Form 10-QSB
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
(Mark One)
{X} QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
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{ } TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________to________________
Commission File Number: 0-23835
NDS SOFTWARE, INC.
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(Exact name of small business issuer as specified in its charter)
Nevada 87-0397464
- ------ ----------
(State or other jurisdiction of (IRS Employer
Incorporation or organization) Identification No.)
2241 Park Place, Suite E, Minden, NV 89423-8602
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(Address of Principal executive offices)
Issuer's telephone number, including area code: (702) 782-2977
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Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.)
YES X NO_____
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APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDING DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required
to be filed Section 12, 13 or 15 (d) of the Exchange Act after the distribution
of Securities under a plan confirmed by court
YES_____ NO_____
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 6,902,742 shares as of April
30, 1998
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NDS SOFTWARE, INC.
Form 10-QSB for the quarter ended March 31, 1998
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TABLE OF CONTENTS AND INFORMATION REQUIRED IN REPORT
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Part I. Financial Information
Item 1. Financial Statements (unaudited): Page
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Consolidated Balance Sheets as of March 31, 1998 and
March 31, 1997 3
Consolidated Statements of Operations for the three months and
nine months ended March 31, 1998 and March 31, 1997 4
Consolidated Statements of Stockholders' Equity (Deficit)
for the nine months ended March 31, 1998 and March 31, 1997 5
Consolidated Statements of Cash Flows for the nine
Months ended March 31, 1998 and March 31, 1997 6
Notes to the Financial Statements 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 24
Part II Other Information Page
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Item 1 Legal Proceedings 26
Item 2 Changes in Securities and Use of Proceeds 26
Item 3 Defaults upon Senior Securities 26
Item 4 Submission of Matters to a Vote of Security Holders 26
Item 5 Other Information 26
Item 6 Exhibits and Reports on Form 8-K 26
SIGNATURES 27
2
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<CAPTION>
Item 1 Financial Statements (Unaudited)
NDS Software, Inc.
Consolidated Balance Sheets UNAUDITED
March 31,
1998 1997
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ASSETS
<S> <C> <C>
Current Assets:
Cash $ 119,768 $ (2,521)
Accounts receivables, net of allowance for uncollectible accounts
of $4,413 in 1998 and $4,413 in 1997 235,731 368,816
Inventories 57,070 11,553
Prepaid expenses 14,604 18,433
Investments 700,000 -
-------------- -------------
Total current assets 1,127,173 396,281
Property and equipment, net 455,577 461,219
Goodwill, net of accumulated amortization of $249,278 in 1998 and $116,912 in 1997 429,783 520,784
Investments in related businesses 557,394 -
Other assets 28,664 59,014
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$ 2,598,591 $ 1,437,298
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LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 312,886 241,271
Accrued liabilities 319,971 253,058
Current portion of capital lease obligations - 25,465
Notes payable 34,698 144,698
Notes payable - related parties 37,075 38,336
Deferred revenue 536,177 338,192
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Total Current liabilities 1,240,807 1,041,021
Convertible debt 377,500 2,081,000
Stockholders' deficit:
Series A convertible preferred stock, $0.001 par value,
5,000,000 shares authorized; 692,000 shares and 677,500 issued
and outstanding at March 31, 1998 and 1997, respectively 692 678
Series B convertible preferred stock, $10.00 par value,
200,000 shares authorized; 0 shares and 13,000 shares issued and
outstanding at March 31, 1998 and 1997, respectively - 130,000
Common stock, $.001 par value, 50,000,000 shares authorized;
6,895,742 shares and 4,593,320 shares issued and outstanding at
March 31, 1998 and 1997, respectively 6,896 4,593
Additional paid-in capital 9,936,582 5,246,123
Accumulated deficit (8,845,161) (7,066,116)
Dividends on Series A convertible preferred stock (118,725) -
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Total stockholders' equity (deficit) 980,284 (1,684,722)
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$ 2,598,591 $ 1,437,298
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</TABLE>
See accompanying notes.
3
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<CAPTION>
NDS Software, Inc.
Consolidated Statements of Operations
UNAUDITED
For the Three Months ended For the Nine Months ended
March 31, 1998 March 31, 1998
1998 1997 1998 1997
---------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Net Sales $ 741,195 $ 280,360 $ 1,863,135 $ 993,927
Cost of sales 109,228 59,674 213,657 122,254
---------- ------------- ------------- -------------
Gross Profit 631,967 220,686 1,649,478 871,673
Selling, general and admin. expenses 1,123,880 746,805 2,809,636 2,296,049
---------- ------------- ------------- -------------
Net loss from operations (491,913) (526,120) (1,160,158) (1,424,377)
Other income (expense):
Interest expense (13,265) (89,787) (100,112) (216,557)
Other (11,129) 21,345 (10,835) 28,090
---------- ------------- ------------- -------------
Loss before provision for income taxes (516,307) (594,561) (1,271,105) (1,612,843)
Provision for income taxes - 1,177 55 1,177
---------- ------------- ------------- -------------
Net loss $ (516,307) $ (595,739) $ (1,271,160) $ (1,614,021)
Net loss per common share ($0.08) ($0.13) ($0.22) ($0.36)
========== ============= ============= =============
Shares used in per share calculations 6,395,886 4,511,369 5,750,779 4,426,022
========== ============= ============= =============
</TABLE>
See accompanying notes.
4
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<TABLE>
<CAPTION>
UNAUDITED
NDS Software, Inc.
