SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10/A
Amendment No. 1
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 20 pages
<PAGE>
ITEM 2 - FINANCIAL INFORMATION
Selected Financial Information
The information required by Item 301 of Regulation S-K has been omitted
because the operating results for 1993 and 1992 were insignificant, since the
Company had only 2-5 employees focused on research and development during those
periods. The results for 1994, 1995 and 1996 are discussed below.
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 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
<PAGE>
$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 clients' projects for late fourth
quarter, 1996 or first quarter, 1997 have been moved forward by the clients to
late first quarter and early second quarter, 1997.
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. 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 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.
3
<PAGE>
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 April, 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 June, 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.
4
<PAGE>
APPENDIX A
ALYDAAR SOFTWARE CORPORATION
FINANCIAL STATEMENTS
Pages
Report of Independent Auditors F-2
Balance Sheets as of December 31, 1996 F-3
and 1995
Statement of Operations for Years Ended F-4
December 31, 1996, 1995
Statement of Stockholders' Equity (Deficiency) F-5
for Years Ended December 31, 1996, 1995
Statements of Cash Flows for Years Ended F-6
December 31, 1996 and December 31, 1995
Notes to Financial Statements F-7-F-12
Report of Independent Auditors
Report of Independent Auditors
Balance Sheets as of December 31, 1995 and 1994
Statement of Operations for Years Ended
December 31, 1995, 1994
Statement of Stockholders' Equity (Deficiency)
for Years Ended December 31, 1995, 1994
Statements of Cash Flows for Years Ended
December 31, 1995, 1994
Notes to Financial Statements
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>
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-3
<PAGE>
ALYDAAR SOFTWARE CORPORATION
STATEMENTS OF OPERATIONS
Years Ended
December 31,
1996 1995
REVENUES (Note 10) $ 37,500 $ 229,400
-------------- -------------
EXPENSES: (Notes 8 and 11)
Payroll and related costs 3,598,307 443,741
Rent and occupancy 320,707 33,421
Advertising 215,453 87,716
Depreciation 349,655 23,203
Other operating expense 714,648 215,367
-------------- -------------
5,198,770 803,448
-------------- -------------
Loss from operations (5,161,270) (574,048)
-------------- -------------
OTHER INCOME (EXPENSES):
Interest expense (3,550) (7,700)
Interest income 6,812 1,600
Other income 25,163 -
-------------- ------------
28,425 (6,100)
-------------- -------------
NET LOSS $ (5,132,845) $ (580,148)
=============== ==============
NET LOSS PER SHARE $(.41) $(.05)
===== =====
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 12,394,056 10,894,254
============= ==========
See notes to financial statements
F-4
<PAGE>
ALYDAAR SOFTWARE CORPORATION
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(Notes 7 and 8)
<TABLE>
<CAPTION>
Common Stock Additional
Shares Paid-in Subscribed
Outstanding Amount Capital Deficit Stock
------------ ----- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1995 10,932,613 $ 10,933 $ 1,129,644 $ (583,947) (450,000)
Issuance of common shares 654,760 654 352,726 - -
Conversion of subscribed stock
to treasury stock - - - - 450,000
Retirement of treasury stock (400,000) (400) (199,600) -
Net loss - - - (580,148) -
--------- ----------- -------------- ----------- --------
Balance, December 31, 1995 11,187,373 11,187 1,282,770 (1,164,095) -
Issuance of common shares 2,385,909 2,386 5,076,014 - -
Issuance of common shares
as treasury stock 900,000 900 (900) - -
Shares issued to employees from
increase of stock options 10,000 10 202,695 - -
Retirement of treasury stock (500,000) (500) (249,500) - -
Net loss - - - (5,132,845) -
------------ ---------- ------------ ------------- -------
Balance, December 31, 1996 13,983,282 $ 13,983 $ 6,311,079 $ (6,296,940) -
============ ======== ============ ============= =======
</TABLE>
Total
Stockholders'
Treasury Stock (Deficiency)
Shares Amount Equity
-------- ----------- ------------
Balance, January 1, 1995 - $ - $ 106,630
Issuance of common shares - - 353,380
Conversion of subscribed stock
to treasury stock (900,000) (450,000) -
Retirement of treasury stock 400,000 200,000 -
Net loss - - (580,148)
----------- ------------ ------------
Balance, December 31, 1995 (500,000) (250,000) (120,138)
Issuance of common shares - - 5,078,400
Issuance of common shares
as treasury stock (900,000) (900) (900)
Shares issued to employees from
increase of stock options 105,000 105 202,810
Retirement of treasury stock 500,000 250,000 -
Net loss - - (5,132,845)
----------- ------------ ------------
Balance, December 31, 1996 (795,000) $ (795) $ 27,327
========== =========== =============
See notes to financial statements
F-5
<PAGE>
ALYDAAR SOFTWARE CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended
December 31,
1996 1995
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (5,132,845) $ (580,148)
----------- -------------------
Adjustments to reconcile net loss to net cash
used in operating activities:
Stock based compensation 252,810 -
Depreciation 349,655 23,203
(Increase) decrease in assets:
