U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 3 to
FORM 10-SB
General Form for Registration of Securities
of Small Business Issuers Under Section 12(b)
or 12(g) of the Securities Act of 1934
HOMESEEKERS.COM, INCORPORATED
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(Name of Small Business Issuer in its Charter)
Nevada 87-0397464
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2241 Park Place, Suite E, Minden, Nevada 89423-8602
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(Address of Principal Executive Offices) (Zip Code)
(702) 782-2977
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(Issuer's Telephone Number)
Securities to be registered under Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which
to be so Registered Each Class is to be Registered
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None
Securities to be registered under Section 12(g) of the Act:
Common Stock, $.001 par value
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(Title of Class)
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PART I
The Company is filing this Form 10-SB on a voluntary basis to (1)
provide current, public information to the investment community, (2) to expand
the availability of secondary trading exemptions under the Blue Sky laws and
thereby expand the trading market in the Company's securities and (3) to comply
with prerequisites for listing of the Company's securities on NASDAQ. In the
event the Company's obligation to file periodic reports under the Exchange Act
is suspended, the Company reserves the right to reevaluate whether to continue
filing periodic reports on a voluntary basis.
DESCRIPTION OF BUSINESS
General
HomeSeekers.com, Incorporated (the "Company") is a leading provider of
online residential real estate information for use by home buyers, real estate
agents, mortgage and title insurance companies. Through HomeSeekers(R)
("HomeSeekers"), the Company's proprietary Internet product available at
www.homeseekers.com, or through HomeSeekers/CityNet(TM) ("HomeSeekers/CityNet"),
the Company's proprietary Intranet (direct, via modem) product, users can search
for a home within a specified geographical area and with desired features such
as number of bedrooms and baths, security, and other added features, apply for
and arrange for a mortgage and title insurance, and track the process of a
closing.
Currently, public access to residential real estate has taken many
forms on the Internet. There are thousands of sites on the Internet advertising
homes for sale. Brokerage chains such as Century 21, Coldwell Banker, RE/MAX,
and others have developed their own web sites. Individually owned and operated
franchises of these firms and individual real estate agents have also created
their own Web sites. City based web sites are carrying a subset of real estate
listings. However, the quality of the data presented on certain of these web
sites is highly selective and not comprehensive. The Company believes that it
has developed a quality database on which it can build in order to provide
nationwide residential real estate information.
The Company has entered into various strategic alliances intended to
expand the Company's products and services and enhance its presence in the
marketplace. The Company has also partnered with an affiliate of Century 21
Incorporated to provide real estate information to the Mexico marketplace, and
jointly develop Internet and Intranet sites for real estate properties. In
addition to its online services and computer software packages, the Company's
Technical Services Division develops computer software applications for the real
estate and mortgage banking industries.
The Company expects to generate revenues from a number of sources
including (i) advertising via HomeSeekers and HomeSeekers City/Net, (ii) sales
of products and services developed through strategic alliances to which the
Company is a party, and (iii) referral fees from mortgage applications and
processing. See "Sales."
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The Company's administrative office is located at 2241 Park Place,
Suite E, Minden, Nevada 89423; telephone no. (702) 782-2977. The Company also
maintains its HomeSeekers office at 2745 Saturn Street, Brea, California 92621;
telephone no. (714) 993-4295. The Company's fiscal year end is June 30.
Background
Nevada Data Systems, Inc., a predecessor of the Company ("Nevada Data"),
was incorporated under the laws of the State of Nevada on October 28, 1987, and
in February 1989, changed its name to NDS Software. From 1987 through 1994,
Nevada Data engaged in the development and marketing of Realty 2000, a
proprietary software package providing real estate customer and property
database information for use by realtors. In 1994, Nevada Data introduced
HomeSearch 2000, an Internet search database permitting users to identify
property meeting the user's specifications. HomeSearch 2000 was the precursor to
the Company's HomeSeekers/CityNet product. See Products and Services", below.
XRF Corporation, a predecessor of the Company ("XRF"), was organized
under the laws of the State of Utah on January 31, 1983 under the name of Aurora
Energy, Inc. From inception until 1989, XRF was involved in the portable X-ray
fluorescent spectrometer business. During 1987 and 1988 XRF also provided
engineering services and contract manufacturing operations. From 1989 until 1992
XRF sought out a different business to operate, and from 1992 until 1994, was
involved in medical transcription correspondence training.
In July 1994, Nevada Data merged with and into XRF, and changed its
name to NDS Software, Inc. Prior to the time of the merger, XRF had disposed of
its business operations and at the time of the merger was not engaged in
revenue-producing activities.
The Company was incorporated under the laws of the State of Nevada on
September 28, 1994, as a wholly-owned subsidiary of XRF. On October 4, 1994, XRF
merged with and into the Company. References in this Registration Statement to
the "Company", include its predecessors Nevada Data and XRF. Effective July 1,
1998, the Company changed its name to HomeSeekers.com, Incorporated.
On May 8, 1996, the Company acquired 100% of the outstanding capital
stock of Visual Listings, Inc. ("VLI"), a California corporation organized in
1992. VLI developed HomeSeekers, the Company's proprietary Internet product that
enables potential homebuyers to view all homes for sale in a subscribing MLS
geographic area. VLI was acquired in exchange for 280,000 shares of the
Company's common stock.
On August 11, 1997, the Company acquired 100% of the outstanding
capital stock of FOCUS Publications, Inc.("Focus") in exchange for 20,000 shares
of the Company's common stock. 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.
In August 1998, the Company acquired the customer list and certain other
assets of Genstar Media, a recently formed company engaged in the sale of web
sites to real estate agents. Genstar Media's customer list includes
approximately 1,600 web site customers. In connection with this acquisition, the
Company engaged the principal officer and shareholder of Genstar Media, and
certain of its other employees, as employees of the Company. The purchase price
for the assets acquired was 50,000 shares of the Company's common stock.