Consolidated Statements of Stockholders' Equity (Deficit)
Series A Series B Additional
Preferred Stock Preferred Stock Common Stock Paid in
Shares Amount Shares Amount Shares Amount Capital
-------- ------- ------ ------ ------ ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at July 1, 1996 662,500 663 13,000 130,000 4,258,723 4,259 4,510,078
Issuance of common stock to vendors
for payment of goods/services - - - - 110,695 111 304,402
Issuance of common stock through
a private placement offering - - - - 200,005 200 298,530
Issuance of common stock for
stock options exercised - - - - 10,000 10 19,990
Conversion of Debt and accrued interest
to common stock 15,000 15 - - 13,897 14 113,123
Unrealized Loss on Securities
Net loss
--------- ------ ------- -------- ---------- --------- -----------
Balance at March 31, 1997 677,500 $ 678 13,000 $130,000 4,593,320 $ 4,593 $ 5,246,123
========= ====== ======= ======== ========== ========= ===========
Balance at July 1, 1997 662,500 663 13,000 130,000 4,605,815 4,606 5,334,895
Issuance of common stock to vendors
for payment of goods/services - - (13,000) (130,000) 59,097 57 203,135
Issuance of common stock to employees
for payment of wages 12,934 13 46,766
Issuance of common stock for
stock warrants exercised. 18,750 19 42,481
Issuance of stock through private
stock sales 134,500 134 - - 489,809 493 1,530,771
Issuance of common stock for
stock options exercised - - - - 147,107 147 379,353
Conversion of convertible debt and
accrued interest to common stock 45,000 45 - - 882,867 883 1,899,500
Conversion of Series A preferred stock
into common stock (150,000) (150) 300,000 300
Issuance of common stock to
purchase FOCUS Publications 20,000 20 49,980
Issuance of common stock as
capital in a related business 300,000 300 449,700
Series A preferred stock dividends
paid in common stock 59,363 59
Unrealized Loss on Securities reversal
Net loss
--------- ------ ------- ------- ---------- --------- -----------
Balance at March 31, 1998 692,000 $ 692 - $ - 6,895,742 $ 6,896 $ 9,936,582
========= ====== ======= ======= ========== ========= ===========
(RESTUBBED TABLE)
Receivable Unrealized Dividends on
from Loss on Accumulated Series A
Stockholder Securities Deficit Preferred Stock Total
------------ ---------- ----------- --------------- -----
<C> <C> <C>
Balance at July 1, 1996 (500,000) - (5,452,095) (1,307,095)
Issuance of common stock to vendors
for payment of goods/services - - - 304,513
Issuance of common stock through
a private placement offering 500,000 - - 798,730
Issuance of common stock for
stock options exercised - - 20,000
Conversion of Debt and accrued interest
to common stock - - 113,151
Unrealized Loss on Securities
Net loss (1,614,021) (1,614,021)
----------- -------- --------- ------------- -----------
Balance at March 31, 1997 $ - $ - $(7,066,116) $ - $(1,684,722
=========== ======== =========== ============= ===========
Balance at July 1, 1997 - (330,775) (7,574,001) (2,434,612)
Issuance of common stock to vendors
for payment of goods/services - - - 73,192
Issuance of common stock to employees
for payment of wages 46,779
Issuance of common stock for
stock warrants exercised. 42,500
Issuance of stock through private
stock sales - - (1) 1,531,396
Issuance of common stock for
stock options exercised - - - 379,500
Conversion of convertible debt and
accrued interest to common stock - - - 1,900,428
Conversion of Series A preferred stock
into common stock 150
Issuance of common stock to
purchase FOCUS Publications 50,000
Issuance of common stock as
capital in a related business 450,000
Series A preferred stock dividends
paid in common stock (118,725) (118,666)
Unrealized Loss on Securities reversal 330,775 330,775
Net loss (1,271,159) (1,271,159)
----------- -------- ----------- ------------- -----------
Balance at March 31, 1998 $ - $ - $(8,845,161) $ (118,725) $ 980,284
=========== ======== =========== ============= ===========
</TABLE>
See accompanying notes.
5
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<CAPTION>
NDS Software, Inc.
Consolidated Statements of Cash Flows
Nine months ended March 31,
UNAUDITED
1998 1997
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<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,271,160) $ (1,614,021)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 217,651 195,658
Loss on sale of securities 63,125 -
Gain on sale of fixed assets (300) -
Noncash marketing revenue received in stock (700,000) -
Common stock issued for goods and services 131,724 275,665
Common stock issued for employee compensation 46,779 12,000
Changes in assets and liabilities net of effects from
purchase of FOCUS:
Trade receivables (57,825) (312,547)
Inventories (52,749) 18,665
Prepaid expenses (14,604) 30,050
Accounts payable (39,845) (85,199)
Accrued liabilities (171,922) (44,210)
Deferred revenue (269,234) 152,557
----------- -----------
Net adjustments (847,200) 242,639
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Net cash used in operating activities (2,118,360) (1,371,382)
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (131,846) (130,939)
Net cash received on purchase of FOCUS 2,134 -
Proceeds from securities sales 744,875 -
Proceeds from fixed asset sales 300 -
Deposit on Opticom Corporation purchase (100,000) -
Capital contributed to REOSeekers, LLC (7,394) -
Net change in other assets 4,286 (39,034)
----------- -----------
Net cash used in investing activities 512,355 (169,973)
----------- -----------
Cash flows from financing activities:
Proceeds from convertible debt - 619,252
Principal payments on capital lease obligations (16,799) (14,450)
Proceeds from notes payable - related parties 118,000
Payments on notes payable - related parties (188,028) (180,467)
Proceeds from notes payable 259,901 200,000
Payments on notes payable (285,000) (100,000)
Net proceeds from exercise of stock options/warrants 422,000
Net proceeds from sale of stock 1,383,477 848,730
----------- -----------
Net cash provided by financing activities 1,693,551 1,373,065
----------- -----------
Net (decrease) increase in cash 87,546 (168,290)
Cash at beginning of fiscal year (July 1) 32,222 165,769
----------- -----------
Cash at end of period $ 119,768 $ (2,521)
=========== ===========
</TABLE>
See accompanying notes.
