will generate sufficient taxable income before 2012 to utilize all of the
Company's deferred tax assets.
LIQUIDITY AND CAPITAL RESOURCES
The Company had $611,826 in cash outflows from operating activities for the
twelve months ended December 31, 1998 compared to cash outflows of $1,747,858
for the twelve months ended December 31, 1997. The decrease in net outflows of
$1,136,032 between 1998 and 1997, operating activities primarily resulted from
the following: a decrease in the net loss from operations after adjustments for
non-cash items of $827,393. This has been offset by a decrease in deferred
revenues of $43,101, a decrease in accrued vacation of $1,781, a decrease in
accounts receivable of $117,363, an increase in other receivables of $48,984, a
decrease in inventories of $14,070, a decrease in other assets of $15,471 and an
increase in accounts payable of $74,401. The total net outflows from operating
activities decreased primarily due to actions whereby the Company has
implemented cost reduction programs by ceasing all costs associated with
development of new titles; discontinuing its Internet gaming services; closing
one business office; significantly reducing marketing and public relations
efforts; reducing the total Company staff to two administrative personnel and
implementing other operating cost reductions.
Investing activities for the twelve months ended December 31, 1998 consisted
of the purchase of $6,052 in computer equipment offset by $6,978 in the
disposition of equipment and additions to software development costs of $22,170.
Pursuant to comprehensive accounting guidelines, investing activities also
included the decrease in market value of marketable securities of $14,892.
The Company had cash inflows from financing activities of $782,321 for the
twelve months ended December 31, 1998 compared to inflows of $209,715 for the
twelve months ended December 31, 1997. Financing activities for the twelve
months ended December 31, 1998 included advances for product development and
operations of $44,317, proceeds from short term borrowings of $29,104, proceeds
from private placements of common stock of $709,250, and the exercise of common
stock warrants of $75,000. This was offset by the payment of $75,350 on notes
payable and long term debt of the Company.
From July 1997 through September 1998 the Company failed to make a principal
payment on an unsecured note payable to a related party. The monthly payment, in
the amount of $10,000, was due in accordance with the terms of the original note
dated February 1, 1991, as amended, which provides for monthly payments of
principal and interest commencing on July 1, 1997. In September 1998 the note
was included in the sale of certain assets and assumption of certain liabilities
by Interactive.
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On January 3, 1997, the Company and IBM executed a final termination
agreement with respect to the District Attorney Developing and Licensing
Agreement dated November 16, 1995. As consideration for the termination and for
the acquisition of IBM's rights under the agreement, the Company was obligated
to pay IBM no later than December 15, 1997 the aggregate sum of $400,000,
representing the total amount of milestone payments made by IBM to the Company
under the DA Licensing Agreement. The Company was not able to make the payment
on December 15, 1997 and in accordance with the terms of the Agreement, accrued
interest at the rate of 10 percent from January 1, 1996 to December 31, 1997. 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 will be immediately due and
payable to IBM, with interest accruing at the rate of ten percent per annum.
As of December 31, 1998, the Company had (i) never achieved operating profits,
(ii) ceased development of new titles, (iii) ceased its internet gaming
services, (iv) closed one of its business offices in California, (v) ceased
marketing and public relations efforts with respect to the software products,
and (vi) reduced its total number of employees to one. Revenues from the
Company's Emergency Room and DA Pursuit of Justice titles and derivatives
thereof are minimal and in light of the proposed Merger with Videocall, are
expected to cease.
On September 8, 1998 the Company and Videocall announced that the two
companies had entered into a Letter of Intent for the Company to purchase the
common shares of Videocall in exchange for the Company's common and preferred
stock. On September 14, 1998 the two companies signed the Merger Plan.
On September 22, 1998 a private placement of $2,000,000 for 2,040,816 shares
of the Company's Common Stock was subscribed to by third party investors to
provide additional capital to the Company for use in the merged
Company/Videocall operations. All monies due under the subscription have been
paid as of March 31, 1999.
Videocall is a development stage company formed to provide videocalling
services to business and consumers. Videocall is in the process of developing
international locations through strategic partnerships and wholly owned
outlets. The Board of Directors of the Company and the Board of Directors of
Videocall have approved the Merger Plan. The parties are currently preparing a
definitive Proxy Statement and Registration Statement on Form S-4 to be
submitted for Company stockholder approval of the Merger Plan. Upon the approval
by stockholders it is the intent of the Company to exit its' 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.
Also, subject to approval of the Merger Plan it is the intent of the Company to
reincorporate from Delaware to Nevada.
The Company believes that it will be able to consumate the Merger, and its
prospects for obtaining additional financing will improve as a result thereof.
However should this transition not be successful the Company could face
liquidity requirements that could significantly deplete its current cash
resources.
Additionally, since the Company has ceased its software development and sales
activities, in the event the Merger is not consummated, the Company will not
have any future revenue stream.
On February 24, 1999, the Company acquired a 22,622 square foot property in
Toronto, Canada in exchange for 975,000 shares of Class A Preferred stock,
$.001 par value, paying dividends of $.095 per share per annum.
18
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On February 19, 1999 the Company signed a Placement and Fee Agreement with Red
Laguna Trading Company, Inc.("Red Laguna") for 500,000 Warrants to purchase the
Company's Common Stock, at the exercise price of $5.00 per share, to employ Red
Laguna to find strategic business alliances for the Company over the period of
the next three years.
On February 23, 1999 the Company and Infochannel Limited ("Infochannel"), a
Jamaican corporation signed a Memorandum of Understanding whereby the Company
will purchase a 23% interest in Infochannel for 78,823 shares of the Company's
Common Stock valued at $4.17 per share. The Company and Infochannel will in turn
form a joint venture, Videocall Jamaica, Limited, to operate the videocalling
outlets in the Jamaican market.
On March 22, 1999 the Company and Proximity Inc., ("Proximity"), a Vermont
corporation, signed a Letter of Intent whereby, subject to due diligence by both
parties, the Company will purchase the outstanding stock of Proximity for $4
million dollars in common stock of the Company valued at $4.00 per share. In
addition the Company will pay Proximity shareholders the sum of $250,000 in 10
equal monthly installments and subject to receiving audited financials and pro
forma operating reports will make available $200,000 for working capital
purposes. Proximity provides international full spectrum videoconferencing
services with public access to over 2,000 videoconferencing sites.
On February 24, 1999 the Company closed the Los Angeles office and
consolidated its operations with Videocall at One Canal Park, Cambridge, MA.
Effective March 1, 1999, the Company changed its name to Talk Visual
Corporation. On the same date, the Company's trading symbol on the Nasdaq
SmallCap Stock Market was changed to TVCPC.
The Company issued 150,000 shares of common stock on January 25, 1999, to a
public relations firm for representation services.
The Company has filed a lawsuit (the "Complaint") in Los Angeles, California
against the former Chairperson, Ariella Lehrer, the D&A Lehrer Children Trust
and other related entities. In that action, the Company alleges that Lehrer
breached her fiduciary duties to the Company through various actions that,
according to the Complaint, "undertook to burden an already weakened Legacy with
unreasonable, unnecessary and unfair obligations that primarily benefited her
personally." The Company also claims that Lehrer's actions were "taken in bad
faith and were... not in the best interest of Plaintiff Legacy or its
shareholders." The Company also alleges that Lehrer fraudulently backdated
documents for her personal benefit, and "deliberately and maliciously
misrepresented the financial condition of plaintiff Legacy..." The company
claims that the misrepresentations created substantial and unnecessary legal
exposure for the Company, particularly with the Company's listing on the Nasdaq
SmallCap Stock Market. The Company seeks to recover substantial damages, to be
proved at trial, for Lehrer's actions and also seeks injunctive relief requiring
Lehrer to return to the Company significant assets.
Year 2000 Compliance
The Company has reviewed its computer systems in order to evaluate if any
modifications are necessary for the year 2000. The Company currently does not
anticipate that any material modifications or expenditures will be required in
its computer systems to bring the systems into compliance with the computational
needs for the year 2000.
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RISK FACTORS
As of December 31, 1998, the Company had (i) never achieved operating profits,
(ii) ceased development of new titles, (iii) ceased its internet gaming
services, (iv) closed one of its business offices in California, (v) ceased
marketing and public relations efforts with respect to the software products,
and (vi) reduced its total number of employees to two. Revenues from the
Company's Emergency Room and DA Pursuit of Justice titles and derivatives
thereof are minimal and in light of the proposed Merger with Videocall, are
expected to cease.
On September 8, 1998 the Company and Videocall announced that the two
companies had entered into a Letter of Intent for the Company to purchase the
common shares of Videocall in exchange for Legacy common and preferred stock. On
September 14, 1998 the two companies signed the Merger Plan.
On September 22, 1998 a private placement of $2,000,000 for 2,040,816 shares
of Common Stock was subscribed to by third party investors into the Company to
provide additional capital to the Company for use in the merged
Company/Videocall operations. As of March 31, 1999, all amounts due under the
subscriptions have been received.
Videocall is a development stage company formed to provide videocalling
services to business and consumers. Videocall is in the process of developing
international locations through strategic partnerships and wholy owned
outlets. The Board of Directors of the Company and the Board of Directors of
Videocall have approved the Merger Plan. The parties are currently preparing a
definitive Proxy Statement and Registration Statement on Form S-4 to be
submitted for Company stockholder approval of the Merger Plan. Upon the approval
by stockholders it is the intent of the Company to exit its' 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.
Also, subject to approval of the Merger Plan it is the intent of the Company to
reincorporate from Delaware to Nevada.
The Company believes that it will be able to consummate the Merger, and its
prospects for obtaining additional financing will improve as a result thereof.
However should this transition not be consummated the Company could face
liquidity requirements that could significantly deplete its current cash
resources.
Additionally, since the Company has ceased its software development and sales
activities, in the event the Merger is not consummated, the Company will not
have any future revenue stream.
Potential Delisting of the Company's Common Stock on NASDAQ
On February 26, 1998. the Company was notified by 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 Company's Common Stock.
2. On June 23, 1998 EBC exercised 57,252 Warrants to purchase the Company's
Common Stock at $1.31 per share thereby generating $75,000 for the Company.
20
<PAGE>
3. On June 30, 1998 a private placement for 210,000 shares of the Company's
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
the Company's Common Stock was made in accordance with the terms of the
Company/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 Interactive, a company currently owned by the
former Chairperson of Company, 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. As a result of the hearing NASDAQ granted the Company an exception to the
listing requirements if the Company complied with certain of the requirements.
This exception, originally granted through December 7, 1998, was extended to
January 29, 1999 and further extended to May 15, 1999.
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, it can continue to be in compliance.
Management of Growth; Uncertainties Relating to Acquisitions, Business
Combinations and New Businesses. The Company has pursued, is currently pursuing
and, in the future may pursue, new technologies and businesses internally and
through acquisitions and combinations which involve significant risks. Any such
acquisition or combination may involve, among other things, the issuance of
equity securities, the payment of cash, the incurrence of contingent liabilities
and the amortization of expenses related to goodwill and other intangible
assets, and transaction costs, which have adversely affected, or may adversely
affect, the Company's business' results of operations and financial condition.
The Company's ability to integrate and organize any new businesses and/or
products, whether internally developed or obtained by acquisition or
combination, will likely require significant expansion of the Company's
operations. There is no assurance that the Company will have or be able to
obtain the necessary resources to satisfactorily effect such expansion, and the
failure to do so could have a material adverse effect on the Company's business,
financial condition and results of operations. In addition future acquisitions
and or combinations by the Company involve risks of, among other things,
entering markets or segments in which the Company has no or limited prior
experience, the potential loss of key employees of the acquired company and/or
difficulty, delay or failure in the integration of the operations, management,
personnel and business of any such new business with the Company's business and
operating and financial difficulties of any new or newly combined operations,
any of which could have a materially adverse effect on the Company's business,
financial condition and results of operations. Moreover, there can be no
assurance that the anticipated benefits of any specific acquisition or of any
internally developed new business segment or business combination will be
realized.
Dependence on Alpha Soft for Substantially All the Company's Revenues. For the
year ended December 31, 1997, approximately 69% of the Company's total revenue
was derived from Alpha Soft on royalty revenue generated by the DA Pursuit of
Justice and Emergency
21
<PAGE>
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 DA 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 DA Pursuit of Justice title. In light
of the Company's cessation of software development and sales as a result of the
proposed Merger with Videocall, should the Merger not take place, there would be
a material adverse effect on the Company's business, financial condition and
results of operations. In addition, upon the Merger taking effect, the Company
will concentrate on the business activity of Videocall, with the attendant risk
of Videocall's developmental activity. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations - "General" and "Results of
Operations"
No Assurance of Profitability
Because Videocall is a developmental company, 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.
ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 129, "Disclosure of
Information about Capital Structure," ("SFAS 129") issued by the FASB is
effective for financial statements ended after December 15, 1997. This standard
reinstates various securities disclosure requirements previously in effect under
Accounting Principles Board Opinion No. 15, which has been superseded by SFAS
No. 128. The Company adopted SFAS No. 129 on December 15, 1997 and it had no
effect on its financial position or results of operations.
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income", ("SFAS 130") issued by the FASB is effective for financial statements
with fiscal years beginning after December 15, 1997. SFAS 130 establishes
standards for reporting and display of comprehensive income and its components
in a full set of general-purpose financial statements. The Company has adopted
SFAS 130 for the year ended December 31, 1998, with respect to prior years, the
Company believes the this pronouncement does not have an impact on its financial
position or results of operations and the only effect is limited to the form
and content of disclosures.