The Industry and Market
The real estate industry has historically distributed information on
residential listings for sale to the public through real estate agents who draw
on inventories of homes residing in a common data base maintained by a local
Multiple Listing Service ("MLS") and controlled by a local Board of Realtors
("Boards"). Boards are volunteer organizations whose members include real estate
agents and companies which provides services to its membership. These Boards
often contract the majority of their operations through one of the regional
providers of property listing information, including InterRealty with
approximately 53% of the market, Moore Data Systems, Risco, and other smaller
organizations. Typically, a real estate agent pays dues to a local Board for
access to this inventory, and until now, the home buyer has had little control
over which properties are presented.
It is the Company's understanding that, in the United States, there are
approximately 1.7 million listings at any one time controlled by approximately
900 MLS/Board organizations. It is estimated that these listings turn over
approximately 2.4 times in the course of a year, resulting in four million homes
sold in a given year at an average value of $125,000 nationwide (National
Association of Realtors survey conducted on the quarter ending December 31,
1997). Management estimates that there are 70 major markets that represent
approximately two-thirds of the listing inventory. In order to provide public
access on a national basis, the Company believes that it will need to penetrate
a significant number of these 70 markets.
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Additionally, management understands that in the United States, there
are approximately 5 million new mortgages entered into annually in connection
with the purchase of homes, and a comparable number of refinance mortgages.
Typically, mortgage referral fees are 50 basis points (one basis point is 1/100
of 1%). See "Sales". Moreover, within 90 days following the purchase of a home,
approximately 10% of the value of the home is often expended on ancillary
purchases such as furniture, window covering, flooring, carpets, appliances,
paint and wall paper and landscaping. These providers of ancillary goods and
services are logical advertisers for the Company.
Business Strategy
The Company's business strategy is to provide high quality,
comprehensive, and reliable services that present to home buyers and real estate
professionals a comprehensive up-to-date national database of residential real
estate listings and complementary services. In order to achieve these goals, the
Company will seek to enter into agreements with MLS/Boards of Realtors in 25 of
the major real estate markets within the next twelve months (for a total of
approximately 50 markets included in the Company's databases), and, expand the
number of local, regional and national companies advertising on the HomeSeekers
and HomeSeekers/CityNet databases. The Company will require additional funds to
finance its growth, including hiring additional marketing, sales and support
personnel to help generate additional revenues. There is no assurance that
additional funding will be available to the Company on favorable terms.
The Company believes that its primary competitive advantage is its
products and services offered. The Company has a wider suite of services and
products for the Realtor and for the consumer looking to purchase a home than
any other single Internet site.
Products and Services
Overview
The Company's current products and services include (i) HomeSeekers and
HomeSeekers/CityNet products, (ii) Realty 2000(R) ("Realty 2000"), a software
package that provides real estate customer and property database geared to real
estate agents, (iii) H.S. Passport, an e-mail and productivity tool, and (iv)
publishing regional demographic data magazines for real estate agents and
brokers through its newly acquired Focus division. Additionally, the Company
provides listing information of real estate owned by financial institutions on
the Internet through its REOSeekers product. Through RealtySeekers
International, Ltd., the Company also has entered into a limited liability
company arrangement to provide Internet-based real estate listing information
for residential and vacation properties in Mexico.
HomeSeekers-HomeSeekers/CityNet Product
Through the Company's proprietary Internet product, HomeSeekers
(available at HomeSeekers.com), and its Intranet product (direct, via modem),
HomeSeekers/CityNet, the Company provides potential home buyers access to all
homes for sale in a subscribing MLS geographical region. HomeSeekers and
HomeSeekers/CityNet employ a sophisticated search engine with over 50 searchable
fields to allow both broadly and narrowly defined searches. The systems
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will search, find and display all listings that match a prospective buyer's
criteria including, among others, a desired location within a city or state,
number of bedrooms and baths, and other desired features. The Company's new
feature, "Let the Listings Find You(sm)", allows users to enter their search,
save it, and automatically search for updated inventory, thus increasing Company
website hits.
The systems also permit users to apply for and arrange for a mortgage
and title insurance.
In order to attain its inventory of residential listings, the Company
has entered into agreements with 36 MLS/Board of Realtors representing more than
185,000 real estate agents and approximately 400,000 home listings in 25 major
markets in the United States. The provisions of the 36 MLS/Board of Realtors
agreements generally require the Company to pay 10% of gross revenues generated,
on a quarterly basis, to the MLS for products sold to Realtors in the MLS' area.
Additionally, the Company will pay a 20% one-time commission to the MLS for
sales of the Company's products generated by the MLS. Initial terms are
generally for three years, with annual renewal terms thereafter. A copy of the
form of MLS agreement has been filed as an Exhibit to this Registration
Statement.
This approach, along with its quality/integrity control systems, allows
HomeSeekers and HomeSeekers/CityNet to maintain accurate and up-to-date
information available to potential home buyers, which in turn, may lead to
increased advertising and usage fee revenue. See "Sales." Unlike certain of the
Company's competitors who, the Company believes, update their listing
approximately every ten days, the Company believes that HomeSeekers is the only
web site to update its listing data on a daily basis. See "Competition." As a
result, in markets shared with the Company's competition, Realtors often
reference HomeSeekers as an "online" database and its competitors as
"historical" databases.
The Company also licenses its proprietary systems to MLS/Boards as an
enhancement to a Board's existing MLS data systems under a three-year contract.
The license agreement does not require a financial commitment from a Board, but
allows the Company access to content which can be directly related to revenue
generation through advertising contracts, scanning services, software
manufacture and upgrading. Additionally, MLS/Boards and advertisers have access
to detailed reports on web site usage, which allows the Company to provide
market feedback and value-added performance measures. The Company has also
developed monitoring tools to maximize server availability to better than 99.5%
uptime.
The Company has developed automated processes that allow it to include
a new MLS/Board of Realtor organization as rapidly as within a few hours (if the
data format is similar to the Company's) and within one to three days for those
organizations with a different data format.