Accounts receivable (37,500) 91,650
Prepaid expense (2,760) (4,143)
Increase in accounts payable and accrued
expenses 1,935,082 199,972
-------------- ------------
Total adjustments 2,497,287 310,682
-------------- ------------
Net cash used in operating activities (2,635,558) (269,466)
-------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment (1,988,666) (33,821)
Increase in security deposits (52,516) (4,896)
-------------- ------------
Net cash used in investing activities (2,041,182) (38,717)
-------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of stock 4,537,500 353,380
Advances from (to) shareholder, net 493,187 (40,913)
-------------- ------------
Net cash provided by financing activities 5,030,687 312,467
-------------- ------------
NET INCREASE IN CASH 353,947 4,284
CASH AND CASH EQUIVALENTS, beginning of year 25,435 21,151
-------------- ------------
CASH AND CASH EQUIVALENTS, end of year $ 379,382 $ 25,435
============== ============
</TABLE>
See notes to financial statements
F-6
<PAGE>
ALYDAAR SOFTWARE CORPORATION
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995
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. However,
the Company recognizes revenue when billable. The typical contract for services
specifies progress billings which reflect recognizable portions of completion of
each job, although the job is not fully complete until tested and accepted by
the customer.
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 and $88,000 for the years ended December 31, 1996 and 1995,
respectively.
F-7
<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 1995 financial statements have been reclassified
to conform to the 1996 classifications.
3. ACCOUNTS RECEIVABLE:
Included in accounts receivable 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.
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-8
<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. 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-9
<PAGE>
8. STOCKHOLDERS' EQUITY (DEFICIENCY):
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 following table summarizes the status of stock options outstanding
under the Company's option plan:
Number of Exercise
Options Price
Granted, 1995 390,000 1.37-1.50
Granted, 1996 295,000 1.19-9.75
Exercised, 1996 (115,000) 1.19-7.63
----------
Outstanding, December 31, 1996 570,000 1.19-9.75
==========
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.
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.
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.
F-10
<PAGE>
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.
In the opinion of management, the Company will not incur a significant
loss as a result of these actions and 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. As of December
31, 1996, the joint venture had no activity.
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.
F-11
<PAGE>
13. FAIR VALUE OF FINANCIAL INSTRUMENTS: (Cont'd)
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:
<TABLE>
<CAPTION>
December 31,
1996 1995
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward $ 2,280,000 $ 229,000
Deferred tax liabilities:
Depreciation method of property and equipment (128,000) -
Allowance for realization of assets (2,152,000) (229,000)
-------------- ------------
$ - $ -
============== ===========
</TABLE>
F-12
ALYDAAR SOFTWARE CORPORATION
REPORT ON AUDIT OF FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31,1995
<PAGE>
HOLTZ RUBENSTEIN & CO., LLP
CERTIFIED PUBLIC ACCOUNTANTS
Independent Auditors' Report
July 25, 1996
Board of Directors
Alydaar Software Corporation
Charlotte, North Carolina
We have audited the balance sheet of Alydaar Software Corporation as of December
31, 1995, and the related statements of operations, stockholders' (deficiency)
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 on these financial statements based on our audit.
We conducted our audit 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 audit provides 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, 1995 and the results of its operations and its cash flows for
the year then ended, in conformity with generally accepted accounting
principles.
The financial statements for the year ended December 1, 1994, prior to their
restatement, were audited by other accountants, whose report dated May 1, 1996
expressed an unqualified opinion on those statements. They have not performed
any auditing procedures since that date. As described in Note 4, the financial
statements have been restated for the reclassification of the forgiveness of
debt by a shareholder previously recorded as income.
125 Baylis Road, Melville, NY 11747-3823 FAX 516/752-1742 516/752-7400
<PAGE>
MICHAEL RACANIELLO, CPA
170 POST ROAD, SUITE 204
FAIRFIELD, CONNECTICUT 06430
(203) 255-6014
To the Board of Directors and Stockholders of
Alydaar Software Corporation
Charlotte, North Carolina
I have audited the accompanying balance sheet of Alydaar Software Corporation as
of December 31, 1994, and the related statements of income, changes in
shareholder equity, and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. My responsibility
is to express an opinion on the financial statements based on my audit.
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 includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial presentation. I believe
that my audit provides a reasonable basis for my opinion.