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information", ("SFAS 131") issued by the
FASB is effective for financial statements with fiscal years beginning after
December 15, 1997. SFAS 131 requires that public companies report certain
information about operating segments, products, services and geographical areas
in which they operate and their major customers. The Company has adopted SFAS
131 for the year ended December 31, 1998; with respect to prior years, the
Company believes the this pronouncement does not have an impact on its financial
position or results of operations and the only effect is limited to the form
and content of disclosures.
Statement of Financial Accounting Standards No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits", ("SFAS 132") issued by the
FASB is effective for financial statements with fiscal years beginning after
December 15, 1997. SFAS 132 revises the disclosure requirements for pension and
other postretirement benefit plans. At December 31, 1998, the Company did not
maintain any postretirement benefit plans.
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities", ("SFAS 133") issued by the FASB is
effective for financial statements with fiscal years beginning after June 15,
1999. This statement establishes accounting and reporting standards for
derivative instruments and for hedging activities. The Company does not expect
the adoption of SFAS 133 to have an impact on its financial position or results
of operations.
22
<PAGE>
Statement of Position 97-2, "Software Revenue Recognition," ("SOP 97-2")
issued by the AICPA is effective for transactions entered into in fiscal years
beginning after December 15, 1997. SOP 97-2 supersedes SOP 91-1 regarding
software revenue recognition. SOP 97-2 establishes standards which require a
company to recognize revenue when (i) persuasive evidence of an arrangement
exists, (ii) delivery has occurred, (iii) the vendor's fee is fixed or
determinable, and (iv) collectability is probable. The SOP also discusses the
revenue recognition criteria for multiple element contracts and allocation of
the fee to various elements based on vendor-specific objective evidence of fair
value. The Company has adopted SOP 97-2 for the year ended December 31, 1998;
with respect to prior years, the Company believes that this pronouncement does
not have a material impact on its financial position or results of operations.
EFFECTS OF INFLATION
The Company believes that inflation has not had a material effect on its net
sales and results of operations. Substantial increases in labor costs or video
production costs on video produced for use within the Company's software
programs or programs produced by joint ventures could adversely affect the
operations of the Company for future periods.
ITEM 7. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
Report of Independent Certified Public Accountants
Financial Statements
Balance Sheets
Statements of Operations
Statements of Stockholders' Equity
Statements of Cash Flows
Notes to Financial Statements
23
<PAGE>
Report of Independent Certified Public Accountants
To the Stockholders of
Talk Visual Corporation
(Formerly Legacy Software, Inc.)
Cambridge, Massachusetts
We have audited the accompanying balance sheet of Talk Visual Corporation
(formerly Legacy Software, Inc.) as of December 31, 1998, and the statements of
operations, stockholders' equity and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion of these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and schedule are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements and
schedules. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation of the financial statements and schedule. 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 financial position of Talk Visual Corporation
(formerly Legacy Software, Inc.) as of December 31, 1998, and the results of its
operations and its cash flows for the year ended in conformity with generally
accepted accounting principles.
Mayer Rispler & Company, P.C.
Brooklyn, New York
March 29, 1999
F-2
<PAGE>
Report of Independent Certified Public Accountants
To the Stockholders of
Legacy Software, Inc.
Los Angeles, California
We have audited the accompanying balance sheet of Legacy Software, Inc. as of
December 31, 1997 and the related statements of operations, stockholders' equity
and cash flows for each of the two years in the period ended December 31, 1997.
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 generally accepted auditing
standards. 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
of the financial statements. 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 financial position of Legacy Software, Inc. as of
December 31, 1997 and the results of its operations and its cash flows for each
of the two years in the period ended December 31, 1997 in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has never achieved
operating profits, and in addition, at December 31, 1997, has negative working
capital, minimal cash, significant indebtedness and liquidity problems. These
matters raise substantial doubt as to the Company's ability to continue as a
going concern. The Company's future operations are dependent upon generating
funds to finance the marketing and expansion of its operations. Management
plans to generate these funds through a possible merger and the issuance of the
Company's stock. There is no assurance that this will generate sufficient funds
to enable the Company to continue its operations for the next twelve months.
The financial statements do not include any adjustments that might results from
the outcome of this uncertainty.
BDO Seidman, LLP
Los Angeles, California
March 12, 1998
F-3
<PAGE>
TALK VISUAL CORPORATION
(FORMERLY LEGACY SOFTWARE, INC.)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
<S> <C> <C>
1998 1997
---------- ----------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 153,608 $ 14,464
Accounts receivable, net of allowances
for doubtful accounts of $12,500 and $12,500 31,243 148,606
Inventory 8,250 22,320
Other receivables 70,000 21,016
Subscriptions receivable 1,743,000
Marketable securities 89,210 -
Other current assets 6,746 22,217
---------- ----------
Total current assets 2,102,057 228,623
---------- ----------
Product development costs, net 381,604 1,255,570
Property and equipment, net 18,500 128,910
Other assets 1,400 1,829
---------- ----------
Total assets $2,503,561 $1,614,932
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 129,968 $ 55,567
Accrued expenses 16,685 18,466
Deferred revenues - 43,010
Notes payable and current portion
of long-term debt 281,066 783,619
---------- ----------
Total current liabilities 427,719 900,662
---------- ----------
LONG-TERM DEBT, net of current portion 75,000 161,882
---------- ----------
Total Liabilities 502,719 1,062,544
---------- ----------
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:
1,393,418 and 885,000 shares
issued and outstanding 1,393 885
Stock Subscribed 382 -
Additional paid in capital 10,000,719 7,062,557
Accumulated deficit (7,829,760) (6,511,054)
Accumulated other comprehensive loss (140,892) -
Stock Subscriptions receivable (157,000) -
----------- -----------
Total stockholders' equity 2,000,842 552,388
----------- -----------
Total Liabilities and Stockholders' Equity $ 2,503,561 $ 1,614,932
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
TALK VISUAL CORPORATION
(FORMERLY LEGACY SOFTWARE, INC.)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------
<S> <C> <C> <C>
1998 1997 1996
----------- ----------- -----------
REVENUE
Royalties $ 206,452 $ 411,465 $ 768,716
Software sales 52,960 85,723 13,501
Corporate services 80,000
Consulting 12,125
___________ ___________ -----------
Total revenue 339,412 497,188 794,342
----------- ----------- -----------
COSTS AND EXPENSES
Cost of royalties 9,558 211,308 76,507
Cost of software sales 33,254 98,881 9,745
Product development 1,008,640 619,516 1,664,478
General & administrative 941,667 1,351,127 1,585,084
Selling 77,309 267,376 91,995
----------- ----------- -----------
Total costs and expenses 2,070,428 2,548,208 3,427,809
----------- ----------- -----------
LOSS FROM OPERATIONS (1,731,016) (2,051,020) (2,633,467)
INTEREST EXPENSE (47,626) (123,571) (459,315)
INTEREST INCOME 19,492 108,240
OTHER EXPENSE (32,862)
OTHER INCOME 192,768 _________ ___________
-----------
LOSS BEFORE EXTRAORDINARY ITEM (1,618,706) (2,155,099) (2,984,542)
EXTRAORDINARY ITEM 300,000
-----------
NET LOSS $(1,318,706) $(2,155,099) $(2,984,542)
=========== =========== ===========
NET LOSS PER COMMON SHARE
BASIC AND DILUTED
BEFORE EXTRAORDINARY ITEM $(1.54) $(2.51) $(4.78)
EXTRAORDINARY ITEM $0.28 _____ _____
-----------
NET LOSS PER COMMON SHARE $(1.26) $(2.51) $(4.78)
=========== =========== ===========
WEIGHTED AVERAGE COMMON STOCK SHARES
OUTSTANDING
BASIC AND DILUTED 1,054,175 858,211 623,968
</TABLE>
See accompanying notes to financial statements
F-5
<PAGE>
TALK VISUAL CORPORATION
(FORMERLY LEGACY SOFTWARE, INC.)
STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
Accumulated
Common Shares Stock Paid-In Subscription Other
----------------------- Comprehensive Accumulated
Shares Amount Subscribed Capital Receivable Loss Deficit Totals
---------- ---------- ---------- ----------- ------------ ------------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, January 1, 1996 247,000 $ 247 $ 546,576 $(1,371,413) $(824,590)
Issuance of common shares
in exchange for services 2,400 2 14,398 -- 14,400
Issuance of common shares
in conversion of note
payable 178,117 178 699,822 -- 700,000
Issuance of common shares
in initial public
offering 383,333 383 6,899,617 -- 6,900,000
Offering costs associated
with initial public
offering -- -- (1,701,952) -- (1,701,952)
Issuance of common shares
in acquisition
of research and
development 11,111 11 233,327 -- 233,338
Issuance of common shares
through employee stock
purchase plan 2,410 2 28,918 -- 28,920
Issuance of common shares
in exchange for services 16,667 17 99,983 -- 100,000
Compensation related to
nonemployee stock options 39,907 -- 39,907
Net loss -- -- -- (2,984,542) (2,984,542)
---------- ---------- ----------- --------- ---------- ----------
BALANCE, December 31, 1996 841,038 841 6,860,595 (4,355,955) 2,505,481
Issuance of common shares
through employee stock
purchase plan 2,614 3 23,523 23,526
Issuance of common shares
for conversion of
warrants 41,348 41 162,459 162,500
Compensation related to
nonemployee
stock options 15,980 15,980
Net loss (2,155,099) (2,155,099)
---------- ----------- ---------- ---------- -------- ---------- ----------- ----------
BALANCE, December 31, 1997 885,000 885 7,062,557 (6,511,054) 552,388
Issuance of common shares
in private placement on
June 30, 1998 72,667 73 109,177 109,250
Issuance of common shares
on exercise of warrants 19,084 19 74,981 75,000
Issue of common stock in
private placement on
September 14, 1998 400,000 400 199,600 200,000
Subscription for common
shares in private
placement
on September 22, 1998 102 1,999,898 (157,000) 1,843,000
Issuance of common stock
for services 16,667 16 27,484 27,500
Subscription for common
stock for investment on
December 18, 1998 52 104,050 104,102
Subscription for common
stock in private
placement on December 31,
1998 200 349,800 350,000
Agreement for common
shares in exchange for
debt 28 73,172 73,200
Net loss (1,318,706) (1,318,706)
Comprehensive income -
unrealized loss on
marketable securities (14,892) (14,892)
---------- ----------- ----------- ----------- ---------- -------- ------------ ----------
BALANCE, December 31, 1998 1,393,418 $ 1,393 $ 382 $10,000,719 $(157,000) $(14,892) $(7,829,760) $2,000,842
842
</TABLE>
See accompanying notes to financial statements
F-6
<PAGE>
TALK VISUAL CORPORATION
(FORMERLY LEGACY SOFTWARE, INC.)
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1998 1997 1996
----------- ----------- -----------
Cash flows from operating activities:
Net loss $(1,318,706) $(2,155,099) $(2,984,542)
Adjustments to reconcile net loss to net cash
used in operating activities:
Provision for doubtful accounts 62,500 6,877
Amortization of product development costs 36,712 134,279 76,507
Writedown of product development costs 859,424 75,000 --
Amortization of deferred loan fees and
original
issue discount 355,307
Depreciation 74,392 99,614 57,399
Due former co-development partner (300,000)
(Gain) on sale of assets and assumption of
debt by third party (153, 235)
(Gain) loss on disposal of property and
equipment 178,537 144
Reduction of property and equipment to
Net Realizable Value 35,092
Stock based compensation expense 15,980 44,245
Issuance of common stock in exchange for
services 31,750 -- 14,400
Issuance of common stock in acquisition of
research and development 233,338
Increase (decrease) in cash from changes in:
Accounts receivable, net 117,363 (159,967) (6,691)
Other receivables (48,984) 104,872 (125,888)
Inventories 14,070 (22,320)
Other assets 15,471 (323) (16,624)
Accounts payable 74,401 (111,530) 157,145
Accrued expenses (1,781) (19,896) (5,419)
Accrued vacation (32,127) 43,101
Payable to former co-development partner 400,000
Development expense co-funding billings in
excess of development expense co-funding
recognized (54,637)
Deferred revenues (43,010) 2,622 40,388
Accrued interest _______ 80,000 (148,550)
----------- -----------
Net cash used in operating activities (607,041) (1,747,858) (1,913,500)
----------- -----------
Cash flows from investing activities:
Note receivable (50,000)
Purchase of property and equipment (6,052) (5,238) (388,829)
Proceeds from the disposition of property and
equipment 6,978 7,438 7,750
Unrealized loss on marketable investments
available for sale (14,892)
Additions to product development costs (22,170) (204,372) (1,260,478)
----------- -----------
Net cash used in investing activities (36,136) (252,172) (1,641,557)
----------- ----------- -----------
Cash flows from financing activities:
Restricted cash 55,240 (55,240)
Payments under line of credit (35,250) 35,250
Proceeds from note payable 75,000
Increase in short term borrowings 29,104
Advances for product development and operations 44,317
Payments on notes payable and long term debt (75,350) (71,301) (365,534)
Borrowings on notes payable and long term debt
Proceeds from private placement of convertible
note
Net proceeds from initial public offering -- 5,355,589
Proceeds from private placements for common stock 709,250
Exercise of Common Stock Warrants 75,000 162,500
Issuance of stock under employee stock
purchase plan _______ 23,526 24,581
-----------
Net cash provided by financing activities 782,321 209,715 4,994,646
----------- ----------- -----------
Increase (decrease) in cash and cash equivalents 139,144 (1,790,315) 1,439,589
Cash and cash equivalents, at beginning of period 14,464 1,804,779 365,190
----------- ----------- -----------
Cash and cash equivalents, at end of period 153,608 $ $ 14,464 $ 1,804,779
=========== =========== ===========
</TABLE>
F-7
<PAGE>
TALK VISUAL CORPORATION
(FORMERLY LEGACY SOFTWARE, INC.)