Since offering HomeSeekers and HomeSeekers/CityNet, the number of homes
viewed have increased from 800,000 in January 1996 to over 4,900,000 as of
December 1997. Site accesses ("hits") have grown from 472,000 in January 1996 to
10,200,000 in December 1997. Presently, over 200,000 separate users access the
HomeSeekers site per month, staying an average of 36 minutes and viewing in
excess of 32 homes per visit. The Company currently offers multiple listing
information in 27 states, Mexico and Chile.
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Realty 2000
Realty 2000, the Company's first product, is a software package
targeted at real estate agents for use on personal computers (PCs). Realty 2000
has since developed into what management believes is the third largest software
product for the real estate vertical market. Realty 2000 provides customer and
property data bases; personal income and expense tracking; a time management
system for real estate agents and staff, internal word processing; estimates of
closing costs, net proceeds and annual property operating data; buyer
qualification data and mortgage lead data; comparative marketing analysis; and
an import option that downloads up-to-the-minute data from local or nationwide
MLS services directly to the property data base. Versions of Realty 2000 have
been developed by the Company to run on networks in offices, thereby permitting
real estate agents to readily share their files and exchange information. Realty
2000 is currently being updated and may be incorporated in the IBM/NDS Total
Solution package. Management believes that Realty 2000 will be instrumental in
developing the Company's advertising and mortgage referral business.
H.S. Passport E-mail and Real Estate Agent Productivity Tool
H.S. Passport is a proprietary e-mail and real estate agent
productivity tool that provides real estate agents direct access to leads from
interested home buyers. H.S. Passport enables agents to gather data relating to
the market positioning of all properties, and provides each subscribing real
estate agent a web page, a scanned photograph of the agent and a biography.
FOCUS Publications
On August 11, 1997, the Company acquired 100% of the outstanding
capital stock of FOCUS Publications, Inc. ("Focus"), in exchange for 20,000
shares of the Company's common stock. Focus produces regional relocation
information including economic, housing, education, entertainment, employment
and other relevant information of interest to persons relocating in a county in
the Southern California region, in paperback form for sale to businesses and
individuals relocating in the area, as well as to realtors, title companies and
other organizations that in turn use the publication as an additional marketing
and promotional tool. In the future, the Company anticipates that in addition to
publication of the data in paperback book
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form, it will also be digitized and added to the HomeSeekers web site to
generate additional advertising and end-user revenues. Revenues from Focus are
generated from advertising and book sales.
Executive Net Services
Executive Net Services, a division of the Company, provides technical
support, and on a project basis, is targeted at small to medium-based
businesses. In particular, Executive Net Services provides Internet/Intranet
Solutions, including designing an Internet presence; management, architecture
and planning, which includes designing and assessing hardware, software,
operating systems and other product needs; systems analysis and design, which
includes developing a system blueprint with flexibility for future requirements;
database design, network design, administration and installation, which includes
providing installation and fine tuning of software solutions along with software
development, testing and implementation of software. The Company's current
programming staff provides the technical resources for the Executive Net
Services division.
Strategic Alliances
The Company has aligned itself with various strategic partners which
are intended to expand the products and services offered by the Company, and
which management believes will enhance the Company's presence in the
marketplace. The following is a brief description of each of the Company's
strategic alliances:
The Company has formed a limited liability company ("LLC") with an
affiliate of Century 21 Incorporated to provide real estate information in
Mexico. The LLC's Operating Agreement calls for the members to develop Internet
and Intranet sites for real estate properties worldwide. The Company acquired a
50% ownership interest in this LLC for a nominal financial contribution.
In December 1997 the Company entered into an agreement with Stewart
Title of California ("Stewart Title"), an affiliate of Stewart Information
Services Corporation (NYSE: STC), to provide comparable home sales information
through HomeSeekers(TM), making it readily accessible to the public without the
need to request this information through a realtor for the first time. Until
now, this information has been available only to licensed real estate
professionals.
In October 1997, Baca Landata, a wholly owned subsidiary of Stewart
Title, entered into an exclusive three-year marketing alliance agreement with
the Company to market HomeSeekers(TM) on behalf of the Company to Multiple
Listing Services in the State of Texas. In consideration for the services
performed by Baca Landata, the Company has agreed to pay Boca Landata a
commission, based on sales generated.
In January 1998, the Company and FINET Holdings, Inc. ("Finet") formed
a Nevada LLC to establish a web site for consumers to view information
pertaining to real estate, and to provide consumers an opportunity to
pre-qualify for, apply for and close residential home loans. Finet is one of the
nation's leading independent mortgage brokers and currently a sponsor in
multiple locations at the Company's HomeSeeker's web site. Revenues will be
generated from transaction fees resulting from the processing of loans and from
advertising. The Company anticipates that this new web site will become
operational in mid-1998. LLC ownership is 50% by the Company and 50% by Finet.
In January 1998, the Company entered into a technology alliance with
RE/MAX of Texas ("RE/MAX"), where the Company has created and hosts RE/MAX's
Internet site "ReMax-Texas.com" for a monthly fee. RE/MAX's two thousand real
estate agents throughout Texas also have access to the Company's
HomeSeekers/CityNet(TM) and H.S. Passport products, and their brokers will sell
advertising for the Company's HomeSeekers.com site on a commission basis.
Additionally, the Company has access to RE/MAX's listing data for the
HomeSeekers.com web site.
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In February 1998, the Company entered into an agreement with E-Loan,
the nation's leading Internet mortgage company, to incorporate E-Loan's mortgage
offerings on the Company's HomeSeekers.com Internet site. Once operational, this
alliance will permit home buyers to access a loan center while viewing homes at
the Company's web site.
In March 1998, the Company entered into an agreement with Inter-City
Relocation Services, Inc. ("RELO"). RELO is a nation-wide network of real estate
agents who provide relocation services to individuals and companies relocating
employees. The Company will pay RELO a commission for the right to market its
HomeSeekers.com products to RELO's 93,000 agent members in nearly 4,000 offices
across the U.S.