6
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NDS Software, Inc.
Consolidated Statements of Cash Flows - Continued
Nine months
ended March 31,
1998 1997
-----------------------
Supplemental disclosure of cash flow information:
Cash paid for interest $ 118,287 $ 42,108
========== ========
Supplemental disclosure of non-cash investing and financing activities:
Nine Months Ended March 31, 1998
- --------------------------------
The Company wrote up certain securities classified as available-for-sale in the
amount of $330,775, effectively reversing the write down from the previous
fiscal period. This was done to bring the cost back in line with the amount
actually received in cash when these securities were sold.
The Company issued stock to vendors in exchange for reductions in outstanding
accounts payable in the amount of $51,982.
The Company converted 13,000 shares of outstanding preferred Series B stock for
35,000 shares of common stock.
The Company converted $1,678,500 of convertible debt into common stock.
The Company paid $118,725 in dividends on preferred Series A stock by issuing
shares of the Company's common stock.
The Company funded its $450,000 investment in a limited liability company by
issuing 300,000 shares of its common stock to the LLC.
One of the holders of the Company's preferred Series A stock converted their
shares into common stock.
The Company received common stock in an entity related by common stock ownership
in return for the license of technology valued at $700,000.
The Company purchased all of the outstanding stock of FOCUS by issuing 20,000
shares of common stock valued at $2.50 per share in exchange for $8,086 in
assets and $1,585 in liabilities.
See accompanying notes.
7
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NDS Software, Inc.
Consolidated Statements of Cash Flows - Continued
Supplemental disclosure of non-cash investing and financing activities:
Nine Months Ended March 31, 1997
- --------------------------------
The Company canceled the issuance of 250,000 shares of common stock when a
certificate of deposit in the amount of $500,000 received by the Company for the
stock purchase became uncollectible.
The Company issued 110,695 shares of common stock in exchange for goods and
services.
See accompanying notes.
8
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NDS Software, Inc.
Notes To Consolidated Financial Statements
March 31, 1998 and 1997
1. Description of Business and Financing Requirements
NDS Software, Inc. ("NDS") was originally incorporated under the Laws of Nevada
on October 28, 1987. On July 20, 1994, NDS merged with XRF Corporation ("XRF"),
which was incorporated in Utah. Through the terms of the merger agreement, XRF,
the surviving entity, acquired all of the outstanding common stock of NDS and
NDS ceased to exist. However, due to the substance of the transaction, the
merger has been treated as a purchase of XRF by NDS (Note 3). Subsequent to the
merger, XRF changed its name to NDS Software, Inc. and has been re-domiciled in
the state of Nevada.
On May 8, 1996, NDS acquired 100% of the outstanding stock of Visual Listings,
Inc. ("VLI") located in Brea, California. The acquisition of VLI was accounted
for as a purchase that resulted in the Company recording $637,696 of goodwill
(Note 3). On August 11, 1997 the Company acquired FOCUS Publications, Inc.
("Focus") which was finalized on December 31, 1997. The acquisition of FOCUS was
accounted for as a purchase that resulted in the Company recording $42,615 of
goodwill (Note 3).
NDS offers desktop software products used by real estate professionals to manage
information, contacts and listings.
VLI provides public access to the Multiple Listing Service via the Internet
through its HomeSeekers.com Internet site. The Internet site allows potential
home buyers to view multiple listings using a standard Internet dial up
connection. VLI also provides an alternative access to the Multiple Listing
Service on HomeSeekers and CityNet, a product that opens the same data to a
non-Internet connected home buyer that has a computer and modem.
Focus produces regional relocation information including economic, housing,
education, entertainment and other related information of interest to businesses
and individuals relocating to the area in paperback form for sale to realtors,
title companies and individuals relocating in the area.
VLI and FOCUS Publications are being operated as divisions of the Company. The
consolidated financial statements include the accounts of NDS and its two
divisions, VLI ("HomeSeekers") and FOCUS Publications ("Focus"). All significant
inter-company balances and transactions have been eliminated in consolidation.
9
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NDS Software, Inc.
Notes To Consolidated Financial Statements
March 31, 1998 and 1997
(Continued)
1. Description of Business and Financing Requirements (continued)
The Company has not yet generated revenues sufficient to fund operations and has
generated the additional cash necessary to fund operations through the issuance
of equity and convertible debt. Accordingly, the Company' ability to accomplish
its business strategy and to ultimately achieve profitable operations is
dependent upon its ability to obtain additional financing and execute its
business plan. There can be no assurance that the Company will be able to obtain
additional funding, and if available, will be obtained on terms favorable to or
affordable by the Company.
The Company' management is exploring several funding options and expects to
raise additional capital in 1998 and to continue to develop the Company'
operations around its products. Ultimately, however, the Company will need to
achieve profitable operations in order to continue as a going concern. The
Company incurred net losses of $2,311,959 and $2,121,906 for the years ended
June 30, 1996 and 1997, respectively, and has incurred a net loss of $1,271,160
for the nine months ending March 31, 1998. The Company has an accumulated
deficit of $8,845,161 as of March 31, 1998.
These conditions raise substantial doubt about the Company's ability to continue
as a going concern. The financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification of
assets or the amounts and classification of liabilities that may result from the
outcome of this uncertainty.