STATEMENT OF CASH FLOWS
(CONTINUED)
Supplemental disclosure of cash flow information
(a) Non-cash transactions
On January 23, 1996, the Company issued 2,400 shares of common stock to
an individual for consulting services.
In May, 1996, $700,000 of a convertible note payable to a trust company
was converted into common stock of the Company.
On August 30, 1996, the Company issued 11,111 shares of common stock to
acquire substantially all of the assets of an internet technology
company, which consisted primarily of purchased research and development
(Note 13).
On November 1, 1996, the Company issued 16,667 shares of common stock to
an individual in satisfaction of accrued compensation in the amount of
$100,000 (Note 8).
During the years ended December 31, 1997 and December 31, 1996, the
Company recorded $15,980 and $39,907 respectively representing
compensation in conjunction with nonemployee stock options
(Notes 8 and 9).
In September 1998 the Company issued 16,667 shares of common stock
in exchange for services.
On December 18, 1998, the Company agreed to issue 52,051 shares of common
stock in exchange for the contribution of a short term investment with a
market value of $104,102.
In December, 1998, the Company agreed to issue 28,150 shares of common stock
for the cancellation of a note payable including accrued interest in the
amount of $73,200.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Sale of assets and assumption of debt by a third party $147,935
__________
Reduction of debt by a former co-development partner $300,000
__________
(b) Cash paid during the period for:
Interest
$47,626 $43,569 $252,000
___________________________________________
Income taxes $1,000
___________________________________________
</TABLE>
See accompanying notes to financial statements
F-8
<PAGE>
TALK VISUAL CORPORATION
(FORMERLY LEGACY SOFTWARE, INC.)
NOTES TO FINANCIAL STATEMENTS
Note 1 -- Summary of Significant Accounting Policies
Business
- ---------
Legacy Software, Inc., renamed Talk Visual Corporation February 26, 1999 (the
"Company") was reincorporated in Delaware in March 1996. On September 8, 1998
the Company and Videocall International Corporation ("Videocall") announced that
the two companies had entered into a Letter of Intent for the Company to
purchase the common shares of Videocall in exchange for the Company's 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, whereby
Videocall will merge (the "Merger") into a newly formed, wholly owned subsidiary
of the Company. In accordance with the terms of the Letter of Intent, the
officers of Videocall and certain Board Members of Videocall were elected to the
Board of the Company, and the existing Members of the Board of the Company
resigned, thus making Videocall a related entity. Videocall is a development
stage company formed to provide videocalling services to businesses and
consumers. Videocall is in the process of developing international locations
through strategic partnerships and wholly owned outlets. The Board of Directors
of the Company and the Board of Directors of Videocall have approved the Merger.
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 the
Company to exit its' 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. At December 31, 1998, the Company had
ceased developing and marketing software products and was focusing on
consummating the Merger with Videocall. Also, subject to approval of the Merger
Plan, it is the intent of the Company to reincorporate from Delaware to Nevada.
Use of Accounting Estimates
- ----------------------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash Equivalents
- -----------------
For purposes of the statement of cash flows, the Company considers all highly
liquid debt instruments purchased with an initial maturity of three months or
less to be cash equivalents.
Inventory
- ----------
Inventory, which consists of finished goods, is valued at the lower of cost or
market. Cost is determined by the first-in, first-out (FIFO) method.
Stock Subscriptions Receivable
- ------------------------------
On September 22, 1998 a private placement of $2,000,000 for 2,040,816 shares of
Common Stock was subscribed to by third party investors to provide additional
capital to the Company for use in the merged Company/Videocall operations. Of
the $1,900,000 still due under the subscriptions at year end, through March 31,
1999, $1,743,000 has been received in cash which has cleared as collected funds;
the balance of $157,000 has been received as other assets.
Property and Equipment
- -----------------------
Property and equipment are stated at cost less accumulated depreciation.
Depreciation on property and equipment is computed using the straight-line
method over the estimated useful lives of the assets, which range from three to
seven years.
During the year ended December 31, 1998, the Company adjusted the carrying value
of all fixed assets to net realizable value. This resulted in a charge to
operating expense of $44,071.
Income Taxes
- -------------
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109 (SFAS 109) "Accounting for Income Taxes." Under the
asset and liability method, deferred income taxes are recognized for the tax
consequences of "temporary differences" by
F-9
<PAGE>
TALK VISUAL CORPORATION
(FORMERLY LEGACY SOFTWARE, INC.)
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
Note 1 -- Summary of Significant Accounting Policies (Continued)
Income Taxes (continued)
- -------------------------
applying enacted statutory tax rates applicable to future years to differences
between the financial statement carrying amounts and the tax bases of existing
assets and liabilities.
Under SFAS 109, deferred tax assets may be recognized for temporary differences
that will result in deductible amounts in future periods. A valuation allowance
is recognized, if on the weight of available evidence, it is more likely than
not that some portion or all of the deferred tax asset will not be realized.
Revenue Recognition
- --------------------
Royalty Revenue
Royalty revenues consist of royalties earned on sales of software developed with
co-development partners or sales made by distribution partners, from which the
Company earns a specified percentage of the sales price or a specified dollar
amount per unit. Royalty revenues on consignment shipments made by the co-
development partners are only recognized when both (i) the Company can
reasonably estimate the product sell-through from its co-development partners
has occurred and (ii) the Company can comply with Statement of Financial
Accounting Standards No. 48 (SFAS 48), "Revenue Recognition When Right of Return
Exists." The Company has determined that it can recognize revenue in accordance
with SFAS 48 by reviewing and analyzing, among other things, (i) the Company's
and the co-development partners' experience on co-development software sales and
returns to date, (ii) sales and returns of the Company's past co-development
software products and other information relating thereto, (iii) sales and
returns of comparable computer software products of other information relating
thereto, (iv) information regarding significant purchasers of the Company's
product, and (v) computer software industry data and practices.
Royalty revenues on sales made by distribution partners are recognized upon
shipment to customers, less a reasonable estimate for returns (Note 15).
Software Sales
Software sales, which consist of sales of Company-owned software, including
Company developed software, are recorded at the time of shipment provided that
no significant vendor and post-contract support obligations remain outstanding
and collection of the resulting receivable is deemed probable by management. Any
insignificant post-contract support obligations and provisions for estimated
returns, including distributors' stock balancing rights and liability under
price protection programs, are accrued for at the time of sale.
Consulting Revenue and Contract Services
Consulting revenue and Contract Service revenue is recognized as services are
performed.
Product Development Costs
- --------------------------
Statement of Financial Accounting Standards No. 86 provides for the
capitalization of certain software development costs once technological
feasibility has been established upon completion of a detailed program design.
All costs capitalized are net of related development expense co-funding, and the
Company ceases capitalizing such costs when the product derived from the project
is available for general release to customers. These costs are amortized on a
product-by-product basis at the greater of the amount computed using (a) the
ratio of current revenues for a product to the total of current and anticipated
future revenues or (b) the straight-line method over the remaining estimated
economic life of the product. The Company evaluates the recoverability of any
software development costs capitalized on a quarterly basis by comparing the net
realizable value, determined pursuant to management's estimates of future
product cash flows, with the unamortized balance of software development costs
(see below). Based on this evaluation, the Company recorded a writedown of
software development costs of $75,000 in 1997. As discussed earlier, the Company
has ceased developing and marketing software products and is focusing on
consumating the Merger. The Company terminated all co-development agreements
prior to January 1, 1998. The Company has not entered into any new co-
development contracts since that date. For the year ended December 31, 1998, the
Company engaged the services of an independent third party to render an opinion
of net realizable value for the capitalized software development costs remaining
on the balance sheet. Accordingly, amortization for the year ended December 31,
1998 reflects an adjustment in the amount of $859,424, to bring capitalized
software development costs to net realizable value. Separate from the adjustment
to net realizable value, during the year ended December 31, 1998, the Company
capitalized $22,170 of software development costs relating to the Emergency Room
Intern title and the DA Pursuit of Justice title, and amortized $36,712 into
operations. With respect to the year ended December 31, 1997, the Company
capitalized $140,148 of software development costs related to the DA Pursuit of
Justice title and in the year ended December 31, 1997, the Company amortized
$169,080 into operations. During the year ended December 31, 1997 the Company
capitalized $64,224 relating to the Emergency Room Intern title and amortized
$40,199 into operations.
F-10
<PAGE>
TALK VISUAL CORPORATION
(FORMERLY LEGACY SOFTWARE, INC.)
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
Note 1 -- Summary of Significant Accounting Policies (Continued)
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. All prior
period weighted average and per share information has been restated in
accordance with SFAS No. 128. Additionally, all amounts have been adjusted for
the September 8, 1998 three for one reverse split.
Stock-Based Compensation
- -------------------------
The Company adopted Statement of Financial Accounting Standards No. 123
"Accounting for Stock-Based Compensation," (SFAS 123), as of January 1, 1996,
which establishes a fair method of accounting for stock-based compensation
plans. In accordance with SFAS 123, the Company has chosen to continue to
account for stock-based compensation utilizing the intrinsic value method
prescribed in APB 25. Accordingly, compensation cost for stock options is
measured as the excess, if any, of the fair market price of the Company's stock
at the date of grant over the amount an employee must pay to acquire the stock.
Also, in accordance with SFAS 123, the Company has provided footnote disclosure
with respect to stock-based employee compensation. The cost of stock-based
employee compensation is measured at the grant date based on the value of the
award and recognized over the service period. The value of the stock-based award
is determined using a pricing model whereby compensation cost is the excess of
the fair value of the stock as determined by the model at grant date or other
measurement date over the amount an employee must pay to acquire the stock.
Accounting Pronouncements:
Capital Structure Disclosure
- ----------------------------
Statement of Financial Accounting Standards No. 129, "Disclosure of Information
about Capital Structure," ("SFAS 129") issued by the FASB is effective for
financial statements ended after December 15, 1997. This standard reinstates
various securities disclosure requirements previously in effect under Accounting
Principles Board Opinion No. 15, which has been superseded by SFAS No. 128. The
Company adopted SFAS No. 129 on December 15, 1997 and it had no effect on its
financial position or results of operations.
Comprehensive Income
- --------------------
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income," ("SFAS 130") issued by the FASB is effective for financial statements
with fiscal years beginning after December 15, 1997. SFAS 130 establishes
standards for reporting and display of comprehensive income and its components
in a full set of general-purpose financial statements. The Company has adopted
SFAS 130 effective with the year ending December 31, 1998, prior years had no
impact on its financial position or results of operations.
Segment Reporting
- -----------------
Statement of Financial Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise and Related Information," ("SFAS 131") issued by the FASB is
effective for financial statements with fiscal years beginning after December
15, 1997. SFAS 131 requires that public companies report certain information
about operating segments, products, services and geographical areas in which
they operate and their major customers. The Company is not subject to the
reporting requirements of SFAS 131 as it does not have any segment activity to
report on in the years presented.
F-11
<PAGE>
TALK VISUAL CORPORATION
(FORMERLY LEGACY SOFTWARE, INC.)
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
Note 1 -- Summary of Significant Accounting Policies (Continued)
Pension and Postretirement Benefits
- -----------------------------------
Statement of Financial Accounting Standards No. 132, "Employers' Disclosure
about Pensions and Other Postretirement Benefits," ("SFAS 132") issued by the
FASB is effective for financial statements with fiscal years beginning after
December 15, 1997. SFAS 132 revises the disclosure requirements for pension and
other postretirement benefit plans. At December 31, 1998, the Company did not
maintain any postretirement benefit plans.
Derivative Instruments and Hedging
- ----------------------------------
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities," ("SFAS 133") issued by the FASB is
effective for financial statements with fiscal years beginning after June 15,
1999. This statement establishes accounting and reporting standards for
derivative instruments and for hedging activities. The Company does not expect
the adoption of SFAS 133 to have an impact on its financial position or results
of operations.
Software Revenue Recognition
- ----------------------------
Statement of Position 97-2, "Software Revenue Recognition," ("SOP 97-2") issued
by the AICPA is effective for transactions entered into in fiscal years
beginning after December 15, 1997. SOP 97-2 supersedes SOP 91-1 regarding
software revenue recognition. SOP 97-2 establishes standards which require a
company to recognize revenue when (i) persuasive evidence of an arrangement
exists, (ii) delivery has occurred, (iii) the vendor's fee is fixed or
determinable, and (iv) collectability is probable. The SOP also discusses the
revenue recognition criteria for multiple element contracts and allocation of
the fee to various elements based on vendor-specific objective evidence of fair
value. The Company believes this SOP does not have a material effect on the
financial statements.