In my opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Alydaar Software Corporation as of
December 31, 1994, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
Fairfield, Connecticut
May 1, 1996
<PAGE>
ALYDAAR SOFTWARE CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31.
ASSETS 1995 1994
------ ---- ----
<S> <C> <C>
CURRENT ASSETS:
Cash $ 25,435 $ 21,151
Accounts receivable - 91,650
Prepaid expenses 4,143 -
Loan to shareholder 40,893
-----------
Total current assets 70,471 112,801
PROPERTY AND EQUIPMENT, net (Note 3) 55,018 44,400
SECURITY DEPOSITS 7,706 2,810
------------ -----------
$ 133,195 $ 160,011
========= ===========
LIABILITIES AND STOCKHOLDERS' (DEFICIENCY) EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 249,353 $ 49,381
Note payable, shareholder (Note 4) 3,980 4,000
------------ -----------
Total current liabilities 253,333 53,381
---------- -----------
COMMITMENTS AND CONTINGENCIES (Note 9)
STOCKHOLDERS'(DEFICIENCY) EQUITY: (Notes 5 and 6)
Common stock, $0.001 par value, 20,000,000 shares
authorized; 11,187,373 and 10,932,613 shares
issued and outstanding 11,187 10,933
Additional paid-in capital 1,282,770 1,129,644
Deficit (1,164,095) (583,947)
---------- -----------
129,862 556,630
Less treasury stock, at cost (250,000) -
Less capital stock subscribed - (450,000)
------------ ------------
Total stockholders' (deficiency) equity (120,138) 106,630
----------- -----------
$ 133,195 $ 160,011
========== ===========
</TABLE>
See notes to financial statements
<PAGE>
ALYDAAR SOFTWARE CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended
December 31,
1995 1994
<S> <C> <C>
REVENUES (Note 8) $ 229,400 $ 160,400
---------- ----------
EXPENSES:
Salaries 386,991 205,369
Payroll taxes 34,829 20,292
Employee benefits 15,585 9,932
Outside services 25,365 20,600
Travel and promotion 52,111 26,747
Advertising 87,716 16,363
Rent 33,420 32,265
Professional fees 75,683 79,163
Telephone 14,844 6,910
Office expense 18,314 23,948
Depreciation 23,203 8,301
Miscellaneous 35,387 2,508
--------- ----------
803,448 452,398
-------- --------
Loss from operations (574,048) (291,998)
---------- ----------
OTHER INCOME (EXPENSES):
Interest expense (7,700) (12,968)
Interest income 1,600 -
----------- --------------
(6,100) (12,968)
----------- ----------
NET LOSS $ (580,148) $ (304,966)
==========- ===========
NET LOSS PER SHARE $(.05) $(.03)
=====- =====-
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 10,894,254 10,233,161
========== ==========
</TABLE>
See notes to financial statements
<PAGE>
ALYDAAR SOFTWARE CORPORATION
STATEMENTS OF STOCKHOLDERS'(DEFICIENCY) EQUITY
YEARS ENDED DECEMBER 31, 1995 AND 1994
(Notes 4, 5, 6 and 11)
<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>
Balance, January 1, 1994,
as previously reported 9,282,613 $12,468 $106,345 $(253,981) - - $ - $(135,168)
Prior period adjustments - (3,185) 3,185 (25,000) - - - (25,000)
--------------------------------------------------------------------------------------------------
January 1, 1994 (restated) 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
in exchange for debt - - 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)
==================================================================================================
</TABLE>
See notes to financial statements
<PAGE>
ALYDAAR SOFTWARE CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended
December 31,
1996 1995
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(580,148) $(304,966)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 23,203 8,301
(Increase) decrease in assets:
Accounts receivable 91,650 (91,650)
Prepaid expense (4,143) -
Increase in accounts payable and accrued expenses 199,972 3,755
---------- ------------
Total adjustments 310,682 (79,594)
---------- ------------
Net cash used in operating activities (269,466) (384,560)
---------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment (33,821) (52,700)
Increase in security deposits (4,896) (2,810)
------------ ------------
Net cash used in investing activities (38,717) (55,510)
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of stock 353,380 369,860
Advances to shareholder (40,913) 66,638
----------- ------------
Net cash provided by financing activities 312,467 436,498
----------- ------------
NET INCREASE (DECREASE) IN CASH 4,284 (3,572)
CASH AND CASH EQUIVALENTS, beginning of year 21,151 24,723
------------ ------------
CASH AND CASH EQUIVALENTS, end of year $ 25,435 $ 21,151
=========== ============
See notes to financial statements
<PAGE>
ALYDAAR SOFTWARE CORPORATION
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995 AND 1994
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION:
The Alydaar Software Corporation (the "Company") was originally
incorporated in the state of Utah in 1982, it is currently incorporated in the
state of North Carolina. The Company designs and markets software translation
and 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. However,
the Company recognizes revenue when billable. The typical contract for
services specifies progress billings which reflect recognizable portions of
completion of each job, although the job is not fully complete until tested
and accepted by the customer.