In March 1998, the Company entered into a technology alliance with
Better Homes and Gardens Real Estate Services ("BH&G"), pursuant to which the
Company will accumulate BH&G's 120,000 nation-wide real estate listings to their
Internet site and mirror this information on the Company's HomeSeekers.com web
site. BH&G's 25,000 real estate agents throughout the U.S. also have access to
the Company's HomeSeekers/CityNet(TM) and H.S. Passport products, and have the
opportunity to advertise on the Company's HomeSeekers.com web site.
In April 1998, the Company entered into an agreement with Southern
California Multiple Listing Service ("SoCal"), to develop an Internet-based
multiple listing system for a fee.
In April 1998, the Company entered into an agreement with HomeShark, an
Internet provider of discount home mortgages and home-buying advice. The Company
will incorporate HomeShark's mortgage offerings onto the Company's
HomeSeekers.com Internet site.
In April 1998, the Company entered into an agreement with Michigan
Multiple Listing Service ("MMLS"), to provide for a fee, software that will
enable MMLS to offer a public access lead generation Intranet system. This
system will be used by MMLS to generate advertising revenues based on their real
estate listing data. The MMLS will use the Company's HomeSeekers/CityNet(TM),
Realty 200O(R) and H.S. Passport products as their system. The Company will be
compensated through software license fees.
In May 1998 the Company entered into an agreement with DataQuick, a
division of Acxiom Corporation, to link DataQuick's comparative market analysis
information to the Company's HomeSeekers.com Internet site. This alliance
permits home buyers to view and print a comparative market analysis of any home
they view on the Company's HomeSeekers.com Internet site. These market analyses
will be sold at various prices based on volume and revenues, and proceeds will
be split 45% to the Company and 55% to DataQuick.
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In August 1998, the Company entered into a marketing agreement with
Harte-Hanks Shoppers, Inc., a division of Harte-Hanks, Inc. (NYSE: HHS).
Pursuant to the agreement, Harte-Hanks Shoppers, Inc. will market web pages on
the Company's Internet sites. The agreement is cancelable by either party on 30
days' written notice.
Future Plans
The Company is currently discussing an agreement with Opticom
Corporation, a California corporation ("Opticom"), pursuant to which the parties
contemplate that Opticom will be merged with and into the Company.
Opticom designs and provides marketing resources to realtors and real
estate boards. Included among Opticom's products and services are (i)
photographing homes for inclusion in regional MLS listings, (ii) printing
specialty brochures and magazines for individual realtors and realtor groups,
and (iii) renting posts designed to accommodate signs advertising homes for
sale, which Opticom markets to real estate brokers in conjunction with post
cards, flyers, fact sheets, personal brochures and newsletters. The Company's
management believes that an alliance with Opticom will enhance the Company's
revenues through sharing of customer bases, as well as the introduction of a new
product based upon both companies' existing photography technology. The new
product will permit still photographs of a home's interior to be digitized and
included in the Company's homeseekers.com Internet website, and will enable the
consumer to access three dimensional views of the home's interior. For each of
the two years ended December 31, 1997 and 1996, Opticom generated revenues of
$2,820,086 and $2,048,939, respectively, and achieved net income (losses) of
$(93,077) and $2,847, respectively.
As currently proposed Opticom would be merged with and into the Company
(the "Proposed Merger Agreement"), in consideration for which the Company will
pay the holders of Opticom's outstanding common stock: $350,000 in cash,
$100,000 of which has been paid; $1,000,000 in securities of the Company; and up
to an additional $1,650,000, based upon the financial performance of the Opticom
Division of the Company over the three years following completion of the
transaction.
It is anticipated that consummation of the transactions contemplated by
the Proposed Merger Agreement will be conditioned upon the Company securing at
least $3,500,000 in funding, to enable the Company to finance the merger. The
Company has identified an investment banker who has agreed to use its best
efforts to raise up to $5,000,000 on the Company's behalf through a private
placement of the Company's preferred stock. The terms of such preferred stock
have not as yet been determined. The investment banker's obligation to proceed
with the proposed private placement is subject to its satisfaction with the
results of its due diligence and other contingencies. In light of the contingent
nature of the Proposed Merger Agreement and the Company's ability to secure the
necessary funding therefore, there is no assurance that the merger contemplated
by the Proposed Merger Agreement will be consummated.
Marketing
The Company has both in-house and outside direct sales personnel that
market its products directly to Boards of Realtors. The Company will use
primarily two sales channels, seminars and direct sales, to market its products
and generate revenues. The sales seminar channel will consist of a team to set
up and present approximately 15 seminars targeted at realtors and real estate
agents interested in marketing their services via the Internet each month
throughout the United States. The
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intent is to market as well as to generate revenues through advertising. The
direct sales channel includes promoting, marketing and selling the Company's
products and services to larger real estate organizations throughout the United
States.
Additionally, the Company has signed marketing agreements with each of
its major Board providers. These agreements provide MLS vendors with an
introduction fee for facilitating a presentation to their respective MLS Boards.
By partnering with the MLS vendor contact, the Company can reduce its sales
costs and shorten its sales cycle by appealing to affiliates of MLS providers
such as title companies, mortgage brokers and insurance agencies.
Sales
The Company expects to generate revenues (i) through advertising by
companies selling their services to home buyers including mortgage brokers,
financial institutions, title companies, real estate agents, local retailers and
services providers, and other businesses seeking exposure to a broad base of
home buyers, (ii) through user fees from mortgage referrals (typically 50 basis
points or 50/100 of 1%), (iii) by providing real estate agent services, such as
referrals, e-mail and other services, and (iv) through the sale of products and
services developed through acquisitions and strategic alliances to which the
Company is a party. The Company also provides technical consulting services for
which it receives fees through its NDS Technical Services division to third
parties to develop industry-specific computer software applications for the real
estate and mortgage banking industry as well as clients developing innovative
business opportunities in other business fields on the Internet.