2. Significant Accounting Policies
Revenue Recognition
Revenues from sales of software licenses are recognized upon shipment of the
related product, net of revenues attributable to insignificant customer
obligations, if any. Advertising revenues are recognized ratably over the term
of the advertising agreement beginning at the time the advertisement first is
displayed on the Company's Internet site. Payments received from customers prior
to the Company shipping product or displaying advertisements are recorded as
deferred revenue.
In accordance with Statement of Position 91-1, the Company accounts for certain
software transactions for which there is no reasonable basis of estimating the
degree of collectibility of related receivables using the installment method of
accounting, effectively recording the transaction as deferred revenue until the
collectibility is probable. See Note 4 "Investments".
10
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NDS Software, Inc.
Notes To Consolidated Financial Statements
March 31, 1998 and 1997
(Continued)
2. Significant Accounting Policies (continued)
Software Development Costs
The Company accounts for the costs of developing software products to be sold in
accordance with Statement of Financial Accounting Standards 86, "Accounting for
the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed" which
requires the capitalization of costs only during the period from the
establishment of technological feasibility to the time at which the product is
available for general release to customers. These costs are not material to the
Company's financial position or results of operations, and have been charged to
research and development expense in the accompanying statements of operations.
Concentrations
Concentrations of Credit Risk - Financial instruments which potentially subject
the Company to credit risk consist primarily of cash in bank, trade receivables,
and receivables from officers/stockholders. The Company maintains its cash in
bank deposit accounts that, at times, may exceed federally insured limits. At
March 31, 1998, substantially all of the accounts receivables are due from
customers within the real estate and related industries.
Concentrations of Operations - All of the Company's current products are
designed for operation in the national domestic real estate market. Any
recessionary pressures or other disturbances in the national real estate market
could have an adverse effect on the Company's operations. For the nine months
ended March 31, 1998, 27% of the Company's revenues were received from one
customer from the sale of customer leads and 37% of the Company's revenues were
received from a related party for a one-time license agreement for the right to
market software developed by the Company.
Financial Statement 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 disclosures 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 these estimates.
11
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NDS Software, Inc.
Notes To Consolidated Financial Statements
March 31, 1998 and 1997
(Continued)
2. Significant Accounting Policies (continued)
Fair Values of Financial Instruments
Effective July 1, 1994, the Company adopted Statement of Financial Accounting
Standards No. 107, "Disclosures about Fair Value of Financial Instruments"
("SFAS No. 107"). The Carrying amounts reported in the balance sheet for cash
and cash equivalents approximate those assets" fair values. Active markets for
the Company's other financial instruments that are subject to the fair value
disclosure requirements of SFAS No. 107, which consist of privately-issued
convertible debt and notes payable, do not exist and there are no quoted market
prices for these instruments. Accordingly, it is not practicable to estimate the
fair values of such financial instruments because of the limited information
available to the Company and because of the significance of the cost to obtain
independent appraisals for this purpose.
Marketable Securities
The Company's securities investments that are bought and held principally for
the purpose of selling them in the near term are classified as trading
securities. Trading securities are recorded at fair value in the balance sheet
in current assets, with the change in fair value during the period included in
earnings.
Securities investments that the Company has the positive intent and ability to
hold to maturity are classified as held-to-maturity securities and recorded at
amortized cost in investments and other assets. Securities investments not
classified as either held-to-maturity or trading securities are classified as
available-for-sale securities. Available-for-sale securities are recorded at
fair value in investments and other assets on the balance sheet, with the change
in fair value during the period excluded from earnings and recorded net of tax
as a separate component of equity.
The Company's investments in marketable equity securities are held for an
indefinite period and thus are classified as available-for-sale.
For the nine months ended March 31, 1998, the Company had $700,000 in
available-for-sale securities. See Note 4 "Investments".
12
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NDS Software, Inc.
Notes To Consolidated Financial Statements
March 31, 1998 and 1997
(Continued)
2. Significant Accounting Policies (continued)
Inventory
Inventory is recorded at the lower of cost (first-in, first-out method) or
market and consists of Focus division publications.
Property and Equipment
Property and equipment are stated at cost. Depreciation is calculated using the
straight-line method over estimated useful lives of 3 years, or the lease term,
whichever is shorter.
Goodwill
The Company has classified as goodwill the cost in excess of fair value of the
net assets of VLI and Focus Publications, both acquired in purchase
transactions. All goodwill is being amortized on a straight-line method over 5
years. Amortization charged to continuing operations amounted to $32,975 and
$103,170 for the nine months ended March 31, 1997 and 1998, respectively.
Goodwill accumulated amortization at March 31, 1998 was $249,278. At each
balance sheet date, the Company evaluates the reliability of goodwill based upon
expectations of non-discounted cash flows and operating results of VLI and
Focus. Based upon its most recent analysis, the Company believes that no
material impairment of goodwill exists at March 31, 1998.
Income Taxes
The liability method is used to account for income taxes. Under this method,
deferred income tax assets and liabilities are determined based on differences
between the financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that are scheduled to be in effect
when the differences are expected to reverse.
13
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NDS Software, Inc.
Notes To Consolidated Financial Statements
March 31, 1998 and 1997
(Continued)
2. Significant Accounting Policies (continued)
Advertising
The Company periodically places advertisements in newspapers and magazines.
Costs of advertising are expensed when paid.
Net Loss Per Share
Net loss per share is based on the simple average number of shares of common
stock and dilutive common stock equivalents outstanding during the period. Other
common stock issuable upon the conversion of convertible preferred stock,
convertible redeemable promissory notes and upon the exercise of certain common
stock warrants and stock options have been excluded from the computation because
their inclusion would be anti-dilutive.
