SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10
Amendment 4
General Form for Registration of Securities
Pursuant to Section 12(b) or (g) of the
Securities Exchange Act of 1934
ALYDAAR SOFTWARE CORPORATION
(Name of Registrant as specified in its charter)
North Carolina 87-0399301
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2101 Rexford Road, Suite 250 West Charlotte, NC 28211
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: 704/365-2324
Securities to be registered under Section 12(b) of the Act:
Title of each class Name of exchange on which
to be so registered each class is to be registered
None None
Securities to be registered under Section 12(g) of the Act:
Common Stock, par value $0.001 per share
(Title of Class)
Page 1 of 19 sequentially numbered pages
Exhibit Index on Page 5
<PAGE>
ITEM 2 - FINANCIAL INFORMATION
Selected Financial Information
<TABLE>
<CAPTION>
Three Months
Ending March 31, Years ending December 31,
----------- -----------------------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
------------ ------------- -------------- --------------- ------------ -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Operating
Revenues ...... $ 187,500 -0- $ 37,500 $ 229,400 $ 160,400 $ 30,000 $ 5,000
(Loss) From
Continuing
Operations .... ($3,118,187) ($ 369,294) ($5,132,845) ($ 580,148) ($ 304,466) ($ 196,730) ($ 28,639)
(Loss) From
Continuing
Operations Per
Common Share .. ($ 0.21) ($ 0.03) ($ 0.41) ($ 0.05) ($ 0.03) ($ 0.02) (-0-)
Total Assets .. $2,190,050 $1,454,753 $2,328,036 $ 133,195 $ 160,011 $ 24,723 $ 20,000
Long-term
Obligations &
Preferred Stock -0- -0- -0- -0- -0- -0- -0-
Cash Dividends
Per Common
Stock ......... -0- -0- -0- -0- -0- -0- -0-
</TABLE>
The operations of the Company prior to 1994 relate to research and
development in computer language translation services. In the period of 1994 to
1996, the Company has been engaged primarily in research and development of an
automated solution to the Year 2000 Problem. The selected financial data is not
indicative of the Company's future financial condition and results of operations
because the revenues were based upon language translation services and the
expenses (1994-1996) related to the research and development of, and staffing
for, Year 2000 Problem solutions. Beginning in 1997, the results of the research
and development efforts and staffing levels will be reflected in revenues.
Management's Discussion and Analysis of Financial Condition and Results of
Operations and Future Plan of Operations.
The Company has been essentially a research and development company
over the last three years. As previously indicated, the Company abandoned its
marketing of language translation services in 1994 and diverted all resources to
research and development of SmartCode to position the Company to offer an
automated solution to the Y2K Problem. The Company began work on language
translation projects in 1994 producing $160,000 in revenues and completed the
projects during 1995 producing $229,000 in revenues. The Company incurred losses
of $305,000 in 1994 and $580,000 in 1995. During the fourth quarter of 1995, the
Company began working with a very large insurance company using their pilot
projects to help the Company de-bug SmartCode and improve its abilities to offer
an automated process to solve the Y2K Problem. In February, 1996, the insurer
gave the Company a pilot project and stated that upon successful completion the
Company would be awarded a $5 million contract with an estimated start date of
April 1996 and completion date by June 30, 1996. The Company's outside counsel
began negotiating an agreement and the negotiations were protracted over a
two-month period of time. In April, 1996, the insurer went through a major
re-organization resulting in the appointment of a new Chief Information Officer
who decided to put Y2K on hold and resulted in the Company's loss of the
contract. The
2
<PAGE>
Company worked with another large insurer over the next seven
months, using the insurer as a Beta site and to further improve its SmartCode
software and Y2K process.
The Company added positions in research and processing as required
during the course of the year through September. Based upon the results of its
marketing efforts and contract negotiations with clients of its business
partners, the Company entered into an agreement with a large international
computer programmer outsourcing firm to recruit and bring to the Company
approximately 150 software engineers during the fourth quarter. The Company
signed lease agreements to increase its square footage from 18,000 square feet
to 37,000 square feet over the course of the fourth quarter. The Company spent
approximately $1,135,000 during the fourth quarter for furniture, fixtures,
computer hardware and software. The contract labor force cost the Company
approximately $2 million during the fourth quarter. The agreement with the
outsourcer provides the Company the opportunity to convert any of the personnel
provided by the outsourcer after a six-month period of time to an employee of
the Company with no additional liability to the outsourcer.