Trademarks, Copyrights and Proprietary Rights
Presently, the Company has not sought patent protection for its
proprietary software system, although it may apply for patents on various
aspects of its programs in the future. The Company, rather, will seek to
maintain its proprietary rights by trade secret protection, copyright notices,
non-competition and non-disclosure agreements with its employees and, as
required, with its vendors. The Company may file for further copyrights and/or
patents for its software program applications and obtain patents where
cost-effective and feasible. There can be no assurance that meaningful
proprietary protection can be attained as a result of such filing, and any
proprietary rights that the Company could choose to protect through legal action
may involve substantial costs.
The Company believes that the technology edge it currently enjoys will
likely lessen over time and in order to be competitive, it must provide a high
quality, continually improving, complete solution to home buyers, real estate
agents and the MLS Boards. The Company believes its core technical competence of
computer programming and knowledge of the real estate market will allow it to
maintain a leading edge product that will have value in the marketplace. The
Company obtained
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federal trademark protection for its Realty 2000 mark in 1990 and has applied
for federal trademark protection for its HomeSeekers-CityNet and HomeSeekers
marks.
Competition
The Company is engaged in a highly competitive segment of the real
estate data processing industry. The Company competes or may subsequently
compete, directly or indirectly, with a large number of companies which may
provide various levels of services or products comparable with those provided by
the Company. Many present or prospective competitors including RealSelect and
Cyberhomes (a division of Moore Data Services), have Internet web sites, are, in
some cases, better capitalized, more established and have greater access to
resources necessary to produce a competitive advantage. Additionally, brokerage
chains such as Century 21, Coldwell Banker, Re/MAX, as well as individual real
estate agents, have developed their own web sites. Although the Company believes
that its software systems and services may be on the leading edge of technology
and can ultimately occupy an attractive market position, there can be no
assurance that the Company will continue to compete effectively in its market.
Government Regulation
The Company is subject, both directly and indirectly, to various laws
and governmental regulations relating to its business. The Company believes it
is currently in compliance with such laws and that they do not have a material
impact on its operations. Moreover, there are currently few laws or regulations
directly applicable to access to or commerce on the Internet. However, due to
the increasing popularity and use of the Internet, it is possible that a number
of laws and regulations may be adopted with respect to the Internet. Such laws
and regulations may cover issues such as user privacy, pricing and
characteristics and quality of products and services. The enactment of any such
laws or regulations in the future may slow the growth of the Internet, which
could in turn decrease the demand for the Company's services and increase the
Company's cost of doing business or otherwise have an adverse effect on the
Company's business, results of operations and financial condition.
Employees
The Company currently has 50 full-time employees, 15 of which are in
administration/management, 14 are in sales and marketing, 5 are in technical
support and 16 are in programming.
DESCRIPTION OF PROPERTY.
The Company currently leases approximately 6,325 square feet of office
space at its Minden, Nevada location from an unaffiliated party. Its monthly
lease payments are $6,524 subject to yearly adjustments based on the Consumer
Price Index for All Urban Consumers all items, U.S. City average (1982-1984).
The lease term, which commenced on September 15, 1994, is for five years with an
option to renew for an additional five-year term.
The Company leases approximately 3,250 square feet of office and
storage space in Brea, California for its HomeSeekers operations from an
unaffiliated party. The term of the lease is three years, commencing August 21,
1996 and the monthly rental is $2,200 for the first year, $2,300 for the second
year and $2,400 for the third year. The Company has a right of first refusal to
purchase the building in the event that the lessor wishes to sell it.
Focus, a division of the Company, rents 1,215 square feet of space in
Orange County, California, at a monthly rate of $1,396. The term of the lease
commenced on September 15, 1997 and ended on April 1, 1998. The lease continues
on a month-to-month basis. The Company is currently investigating expanded
facilities that will accommodate both HomeSeekers and Focus.
11
<PAGE>
DIRECTORS, EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES
The following table sets forth the names, positions with the Company
and ages of the executive officers and directors of the Company. Directors of
the Company will be elected at the Company's annual meeting of stockholders. One
half of the total number of directors are elected at each annual meeting, and,
therefore, each director serves for two years or until their successors are
elected and qualify. Officers are elected by the Board and their terms of office
are, except to the extent governed by employment contract, at the discretion of
the Board.
<TABLE>
<CAPTION>
Name Age Position Director Since
---- --- -------- --------------
<S> <C> <C> <C>
Greg Johnson 45 Chairman of the Board of Directors 1988
Chief Executive
Officer, Secretary,
Treasurer
John Giaimo 42 President, Chief 1996
Operating Officer
Director
Douglas Swanson 53 Vice Chairman, 1996
Executive Vice President
Scott Berry 39 Chief Financial Officer N/A
Larry Ross 46 Vice President, Marketing N/A
</TABLE>
- ------------------
Greg Johnson, the Company's founder, has served as the Company's
Chairman of the Board since August 6, 1996, its Chief Executive Officer ("CEO"),
and a Director of the Company since 1988, and its President from 1988 through
August 5, 1996. Mr. Johnson has been involved in all phases of management of the
Company. Mr. Johnson is a licensed real estate broker/agent in Nevada and has
extensive experience in the marketing and sales of real estate.
John Giaimo has served as the Company's President, Chief Operating
Officer ("COO") and a Director since August 6, 1996. He was the President of
Visual Listings, Inc. (now part of the HomeSeekers division), and since July
1990 and the Chief Executive Officer of VLI from July 1990 to August 5, 1996.
Mr. Giaimo was the subject of a recent chapter 7 personal bankruptcy which
became final on September 12, 1996 and involved three computer stores where he
was the sole proprietor. The bankruptcy was the result of the computer stores'
inability to sustain profitability and positive cash flows in order to meet the
obligations of the stores and Mr. Giaimo when they became due.
12
<PAGE>
Douglas Swanson has served as Vice Chairman of the Board of Directors
and Executive Vice President of the Company since October 31, 1995. His current
responsibilities for the Company include serving as liaison to significant
investors in the Company and implementing the HomeSeekers marketing division.