Stock Options
The Company adopted SFAS No. 123, Accounting for Stock-Based Compensation, which
is effective for fiscal years beginning after December 15, 1995, or earlier as
permitted. As provided by SFAS No. 123, the Company will continue to account for
employee stock options under Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees. There were options to purchase
3,565,700 shares of common stock outstanding as of March 31, 1998.
3. Business Acquisitions
On July 20, 1994, the Company merged with XRF Corporation, (XRF), (a Utah
Corporation). Through the terms of the merger agreement, XRF, the surviving
entity, acquired all of the outstanding common stock of NDS and NDS ceased to
exist. The existing stockholders of XRF retained their 1,192,352 shares and the
stockholders of NDS received shares of XRF at a ratio of 76.5 to 1 for a total
of 1,700,000 shares. Due to majority ownership of the Company after the
transaction by NDS stockholders and XRF's lack of substantial assets,
liabilities, or marketable products, the transaction was treated as a reverse
acquisition of XRF by NDS using the purchase method for accounting purposes.
14
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NDS Software, Inc.
Notes To Consolidated Financial Statements
March 31, 1998 and 1997
(Continued)
3. Business Acquisitions (continued)
Effective May 8, 1996, Visual Listings, Inc. (a California corporation) became a
division of NDS as part of an agreement in which NDS acquired all of the
outstanding shares of VLI in return for 280,000 shares of NDS? common stock
valued at $560,000. The acquisition was accounted for as a purchase and resulted
in the assumption of net liabilities of $77,696.
On August 11, 1997, the Company acquired FOCUS Publications, Inc. (a Nevada
corporation) ("Focus") which was finalized on December 31, 1997. NDS acquired
all of the outstanding shares of Focus in return for 20,000 shares of NDS?
common stock valued at $45,000. The acquisition was accounted for as a purchase.
4. Investments
As of March 31, 1998, the Company has recorded common stock it received as
payment for services rendered from a related party. The common stock is
classified on the balance sheet as securities available-for-sale at its
estimated realizable value of $700,000 as of March 31, 1998. This stock is
restricted stock and is not currently traded on any stock exchange or
over-the-counter ("OTC") market. 700,000 shares has been included on the
Company's March 31, 1998 balance sheet at $1.00 per share, which is management's
estimate of the stock's fair market value once it begins trading. Management
anticipates that this stock will begin trading on an OTC market by June 30,
1998.
Should this stock not begin trading at a value of at least $1.00 per share by
June 30, 1998, then management will re-assess the value of this asset at this
time. There is the chance that this asset, and the related $685,000 (of the
total $700,000) of sales recognized for license of technology in the nine months
ending March 31, 1998 will need to be reduced.
On January 16, 1998, the Company entered into a Limited Liability Company
("LLC") with another mortgage business to develop and operate a new Internet
site that brings the Company's real estate listings together with the other
party's mortgage offerings. The Company contributed 300,000 shares of common
stock to this LLC as collateral should the company not perform as promised.
These shares may be forfeited at a maximum of 100,000 shares per year over a
three-year period.
15
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NDS Software, Inc.
Notes To Consolidated Financial Statements
March 31, 1998 and 1997
(Continued)
5. Property and Equipment
<TABLE>
<CAPTION>
March 31,
Property and equipment consist of the following: 1998 1997
---- ----
<S> <C> <C>
Computer equipment $690,992 $551,229
Software 102,307 100,099
Furniture and office equipment 110,921 109,670
Leasehold improvements 13,542 13,542
---------- ----------
917,762 774,540
Less accumulated depreciation and amortization (462,185) (313,321)
---------- ----------
$455,577 $461,219
</TABLE>
6. Accrued Liabilities
<TABLE>
<CAPTION>
March 31,
Accrued liabilities consist of the following: 1998 1997
---- ----
<S> <C> <C>
Accrued payroll and related expenses $272,277 $113,703
Accrued Interest 17,689 109,429
Other accrued liabilities 30,005 30,200
---------- ----------
$319,971 $253,058
</TABLE>
7. Notes Payable
During December 1996, the Company issued $200,000 in promissory notes to an
unrelated third party in return for cash. Interest at 12% and principal was due
on or before January 15, 1997. As of June 30, 1997, principal and interest of
$100,000 was repaid with a remaining principal balance of $105,918 plus accrued
interest.
8. Notes Payable to Related Parties
The Company has three notes payable to related parties totaling $37,075 at March
31, 1998, which were acquired in the acquisition of VLI. Interest accrues at
annual rates of 16.65% to 18% and principle and interest is payable on demand.
At March 31, 1998, the weighted average interest rate on all short-term
borrowings including related party borrowings was 13%.
16
<PAGE>
NDS Software, Inc.
Notes To Consolidated Financial Statements
March 31, 1998 and 1997
(Continued)
9. Convertible Redeemable Promissory Notes with Warrants
During March of 1996, the Company commenced a $1.5 million, 60 unit private
placement of unsecured convertible redeemable promissory notes (the "Notes")
with attached redeemable common stock purchase warrants (the "Warrants") priced
at $25,000 per unit. A unit includes a redeemable promissory note and a warrant,
as discussed below. The Company completed the placement in July 1996, receiving
$1,500,000 in gross proceeds.
In August 1996, the Company commenced and completed a $500,000, 20 unit private
placement of unsecured convertible redeemable promissory notes with attached
redeemable common stock purchase warrants priced at $25,000 per unit. A unit
includes a redeemable promissory note and a warrant. The Company placed 23.24
units and received $581,000.
The Notes mature June 1, 1999 and accrue interest at 12% per annum payable
semi-annually on June 1 and December 1. The Notes became convertible at the
option of the note holder beginning September 15, 1996 at the rate of one share
of the Company's common stock per $2 of indebtedness. The Notes become
redeemable at the option of the Company at the same rate above at any time
subsequent to November 1, 1996 provided that a registration statement covering
the shares of common stock issuable upon the conversion of the Notes is
effective with the Securities and Exchange Commission.