Note 2 -- Financial Condition and Liquidity
As of December 31, 1998, the Company had (i) never achieved operating profits,
(ii) ceased development of new titles, (iii) ceased its internet gaming
services, (iv) closed one of its business offices in California, (v) ceased
marketing and public relations efforts with respect to the software products,
and (vi) reduced its total number of employees to two. Revenues from the
Company's Emergency Room and DA Pursuit of Justice titles and derivatives
thereof are minimal and in light of the proposed Merger with Videocall, are
expected to cease. On September 8, 1998 the Company and Videocall announced that
the two companies had entered into a Letter of Intent for the Company to
purchase the common shares of Videocall in exchange for the Company's common and
preferred stock. On September 14, 1998 the two companies signed Merger Plan. On
September 22, 1998 a private placement subscription of $2,000,000 for 2,040,816
shares of the Company's Common Stock was made by third party investors into the
Company to provide additional capital to the Company for use in the merged
Company/Videocall operations. At March 31, 1999, all amounts due under stock
subscriptions had been received by the Company. The Company has received a total
of $905,717 in contributed capital during the period June 1, 1998 through
December 31, 1998. Management feels that based on these contributed capital
amounts, the Company will be able to operate for the coming twelve months. The
Company believes that it will be able to consummate the Merger, and its
prospects for obtaining additional financing will improve as a result thereof.
Additionally, subject to approval of the Merger Plan, it is the intent of the
Company to reincorporate from Delaware to Nevada.
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. As a result of the hearing NASDAQ
granted the Company an exception to the listing requirements if the Company
complied with certain of the requirements. This exception, originally granted
through December 7, 1998, was extended to January 29, 1999 and further extended
to May 15, 1999.
F-12
<PAGE>
TALK VISUAL CORPORATION
(FORMERLY LEGACY SOFTWARE, INC.)
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
Note 2 -- Financial Condition and Liquidity (continued)
Fair Value of Financial Instruments
- -----------------------------------
SFAS 107, "Disclosure About Fair Value of Financial Instruments," requires
certain disclosures regarding the fair value of financial instruments. Cash and
cash equivalents, accounts receivable, accounts payable, accrued liabilities and
amounts due to and from affiliates are reflected in the financial statements at
fair value because of the short-term maturity of these instruments. The fair
value of long-term debt closely approximates its carrying value. The Company
uses quoted market prices, when available, or discounted cash flows to calculate
these fair values.
Marketable Securities
- ---------------------
Marketable securities consist of common stock currently trading on a national
exchange. Marketable securities are stated at market value as determined by the
most recently traded price of each security at the balance sheet date. At
December 31, 1998, marketable securities were considered as available-for-sale
as defined by Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities." Available-for-sale
securities are carried at fair value, with the unrealized gains and losses, net
of tax, reported as a separate component of stockholders' equity. The cost of
investments sold is determined on the specific identification or the first-in,
first-out method. At December 31, 1998, available-for-sale equity securities and
their market value was as follows:
Equity Securities, at cost $ 104,102
Unrealized Loss (14,892)
----------
Market Value at December 31, 1998 $ 89,210
==========
Note 3 -- Property and Equipment
Property and equipment are summarized as follows:
<TABLE>
<CAPTION>
December 31,
-----------------
<S> <C> <C>
1998 1997
------- --------
Computers and equipment $16,500 $212,688
Furniture and fixtures 1,000 17,930
Computer software 1,000 10,496
------- --------
18,500 241,114
Less accumulated depreciation - 112,204
------- --------
Totals $18,500 $128,910
======= ========
</TABLE>
Depreciation and amortization expense on property and equipment was $74,392,
$99,614, and $57,399 for the years ended December 31, 1998, 1997, and 1996,
respectively.
Due to the Company downsizing and relocating its corporate offices, the Company
wrote off $35,071 related to computers and equipment during 1998. The Company
wrote off $51,885 related to computers and equipment and $32,250 related to
leasehold improvements during 1997. Additionally, in 1997 the Company sold the
majority of its furniture and fixtures to its Landlord and recorded a loss of
approximately $95,000.
F-13
<PAGE>
TALK VISUAL CORPORATION
(FORMERLY LEGACY SOFTWARE, INC.)
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
Note 4 - Extraordinary Item
Termination of Co-Development Partner's Agreement
The Company and IBM entered into a Development and Licensing Agreement (the "DA
License Agreement") on November 16, 1995. In the fourth quarter of 1996 the
Company and IBM mutually agreed to terminate the DA License Agreement. At that
time, the Company had an obligation to IBM in the amount of $500,000. The
Company and IBM reached an agreement on September 14, 1998 whereby the Company
will pay $200,000 to IBM in quarterly payments of $25,000 commencing with the
fiscal quarter ended September 30, 1998. The Company has recognized $300,000 of
extraordinary income as a result of the cancellation of the debt under the terms
of the agreement with IBM.
During 1996 a letter of intent was signed with McGraw Hill Home Interactive
("McGraw Hill") for the development and licensing of the contemplated Animal
Doctor title. The letter of intent was effectively terminated without cause by
McGraw Hill prior to December 31, 1996, with unfunded development expense
reimbursement due in the amount of $75,000. The unfunded development expense due
was received in 1997.
Note 5 -- Long Term Debt
The Company's long-term debt is as follows:
<TABLE>
<CAPTION>
December 31,
------------
1998 1997
---- ----
<S> <C> <C>
Unsecured note payable to related party bearing interest at 10.5%; all
accrued interest and principal payable in monthly installments of $10,000,
from July 1997 through June 1999 $260,051
Unsecured note payable to shareholder bearing interest at 16.7%; all
accrued interest and principal payable over the course
of two years from March 1998 through February 2000 73,200
Unsecured note payable to shareholder bearing interest at 10.5%; all
accrued interest and principal payable over the course
of two years from March 1998 through February 2000 57,250
Unsecured note payable to IBM, due in quarterly installments of
$25,000 through September 30, 2000 175,000
Unsecured obligation to IBM for milestone payments 480,000
Unsecured note payable to a third party with outstanding principal due
December 31, 1998 75,000
Unsecured notes payable to third parties 178,066
Unsecured notes payable to related parties 4,000
-------- --------
Total notes payable 356,066 945,501
Less current portion 281,066 783,619
-------- --------
Long-term portion $ 75,000 $161,882
======== ========
</TABLE>
F-14
<PAGE>
TALK VISUAL CORPORATION
(FORMERLY LEGACY SOFTWARE, INC.)
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
Note 5 -- Long Term Debt (Continued)
On September 14, 1998 the Company entered into an Agreement of Sale between the
Company and Legacy Interactive ("Interactive"), a company currently owned by
the former Chairperson of the Company, whereby certain assets of the Company
totaling $216,260 were sold to Interactive and Interactive assumed $324,359 in
debt from the Company. The difference of $108,099, was recorded as a note
payable.
On December 31, 1998, a shareholder and former member of the Board agreed to
cancel the Company's debt obligation in the amount of $73,200 in exchange for
28,150 shares of common stock to be issued.
The aggregate maturities of long-term debt maturing in succeeding years are as
follows:
December 31, Amount
------------ ------
2000 $ 75,000
========
Note 6 --Commitments and Contingencies
Operating Leases
- -----------------
The Company leases certain equipment under various operating leases which expire
at various dates through November 5, 1999. Future minimum rental payments
required under operating leases that have initial or remaining terms in excess
of one year at December 31, 1998 are as follows:
Operating
December 31, Leases
------------ ------
1999 $9,948
2000 9,948
---------
$19,896
=======
Rent expense for the years ended December 31, 1998, 1997 and 1996 was $61,031,
$155,013, $113,569.
Employment Agreements
- ----------------------
During 1997, the Company cancelled all of its employment agreements with
employees, exclusive of two officers, whose employment agreements were cancelled
in 1998.
Legal Proceedings
- -----------------
On August 18, 1997, the U.S. Securities and Exchange Commission ("SEC") issued
subpoenas 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 has filed a lawsuit (the "Complaint") in Los Angeles, California
against the former Chairperson, Ariella Lehrer, the D&A Lehrer Children Trust
and other related entities. In that action, the Company alleges that Lehrer
breached her fiduciary duties to the Company through various actions that,
according to the Complaint, "undertook to burden an already weakened Legacy with
unreasonable, unnecessary and unfair obligations that primarily benefited her
personally." The Company also claims that Lehrer's actions were "taken in bad
faith and were... not in the
F-15
<PAGE>
TALK VISUAL CORPORATION
(FORMERLY LEGACY SOFTWARE, INC.)
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
Note 6 --Commitments and Contingencies (continued)
Legal Proceedings (continued)
- -----------------------------
best interest of Plaintiff Legacy or its shareholders." The Company also
alleges that Lehrer fraudulently backdated documents for her personal benefit,
and "deliberately and maliciously misrepresented the financial condition of
plaintiff Legacy..." The company claims that the misrepresentations created
substantial and unnecessary legal exposure for the Company, particularly with
the Company's listing on the Nasdaq SmallCap Stock Market. The Company seeks to
recover substantial damages, to be proved at trial, for Lehrer's actions and
also seeks injunctive relief requiring Lehrer to return to the Company
significant assets.
Stock and Warrant Contingency
- -----------------------------
The Company has agreed to issue 600,000 shares of stock and 1,800,000 options to
parties responsible for the introduction of the Company to Videocall. The
options are exercisable at twenty five cents per share and expire three years
from the issue date. Additionally, Videocall has agreed to issue 1,200,000
shares in connection with the Merger agreement to parties responsible for the
introduction of Videocall to the Company. Both equity obligations take effect on
the successful Merger of Videocall with the Company.
Note 7 -- Stockholders' Equity
Initial Public Offering
In May 1996, the Company consummated an initial public offering of 383,333
shares of its common stock adjusted for the 1:3 reverse split in September 1998.
Net proceeds to the Company were approximately $5,198,048 after deducting all
offering-related expenses. During 1996 and 1997, the Company used a majority of
the net proceeds for the development of additional RealPlayTM (formerly Career
SimTM) titles, the development of Passport2, the Company's Internet gaming
technology, certain outstanding debt, and for working capital purposes.
Capital Stock Transactions
On January 23, 1996, the Company issued 2,400 shares of common stock to an
individual in exchange for consulting services. The Company recorded expenses
during 1996 of $14,400 representing the fair market value of the common shares
issued.
In May 1996 $700,000 of a convertible note payable to a trust company was
converted into 178,117 shares of the Company stock. The number of shares issued
was determined by the conversion price of $3.93 per share.
In May 1996, in conjunction with the initial public offering, the Company
granted to the underwriter a five-year warrant to purchase up to 30,933 shares
of common stock exercisable at $27.00 per share. The Company did not record an
expense during 1996, as the Company determined the value of the warrants was
less than the exercise price.
During the years ended December 31, 1997 and 1996 the Company recorded stock-
based compensation expense of $15,980 and $39,907 related to non-employee stock
options in accordance with SFAS 123.
On August 30, 1996 the Company issued 11,111 shares of common stock to acquire
substantially all of the assets of an internet technology company, which
consisted primarily of purchased research and development. The Company recorded
$233,338 of product development expenses related to this transaction which was
valued based on the fair market value of the stock issued.
On October 31, 1996, the Company issued 2,410 shares of common stock to various
employees under the Employee Stock Purchase Plan. The fair market value of the
stock was $12.00 per share on October 31, 1996 and the purchase price to the
plan was $10.20 per share. The Company recorded compensation expense of $4,338
related to this transaction.
On November 1, 1996 the Company issued 16,667 shares of common stock to an
individual in satisfaction of accrued consulting compensation. This transaction
was valued at the fair market value of the services received of $100,000.
On May 30, 1997 the Company issued 2,614 shares of common stock to various
employees under the Employee Stock Purchase Plan. The fair market value of the
stock was $9.00 per share on May 30, 1997 and the purchase price to the plan was
$7.65 per share. The Company recorded compensation expense of $3,529 related to
this transaction (See Note 9).
F-16
<PAGE>
TALK VISUAL CORPORATION
(FORMERLY LEGACY SOFTWARE, INC.)
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
Note 7 -- Stockholders' Equity (continued)
Capital Stock Transactions (continued)
On August 15, 1997 a trust company exchanged 41,348 warrants on the Company's
common stock for $162,500.
On June 30, 1998 the Company issued 72,667 shares of common stock in a private
placement of $109,250.
On June 23, 1998 a trust company exchanged 19,084 warrants on the Company's
common stock for $75,000.
On September 14, 1998 the Company issued 400,000 shares of common stock in a
private placement for $200,000.
On September 22, 1998 the Company received stock subscriptions for 2,040,818
shares of common stock in a private placement of $2,000,000. At that date
$100,000 was paid on the subscriptions. Of the remaining $1,900,000 due under
the subscriptions, $1,743,000 has been received in cash funds collected by the
depository as of March 31, 1999 and therefor has been classified as a current
receivable; the balance of $157,000 has been received in other assets as of
March 31, 1999.
On October 1, 1998 the Company issued 16,667 shares of common stock for
services.
On December 18, 1998, the Company exchanged 52,051 shares for marketable
securities with a market value of $104,102.
On December 31, 1998, the Company had received $300,000 in cash and an advance
receivable in the amount of $50,000 for 200,000 shares to be issued.
On December 31, 1998, a shareholder and former member of the Board, had agreed
to cancel the Company's debt obligation to him of $73,200 in exchange for 28,150
shares of stock to be issued. The debt was cancelled effective December 31,
1998.