The Company incurred the substantial cost to position itself to be a
viable candidate to be successful in bidding for contracts of $5 million or
more. The Company had to incur the substantial cost of ramping-up the
organization before actual work was started on revenue producing projects due to
the substantial training time requirement and the need for substantial resources
to be continually devoted to additional research and development. As of the end
of the year, approximately seventy people were involved in research and
development. In early December,1996, the Company was awarded a $20 million
contract from S.A.I.C., one of its strategic alliance partners. The Company had
already started work on a $6 million task order issued under the contract in
November, 1996, and in February, 1997, began work on a second task order for $3
million. The expected start dates for other client's projects for late fourth
quarter, 1996 or first quarter, 1997 have been moved forward by the client to
late first quarter and early second quarter, 1997.
1996 Compared with 1995 Operating Expenses
The Company's total operating expenses, excluding depreciation, rose to
approximately $4.8 million in 1996 from $780,000 in 1995. Approximately $3.7
million of 1996 total expenses were incurred in the fourth quarter, 1996. Of the
fourth quarter amount, approximately $2 million was paid or accrued for contract
labor and $700,000 was paid or accrued for payroll cost. Salaries, contract
labor, and benefits totaled $3,598,000 in 1996 compared to $444,000 in 1995.
Employee and contractor count rose from 10 during 1995 to 180 at December 31,
1996. Rent increased to $321,000 in 1996 from $44,000 in 1995, as space occupied
grew from 3,000 square feet during 1995 and through April 15, 1996, to 38,000
square feet by December 31, 1996. Advertising increased from $88,000 in 1995 to
$215,000 in 1996, as the Company began significant marketing of its technology
in print media, trade publications, etc. during 1996. Depreciation expense
increased from $23,000 in 1995 to $350,000 in 1996, as $1,989,000 was spent on
fixed
3
<PAGE>
asset additions during 1996. Significant increases in other operating expenses
in 1996 included travel up $170,000, trade shows up $80,000, professional fees
up $58,000, office supplies up $48,000, utilities up $36,000, and repairs up
$26,000. Travel and trade shows increased expense related to significantly
increased marketing efforts. Professional fees included two years audit expense
and outside counsel costs for reviews of contracts. Office supplies increased as
the employee count increased. Utilities and repairs increased as the amount of
rented space increased.
1995 Compared with 1994 Operating Expenses
Payroll and related costs increased from $236,000 in 1994 to $444,000
in 1995 due to increased number of employees, i.e. five to ten. Advertising
increased from $16,000 in 1994 to $88,000 in 1995, as the Company began
marketing its Year 2000 solution. Depreciation increased from $8,000 in 1994 to
$22,000 in 1995 due to full year of depreciation on $53,000 of 1994 fixed asset
additions and partial year on $34,000 of 1995 fixed asset additions. After
operating expenses increased by $55,000 for 1995 compared with 1994. Increases
in travel, professional fees, telephone and insurance expense accounted for
$53,000 of the total increase in operating expenses.
First Quarter, 1997 Compared with First Quarter, 1996 Operating Results
There were no revenues generated in the 1st quarter, 1996, as the
Company was focused on research and development activities. In 1st quarter,
1997, the Company recorded revenues on completed projects. The Company had
started working on projects under contracts during the 1st quarter which were
not billable until completion in the 2nd quarter.
The two periods are not comparable due to the tremendous growth in
personnel and space occupied from one period to the next. The Company averaged
approximately 225 employees during 1997 compared with 11 employees in 1996. The
space occupied totaled 38,000 square feet in 1997 compared with 3000 square feet
in 1996. Depreciation expense increased significantly in 1997 due to 1,989,000
spent on fixed asset additions during 1996. Other operating expense
approximately doubled due to the significant increase in employees and space
occupied.
As previously indicated, the Company began work on two projects at the
end of 1996 resulting in receivables of $188,000 at the end of the year. This
was the only revenue reported for 1996 as the cost for the Y2K problem for the
Company's other clients was either not in their 1996 budget or the problem was
not within the 1996 planning horizon for those companies.