Each unit also consists of a Warrant to purchase 12,500 shares of the Company's
common stock at an exercise price of $3 per share at any time prior to December
15, 1998. The Warrants are redeemable at the option of the Company at a price
per common share of $0.01 provided that a registration statement covering the
shares of common stock issuable upon the exercise of the Warrants is effective
with the Securities and Exchange Commission and the market price of the
Company's common stock is $6 per share for 10 consecutive trading days.
At March 31, 1998, Warrants to purchase 1,040,500 shares of the Company's common
stock had been issued to the note holders, with Warrants to purchase 12,500
shares exercised.
10. Stockholders' Equity (Deficit)
Common Stock
As of March 31, 1998 the Company has reserved a total of 6,863,444 shares of
common stock pursuant to outstanding warrants, options, convertible preferred
stock and convertible redeemable promissory notes.
17
<PAGE>
NDS Software, Inc.
Notes To Consolidated Financial Statements
March 31, 1998 and 1997
(Continued)
10. Stockholders' Equity (Deficit) (continued)
Redeemable Common Stock Warrants
As of March 31, 1998 the Company has Warrants outstanding to purchase 1,724,994
shares of common stock at prices ranging from $1.47 to $6.00 per share for
periods of 2 1/2 years to 6 1/2 years.
Stock Options
As of March 31, 1998, the Company has options outstanding to purchase an
aggregate of 3,565,700 Shares of the Company at prices ranging from $1.47 to
$6.50 per Share and for exercise periods ranging from two years to five years
from the date of issuance.
Preferred Stock
Series A preferred stock has a par value of $.001 and is entitled to a
cumulative dividend of 15% per annum based upon a value of $2 per share at the
time of conversion to common stock. At the option of the preferred stockholder,
each share of stock can be redeemed at $1 per share or can be converted to
common stock at a rate of two shares of common for each share of preferred. Each
share of series A preferred stock is entitled to the voting rights of five
shares of common stock.
On June 30, 1995, the Company converted short and long-term notes payable to
officers and stockholders of $535,613 and related interest of $100,866 (at a
rate of 15%) into 662,500 shares of series A preferred stock.
Series B convertible preferred stock has a par value of $10 and is entitled to a
cumulative dividend, when declared, of 9% per annum based upon a value of $10
per share. At the option of the board of directors, each share of stock can be
redeemed at $10 per share or can be converted to common stock at a rate of five
shares of common for each share of preferred. Conversion to common stock cannot
occur until at least six months after issuance and if the listed price of the
Company's common stock has been at least $3 for at least ten consecutive trading
days with an aggregate volume of no less than 20,000 shares. Series B
convertible preferred stock is not entitled to the voting rights of common
stock.
18
<PAGE>
NDS Software, Inc.
Notes To Consolidated Financial Statements
March 31, 1998 and 1997
(Continued)
10. Stockholders' Equity (Deficit) (continued)
Preferred Stock (continued)
As of March 31, 1998, $118,725 in dividends have been declared, and paid in the
form of common stock, on Series A convertible preferred stock. No dividends have
been declared or paid on Series B convertible preferred stock.
11. 1996 Stock Option Plan
On October 9, 1996, the Company's Board of Directors ratified a stock option
plan under which the Company may grant incentive and non-statutory stock options
to employees, directors, and consultants. As part of the provisions of the Plan,
the Company may grant, but is not obligated to grant, options that include
reload features. The Company has reserved 5,500,000 shares of its common stock
for issuance under the Plan. Options granted generally have terms from one to
five years from the date of grant and generally vest immediately or ratably over
their terms. The exercise price of incentive stock options granted under the
Plan may not be less than 100% of the fair market value of the Company's common
stock on the date of the grant. The exercise price of non-statutory stock
options granted under the Plan may not be less than 75% of the fair market value
of the Company's common stock on the date of the grant. For a person, who, at
the time of the grant, owns stock representing 10% of the voting power of all
classes of the Company's stock, the exercise price of the incentive stock
options granted under the Plan may not be less than 110% of the fair market
value of the common stock on the date of the grant.
The Company applies APB Opinion 25 in accounting for its fixed stock option
plan. Accordingly, since the market value and the option price of the Company?s
stock were equal on the measurement date, no compensation cost has been
recognized for the Plan for the fiscal periods ended March 31, 1998 and 1997.
Had compensation cost been determined on the basis of fair value pursuant to
FASB Statement No. 123, net income (loss) and earnings per share would have been
impacted as follows:
19
<PAGE>
NDS Software, Inc.
Notes To Consolidated Financial Statements
March 31, 1998 and 1997
(Continued)
11. 1996 Stock Option Plan (continued)
Nine Month Period Ended March 31,
--------------------------------
1998 1997
---- ----
Net Income (Loss)
-----------------
As reported $ (1,271,105) $ (1,612,843)
================ ============
Pro forma $ (3,559,876) $ (5,897,878)
================ ============
Primary Earnings Per Share
--------------------------
As reported $ (.22) $ (.36)
================ ============
Pro forma $ (.56) $ (1.32)
================ ============
Fully Diluted Earnings Per Share
--------------------------------
As reported $ (.22) $ (.36)
================ =============
Pro forma $ (.56) $ (1.32)
================ =============
For purposes of estimating the fair value of each option granted in accordance
with FASB 123, the Black-Scholes Model was used. The following assumptions were
made in estimating fair value:
Dividend yield 0%
Risk-free interest rate 8.50%
Expected life 3 years
Expected volatility 111.18%
Compensation expense that would have been charged to operations had the
provisions of FASB 123 been applied were $2,288,771 for the nine month period
ended March 31, 1998, and $4,285,035 for the nine month period ended March 31,
1997.