Warrants
In connection with the Company's initial public offering of common stock, the
Company issued warrants to a trust company to purchase 66,667 shares of common
stock at $3.93 per share. The warrants were exercisable immediately.
During 1997 the trust company exercised warrants to purchase 41,348 shares of
common stock and in 1998, 19,084 shares of common stock . As of December 31,
1998, warrants to purchase 6,235 shares of common stock were outstanding.
Note 8 -- Stock Option and Purchase Plans
The Company had a stock option plan for employees and certain non-employees,
that provided for the granting of stock options and authorized the issuance of
common stock. On June 19, 1997, in connection with the termination of certain
employment agreements, all stock options were fully vested for terminating
employees. At December 31, 1998, all outstanding stock options were fully
vested.
The Option Plan was divided into three separate components: (i) the
Discretionary Option Grant Program under which eligible individuals could, at
the discretion of the Plan Administrator, be granted options to purchase shares
of Common Stock at an exercise price not less than 85% of their fair market
value on the grant date; (ii) the Stock Issuance Program under which such
individuals could, at the Plan Administrator's discretion, be issued shares of
Common Stock directly, through the purchase of shares at a price not less than
85% of their fair market value at the time of issuance or as a bonus tied to the
performance of services; and (iii) the Automatic Option Grant Program under
which option grants will automatically be made at periodic intervals to eligible
non-employee Board members to purchase shares of Common Stock at an exercise
price equal to 100% of the fair market value on the grant date.
F-17
<PAGE>
TALK VISUAL CORPORATION
(FORMERLY LEGACY SOFTWARE, INC.)
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
Note 8 -- Stock Option and Purchase Plans (continued)
Option activity within each plan was as follows:
<TABLE><CAPTION>
Weighted
Incentive Directors Average
Stock Option Stock Option Price
Plans Plan Per Share
------------ ------------ ---------
<S> <C> <C> <C>
Balance outstanding December 31, 1996 157,222 6,667 $ 9.54
Options granted range from
$9.00 to $11.25 per share 3,332 1,667 $10.50
Options canceled range from
$9.00 to $21.75 per share (41,554) $ 9.48
Balance outstanding, December 31, 1997 119,000 8,333 $ 9.60
Options granted range from
$2.07 to $12.00 per share 140,000 1,667 $ 3.20
Options cancelled range from
$3.00 to $12.00 per share (6,667) (10,000) $ 9.60
--------- ---------- ---------
Balance outstanding, December 31, 1998 252,333 0 $ 5.74
======== ========== =========
Options exercisable, December 31, 1998 252,333 0 $ 5.74
======== ========== =========
</TABLE>
Information relating to stock options at December 31, 1998 summarized by
exercise price are as follows:
<TABLE>
Outstanding Exercisable
----------- -----------
Weighted Average Weighted Average
---------------- ----------------
Exercise Price Life Exercise Exercise
Per Share Shares (Months) Price Shares Price
------ -------- -------- ------ --------
<S> <C> <C> <C> <C> <C>
Incentive Stock Option Plan
59,500 6.0 $8.25 59,500 $8.25
59,500 6.0 $9.75 59,500 $9.75
66,667 18.0 $2.07 66,667 $2.07
33,333 18.0 $3.11 33,333 $3.11
33,333 18.0 $4.14 33,333 $4.14
------- ---- ----- ------- -----
252,333 12.4 $5.74 252,333 $5.74
======= =======
</TABLE>
All stock options issued to employees have an exercise price of not less than
85% of the fair market value of the Company's common stock on the date of the
grant, and in accordance with accounting for such options utilizing the
intrinsic value method there is a related compensation expense recorded in the
Company's financial statements representing 15% of the fair market value. Had
the compensation cost for stock-based compensation been determined based on the
fair value of the grant dates consistent with the method of SFAS 123, the
Company's net loss and loss per share for the years ended December 31, 1998,
1997 and 1996 would have been increased to the pro forma amounts presented below
as follows:
F-18
<PAGE>
TALK VISUAL CORPORATION
(FORMERLY LEGACY SOFTWARE, INC.)
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
Note 8 -- Stock Option and Purchase Plans (continued)
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Net loss as reported $(1,318,706) $(2,155,099) $(2,984,542)
Net loss pro forma $(1,366,120) $(2,621,214) $(2,997,000)
Basic net loss per common share as reported $ (1.26) $ (2.51) $ (4.78)
Basic net loss per common share pro forma $ (1.30) $ (3.05) $ (4.80)
Diluted net loss per common share as reported $ (1.26) $ (2.51) $ (4.78)
Diluted net loss per common share pro forma $ (1.30) $ (3.05) $ (4.80)
</TABLE>
The fair value of option grants is estimated on the date of grant utilizing the
Black-Scholes option-pricing model with the following weighted average
assumptions for grants in 1997 and 1996; expected life of option of 10 years,
expected volatility of 26.2%, and 14.7% respectively risk-free interest rate of
6.0% and 6.2%, respectively and a 0% and 0% dividend yield, respectively. The
weighted average fair value at date of grants for options granted during 1997
and 1996 was approximately $1.72 and $3.00 per option. For 1998, all outstanding
options expire within eighteen months. At December 31, 1998, option exercise
prices were above the market price of the stock, except for 66,667 shares.
Under the Company's Automatic Option Grant Program, options were outstanding to
outside directors at December 31, 1997. In accordance with accounting for
options granted to nonemployees utilizing the fair value method in accordance
with SFAS 123, the Company recorded stock-based compensation expense of $15,980
and $39,907 in the Statement of Operations for the years ended December 31, 1997
and 1996, with a corresponding credit to additional paid-in-capital.
On October 31, 1996, the Company's Employee Stock Purchase Plan (the "Purchase
Plan") purchased 2,410 shares of the Company's common stock. The fair market
value of the stock on this date was $12.00 per share, and the purchase price to
the employees was 85% of fair market value, or $10.20 per share. Compensation
expense in the amount of $4,338 related to this transaction was recognized in
the Statement of Operations for the year ended December 31, 1996. On May 30,
1997 the plan purchased 2.614 shares of the Company's common stock. The fair
market value was $9.00 per share and the purchase price to the employees was 85%
of fair market value, or $7.65 per share. Compensation expense in the amount of
$3,529 was recognized in the Statement of Operations for the year ended December
31, 1997.
Note 9 - Income Taxes
At December 31, 1998, the Company has federal and state net operating loss
carryforwards of approximately $6,851,000 and $3,333,600, respectively,
available to offset taxable income through the year 2013. The Tax Reform Act of
1986 contains provisions which limit the federal net operating loss
carryforwards available that can be used in any given year in the event of
certain occurrences, which include significant ownership changes.
At December 31, 1998 and 1997, the Company's net deferred tax asset consisted
primarily of net operating losses. The Company established a valuation allowance
equal to the net deferred tax asset, as the Company could not conclude that it
was more likely than not that the deferred tax asset would be realized. The
valuation allowance at December 31, 1998 and 1997 was $2,790,900 and $2,253,000.
Note 10 - Significant Customer
The Company had one significant customer in 1998, 1997 and 1996 which
represented approximately 61%, 69%, and 94% of revenue.
Note 11 - Related Party Transactions
During 1997, and 1996 the Company paid $3,974, and $1,527,328 in production
coordination expenses to a company in which an employee is a 50% owner. During
1998 the Company paid $21,102 in legal fees to a member of the Board, and
advanced $70,000 to a subsidiary of Videocall. Additionally, Videocall advanced
$4,000 at December 31, 1998 to the Company.
F-19
<PAGE>
TALK VISUAL CORPORATION
(FORMERLY LEGACY SOFTWARE, INC.)
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
Note 11 - Related Party Transactions (continued)
As provided in the Merger Plan, and in accordance with the terms of the
September 8, 1998 Letter of Intent, 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 totaling
$216,260 to Interactive and Interactive assumed certain debts totaling
$324,359 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. 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. Mr.
Zwebner is Chairman of the Board for Videocall and Mr. Rosov is President and
CEO of Videocall. Additionally, Mr. Zwebner, Mr. Rosov and Mr. Walker are
Directors of Videocall.
During the year ended December 31, 1998 and 1997, the Company entered into a
number of related party debt transactions as described in Note 6.
Note 12 - Acquisition of Research and Development
In August 1996, the Company acquired substantially all of the assets,
properties, and rights of On the Toes of Giants, Inc., a California corporation
("OTTOG"), pursuant to an Asset Purchase Agreement, dated August 19, 1996, which
consisted primarily of purchased research and development. The Consideration for
the purchased assets consisted of 11,111 newly-issued shares of common stock,
par value $.001, of the Company and the assumption of certain liabilities of
OTTOG. The transaction was valued as of August 30, 1996, the closing date, when
the common stock had a fair market value of $21.00 per share, at a total fair
market value of $233,338, and was recorded as an expense of product development.
Note 13 - Earnings Per Share
The following is a reconciliation of the weighted average number of shares used
to compute basic and diluted earnings per share:
<TABLE>
<CAPTION>
1998 1997 1996
--------- ------- -------
<S> <C> <C> <C>
Basic weighted average shares outstanding 1,054,175 858,211 623,968
Dilutive effect of options -- -- --
--------- ------- -------
Diluted weighted average shares outstanding 1,054,175 858,211 623,968
</TABLE>
Options to purchase 252,333, 127,333 and 163,889 shares were outstanding during
the years ended 1998, 1997 and 1996, respectively, but were not included in the
computation of diluted loss per common share because the effect would be
antidilutive.
Note 14 - Fourth Quarter Transaction
During the fourth quarter of 1996, the Company recognized into its Statement of
Operations $747,995 of royalty revenue from the Emergency Room title that
related to the co-development sales. Although the cash had been received in
earlier periods, the Company was unable to reasonably estimate returns on its
early sales of the Emergency Room title in accordance with Statement of
Financial Accounting Standards No. 48 (SFAS 48). However, during the fourth
quarter, sufficient information was available for the Company to reasonably
estimate the returns. Of the royalty revenue recognized in the fourth quarter of
1996, $312,787, $493,670, $266,592 and $73,946 relates to sales from the fourth
quarter of 1995, and the first, second, and third quarters of 1996,
respectively.
F-20
<PAGE>
TALK VISUAL CORPORATION
(FORMERLY LEGACY SOFTWARE, INC.)
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
Note 15 - Subsequent Events
Subsequent to December 31, 1998, the following activities have occurred with
respect to the Company:
Property Acquisitions
The Company has acquired a 22,622 square foot property in Toronto, Canada
in exchange for 975,000 shares of Class A Preferred stock, $.001 par value,
paying dividends at the rate of $ .095 per share per annum.
Business Alliances
On February 19, 1999 the Company signed a Placement and Fee Agreement
with Red Laguna Trading Company, Inc., ("Red Laguna") for compensation of
500,000 Warrants to purchase the Company's Common Stock, at an exercise price of
$5.00 per share, to employ Red Laguna to find strategic business alliances for
the Company over the period of the next three years.
On February 23, 1999 the Company and Infochannel Limited ("Infochannel"), a
Jamaican corporation signed a Memorandum of Understanding whereby the Company
will purchase a 23% interest in Infochannel for 78,823 shares of the Company's
Common Stock valued at $4.17 per share. The Company and Infochannel will in turn
form a joint venture, Videocall Jamaica, Limited, to operate the videocalling
outlets in the Jamaican market.
Business Acquisitions
On March 22, 1999 the Company and Proximity Inc. ("Proximity"), a Vermont
corporation, signed a Letter of Intent whereby, subject to due diligence by
both parties, the Company will purchase the outstanding stock of Proximity for
$4 million dollars in common stock of the Company valued at $4.00 per share. In
addition the Company will pay Proximity shareholders the sum of $250,000 in 10
equal monthly installments and subject to receiving audited financials and pro
forma operating reports will make available $200,000 for working capital
purposes. Proximity provides international full spectrum videoconferencing
services with public access to over 2,000 videoconferencing sites.
Facilities
On February 24, 1999 the Company closed the Los Angeles office and
consolidated its operations with Videocall at One Canal Park, Cambridge, MA.
Corporate Name and Trading Symbol
Effective March 1, 1999, the Company changed its name to Talk Visual
Corporation. On the same date, the Company's trading symbol on the Nasdaq
SmallCap Stock Market was changed to TVCPC.
Stockholder Public Relation Services
The Company issued 150,000 shares on January 25, 1999, to a public
relations firm for representation services.
F-21
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On February 4, 1999, the Board of Directors of the Company, appointed Mayer
Rispler & Company, P.C. ("Rispler") as the independent public accountants -
auditors of the Company effective this date. Rispler replaces BDO Seidman, LLP
("BDO") which resigned as independent public accountants of the Company on
January 14, 1999.