The Company began work on nine projects or pilots during the first
quarter of 1997. Based upon those projects and other commitments, the Company
expects to record a loss in the $2-$3 million range for the first quarter, 1997,
an operating profit in second
4
<PAGE>
quarter, 1997, a strongly profitable third quarter, 1997 and year-to-date, and
an improvement in the fourth quarter profitability as compared to the third
quarter profit. Revenues are expected to grow from $500,000 in first quarter to
in excess of $10 million for fourth quarter. The Company's forecast is that
recorded revenue will exceed expenses beginning in May, 1997.
Liquidity and Capital Resources
The Company reflected approximately $2.2 million in accounts payable
and accrued expenses at the end of 1996 and $567,000 in cash and accounts
receivable. Approximately $1.7 million of accounts payable was due to one vendor
for contract labor supplied from the last week of October and for all of
November and December. The vendor does not consider amounts delinquent until
sixty days after billed, and therefore only approximately $25,000 of the
year-end balance was considered to be delinquent. As of the end of 1997 the
Company expects to have paid all current and delinquent amounts due to that
vendor.
As noted, the Company had approximately $1.6 million more in accounts
payable and accrued expenses than cash and accounts receivable at December 31,
1996. The Company received subscriptions for approximately $8.7 million during
the first quarter for the purchase of restricted stock and the exercise of
warrants. The Company received $2.7 million during the first quarter, had $3.7
million in escrow at March 31 for release to the Company in early April, and
expects the balance of $2.3 million in payments for the subscribed stock to be
received in early May. The Company believes that the cash on hand at the end of
1996 plus the cash collected on receivables during the first quarter, 1997 and
the capital received by or receivable at March 31, 1997 is sufficient to pay for
obligations incurred through March 31, 1997, and to be incurred through May 31,
1997. The Company's projections reflect a positive cash flow for July, 1997, and
each month thereafter. The Company financed 1996 operations through the sale of
restricted stock, proceeds from exercise of warrants, and loans from its
majority stockholder and Chief Executive Officer.
The forward looking information reflected above is based upon only
those commitments which are known as of March 31, 1997, and do not incorporate
the expected substantial additional revenue to be derived by the Company during
the course of 1997. The Company has a significant amount of excess capacity
beyond the revenue included in the forecast with its existing cost structure.
Therefore, additional revenue can be generated with insignificant increase in
cost, since labor is the primary cost factor involved in the Company's
operations.
5
<PAGE>
ITEM 15 - FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements
SEE INDEX OF APPENDIX A
(b) Exhibit Index
Exhibit Description
16.1 LETTER RE: CHANGE IN CERTIFIED ACCOUNTANT
<PAGE>
APPENDIX A
ALYDAAR SOFTWARE CORPORATION
INDEX TO FINANCIAL STATEMENTS
Page
Independent auditors' reports F-2 - F-3
Balance sheets F-4
Statements of operations F-5
Statement of stockholders' equity (deficiency) F-6
Statements of cash flows F-7
Notes to financial statements F-8 - F-13
Balance Sheet page 1
Statement of Operations page 2
Statement of Cash Flows page 3
F-1
<PAGE>
Independent Auditors' Report
Board of Directors
Alydaar Software Corporation
Charlotte, North Carolina
We have audited the balance sheets of Alydaar Software Corporation as of
December 31, 1996 and 1995, and the related statements of operations,
stockholders' equity (deficiency) and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with 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.
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 Alydaar Software Corporation as
of December 31, 1996 and 1995 and the results of its operations and its cash
flows for the years then ended, in conformity with generally accepted accounting
principles.
HOLTZ RUBENSTEIN & CO., LLP
Melville, New York
March 27, 1997
F-2
<PAGE>
MICHAEL RACANIELLO, CPA
170 POST ROAD, SUITE 204
FAIRFIELD, CT 06430
Board of Directors
Alydaar Software Corporation
Charlotte, North Carolina
I have audited the accompanying statements of operations, stockholders' equity
(deficiency) and cash flows of Alydaar Software Corporation for the year ended
December 31, 1994. These financial statements are the responsibility of the
Company's management. My responsibility is to express an opinion on these
financial statements based on my audits.
I conducted my audit in accordance with generally accepted auditing standards.
Those standards require that I 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.
I believe that my audit provides a reasonable basis of my opinion.