Between 1990 and October 30, 1995, Mr. Swanson served as Chairman and was
founder of Remington-Fox, Inc. (OTC: RFOX), a company engaged in the business of
medical transcribing. Remington-Fox filed for bankruptcy protection under
Chapter 11 in June 1996 and is no longer in operation. Because of personal
guarantees associated with Remington-Fox, Mr. Swanson also filed for personal
bankruptcy protection under Chapter 11 in June 1996.
Scott Berry has served as Chief Financial Officer of the Company since
October 1997 and is responsible for investor relations, accounting, financial
planning and control. Between 1994 and October 1997, Mr. Berry served as
Controller of several business including Dennis Banks Construction Company from
February 1997 to October 1997, Advanced Plastic Molding, Inc. from April 1996 to
January 1997, and Siller Brothers, Inc. from December 1994 to February 1996.
From July 1993 to August 1994, Mr. Berry served as Vice president of Finance for
Precision Resource Corporation, a software developer and computer hardware
reseller. From September 1988 through June 1993, Mr. Berry was Chief Financial
Officer of Lansmont Corporation, a developer and manufacturer of computer-based
product and package test equipment.
Larry Ross has served as Vice President of Marketing since September
1997. From May 1989 to May 1996, Mr. Ross served as the Regional Director/Chief
Operating Officer for Century 21 Region V, which comprises the eastern half of
Los Angeles County, Riverside County and San Bernardino County, California, one
of the top five regions of 45 nationwide that are consistently ranked first in
"per office" productivity, where he was responsible for 185 offices with 7,000
real estate agents and managed a corporate staff of 35. Between 1990 and 1992,
he served as Regional Director Representative to the National Advertising Fund
committee which helped set direction for the Century 21 advertising fund of $40
million. Additionally, from 1993 to 1994, he was one of three Regional Directors
appointed to serve on the President's National Top Brokers Task Force which
contributed input to the Chief Executive Officer of Century 21.
There are no family relationships among any of the executive officers
or directors.
The Company's officers are elected bi-annually by the Company's Board
of Directors. Directors are entitled to reimbursement for reasonable travel and
other out-of-pocket expenses incurred in connection with attendance at Board of
Directors meetings, but receive no set fees or benefits as directors, although a
director may receive certain options upon acceptance of the position as a
director of the Company. See "Remuneration of Directors and Officers."
13
<PAGE>
REMUNERATION OF DIRECTORS AND OFFICERS
Executive Compensation
Below is the aggregate annual remuneration of each of the three highest
paid persons who are officers or directors as a group as of June 30, 1997.
Capacities in Which
Name of Individual or Remuneration Aggregate
Identity of Group Was Received Remuneration
- --------------------- ------------------- ------------
Greg Johnson Chairman & CEO $118,277(1)
Doug Swanson Vice Chairman $118,277(1)
John Giaimo President & COO $118,277(1)
- ------------
(1) Includes a car allowance of $7,200 which has been accrued but unpaid.
Employment Agreements
Greg Johnson, Chairman and CEO. In June 1996, the Company entered into
a five year employment agreement with Greg Johnson whereby Mr. Johnson continued
to serve as the President/CEO of the Company and received a signing bonus of
$34,664. Subsequently, Mr. Johnson resigned as President of the Company, however
no written modification has been made to his employment agreement to date.
Effective September 1, 1996, Mr. Johnson's annual salary was increased to
$100,000 and, on March 4, 1997, Mr. Johnson's employment agreement was again
amended to increase his annual salary to $144,000; however, he did not begin
receiving this increased rate until September 1997. The amount earned, but not
paid to Mr. Johnson has been recorded as a liability on the books of the
Company. Mr. Johnson is also entitled to receive (i) an annual bonus equal to 4%
of the pre-tax earnings of the Company and (ii) options to purchase Common Stock
of the Company equal to 4% of the pre-tax earnings of the Company, at an
exercise price equal to the bid price of the Company's Common Stock on the date
of such grant. Mr. Johnson also has the right to receive a monthly automobile
allowance of $600.00.
Douglas Swanson, Vice Chairman. In June 1996, the Company entered into
a five year employment agreement with Mr. Swanson whereby Mr. Swanson continued
to serve as the Vice Chairman of the Company, and received a signing bonus of
$35,402. Effective September 1, 1996, Mr. Swanson's annual salary was increased
to $100,000 and, on March 4, 1997, Mr. Swanson's employment agreement was again
amended to increase his annual salary to $144,000 however, he did not begin
receiving this increased rate until September 1997. The amount earned, but not
paid to Mr. Swanson has been recorded as a liability on the books of the
Company. Mr. Swanson is also entitled to receive (i) an annual bonus equal to 4%
of the pre-tax earnings of the Company and (ii) options to purchase Common Stock
of the Company equal to 4% of the pre-tax earnings of the
14
<PAGE>
Company, at an exercise price equal to the bid price of the Company's Common
Stock on the date of such grant. Mr. Swanson also has the right to receive a
monthly automobile allowance of $600.00.
John Giaimo, President, COO and a Director. In May 1996, the Company
entered into a five year employment agreement with John Giaimo whereby Mr.
Giaimo was appointed President and COO of the Company and received a signing
bonus of $50,000. Effective September 1, 1996, Mr. Giaimo's annual salary was
increased to $100,000 and, on March 4, 1997, Mr. Giaimo's employment agreement
was again amended to increase his annual salary to $144,000; however, he did not
begin receiving this increased rate until September 1997. The amount earned, but
not paid to Mr. Giaimo has been recorded as a liability on the books of the
Company. Mr. Giaimo is also entitled to receive (i) an annual bonus equal to 4%
of the pre-tax earnings of the Company and (ii) options to purchase Common Stock
of the Company equal to 4% of the pre-tax earnings of the Company, at an
exercise price equal to the bid price of the Company's Common Stock on the date
of such grant. Mr. Giaimo also has the right to receive a monthly automobile
allowance of $600.00.