BDO's report on the Company's financial statements for the year ended December
31 1997 was subject to a going-concern qualification. The decision to change
accountants was approved by the Company's Board of Directors. There were no
disagreements with BDO, whether or not resolved, on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure, which, if not resolved to BDO's satisfaction, would have caused it to
make references to the subject matter of the disagreement(s) in connection with
its report.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTORS AND CONTROL PERSONS, COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
Information concerning the directors of the Company is contained in portions
of the Proxy Statement for the Company's 1998 Annual Meeting of Stockholders to
be filed with the Securities and Exchange Commission within 120 days after the
close of the fiscal year ended December 31, 1998 and incorporated herein by
reference. Information concerning the following individuals is not contained in
the Proxy Statement and therefore is presented below:
C. Harold Snyder, CPA - Age 43, has held the position of Chief Financial Officer
since November 6, 1998. From 1985 to 1990 served as Executive Officer for
Finance and Administration with North American Beauty Services, Inc., a
wholesale and retail distributor of beauty products. From 1990 to 1992, served
as VP of Finance for Innovative Telecom Company, Inc., a telecommunications
provider. From 1992 to 1998, served as a business consultant, financial and tax
strategist for companies throughout the New England area. Currently serves as
Chief Financial Officer for Videocall.
Section 16(a) Beneficial Ownership Reporting Compliance
(The following people are directors, officers, beneficial owners of 10% or
more of the common stock, or any other person subject to section 16 of the
Exchange Act that failed to file on a timely basis Forms 3, 4 and/or 5 as
required under section 16(a) of the Exchange Act)
Michael Zwebner, Eugene Rosov, David Hurwitz, Alexander Walker, Jr., Michael
Cuzner-Charles and C. Harold Snyder have reportable events in 1998 which require
the filing of forms 3 and 5, and all contemplate that such Forms will be filed
subsequent to the filing of this Report.
ITEM 10. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference to
portions of the Proxy Statement for the Company's 1998 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission within 120
days of the close of the fiscal year ended December 31, 1998.
F-22
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated herein by reference to
portions of the Proxy Statement for the Company's 1998 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission within 120
days of the close of the fiscal year ended December 31, 1998.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by reference to
portions of the Proxy Statement for the Company's 1998 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission within 120
days of the close of the fiscal year ended December 31, 1998.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
3(i). Articles of Incorporation
3(ii). By-Laws
27. Financial Data schedule
99. Additional exhibits - internal Balance Sheet at 2/28/99
(b) REPORTS ON FORM 8-K.
Disclosure under item 5 of Agreement and plan of Merger with Videocall
International Corporation - filed September 14, 1998. No financial statements
were included with this filing.
F-23
<PAGE>
SIGNATURES
In accordance with the requirements of Section 13 or 15(d) of the Exchange
Act, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
TALK VISUAL CORPORATION
By: /s/ Eugene Rosov
-----------------
Chief Executive Officer
Dated: March 31, 1999
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Eugene Rosov and C. Harold Snyder, and each of
them, as his or her true and lawful attorneys-in-fact and agents, each with full
power of substitution and resubstitution, for him or her and in his or her name,
place and stead, in any and all capacities, to sign this Report and any
amendments hereto, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in connection therewith, as fully to all intents and
purposes as he or she might or could do in person, hereby ratifying and
confirming all that each of said attorneys-in-fact and agents, or any of them,
or their or his or her substitute or substitutes, may lawfully do or cause to be
done by virtue hereof.
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ EUGENE ROSOV President and Chief Executive March 31, 1999
- ---------------------------- Officer (Principal Executive
Eugene Rosov Officer) and Director
/s/ C. HAROLD SNYDER Chief Financial Officer March 31, 1999
- ---------------------------- (Principal Financial
C. Harold Snyder and Accounting Officer)
/s/ MICHAEL ZWEBNER Chairman of the Board and March 31, 1999
- ---------------------------- Director
Michael Zwebner
/s/ DAVID B. HURWITZ Director March 31, 1999
- ----------------------------
David B. Hurwitz
/s/ ALEXANDER WALKER, JR. Director March 31, 1999
- ----------------------------
Alexander Walker, Jr.
/s/ MICHAEL CUZNER-CHARLES Director March 31, 1999
- ----------------------------
Michael Cuzner-Charles
</TABLE>
F-24
<PAGE>
EXHIBIT 3(i)
CERTIFICATE OF INCORPORATION OF
LEGACY SOFTWARE ACQUISITION, INC.
A DELAWARE CORPORATION
ARTICLE I
The name of this corporation is Legacy Software Acquisition, Inc.
ARTICLE II
The address of the registered office of the corporation in the State of
Delaware is 1209 Orange Street, in the City of Wilmington, County of New Castle.
The name of its registered agent at such address is the Corporation Trust
Company.
ARTICLE III
The nature of the business or purposes to be conducted or promoted is to
engage in any lawful act or activity for which corporations may be organized
under the General Corporation Law of Delaware.
ARTICLE IV
(A) This corporation is authorized to issue two classes of shares to be
designated respectively preferred stock ("preferred stock") and common
stock ("common stock"). The total number of shares of capital stock
that the corporation is authorized to issue is fifteen million
(15,000,000). The total number of shares of preferred stock this
corporation shall have authority to issue is five million (5,000,000).
The total number of shares of common stock this corporation shall have
authority to issue is ten million (10,000,000). The preferred stock
shall have par value $.001 Per share and the common stock shall have
par value $.001 Per share.
F-25
<PAGE>
(B) The shares of preferred stock may be issued from time to time in
one or more series. The board of directors of the corporation (the
"Board of Directors") is expressly authorized to provide for the issue
of all or any of the shares of the preferred stock in one or more
series, and to fix the number of shares and to determine or alter, for
each such series, such voting powers, full or limited, or no voting
powers, and such designations, preferences, an relative, participating,
optional, or other rights and such qualifications, limitations, or
restrictions thereof, as shall be stated and expressed in the
resolution or resolutions adopted by the board of directors providing
for the issue of such shares (a "preferred stock designation") and as
may be permitted by the general corporation law of the State of
Delaware. The Board of Directors is also expressly authorized to
increase or decrease (but not below the number of shares of such series
then outstanding) the number of shares of any series subsequent to the
issue of shares of that series. In case the number of shares of any
such series shall be so decreased, the shares constituting such
decrease shall resume the status that they had prior to adoption of the
resolution originally fixing the number of shares of such series.
ARTICLE V
The name and mailing address of the incorporator is Ariella J. Lehrer, 5340
Alla Road, Los Angeles, CA 90066.
ARTICLE VI
Except as otherwise provided in this Certificate of Incorporation, in
furtherance and not in limitation of the powers conferred by statue, the board
of directors is expressly authorized to make, repeal, alter, amend and rescind
any or all of the Bylaws of the corporation.
F-26
<PAGE>
ARTICLE VII
The number of directors of the corporation shall be fixed from time to time
by, or in a manner provided in, the bylaws or amendment thereof duly adopted by
the Board of Directors or by the stockholders.
ARTICLE VIII
Elections of directors need not be by written ballot unless the bylaws of
the corporation shall so provide.
ARTICLE IX
Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. The books of the corporation may be kept
(subject to any provision contained in the statutes) outside the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the Bylaws of the corporation.
ARTICLE X
A director of the corporation shall not be personally liable to the
corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under section 174 of the Delaware General Corporation
Law, or (iv) for any transaction from which the director derived any improper
personal benefit. If the Delaware General Corporation Law is amended after
approval by the stockholders of this article to authorize corporate action
further eliminating or limiting the personal liability of directors then the
liability of a director of the corporation shall be eliminated or limited to the
fullest extent permitted by the Delaware General Corporation Law as amended.
F-27
<PAGE>
Any repeal or modification of the foregoing provision of this article x by
the stockholders of the corporation shall not adversely affect any right or
protection of a director of the corporation existing at the time of such repeal
or modification.
ARTICLE XI
The corporation reserves the right to amend, alter, change or repeal any
provision contained in this Certificate of Incorporation, in the manner now or
hereafter prescribed by statue, and all rights conferred upon stockholders
herein are granted subject to this reservation.
IN WITNESS WHEREOF, The undersigned has signed this certificate this 20th
day of December, 1995
/S/ ARIELLA J. LEHRER
---------------------
Ariella J. Lehrer, Incorporator
F-28
<PAGE>
EXHIBIT 3(ii)
BYLAWS
OF
LEGACY SOFTWARE ACQUISITION, INC.
a Delaware Corporation
December 15, 1995
F-29
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE 1 - Offices 1
1.1 Registered Office 1
1.2 Other Offices 1
ARTICLE 2 - Stockholders 1
2.1 Place of Meetings 1
2.2 Annual Meetings 1
2.3 Special Meetings 1
2.4 Notice of Meetings 1
2.5 Voting List 1
2.6 Quorum 2
2.7 Adjournments 2
2.8 Voting and Proxies 2
2.9 Action at Meeting 2
2.10 Action Without Meeting 2
ARTICLE 3 - Directors 3
3.1 General Powers 3
3.2 Number; Election; Tenure and Qualifications 3
3.3 Enlargement of the Board 3
3.4 Vacancies 3
3.5 Resignation 3
3.6 Removal 3
3.7 Regular Meetings 4
3.8 Special Meetings 4
3.9 Notice of Special Meetings 4
3.10 Meetings by Telephone Conference Calls 4
3.11 Quorum 4
3.12 Action at Meeting 4
3.13 Action by Consent 4
3.14 Committees 4
3.15 Compensation of Directors 5
ARTICLE 4 - Officers 5
4.1 Enumeration 5
4.2 Election 5
4.3 Qualification 5
4.4 Tenure 5
4.5 Registration and Removal 5
4.6 Vacancies 6
4.7 Chairman of the Board and Vice Chairman of the Board 6
4.8 President 6
4.9 Vice Presidents 6
</TABLE>
F-30
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
4.10 Secretary and Assistant Secretaries 6
4.11 Chief Financial Officer and Assistant Treasurers 7
4.12 Bonded Officers 7
4.13 Salaries 7
ARTICLE 5 - Capital Stock 8
5.1 Issuance of Stock 8
5.2 Certificates of Stock 8
5.3 Transfers 8
5.4 Los, Stolen or Destroyed Certificates 8
5.5 Record Date 8
ARTICLE 6 - Indemnification 9
ATRICLE 7 - General Provisions 10
7.1 Fiscal Year 10
7.2 Corporate Seal 10
7.3 Execution of Instruments 10
7.4 Waiver of Notice 10
7.5 Voting of Securities 11
7.6 Evidence of Authority 11
7.7 Certificate of Incorporation 11
7.8 Transactions with Interested Parties 11
7.9 Severability 12
7.10 Pronouns 12
ARTICLE 8 - Amendments 12
8.1 By the Board of Directors 12
8.2 By the Stockholders 12
</TABLE>
F-31
<PAGE>
BYLAWS
OF
LEGACY SOFTWARE ACQUISITION, INC.
a Delaware corporation
ARTICLE 1 - Offices
1.1 Registered Office. The registered office shall be in the
City of Wilmington, County of New Castle, State of Delaware.
1.2 Other Offices. The corporation may also have offices at
such other places both within and without the State of Delaware as the Board of
Directors may from time to time determine or the business of the corporation may
require.
ARTICLE 2 - Stockholders
2.1 Place of Meetings. All meetings of stockholders shall be
held at such place within or without the State of Delaware as may be designed
from time to time by the Board of Directors or the President, or if not so
designated, at the registered office of the corporation.
2.2 Annual Meetings. The annual meeting of stockholders for
the election of directors and for the transaction of such other business as may
properly be brought before the meeting shall be held each year at such date and
time as shall be designated from time to time by the Board of Directors and
stated in the notice of meeting.
2.3 Special Meetings. Special meetings of stockholders may be
called at any time, for any purpose or purposes, unless otherwise prescribed by
statute or by the Certificate of Incorporation, by the President, the Board of
Directors, or holders of at least 10% of the corporation's common stock.
Business transacted at any special meeting of stockholders shall be limited to
matters relating to the purpose or purposes stated in the notice of meeting.
2.4 Notice of Meetings. Except as otherwise provided by law,
written notice of each meeting of stockholders, whether annual or special, shall
be given not less than 10 nor more than 60 days before the date of the meeting
to each stockholder entitled to vote at such meeting. The notices of all
meetings shall state the place, date and hour of the meeting. The notice of a
special meeting shall state, in addition, the purpose or purposes for which the
meeting is called. If mailed, notice is given when deposited in the United
States mail, postage prepaid, directed to the stockholder at his address as it
appears on the records of the corporation.
F-32
<PAGE>
2.5 Voting List. The officer who has charge of the stock
ledger of the corporation shall prepare, at least 10 days before every meeting
of stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of share registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
10 days prior to the meeting, at a place within the city where the meeting is to
be held. The list shall also be produced and kept at the time and place of the
meeting during the whole time of the meeting, and may be inspected by any
stockholder who is present.
2.6 Quorum. Except as otherwise provided by law, the
Certificate of Incorporation or these Bylaws, the holders of a majority of the
shares of the capital stock of the corporation issued and outstanding and
entitled to vote at the meeting, present in person or represented by proxy,
shall constitute a quorum for the transaction of business.
2.7 Adjournments. Any meeting of stockholders may be adjourned
to another time and to any other place at which a meeting of stockholders may be
held under these Bylaws by the stockholders present or represented at the
meeting and entitled to vote, although less than a quorum, or, if no stockholder
is present, by any officer entitled to vote, although less than a quorum, or, if
no stockholder is present, by any officer entitled to preside at or to act as
Secretary of such meeting. It shall not be necessary to notify any stockholder
of any adjournment of less than 30 days if the time and place of the adjourned
meeting are announced at the meeting at which adjournment is taken, unless after
the adjournment a new record date is fixed for the adjourned meeting. At the
adjourned meeting, the corporation may transact any business which might have
been transacted at the original meeting.