In my opinion, the financial statements referred to above present fairly, in all
material respects, the results of its operations, the changes in stockholders'
equity (deficiency) and the cash flows of Alydaar Software Corporation for the
year ended December 31, 1994, in conformity with generally accepted accounting
principles.
MICHAEL RACANIELLO, CPA
Fairfield, Connecticut
May 1, 1996
July 25, 1996, as it refers to Note 6
F-3
<PAGE>
ALYDAAR SOFTWARE CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
ASSETS 1996 1995
------ -------------- ----------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 379,382 $ 25,435
Accounts receivable (Note 3) 187,500 -
Prepaid expenses 6,903 4,143
Other receivable (Note 4) 490,000 -
Loan to stockholder 51,256 40,893
-------------- --------------
Total current assets 1,115,041 70,471
PROPERTY AND EQUIPMENT, net (Note 5) 1,694,029 55,018
SECURITY DEPOSITS 60,222 7,706
-------------- --------------
$ 2,869,292 $ 133,195
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 2,184,435 $ 249,353
Unearned revenue 150,000 -
Note payable, stockholder (Note 6) 507,530 3,980
-------------- --------------
Total current liabilities 2,841,965 253,333
-------------- --------------
COMMITMENTS AND CONTINGENCIES (Note 11)
STOCKHOLDERS' EQUITY (DEFICIENCY):
(Notes 7 and 8)
Common stock, $0.001 par value, 20,000,000 shares
authorized; 13,983,282 and 11,187,373 shares issued 13,983 11,187
Additional paid-in capital 6,311,079 1,282,770
Deficit (6,296,940) (1,164,095)
-------------- --------------
28,122 129,862
Less treasury stock, at cost (795) (250,000)
-------------- --------------
Total stockholders' equity (deficiency) 27,327 (120,138)
-------------- --------------
$ 2,869,292 $ 133,195
============== ==============
</TABLE>
See notes to financial statements
F-4
<PAGE>
ALYDAAR SOFTWARE CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended
December 31,
----------------------------------------------------------
1996 1995 1994
--------------- ------------ ------------
<S> <C> <C> <C>
REVENUES (Note 10) $ 37,500 $ 229,400 $ 160,400
--------------- ------------ ------------
EXPENSES: (Notes 8 and 11)
Payroll and related costs 3,598,307 443,741 235,593
Rent and occupancy 320,707 33,421 32,265
Advertising 215,453 87,716 16,363
Depreciation 349,655 23,203 8,301
Other operating expense 714,648 215,367 159,876
--------------- ------------ ------------
5,198,770 803,448 452,398
--------------- ------------ ------------
Loss from operations (5,161,270) (574,048) (291,998)
--------------- ------------ ------------
OTHER INCOME (EXPENSES):
Interest expense (3,550) (7,700) (12,968)
Interest income 6,812 1,600 -
Other income 25,163 - -
--------------- ------------ -----------
28,425 (6,100) (12,968)
--------------- ------------ ------------
NET LOSS $ (5,132,845) $ (580,148) $ (304,966)
============ =============== ============
NET LOSS PER SHARE $(.41) $(.05) $(.03)
===== ===== =====
WEIGHTED AVERAGE COMMON
AND COMMON EQUIVALENT
SHARES OUTSTANDING 12,394,056 10,894,254 10,233,161
=============== ========== ==========
</TABLE>
See notes to financial statements
F-5
<PAGE>
ALYDAAR SOFTWARE CORPORATION
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(Notes 7 and 8)
<TABLE>
<CAPTION>
Total
Common Stock Additional Stockholders'
Shares Paid-in Subscribed Treasury Stock (Deficiency)
Outstanding Amount Capital Deficit Stock Shares Amount Equity
----------- ------ --------- ---------- -------- ------- ----------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
January 1, 1994 9,282,613 $ 9,283 $ 109,530 $ (278,981) - - $ - $ (160,168)
Issuance of additional shares 1,650,000 1,650 818,210 - - - - 819,860
Additional paid-in capital
arising from debt forgiveness - - 201,904 - - - - 201,904
Net loss - - - (304,966) - - - (304,966)
Less stock subscription receivable - - - - (450,000) - - (450,000)
------------ -------- ----------- ----------- -------- -------- ----------- ---------
Balance, December 31, 1994 10,932,613 10,933 1,129,644 (583,947) (450,000) - - 106,630
Issuance of common shares 654,760 654 352,726 - - - - 353,380
Conversion of subscribed stock
to treasury stock - - - - 450,000 (900,000) (450,000) -
Retirement of treasury stock (400,000) (400) (199,600) - 400,000 200,000 -
Net loss - - - (580,148) - - - (580,148)
------------- ---------- -------- --------- -------- --------- --------- ---------