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.
As of December 31, 1995 and December 31, 1994, a net operating loss
carry forward of $571,000 and $316,000, respectively, is available through
December 31, 2010 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
$88,000 and $16,000 for the years ended December 31, 1995 and 1994,
respectively.
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Cont'd)
g. Earnings per share
Earnings per common share were computed by dividing net earnings by the
weighted average number of shares of common stock during the period. Common
stock equivalents were not considered in the computations as their effect would
be anti-dilutive.
3. PROPERTY AND EQUIPMENT:
Equipment, at cost, consists of the following:
December 31,
1995 1994
Equipment $ 86,522 $ 52,701
Less accumulated depreciation 1,504 8,301
---------- -----------
$ 55,018 $ 44,400
======== ========
4. NOTE PAYABLE, SHAREHOLDER:
As of December 31, 1995, the Company had a note payable to a shareholder.
The balance of $3,980 bears interest at 8.25%. During 1994 the Company had
accumulated borrowings from its major shareholder and president of $201,904. The
shareholder forgave this debt in 1994. This exchange was recorded as an increase
in additional paid-in capital.
5. 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 and retained the balance of the shares as treasury stock which it
intends to retire during 1996.
6. STOCKHOLDERS' (DEFICIENCY) EQUITY:
The Company sold 654,760 shares of common stock and 425,000 Class A
warrants and 300,000 Class B warrants during 1995. Certain shares were
subscribed in units that contained Class A and Class B warrants.
In 1994, the Company sold 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.
Both classes of warrants will expire, the sooner of, five years from the date
of issue or two years from the listing of the common stock on a national
trading exchange.
During 1995, the Company's Board of Directors approved an omnibus stock
option plan to benefit certain key employees. Under this plan, the Company may
issue up to 550,000 shares of stock and/or options on stock through 2004. As
of December 31, 1995, the Company granted 350.000 options to purchase stock at
$1.50 and additional 40,000 options to purchase stock at $1.37. These exercise
prices reflect the fair value of the stock on the date of grant, and
accordingly no compensation expense has been recorded. The options become
exerciseable two years from the date of grant.
<PAGE>
6. STOCKHOLDERS' (DEFICIENCY) EQUITY: (Cont'd)
In July 1996 the Company issued an additional 150,000 shares of common
stock for net proceeds of $1,050,000. The underwriter received as compensation
warrants to purchase 10,000 shares of common stock with an exercise price at
the stock value on the date of this issuance.
Contingent upon filing form 10-SB, and listing with NASDAQ the
underwriter has agreed to raise an additional $5,000,000. Specific terms and
compensation to the underwriter are to be negotiated.
7. SUPPLEMENTARY CASH FLOW INFORMATION:
Cash paid for interest expense for the year ended December 1, 1995 was
$2,000.
8. CONCENTRATION OF CREDIT RISK:
The Company maintained bank balances, which at times exceeded the
federally insured limit of $100,000.
During 1995, one customer accounted for 75% of the Company's sales.
During 1994, the Company sold its services to only three customers with the
largest accounting for 70% of sales.
9. COMMITMENTS AND CONTINGENCY:
The Company leases office space under various operating leases. Rent expense
under these leases totaled approximately $35,000 in 1995 and $30,000 in 1994.
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
1996 $252,000
1997 293,000
1998 265,000
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 a
former subsidiary of Alydaar Software Corporation, Gem Technologies, Inc.
(GEM). 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
relation 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.
In the opinion of management, the Company will not incur a significant
loss as a result of these actions and the Company intends to vigorously defend
the allegations made in these complaints.
<PAGE>
10. FAIR VALUE OF FINANCIAL INSTRUMENTS:
In 1995, the Company adopted Financial Accounting Standards Board
Statement No. 107, which requires disclosures about the fair value of the
Company's 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 11, 1995 are as follows: Carrying Fair Amount Value
Cash $ 25,435 $25,435
Loan to shareholder 40,893 40,891
Note payable, shareholder 3,980 3,980
11. PRIOR PERIOD ADJUSTMENTS
The period adjustments reflected in the January 1, 1994 balance of
stockholder equity were for corrections of accrued expenses payable ($25,000)
and correction to Common Stock and additional paid-in capital. None of the
changes have any tax effects.
12. 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,
1995 1994
Deferred tax assets:
Net operating loss carry forward $ 229,000 $ 126,000
--------- ---------
Allowance for realization of assets (229,000) (126,000)
--------- ---------
$ - $ -
========== ==========
<PAGE>
</TABLE>