2.8 Voting and Proxies. Each stockholder shall have one vote
for each share of stock entitled to vote held of record by such stockholder and
a proportionate vote for each fractional share so held, unless otherwise
provided in the Certificate of Incorporation. Each stockholder of record
entitled to vote at a meeting of stockholders, or to express consent or dissent
to corporate action in writing without a meeting, may vote or express such
consent or dissent in person or may authorize another person or persons to vote
or act for him by written proxy executed by the stockholder or his authorized
agent and delivered to the Secretary of the corporation. No such proxy shall be
voted or acted upon after three years from the date of its execution, unless the
proxy expressly provides for longer period.
2.9 Action at Meeting. When a quorum is present at any
meeting, the holders of a majority of the stock present or represented and
entitled to vote on the subject matter (or if there are two or more classes of
stock entitled to vote as separate classes, then in the case of each such class,
the holders of a majority of the stock of that class present or represented and
entitled to vote on the subject matter) shall decide any matter to be voted upon
by the stockholders at such meeting, except when a different vote
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<PAGE>
is required by express provision of law, the Certificate of Incorporation or
these Bylaws. Any election of directors by stockholders shall be determined by a
plurality of the votes cast by the stockholders entitled to vote at the
election.
2.10 Action without Meeting. Any action required or permitted
to be taken at any annual or special meeting of stockholders of the corporation
may be taken without a meeting, without prior notice and without a vote, if a
consent in writing, setting forth the action so taken, is signed by the holders
of outstanding stock having not less than the minimum number of votes that would
be necessary to authorize or take such action at a meeting at which all shares
entitled to vote on such action were present and voted. Prompt notice of the
taking of corporate action without a meeting by less than unanimous written
consent shall be given to those stockholders who have not consented in writing.
ARTICLE 3 - Directors
3.1 General Powers. The business and affairs of the
corporation shall be managed or under the direction of a Board of Directors, who
may exercise all of the powers of the corporation except as otherwise provided
by law, the Certificate of Incorporation or these Bylaws. In the event of a
vacancy in the Board of Directors, the remaining directors, except otherwise
provided by law, may exercise the powers of the full Board until the vacancy is
filled.
3.2 Number; Election; Tenure and Qualification. The number of
directors which shall constitute the whole Board shall be determined by
resolution of the Board of Directors. Each director shall be elected by the
stockholders at the annual meeting and shall hold office until the next annual
meting and until his successor is elected and qualified, or until his earlier
death, resignation or removal. Directors need not be stockholders of the
corporation.
3.3 Enlargement of the Board. The number of the Board of
Directors may be increased at any time by vote of a majority of the directors
when in office.
3.4 Vacancies. Unless and until filled by the stockholders,
any vacancy in the Board of Directors, however occurring, including a vacancy
resulting from an enlargement of the Board, may be filled by vote of a majority
of the directors then in office, although less than a quorum, or by a sole
remaining director. A director elected to fill a vacancy shall be elected for
the unexpired term of his predecessor in office, or a director chosen to fill a
position resulting from an increase in the number of directors shall hold office
until the next annual meeting of stockholders and until his successor is elected
and qualified, or until his earlier death, resignation or removal.
3.5 Resignation. Any director may resign by delivering his
written resignation to the corporation at its principal office or to the
President or Secretary. Such
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<PAGE>
resignation shall be effective upon receipt unless it is specified to be
effective at some other time or upon the happening of some other event.
3.6. Removal. Any director or the entire Board of Directors
may be removed, with or without cause, by the holders of a majority of the
shares then entitled to vote at an election of directors.
3.7 Regular Meetings. Regular meetings of the Board of
Directors may be held without notice at such time and place, within or without
the State of Delaware, as shall be determined from time to time by the Board of
Directors; provided that any director who is absent when such a determination is
made shall be given notice of the determination. A regular meeting of the Board
of Directors may be held without notice immediately after and at the same place
as the annual meeting of stockholders.
3.8 Special Meetings. Special meetings of the Board of
Directors may be held at any time and place, within or without the State of
Delaware, designated in a call by the Chairman of the Board, President, two or
more directors, or by one director in the event that there is only a single
director in office.
3.9 Notice of Special Meetings. Notice of any special meeting
of directors shall be given to each director by the Secretary or by the officer
or one of the directors calling the meeting. Notice shall be given to each
director in person, by telephone, by facsimile transmission or by telegram sent
to his business or home address at least 48 hours in advance of the meeting, or
by written notice mailed to his business or home address at least 72 hours in
advance of the meeting. A notice or waiver of notice of a meeting of the Board
of Directors need not specify the purposes of the meeting.
3.10 Meetings by Telephone Conference Calls. Directors or any
members of any committee designated by the directors may participate in a
meeting of the Board of Directors or such committee by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other, and participation by such
means shall constitute presence in person at such meeting.
3.11 Quorum. A majority of the number of directors fixed
pursuant to Section 2.2 shall constitute a quorum at all meetings of the Board
of Directors. In the event one or more of the directors shall be disqualified to
vote at any meeting, then the required quorum shall be reduced by one for each
such director so disqualified; provided, however, that in no case shall less
than one-third (1/3) of the number so fixed constitute a quorum. In the absence
of a quorum at any such meeting, a majority of the directors present may adjourn
the meeting from time to time without further notice other than announcement at
the meeting, until a quorum shall be present.
3.12 Action at Meeting. At any meeting of the Board of
Directors at which a quorum is present, the vote of a majority of those present
shall be sufficient to
F-35
<PAGE>
take any action, unless a different vote is specified by law, the Certificate of
Incorporation or these Bylaws.
3.13 Action by Consent. Any action required or permitted to be
taken at any meeting of the Board of Directors or of any committee of the Board
of Directors may be taken without a meeting, if all member of the Board or
committee, as the case may be, consent to the action in writing, and the written
consents are filed with the minutes of proceedings of the Board or committee.
3.14 Committees. The Board of Directors may, by resolution
passed by a majority of the whole Board, designate one or more committees, each
committee to consist of one or more of the directors of the corporation. The
Board may designate one or more directors as alternate members of any committee,
who may replace any absent or disqualified member at any meeting of the
committee. In the absence or disqualification of a member of a committee, the
member of members of the committee present at any meeting and not disqualified
from voting, whether or not he or they constitute a quorum, may unanimously
appoint another member of the Board of Directors to act at the meeting in the
place of any such absent or disqualified member. Any such committee, to the
extent provided in the resolution of the Board of Directors and subject to the
provisions of the General Corporation Law of the State of Delaware, shall have
and may exercise all the powers and authority of the Board of Directors in the
management of the business and affairs of the corporation and may authorize the
seal of the corporation to be affixed to all papers which may require it. Each
such committee shall keep minutes and make such reports as the Board of
Directors may from time to time request. Except as the Board of Directors may
otherwise determine, any committee may make rules for the conduct of its
business, but unless otherwise provided by the directors or in such rules, its
business shall be conducted as nearly as possible in the same manner as is
provided in these Bylaws for the Board of Directors.
3.15 Compensation of Directors. Directors may be paid such
compensation for their services and such reimbursement for expenses of
attendance at meetings at the Board of Directors may from time to time
determine. No such payment shall preclude any director from serving the
corporation or any of its parent or subsidiary corporations in any other
capacity and receiving compensation for such service.
ARTICLE 4 - Officers
4.1 Enumeration. The officers of the corporation shall consist
of a President, a Secretary, a Chief Financial Officer and such other officers
with such other titles as the Board of Directors shall determine, including a
Chairman of the Board, a Vice Chairman of the Board, and one or more Vice
Presidents, Assistant Treasurers, and Assistant Secretaries. The Board of
Directors may appoint such other officers as it may deem appropriate.
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<PAGE>
4.2 Election. The President, Chief Financial Officer and
Secretary shall be elected by the Board of Directors at its first meeting
following the annual meeting of stockholders. Other officers may be appointed by
the Board of Directors at such meeting or at any other meeting.
4.3 Qualification. The President need not be a director. No
officer need be a stockholder. Any two or more offices may be held by the same
person.
4.4 Tenure. Except as otherwise provided by law, by the
Certificate of Incorporation or by these Bylaws, each officer shall hold office
until his successor is elected and qualified, unless a different term is
specified in the vote choosing or appoint him, or until his earlier death,
resignation or removal.
4.5 Resignation and Removal. Any officer may resign by
delivering his written resignation to the corporation at its principal office or
to the President or Secretary.
4.6 Vacancies. The Board of Directors may fill any vacancy
occurring in any office for any reason and may, in its discretion, lease
unfilled for such period as it may determine any offices other than those of
President, Chief Financial Officer and Secretary. Each such successor shall hold
office for the unexpired term of his predecessor and until his successor is
elected and qualified, or until his earlier death, resignation or removal.
4.7 Chairman of the Board and Vice Chairman of the Board. If
the Board of Directors appoints a Chairman of the Board, he shall, when present,
preside at all meetings of the Board of Directors. He shall perform such duties
and possess such powers as are usually vested in the office of the Chairman of
the Board or as may be vested in him by the Board of Directors. If the Board of
Directors appoints a Vice Chairman of the Board, he shall, in the absence or
disability of the Chairman of the Board, perform the duties and exercise the
powers of the Chairman of the Board and shall perform such other duties and
possess such other powers as may from time to time be vested in him by the Board
of Directors.
4.8 President. The President shall be the chief operating
officer of the corporation. He shall also be the chief executive officer of the
corporation unless such title is assigned to a Chairman of the Board. The
President shall, subject to the direction of the Board of Directors, have
general supervision and control of the business of the corporation. Unless
otherwise provided by the directors, he shall preside at all meetings of the
stockholders and of the Board of Directors (except as provided in Section 3.7
above). The President shall perform such other duties and shall have such other
powers as the Board of Directors may from time to time prescribe.
F-37
<PAGE>
4.9 Vice Presidents. Any Vice President shall perform such
duties and possess such powers as the Board of Directors or the President may
from time to time prescribe. In the event of the absence, inability or refusal
to act of the President, the Vice President (or if there shall be more than one,
the Vice Presidents in the order determined by the Board of Directors) shall
perform the duties of the President and when so performing shall have all the
powers of and be subject to all the restrictions upon the President. The Board
of Directors may assign to any Vice President the title of Executive Vice
President, Senior Vice President or any other title selected by the Board of
Directors.
4.10 Secretary and Assistant Secretaries. The Secretary shall
perform such duties and shall have such powers as the Board of Directors or the
President may from time to time prescribe. In addition, the Secretary shall
perform such duties and have such powers as are incident to the office of the
secretary, including without limitation the duty and power to give notices of
all meetings of stockholders and special meetings of the Board of Directors, to
attend all meetings of stockholders and the Board of Directors and keep a record
of the proceedings, to maintain a stock ledger and prepare lists of stockholders
and their addresses as required, to be custodian of corporate records and the
corporate seal and to affix and attest to the same on documents.
Any Assistant Secretary shall perform such duties and possess
such powers as the Board of Directors, the President or the Secretary may from
time to time prescribe. In the event of the absence, inability or refusal to act
of the Secretary, the Assistant Secretary, (or if there shall be more than one,
the Assistant Secretaries in the order determined by the Board of Directors)
shall perform the duties and exercise the powers of the Secretary.
In the absence of the Secretary or any Assistant Secretary at
any meeting of stockholders or directors, the person presiding at the meeting
shall designate a temporary secretary to keep a record of the meeting.
4.11 Chief Financial Officer and Assistant Treasurers. The
Chief Financial Officer shall perform such duties and shall have such powers as
may from time to time be assigned to him by the Board of Directors or the
President. In addition, the Chief Financial Officer shall perform such duties
and have such powers as are incident to the office of treasurer, including
without limitation the duty and power to keep and be responsible for all funds
and securities of the corporation, to deposit funds of the corporation in
depositories selected in accordance with these Bylaws, to disburse such funds as
ordered by the Board of Directors, to make proper accounts of such funds, and to
render as required by the Board of Directors statements of all such transactions
and of the financial condition of the corporation.
The Assistant Treasurers shall perform such duties and possess
such powers as the Board of Directors, the President or the Chief Financial
Officer may from
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<PAGE>
time to time prescribe. In the event of the absence, inability or refusal to act
of the Chief Financial Officer, the Assistant Treasurer, (or if there shall be
more than one, the Assistant Treasurers in the order determined by the Board of
Directors) shall perform the duties and exercise the powers of the Chief
Financial Officer.
4.12 Bonded Officers. The Board of Directors may require any
officer to give the corporation a bond in such sum and with such surety or
sureties as shall be satisfactory to the Board of Directors upon such terms and
conditions as the Board of Directors may specify, including without limitation a
bond for the faithful performance of his duties and for the restoration to the
corporation of all perper6ty in his possession or under his control belonging to
the corporation.
ARTICLE 5 - CAPITAL STOCK
5.1 Issuance of Stock. Unless otherwise voted by the
stockholders and subject to the provisions of the Certificate of Incorporation,
the whole or any part of any unissued balance of the authorized capital stock of
the corporation or the whole or any part of any unissued balance of the
authorized capital stock of the corporation held in its treasury may be issued,
sold, transferred or otherwise disposed of by vote of the Board of Directors in
such manner, for such consideration and on such terms as the Board of Directors
may determine.