20
<PAGE>
NDS Software, Inc.
Notes To Consolidated Financial Statements
March 31, 1998 and 1997
(Continued)
11. 1996 Stock Option Plan (continued)
Following is a summary of the status of options outstanding during the nine
month periods ended March 31, 1998 and 1997:
<TABLE>
<CAPTION>
Nine Months Ended March 31,
--------------------------
1998 1997
------------------------------- -----------------------------
Weighted Weighted
Average Average
Exercise Exercise
# of Shares Price # of Shares Price
----------- -------- ----------- --------
<S> <C> <C> <C> <C>
Outstanding at July 1,
1997 and 1996 3,015,800 $ 1.68 2,100,800 $ 1.60
Granted 790,000 2.63 955,000 2.01
Canceled (100,000) 3.94 (30,000) 6.38
Exercised (140,100) 2.60 (25,000) 2.00
----------- ------- ---------- -------
Outstanding at March 31 3,565,700 1.79 3,000,800 1.68
=========== ======= ========== ======
Options exercisable
at March 31 3,565,700 1.79 3,000,800 1.68
=========== ====== ========== ======
Weighted average fair value of
options granted during 1998 and 1997 $ 2.90 $ 4.49
======= =======
</TABLE>
21
<PAGE>
Notes To Consolidated Financial Statements
March 31, 1998 and 1997
(Continued)
12. Income Taxes
Deferred taxes result from temporary differences in the recognition of certain
revenue and expense items for income tax and financial reporting purposes. The
significant components of the Company?s deferred taxes as of March 31, 1998 and
1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
------------ --------------
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryover $ 2,402,086 $ 1,807,417
Deferred revenue 187,662 118,367
Depreciation - 8,461
Employee salaries issued in stock 20,573 4,200
Allowance for bad debts 1,544 -
------------ --------------
2,611,865 1,938,445
Deferred tax liabilities:
Depreciation (6,274) -
------------- --------------
2,605,591 1,938,445
Less: Valuation allowance (2,605,591) (1,938,445)
------------- --------------
Net Deferred Taxes $ -0- $ -0-
============= ==============
</TABLE>
The increase in the valuation allowance was $667,146 and $550,457 for the nine
months ended March 31, 1998 and 1997, respectively.
The company has available at March 31, 1998 $6,863,103 of unused operating loss
carryforwards that may be applied against future taxable income and that expire
in various years from 2008 to 2013. The principal reasons for the difference
between the effective income tax rate and the federal statutory income tax rate
are as follows:
<TABLE>
<CAPTION>
1998 1997
------------ ----------
<S> <C> <C>
Federal benefit expected at statutory rate $(444,906) $ (564,907)
Net operating loss with no current benefit 628,646 507,134
Taxable deferred revenue (237,148) 53,395
Amortization of software costs - (22,472)
Depreciation 37,036 22,650
Employee salaries issued in stock 16,373 4,200
Other (1) -
----------- -------------
$ -0- $ -0-
=========== =============
</TABLE>
22
<PAGE>
Notes To Consolidated Financial Statements
March 31, 1998 and 1997
(Continued)
13. Commitments
Leases
The Company leases its facilities under two non-cancelable operating leases. One
facility lease includes an escalation clause based on the consumer price index
and is adjusted on an annual basis and has a term of five years. The other
facility lease has a term of three years where the monthly rental payment
increases $100 annually on top of a stated base rate. The Company also leases
certain equipment under operating leases. The following is a schedule, by years,
of the future minimum lease payments under operating leases as of March 31,
1998.
Operating
Leases
---------
Years ending June 30,
1998 $ 30,479
1999 115,422
2000 24,392
---------
Minimum lease payments $170,293
Employment Agreements
During May and June of 1996, the Company entered into employment agreements with
three officers. The agreements are for a five-year period and call for an annual
salary for each officer of $144,000 and an annual bonus of 4% of pre-tax
earnings.
Past Due Obligations
The Company is currently in default under the terms of one note payable to an
outside third party wherein the required payment at the maturity date of the
note payable in the amount of $35,000 has not been paid. The Company has been
paying the accrued interest and intends on paying the principal balance once
cash funds allow.
In addition, the Company is currently delinquent in the payment of a number of
accounts payable. The Company is attempting to payoff these outstanding
obligations as soon as practicable given its cash flow requirements.
23
<PAGE>
Item 2 Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Financial Condition - March 31, 1998 compared to March 31, 1997
Investments
As of March 31, 1998, the Company has recorded common stock it received as
payment for services rendered from a related party. The common stock is
classified on the balance sheet as securities available-for-sale at its
estimated realizable value of $700,000 as of March 31, 1998. This stock is
restricted stock and is not currently traded on any stock exchange or
over-the-counter ("OTC") market. 700,000 shares has been included on the
Company's March 31, 1998 balance sheet at $1.00 per share, which is management's
estimate of the stock's fair market value once it begins trading. Management
anticipates that this stock will begin trading on an OTC market soon.
Should this stock not begin trading at a value of at least $1.00 per share by
June 30, 1998, then management will re-assess the value of this asset at this
time. There is the chance that this asset, and the related $685,000 (of the
total $700,000) of sales recognized for license of technology in the nine months
ending March 31, 1998 will need to be reduced.
Investments in related businesses
On January 16, 1998, the Company entered into a Limited Liability Company
("LLC") with another mortgage business to develop and operate a new Internet
site that brings the Company's real estate listings together with the other
party's mortgage offerings. The Company contributed 300,000 shares of NDS common
stock to this LLC as collateral should the company not perform as promised.