Incentive and Non-Qualified Stock Option Plan
On October 9, 1996, the Board of Directors ratified a stock option plan
called the "1996 Stock Option Plan (the "Plan") and on December 21, 1996, the
stockholders approved the Plan. On December 18, 1997, at the annual meeting of
the Company stockholders, a majority of the Company's stockholders and
members of the Board of Directors voted to amend the Plan to increase the
number of options to 5,500,000.
The Company believes the Plan will work to increase the proprietary
interest in the Company of its directors, officers, employees and consultants,
and to align more closely their interests with the interests of the Company's
stockholders. The Plan will also maintain the Company's ability to attract and
retain the services of experienced and highly qualified employees and directors.
Under the Plan, the Company has reserved an aggregate of 5,500,000
shares of Common Stock for issuance pursuant to options granted under the Plan
("Plan Options"). The Board of Directors of the Company administers the Plan
including, without limitation, the selection of the persons who will be granted
Plan Options under the Plan, the type of Plan Options to be granted, the number
of shares subject to each Plan Option and the Plan Option price.
The Plan authorizes the issuance of incentive stock options ("ISOs") as
defined in Section 422A of the Internal Revenue Code of 1986, non-qualified
stock options ("NQSOs") and together with ISOs,"Options"). In addition, the Plan
also allows for the inclusion of a reload option provision ("Reload Option"),
which permits an eligible person to pay the exercise price of the Plan Option
with shares of Common Stock owned by the eligible person and receive a new Plan
Option to purchase shares of Common Stock equal in number to the tendered
shares.
15
<PAGE>
Any ISO granted under the Plan must provide for an exercise price of
100% of the fair market value of the underlying shares on the date of such
grant, but the exercise price of any ISO granted to an eligible person owning
more than 10% of the Company's Common Stock must be at least 110% of such fair
market value as determined on the date of the grant. The aggregate fair market
value of the shares covered by the ISOs granted under the Plan that become
exercisable by a Plan participant for the first time in any calendar year is
subject to a $100,000 limitation. The exercise price of each NQSO is determined
by the Board of Directors or a committee thereof, in its discretion, provided
that the exercise price of an NQSO is not less than 75% of the fair market value
of the Common Stock on the date of the grant. The Board of Directors (or
committee thereof), shall determine the term of the Options; provided, however,
that in no event may an Option be exercisable more than 10 years after the date
of its grant and, in the case of an Incentive Option granted to an eligible
employee owning more than 10% of the Company's Common Stock, no more than five
years after the date of the grant. Any option which is granted shall be vested
and exercisable at such time as determined by the Board of Directors or a
committee thereof.
The per share purchase price of shares subject to Plan Options granted
under the Plan may be adjusted in the event of certain changes in the Company's
capitalization, but any such adjustment shall not change the total purchase
price payable upon the exercise in full of Plan Options granted under the Plan.
As of May 26, 1998, there were options outstanding to purchase an
aggregate of 3,610,200 shares granted pursuant to the Plan.
Options, Warrants and Rights
<TABLE>
<CAPTION>
Title and Amount of
Securities Called For By
Name of Holder Options, Warrants or Rights Exercise Price Date of Exercise
- -------------- --------------------------- -------------- ----------------
<S> <C> <C> <C>
Greg Johnson 726,000 options $1.47 Through January 13, 2003
John Giaimo 475,000 options $1.47 Through January 13, 2003
Dr. John C. Kelly 300,000 options $1.47 Through January 13, 2003
16,500 warrants(1) $3.00 Through December 15, 1998
Douglas Swanson 1,001,000 options $1.47 Through January 13, 2003
William Tomerlin 27,500 options $2.00 Through January 26, 1999
</TABLE>
- --------------
(1) Purchased pursuant to a private offering undertaken by the Company.
See "Part II - Sale of Unregistered Securities."
16
<PAGE>
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN SECURITY HOLDERS
Principal Shareholders
The following table sets forth certain information regarding the
Company's common stock, par value $.001 ("Common Stock") beneficially owned as
of May 26, 1998 for (i) each stockholder known by the Company to be the
beneficial owner of five (5%) percent or more of the Company's outstanding
Common Stock, (ii) each of the Company's directors, (iii) each named executive
officer (as defined in Item 402(a)(2) of Regulation S-B), and (iv) all executive
officers and directors as a group. At May 26, 1998 there were 7,336,792 shares
of Common Stock outstanding. Except as specifically set forth in the notes
below, the table does not give effect to (a) the conversion of the convertible
redeemable promissory notes ("Notes") into an aggregate of 76,250 shares of
Common Stock, (b) the exercise of warrants to purchase 1,799,794 shares of
Common Stock, (c) the exercise of options to purchase an aggregate of 3,610,200
shares of Common Stock, (d) the conversion of Series A Preferred Stock into
1,384,000 shares of Common Stock and (e) 1,739,700 shares of Common Stock
reserved for issuance pursuant to the Company's Stock Option Plan.
<TABLE>
<CAPTION>
Name and Address or Amount and Nature of Percentage Percentage
Beneficial Owner(1) Beneficial Ownership(2) of Class of Votes(9)
------------------- ----------------------- ---------- -----------
<S> <C> <C> <C> <C>
Greg Johnson(3) 1,151,500 14.1% 34.9%
John Giaimo(4) 534,882 6.8% 6.8%
Dr. John C. Kelly(5) 790,437 10.1% 13.2%
Douglas Swanson(6) 1,002,502 12.0% 12.0%
Scott Berry 32,500 .4% .4%
Larry Ross -0- -0- -0-
William Tomerlin(7) 1,615,418 19.3% 8.5%(10)
Darin Murphy(8) 305,209 4.1% 5.8%
All directors and officers
as a group (five persons) 2,721,384 28.2% 43.4%
- ----------
</TABLE>
(1) Unless otherwise indicated, the address of each of the listed
beneficial owners identified is 2241 Park Place, Suite E, Minden,
Nevada 89423. Unless otherwise noted, the Company believes that all
persons named in the table have sole voting and investment power with
respect to all the Shares beneficially owned by them.