5.2 Certificates of Stock. Every holder of stock of the
corporation shall be entitled to have a certificate, in such form as may be
prescribed by law and by the Board of Directors, certifying the number and class
of shares owned by him in the corporation. Each such certificate shall be signed
by, or in the name of the corporation by, the Chairman or Vice Chairman, if any,
of the Board of Directors, or the President or a Vice President, and the Chief
Financial Officer or an Assistant Treasurer, or the Secretary or an Assistant
Secretary of the corporation. Any or all of the signatures on the certificate
may be a facsimile.
Each certificate for shares of stock which are subject to any
restriction on transfer pursuant to the Certificate of Incorporation, the
Bylaws, applicable securities laws or any agreement among any number of
stockholders or among such stockholders and the corporation shall have
conspicuously noted on the face or back of the certificate either the full text
of the restriction or a statement of the existence of the restriction.
5.3 Transfers Subject to the restrictions, if any, stated or
noted on the stock certificates, shares of stock may be transferred on the books
of the corporation by the surrender to the corporation or its transfer agent of
the certificate representing such shares properly endorsed or accompanied by a
written assignment or power of attorney properly
F-39
<PAGE>
executed, and with such proof of authority or the authenticity of signature as
the corporation or its transfer agent may reasonably require. Except as may be
otherwise required by law, by the Certificate of Incorporation or these Bylaws,
the corporation shall be entitled to treat the record holder of stock as shown
on its books as the owner of such stock for all purposed, including the payment
of dividends and the right to vote with respect to such stock, regardless of any
transfer, pledge or other disposition of such stock until the shares have been
transferred on the books of the corporation in accordance with the requirements
of these Bylaws.
5.4 Lost, Stolen or Destroyed Certificates. The corporation
may issue a new certificate of stock in place of any previously issued
certificate alleged to have been lost, stolen or destroyed, upon such terms and
conditions as the Board of Directors may prescribe, including the presentation
of reasonable evidence of such loss, theft or destruction and the giving of such
indemnity as the Board of Directors may require for the protection of the
corporation or any transfer agent or registrar.
5.5 Record Date. The Board of Directors may fix in advance a
date as a record date for the determination of the stockholders entitled to
notice of or to vote at any meeting of stockholders or to express consent (or
dissent) to corporate action in writing without a meeting, or entitled to
receive payment of any dividend or other distribution or allotment of any rights
in respect of any change, conversion or exchange of stock, or for the purpose of
any other lawful action. Such record date shall not be more than 60 nor less
than 10 days before the date of such meeting, nor more than 60 days prior to any
other action to which such record date relates.
If no record date is fixed, the record date for determining
stockholders entitled to notice of or to vote at a meeting of stockholders shall
be at the close of business on the day before the day on which notice is given,
or, if notice is waived, at the close of business on the day before the day on
which the meeting is held. The record date for determining stockholders entitled
to express consent to corporate action in writing without a meeting, when no
prior action by the Board of Directors is necessary, shall be the day on which
the first written consent is expressed. The record date for determining
stockholders for any other purpose shall be the close of business on the day on
which the Board of Directors adopts the resolution relating to such purpose.
A determination of stockholders of record entitled to notice
of or to vote at a meeting of stockholders shall apply to any adjournment of the
meeting; provided, however, that the Board of Directors may fix a new record
date for the adjourned meeting.
ARTICLE 6 - Indemnification
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<PAGE>
The corporation shall, to the fullest permitted by section 145 of the
General Corporation Law of Delaware, as that Section may be amended and
supplemented from time to time, indemnify any director or officer which it shall
have power to indemnify under the section against any expenses, liabilities or
other matters referred to in or covered by that Section. The indemnification
provided in this Article (i) shall not be deemed exclusive of any other rights
to which those indemnified may be entitled under any bylaw, agreement or vote of
stockholders or disinterested directors or otherwise. Both as to action in their
official capacities and as to action in another capacity while holding such
office, (ii) shall continue as to a person who has ceased to be a director or
officer, (iii) shall inure to the benefit of the heirs, executors and
administrators of such a person. The corporation's obligation to provide
indemnification under this Article shall be offset to the extent of any other
source of indemnification or any otherwise applicable insurance coverage under a
policy maintained by the corporation or any other person.
Expenses incurred by a director of the corporation in defending a civil or
criminal action, suit or proceeding by reason of the fact that he is or was a
director of the corporation (or was serving at the corporation's request as a
director or officer of another corporation) shall be paid by the corporation in
advance of the final disposition of such action, suit or proceeding upon receipt
of an undertaking by or on behalf of such director to repay such amount if it
shall ultimately be determined that he is not entitled be indemnified by the
corporation as authorized by relevant sections of the General Corporation Law of
Delaware. Notwithstanding the foregoing, the corporation shall not be required
to advance such expenses to an agent who is a party to an action, suit or
proceeding brought by the corporation and approved by a majority of the Board of
Directors of the corporation which alleges willful misappropriation of corporate
assets by such agent, disclosure of confidential information in violation of
such agent's fiduciary and contractual obligations to the corporation or nay
other willful and deliberate breach in bad faith of such agent's duty to the
corporation or its stockholders.
To assure indemnification under this Article of all such persons who are
determined by the corporation or otherwise to be or to have bee "fiduciaries" of
any employee benefit plan of the corporation which may exist from time to time,
such Section 145 shall, for the purposes of this Article, be interpreted as
follows: an "other enterprise" shall be deemed to include such employee benefit
plans, including without limitation, any plan of the corporation which is
governed by an Act of Congress entitled "Employee Retirement Income Security Act
of 1974," as amended from time to time; the corporation shall be deemed to have
requested a person to serve an employee benefit plan where the performance by
such person of his duties to the corporation also imposes duties on, or
otherwise involves services by, such person to the plan or participants or
beneficiaries of the plan; excise taxes assessed on a person with respect to an
employee benefit plan pursuant to such Act of Congress shall be deemed "fines";
and action taken or omitted by a person with respect to an employee benefit plan
in the performance of such person's duties for a purpose reasonably believed by
such person to be in the interest of
F-41
<PAGE>
participants or beneficiaries of the plan shall be deemed to be for a purpose
which is not opposed to the best interests of the corporation.
ARTICLE 7 - General Provisions
7.1 Fiscal Year Except as from time to time otherwise
designated by the Board of Directors, the fiscal year of the corporation shall
begin on the 1st day of January in each year and end on the 31st day of December
in each year.
7.2 Corporate Seal The corporate seal shall be in such form as
shall be approved by the Board of Directors.
7.3 Execution of Instruments The President or the Chief
Financial Officer shall have the power to execute and deliver on behalf and in
the name of the corporation any instrument requiring the signature of an officer
of the corporation, except as otherwise provided by the Bylaws, or where the
execution and delivery of such instrument shall be expressly delegated by the
Board of Directors to some other officer or agent of the corporation.
7.4 Waiver of Notice Whenever any notice whatsoever is
required to be given by law, by the Certificate of Incorporation or by these
Bylaws, a waiver of such notice either in writing signed by the person entitled
to such notice or such person's duly authorized attorney, or by telegraph, cable
or any other available method, whether before, at or after the time stated in
such waiver, or the appearance of such person or persons at such meeting in
person or by proxy, shall be deemed equivalent to such notice.
7.5 Voting of Securities Except as the directors may otherwise
designate, the President, any Vice President, the Secretary or Chief Financial
Officer may waive notice of, and act as, or appoint any person or persons to act
as, proxy or attorney-in-fact for this corporation (with or without power of
substitution) at, any meeting of stockholders or shareholders of any other
corporation or organization, the securities of which may be held by this
corporation.
7.6 Evidence of Authority A certificate by the Secretary, or
an Assistant Secretary, or a temporary Secretary, as to any action taken by the
stockholders, directors, a committee or any officer or representative of the
corporation shall as to all persons who rely on the certificate in good faith be
conclusive evidence of such action.
7.7 Certificate of Incorporation All references in these
Bylaws to the
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<PAGE>
Certificate of Incorporation shall be deemed to refer to the Certificate of
Incorporation of the corporation, as amended and in effect from time to time.
These Bylaws are subject to the provisions of the Certificate of Incorporation
and applicable law.
7.8 Transactions with Interested Parties. No contract or
transaction between the corporation and one or more of the directors or
officers, or between the corporation and any other corporation, partnership,
association, or other organization in which one or more of the directors or
officers are directors or officers, or have a financial interest shall be void
or voidable solely for this reason, or solely because the director or officer is
present at or participates in the meeting of the Board of Directors or a
committee of the Board of Directors which authorized the contract or transaction
or solely because his or their votes are counted for such purpose, if;
(1) The material facts as to his relationship or interest as
to the contract or transaction are disclosed or are known to the Board of
Directors or the committee, and the Board or committee in good faith authorizes
the contract or transaction by the affirmative votes of a majority of the
disinterested directors, even though the disinterested directors be less than a
quorum;
(2) The material facts as to his relationship or interest and
as to the contract or transaction are disclosed or are known to the stockholders
entitled to vote thereon, and the contractor or transaction is specifically
approved in good faith by vote of the stockholders; or
(3) The contract or transaction is fair as to the corporation
as of the time it is authorized, approved or ratified, by the Board of
Directors, a committee of the Board of Directors or the stockholders.
Common or interested directors may be counted in determining
the presence of a quorum at a meeting of the Board of Directors or of a
committee which authorized the contract or transaction.
7.9 Severability Any determination that any provision of these
Bylaws is for any reason inapplicable, illegal or ineffective shall not affect
or invalidate any other provision of these Bylaws.
7.10 Pronouns All pronouns used in these Bylaws shall be
deemed to refer to the masculine, feminine or neuter, singular or plural, as the
identity of the person or persons may require.
ARTICLE 8 - Amendments
By the Board of Directors These Bylaws may be altered, amended
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<PAGE>
or repealed or new bylaws may be adopted by the affirmative vote of a majority
of the directors present at any regular or special meeting of the Board of
Directors at which a quorum is present.
8.2 By the Shareholders These Bylaws may be altered, amended
or repealed or new bylaws may be adopted by the affirmative vote of the holders
of a majority of the shares of the capital stock of the corporation issued and
outstanding and entitled to vote at any regular meeting of stockholders, or at
any special meeting of stockholders, provided notice of such alteration,
amendment, repeal or adoption of new bylaws shall have been stated in the notice
of such special meeting.
F-44
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM TALK VISUAL
CORPORATION'S BALANCE SHEET AS OF DECEMBER 31, 1998 AND THE STATEMENTS OF
OPERATIONS, STOCKHOLDERS' EQUITY AND CASH FLOWS FOR THE YEAR THEN ENDED, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 153,608
<SECURITIES> 0
<RECEIVABLES> 31,243
<ALLOWANCES> 12,500
<INVENTORY> 8,250
<CURRENT-ASSETS> 2,102,057
<PP&E> 18,500
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,503,561
<CURRENT-LIABILITIES> 427,719
<BONDS> 0
0
0
<COMMON> 1,393
<OTHER-SE> 1,999,449
<TOTAL-LIABILITY-AND-EQUITY> 2,503,561
<SALES> 52,960
<TOTAL-REVENUES> 339,412
<CGS> 33,254
<TOTAL-COSTS> 2,070,428
<OTHER-EXPENSES> (112,310)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 47,626
<INCOME-PRETAX> (1,618,706)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,618,706)
<DISCONTINUED> 0
<EXTRAORDINARY> 300,000
<CHANGES> 0
<NET-INCOME> (1,318,706)
<EPS-PRIMARY> (1.26)
<EPS-DILUTED> (1.26)
</TABLE>
<PAGE>
Exhibit 99.
In accordance with requirements outlined in a letter dated January 20, 1999 from
the NASDAQ Listing Qualification Panel, the February 28, 1999 balance sheet is
presented as an exhibit with this filing. This internal balance sheet has not
been audited or reviewed by any independent accountant; it is strictly presented
to comply with NASDAQ Listing Qualification Panel requirements.
TALK VISUAL CORPORATION
(FORMERLY LEGACY SOFTWARE, INC.)
BALANCE SHEET
<TABLE>
<CAPTION>
February 28, 1999
------------------
<S> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 12,400
Accounts receivable, net of allowances
for doubtful accounts of $12,500 2,485
Inventory 8,029
Other receivables 186,018
Subscriptions receivable 450,000
Marketable securities 89,210
Other current assets 1,400
-----------
Total current assets 749,542
-----------
Product development costs, net 381,605
Property and equipment, net 1,981,084
Notes Receivable - related parties 1,308,513
Other assets 10,614
-----------
Total assets $ 4,431,358
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 140,187
Accrued expenses 19,801
Advances and other current liabilities 56,576
Notes payable and current portion of long-term debt 246,066
-----------
Total current liabilities 462,630
-----------
LONG-TERM DEBT, net of current portion 984,266
-----------
Total Liabilities 1,446,896
-----------
STOCKHOLDERS' EQUITY
Preferred Stock, par value $.001 per share, 5,000,000
shares authorized; 975,000 issued and outstanding 975
Common Stock, par value $.001 per share, 10,000,000
shares authorized: 3,779,037 shares issued and outstanding 3,779
Stock Subscribed 775
Additional paid in capital 10,972,805
Accumulated deficit (7,821,980)
Accumulated other comprehensive loss (14,892)
Stock Subscriptions receivable (157,000)
-----------
Total stockholders' equity 2,984,462
-----------
Total Liabilities and Stockholders' Equity $ 4,431,358
===========
</TABLE>
F-45