Balance, December 31, 1995 11,187,373 11,187 1,282,770 (1,164,095) - (500,000) (250,000) (120,138)
Issuance of common shares 2,385,909 2,386 5,076,014 - - - - 5,078,400
Issuance of common shares
as treasury stock 900,000 900 (900) - - (900,000) (900) (900)
Shares issued to employees from
exercise of stock options 10,000 10 202,695 - - 105,000 105 202,810
Retirement of treasury stock (500,000) (500) (249,500) - - 500,000 250,000 -
Net loss - - - (5,132,845) - - - (5,132,845)
-------------- --------- -------- --------- --------- --------- ----------- --------
Balance, December 31, 1996 13,983,282 $ 13,983 $ 6,311,079 $(6,296,940) - (795,000) $ (795) $ 27,327
============ ======== =========== =========== ======== ======== =========== =========
</TABLE>
See notes to financial statements
F-6
<PAGE>
ALYDAAR SOFTWARE CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended
December 31,
-------------------------------------------------
1996 1995 1994
--------------- ------------ -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (5,132,845) $ (580,148) $ (304,966)
-------------- -------------- ---------------
Adjustments to reconcile net loss to net cash
used in operating activities:
Stock based compensation 252,810 - -
Depreciation 349,655 23,203 8,301
(Increase) decrease in assets:
Accounts receivable (37,500) 91,650 (91,650)
Prepaid expense (2,760) (4,143) -
Increase in accounts payable and accrued expenses 1,935,082 199,972 3,755
--------------- ------------ ------------
Total adjustments 2,497,287 310,682 (79,594)
--------------- ------------ ------------
Net cash used in operating activities (2,635,558) (269,466) (384,560)
--------------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment (1,988,666) (33,821) (52,700)
Increase in security deposits (52,516) (4,896) (2,810)
--------------- ------------ ------------
Net cash used in investing activities (2,041,182) (38,717) (55,510)
--------------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of stock 4,537,500 353,380 369,860
Advances to shareholder (10,183) (40,893) -
Loans from shareholder 503,370 - 142,014
Repayments of shareholder loan - (20) (75,376)
--------------- ------------ ------------
Net cash provided by financing activities 5,030,687 312,467 436,498
--------------- ------------ ------------
NET INCREASE IN CASH 353,947 4,284 (3,572)
CASH AND CASH EQUIVALENTS, beginning of year 25,435 21,151 24,723
--------------- ------------ ------------
CASH AND CASH EQUIVALENTS, end of year $ 379,382 $ 25,435 $ 21,151
=============== ============ ============
</TABLE>
See notes to financial statements
F-7
<PAGE>
ALYDAAR SOFTWARE CORPORATION
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION:
Alydaar Software Corporation (the "Company") was originally incorporated
in the state of Utah in 1982, and it is currently incorporated in the state of
North Carolina. The Company designs and markets software language translation
and systems migration services.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
a. Cash and cash equivalents
For purposes of the cash flow statement, the Company considers all
highly liquid debt instruments purchased with a maturity of three months or less
to be cash and/or cash equivalents.
b. Depreciation and amortization expense
Depreciation is computed using the straight-line method over the
asset's estimated useful life (3 years).
c. Revenue recognition
The Company generally uses the accrual method of accounting. The
typical unit-price contract for services is of a short-term nature and is
progress-billed as the work progresses. Revenue is recognized when the contract
tasks are completed and accepted by the customers. Payments received under
contracts are not contingent or refundable under any circumstances.
d. Income taxes
Deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities,
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse. A valuation allowance has been
provided for the deferred tax asset resulting from the net operating loss
carryforward and accelerated tax depreciation for fixed assets.
As of December 31, 1996, a net operating loss carryforward of
$5,700,000, is available through December 31, 2011 to offset future taxable
income.
e. 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.
f. Advertising costs
Advertising costs are expensed as incurred and were approximately
$215,000, $88,000 and $16,000 for the years ended December 31, 1996, 1995 and
1994, respectively.