These shares may be forfeited at a maximum of 100,000 shares per year over a
three-year period. The shares were valued at $1.50 per share, bringing the total
investment in this LLC to $450,000.
Additionally, the Company made a $100,000 down payment on the purchase of
Opticom Corporation ("Opticom") during fiscal 1998. Opticom designs and provides
marketing tools to Realtors, and currently generates approximately $3,000,000 in
annual sales. Current sales include photographs of homes for sale, real estate
marketing materials printing, magazine design and printing and real estate "For
Sale" signs. Opticom's long-term marketing strategy is to become a "one-stop"
provider of marketing services for listing real estate agents. The Company is
completing the due diligence phase of its acquisition of Opticom, and is
currently negotiating the purchase price.
Convertible Debt
$1,704,000 of convertible debt holders converted their notes into common stock
during fiscal 1998. Approximately 883,000 shares of common stock were issued for
the conversion of $1,900,000 in convertible debt and accrued interest during
fiscal 1998.
24
<PAGE>
Stockholders' Equity (Deficit)
The Company's equity structure improved drastically during fiscal 1998, moving
from a ($1,685,000) deficit as of March 31, 1997 to a $980,000 positive equity
as of March 31, 1998. The primary reason for this improvement was conversion of
$1,900,000 in convertible debt and accrued interest. Secondly, the Company
raised $1,805,000 in gross proceeds from the sale of stock and from the exercise
of stock options and warrants during this period.
Results of Operations - Three Months Ending March 31, 1998 compared to the Three
Months Ending March 31, 1997
Sales were up $461,000, or 164% for the quarter ending March 31, 1998 over the
corresponding 1997 quarter. This increase was due to strong technical services
sales and customer leads related to mortgage referrals sold to a mortgage
company.
Selling, general and administrative expenses were up $377,000, or 51% for the
quarter ending March 31, 1998 over the corresponding 1997 quarter. Sales and
programming personnel were added to increase Company sales and to meet the
production requirements of the increasing number of advertising customers.
Additionally, the Company incurred a $51,000 sales commission when it liquidated
equity securities received as payment for services during the quarter ending
March 31, 1998. The Company increased it's Internet communication capabilities,
and related costs, year-over-year, and spent considerable funds filing its Form
10-SB with the Securities and Exchange Commission during 1998.
Interest expense was down $77,000, or 85% for the three months ending March 31,
1998 from 1997 primarily due to the conversion of convertible debt into equity.
Results of Operations - Nine Months Ending March 31, 1998 compared to the Nine
Months Ending March 31, 1997
Sales for the nine months ending March 31, 1998 were up $869,000, or 88% over
the nine months ending March 31, 1997. This increase was due to strong technical
services sales and customer leads related to mortgage referrals sold to a
mortgage company.
Selling, general and administrative expenses were up $514,000, or 22% for the
nine months ending March 31, 1998 over the nine months ending March 31, 1997.
Sales and programming personnel were added to increase Company sales and to meet
the production requirements of the increasing number of advertising customers.
Interest expense was down $116,000, or 54% for the nine months ending March 31,
1998 from 1997 primarily due to the conversion of convertible debt into equity.
Cash flows - Nine months ending March 31, 1998 compared to the Nine Months
Ending March 31, 1997
25
<PAGE>
The Company sold common stock it received as payment for services rendered
during the nine months ending March 31, 1998 for net proceeds of $745,000 after
deducting a $51,000 sales commission on the sale.
The Company received $619,000 of proceeds from the sale of convertible notes
payable during the nine months ended March 31, 1997.
Proceeds from the sale of common stock and the exercise of stock options and
warrants was $1,805,000 during the nine months ending March 31, 1998 versus
$849,000 during the nine months ending March 31, 1997.
Since March 31, 1998 the Company has sold 439,000 shares of common stock for
proceeds of approximately $878,000. Additionally, the Company intends to raise
an additional $5 million in the near future. These funds will be used to
increase the sales and marketing efforts necessary to increase the sales volume
to profitable levels of operation.
PART II OTHER INFORMATION
Item 1 Legal Proceedings
None
Item 2 Changes in Securities and Use of Proceeds
None
Item 3 Defaults upon Senior Securities
None
Item 4 Submission of Matters to a Vote of Security Holders
None
Item 5 Other Information
None
Item 6 Exhibits and Reports on Form 8-K
None
26
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NDS Software, Inc.
(Registrant)
- ---------------------------- --------------------------
Greg Johnson Scott Berry
Chief Executive Officer Chief Financial Officer
Dated: May 14, 1998
27
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 119,768
<SECURITIES> 700,000
<RECEIVABLES> 240,144
<ALLOWANCES> 4,413
<INVENTORY> 57,070
<CURRENT-ASSETS> 1,127,173
<PP&E> 917,762
<DEPRECIATION> 455,577
<TOTAL-ASSETS> 2,598,591
<CURRENT-LIABILITIES> 1,240,807
<BONDS> 0
0
692
<COMMON> 6,896
<OTHER-SE> 972,696
<TOTAL-LIABILITY-AND-EQUITY> 2,598,591
<SALES> 741,195
<TOTAL-REVENUES> 741,195
<CGS> 109,228
<TOTAL-COSTS> 1,123,880
<OTHER-EXPENSES> (11,129)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,265
<INCOME-PRETAX> (516,307)
<INCOME-TAX> 0
<INCOME-CONTINUING> (516,307)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (516,307)
<EPS-PRIMARY> (0.08)
<EPS-DILUTED> (0.08)
</TABLE>