F-8
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Cont'd)
g. Loss per share
Loss per common share was computed by dividing the net loss by the
weighted average number of shares of common stock outstanding during the period.
Common stock equivalents were not considered in the computations as their effect
would be anti-dilutive.
h. Reclassifications
Certain items in the 1994 and 1995 financial statements have been
reclassified to conform to the 1996 classifications.
3. ACCOUNTS RECEIVABLE:
Included in accounts receivable as of December 31, 1996 is $150,000 which
relates to unearned revenue.
4. OTHER RECEIVABLES:
Other receivables consist of amounts owed the Company for shares of
common stock issued in connection with warrant exercises which were collected in
February 1997.
5. PROPERTY AND EQUIPMENT:
Property and equipment, at cost, consists of the following:
December 31,
1996 1995
Equipment ........................... $1,813,377 $ 86,522
Software ............................ 251,105 --
Leasehold improvements .............. 10,706 --
---------- ----------
2,075,188 86,522
Less accumulated depreciation ....... 381,159 31,504
---------- ----------
$1,694,029 $ 55,018
========== ==========
6. NOTE PAYABLE, STOCKHOLDER:
During 1996, a stockholder loaned the Company $500,000 which is payable
on demand with interest at 4 1/2% per annum. As of December 31, 1995, the
Company had an 8 1/4% note payable to a shareholder. During 1994, the Company
had accumulated borrowings from its major shareholder and president in the
amount of $201,904. The shareholder forgave this debt in 1994 and in previously
issued financial statements, the debt forgiveness had been treated as income in
the statement of operations. Subsequently, the 1994 financial statements were
revised to reflect the debt forgiveness as a credit to additional paid-in
capital.
7. NON-CASH TRANSACTIONS:
During 1994, the Company accepted non-recourse notes totaling $450,000
for 900,000 shares of subscribed stock. In 1995, the notes expired without
repayment. The Company reclaimed the shares from escrow, retired 400,000 of
those shares in 1995 and retired the balance during 1996.
F-9
<PAGE>
8. STOCKHOLDERS' EQUITY (DEFICIENCY):
a. Capital stock
In January 1996 the Company retired all of the outstanding treasury
shares, that were obtained when a stock subscriber defaulted on his obligation.
Subsequently the Company issued 900,000 shares into treasury at par value to
fulfill obligations under employee stock grants and stock options. During the
year 105,000 shares were distributed from treasury to employees in connection
with the exercise of stock options.
In February 1996 the Company granted an employee 20,000 shares of
common stock and recorded compensation of $40,000.
In July 1996 the Company issued 150,000 shares of common stock for net
proceeds of $1,048,800. The underwriter received warrants to purchase 10,000
shares of common stock as compensation which are exercisable at the market value
of the stock on the date of issuance. The fair value of each warrant is
estimated on the date of the grant using the Black-Scholes option pricing model
with the following assumptions used for grants in 1996:
dividend yield 0%; expected volatility of .71%; risk-free interest rate of
6.875%; and expected lives of 10 years. The fair value of such warrants
approximated $58,000. In August 1996 the Company issued 25,000 shares to the
purchaser of 150,000 shares, thereby reducing the proceeds to the Company by $1
per share as a penalty for failing to comply with a condition of the stock
placement agreement.
In October 1996 the Company issued 1,000,000 shares in exchange for
$850,000, 565,000 of Class A Warrants and 935,000 of Class B Warrants and the
forgiveness of certain demand registration rights previously granted to this
warrantholder.
In December 1996 the Company issued 109,909 shares of common stock in
exchange for 65,000 Class A Warrants and 65,000 Class B Warrants.
In December 1996 the Company issued 370,000 shares of common stock for
net proceeds of $65,000 and a receivable of $490,000 in connection with the
exercise of 370,000 Class A Warrants.
In December 1996 the Company placed 500,000 shares for anticipated net
proceeds of $3,500,000, but the transaction was not completed by December 31,
1996. In December 1996 the Company issued 155,000 of the 500,000 shares of
common stock for net proceeds of $1,041,445. The net proceeds reflect a fee of
4% and other fees charged by the underwriter. In connection with this offering,
the Company has agreed to file Form 10-SB, to register its class of common stock
and to file an application for listing with NASDAQ on or before March 31, 1997.
If the Company is unable to comply, the offering price of the December placement
will be reduced, retroactively, by $1 per share. The maximum estimated penalty
would be $500,000 if the Company is unable to register its shares.
b. Stock option plan
During 1994, the Company's Board of Directors approved an omnibus
stock option plan to benefit certain key employees. Under this plan (as
amended), the Company may issue up to 1,000,000 shares of stock and/or stock
options through the year 2004. The options become exerciseable at various
periods of time from 30 days to two years from the date of grant.
During 1996 and 1995, the Company granted its employees options to
purchase 295,000 and 390,000 shares of stock, respectively at various exercise
prices that reflected the fair value of stock on the date of grant. The Company
has elected to follow Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," and related Interpretations in accounting for
its employee stock options. Therefore, no compensation cost has been recognized.
If the Company accounted for its stock options under the fair value method of
SFAS No. 123, "Accounting for Stock-Based Compensation", the Company's net loss
and loss per share would have been increased to the pro forma amounts indicated
below:
F-10
<PAGE>
8. STOCKHOLDERS' EQUITY (DEFICIENCY): (Cont'd)
b. Stock option plan (Cont'd)
Year Ended
December 31,
1996 1995
Net loss:
As reported $ (5,132,845) $ (580,148)
Proforma (5,482,845) (880,148)
Loss per share:
As reported $(.41) $(.05)
Proforma $(.44) $(.08)
The fair value of each option is estimated on the date of the grant
using the Black-Scholes option pricing model with the following assumptions used
for grants in 1996: dividend yield 0%; expected volatility of .71%; risk-free
interest rate of 6.875%; and expected lives of 10 years.
The following table summarizes the status of stock options outstanding
under the Company's option plan:
Weighted
Average Weighted
Number of Exercise Average
Options Price Fair Value
Granted during 1995 and outstanding,
December 31, 1995 .......................... 390,000 1.49 .77
Granted during 1996 .......................... 295,000 2.23 1.16
Exercised during 1996 ........................ (115,000) 1.75 .91
-------- ---- ----
Outstanding and exercisable, December 31, 1996 570,000 1.82 .94
======== ==== ====
The weighted average remaining contractual life of options outstanding
as of December 31, 1996 is 8 1/3 years.
The Company contributed the capital for the exercise of the 115,000
options and recorded approximately $212,800 as compensation expense.
c. Warrants
During 1996, 435,000 Class A warrants and 65,000 Class B warrants were
exercised, 565,000 of Class A warrants and 935,000 of Class B warrants were
retired. The Company granted its underwriter 10,000 Class C warrants at 110% of
the fair market value on the date of grant. At December 31, 1996, there were
outstanding 425,000 Class A warrants, 300,000 Class B warrants and 10,000
Class C warrants.
During 1995, the Company sold 654,760 shares of common stock and
425,000 Class A warrants and 300,000 Class B warrants. Certain shares were
subscribed in units that contained Class A and Class B warrants.
In 1994, the Company issued 1,000,000 Class A warrants and 1,000,000
Class B warrants in connection with the sale of 600,000 shares of common stock.
The Class A warrants can be exercised at a price of $1.50 per share
while the Class B warrants can be exercised at a price of $2.00 per share. Class
C warrants are exerciseable at $11.25 per share. Both classes of warrants will
expire five years from the date of issue or two years from the listing of the
common stock on a national trading exchange whichever is earlier.
F-11
<PAGE>
9. SUPPLEMENTARY CASH FLOW INFORMATION:
Cash paid for interest expense for the year ended December 31, 1995 was
$2,000.
10. CONCENTRATION OF CREDIT RISK:
The Company maintained bank balances, which at times exceeded the
federally insured limit of $100,000.
During 1996 and 1995, one customer accounted for 100% and 75% of the
Company's sales, respectively.
11. COMMITMENTS AND CONTINGENCY:
The Company leases office space under various operating leases. Rent
expense under these leases totaled approximately $257,000 in 1996 and $35,000 in
1995. In April 1996, the Company moved its offices and entered into a 2 1/2 year
lease for this new office space. Future minimum lease payments under these
operating leases are:
Year Ending
December 31, Amount
1997 $779,000
1998 800,000
1999 425,000
2000 365,000
During 1995, the Company allowed its general liability coverage to
expire. In April 1996, the Company reinstated its insurance coverage.
The Company is a defendant in two lawsuits, both of which relate to Gem
Technologies, Inc. (GEM) a former affiliated company of Alydaar Software
Corporation. Twenty purported noteholders or shareholders of GEM filed a
complaint against certain officers, GEM and the Company alleging that the
defendants fraudulently induced the plaintiffs into entering a note purchase
agreement with GEM and fraudulently transferred the property of GEM to the
Company. The plaintiffs have sought actual damages, punitive damages, attorney
fees and injunctive relief relative to the property allegedly transferred to the
Company.
A purported shareholder of GEM filed a complaint against the Company's
president, GEM, and the Company alleging a breach of contract and fraudulent
misrepresentation in that the plaintiff purportedly was to receive shares of
common stock of the Company in exchange for his investment in GEM, but has
purportedly not received any shares. The plaintiff has sought monetary damages,
punitive damages, interest and attorneys' fees.
Although no estimate of loss or range of loss, if any, can be determined
at this time, the Company intends to vigorously defend the allegations made in
these complaints. In addition, the Company's President has agreed to indemnify
the Company against any liability resulting from a final and unappealable
judgment or settlement in these actions.
12. JOINT VENTURE:
In December 1996, the Company entered into a joint venture agreement that
formed Alydaar Software Europe, plc. (ASE) which is headquartered in London,
England. This joint venture will market the Company's services internationally.
The Company has contributed licensing authority for the use of its proprietary
software to obtain its 45 percent ownership in the joint venture, which will be
accounted for by the equity method. As of December 31, 1996, the joint venture
had no activity.
F-12
<PAGE>
13. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The methods and assumptions used to estimate the fair value of the
following classes of financial instruments were:
CURRENT ASSETS AND CURRENT LIABILITIES: The carrying amount of cash,
current receivables and payables and certain other short-term financial
instruments approximate their fair value.
The carrying amount and the fair value of the Company's financial
instruments at December 31, 1996 are as follows:
Carrying Fair
Amount Value
Cash $ 379,382 $ 379,382
Accounts receivable and other receivable 677,500 677,500
Loan to stockholder 51,256 51,256
Accounts payable and accrued expenses 2,184,435 2,184,435
Note payable, stockholder 507,530 507,530
14. INCOME TAXES:
Due to the losses incurred by the Company, no provision for taxes,
current or deferred have been recorded.
The components of the net deferred taxes are as follows:
December 31,
--------------------------------
1996 1995 1994
---------- ------------ ---------
Deferred tax assets:
Net operating loss carryforward ... $ 2,280,000 $ 229,000 $ 126,000
Deferred tax liabilities:
Depreciation method of
property and equipment .......... (128,000) -- --
Allowance for realization of assets (2,152,000) (229,000) (126,000)
----------- ----------- -----------
$ -- $ -- $ --
=========== =========== ===========
A reconciliation between the actual income tax expense and income taxes
computed by applying the statutory federal income tax rate to income before
taxes is as follows:
Years Ended
December 31,
---------------------------------------
1996 1995 1994
-------------- ------------ ---------
Computed income tax credit at 34% ... $(1,745,167) $ (197,250) $ (103,688)
Addition to allowance for realization
of deferred tax asset net operating
loss carryforward ................. 1,745,167 197,250 103,688
----------- ----------- -----------
$ -- $ -- $ --
=========== =========== ===========
F-13
<PAGE>
Michael Racaniello
Certified Public Accountant
170 Post Road, Suite 204
Fairfield, Connecticut 06430
Phone 203.255-6014
Fax 203.259-5906
June 20, 1997
U. S. Securities and Exchange Commission
Washington, D. C. 20549
Re: Alydaar Software Corporation.
Gentlemen:
I have read item 14, 'Changes and Disagreements with Accountants," amendment
number 2, filed by Alydaar Software Corporation, and I concur with the
statements made therein by the registrant.
I confirm that there were no disagreements with the Company on any matter of
accounting principles or practices, financial statement disclosures or auditing
scope or procedures at the time of my discharge from the engagement as the
Company's independent certified public accountant.
No information has come to my attention that materially limits the fairness or
reliability of previously issued audit reports or underlying financial
statements.
Very truly yours,
Michael Racaniello
Certified Public Accountant