(2) A person is deemed to be the beneficial owner of securities that can be
acquired by such person within 60 days upon the exercise of warrants or
options. Each beneficial owner's percentage ownership is determined by
assuming that warrants or options that are held by such person (but not
those held by any other person) and that are exercisable within 60 days
have been exercised.
(3) Mr. Greg Johnson is Chairman of the Board of Directors and Chief
Executive Officer of the Company. Includes options to purchase 726,000
Shares at $1.47 per Share through January 13, 2003. Also includes
80,330 shares issuable upon conversion of 40,165 shares of Series A
Preferred Stock (without giving effect to shares issuable, at the
Company's option, in payment of dividends thereon). Does not include
1,626 Shares underlying warrants or Notes convertible into 1,626 Shares
owned by Janet Gookin and Brandon Wilson, the sister and nephew of Mr.
Johnson.
17
<PAGE>
(4) Mr. John Giaimo is President, Chief Operating Officer and a Director of
the Company. Includes options to purchase 475,000 Shares at $1.47 per
Share through January 13, 2003. Does not include 69,492 Shares owned by
Melinda Giaimo, the wife of Mr. Giaimo and an employee of the Company.
(5) Dr. John Kelly is a former Director of the Company. Includes
options to purchase 300,000 Shares at $1.47 per Share through January
13, 2003. Also includes 188,930 shares issuable upon conversion of
94,465 shares of Series A Preferred Stock (without giving effect to
shares issuable, at the Company's option, in payment of dividends
thereon). Dr. Kelly resigned as a Director on May 1, 1998.
(6) Mr. Douglas Swanson is Vice Chairman of the Board of Directors and
Executive Vice President of the Company. Includes options to purchase
1,001,000 Shares at $1.47 per Share through January 13, 2003.
(7) Mr. William Tomerlin is the former Chairman of the Board of
Directors of the Company. He retired from this position in August 1996.
Includes options to purchase 27,500 Shares at $2.00 per Share through
January 26, 1999. Also includes 990,310 shares issuable upon conversion
of 495,155 shares of Series A Preferred Stock (without giving effect to
shares issuable, at the Company's option, in payment of dividends
thereon).
(8) Mr. Murphy's address is 4465 Juniper Trail, Reno, Nevada 86509. The
shares are held through Specialty Enterprises Corporation and
Specialties Enterprises, LLC. Includes 90,000 shares issuable upon
conversion of 45,000 shares of Series A Preferred Stock (without
giving effect to shares issuable, at the Company's option, in
payment of dividends thereon).
(9) Gives effect to 5:1 voting rights attributable to ownership of
Series A Preferred Stock, but not to its conversion into common stock.
(10) Mr. Tomerlin has granted Greg Johnson a voting proxy covering the
495,155 shares of Series A Preferred Stock owned by Mr. Tomerlin. The
voting power corresponding to said 495,155 shares of Series A Preferred
Stock is reflected in the percentage of votes attributable to Mr.
Johnson.
INTEREST OF MANAGEMENT AND OTHERS IN CERTAIN TRANSACTIONS
Family Relationships
As a result of the purchase and exchange agreement in May 1996 with
Visual Listings, Inc., ("VLI"), whereby the Company acquired VLI for 280,000
shares of Common Stock of the Company. Melinda Giaimo, an employee of the
Company and the wife of John Giaimo, the President, Chief Operating Officer and
a director of the Company and VLI, received 68,500 Shares of the Company in
exchange for VLI common stock held by Ms. Giaimo. Additionally, Donna Emory, the
sister of Mr. Giaimo received 6,000 Shares in connection with the Company's
acquisition of VLI. The VLI acquisition provided the Company with the technology
necessary to compete in the Internet market and to enable the Company to make
its HomeSeekers-CityNet (then known as "HomeSearch 2000") product available via
the Internet.
Loans to the Company
During fiscal year 1997, the Company received a personal loan of
$100,000 jointly from Mr. Greg Johnson, the Chief Executive Officer and Chairman
of the Board of Directors, and Dr. John Kelly, a Director. The funds were
borrowed personally from a bank by Mr. Johnson and Dr. Kelly and advanced to the
Company. The interest rate charged by the bank is variable, and has been 10% per
annum to date. Interest is passed on to the Company for payment. The purpose of
this $100,000 loan was for working capital and the due date was January 29,
1998. This loan was paid in full on January 21, 1998.
18
<PAGE>
As of December 31, 1997, the principal amount of $10,000 of loans, due
on demand to Dr. Kelly, was outstanding to the Company, at 12% interest per
annum. As of December 31, 1997, an on-demand loan in the principal amount of
$10,000 at 12% interest per annum was outstanding and due to Jeannie Johnson, an
employee, and the wife of Greg Johnson.
Transactions with Promoters
In May 1996, the Company entered into an agreement with The Armand
Group, which later changed their name to Griffin Partners, for corporate finance
advisory services for a period of 12 months. As consideration for business,
advisory and other consulting services performed on behalf of the Company,
Griffin Partners received $78,750 in cash, 50,000 Shares and Warrants (the
"Armand Warrants") to purchase (i) 150,000 Shares at $1.75 per Share through May
22, 2001; (ii) 150,000 Shares at $3.00 per Share through May 22, 2001; and (iii)
150,000 Shares at $4.00 per Share through May 22, 2001. The $1.75 Warrant and
the $3.00 Warrant are redeemable at their exercise price at the option of the
Company in the event the closing price of the Company's Common Stock exceeds
$5.00 per Share for twenty consecutive business days. The $4.00 Warrant is
redeemable at its exercise price at the option of the Company in the event the
closing price of the Company's Common Stock exceeds $12.00 per Share for twenty
consecutive business days. See "Description of Securities - Warrants." In
February 1997 Griffin Partners exercised their $1.75 Warrant.
In September 1996, the Company entered into an agreement with John L.
Crary for corporate finance advisory services for an initial term of 90 days.
During early 1997, the Company continued to use Mr. Crary's services on a
month-to-month basis. As consideration for business, advisory and other
consulting services performed on behalf of the Company, Mr. Crary received
$24,355 in cash, is currently owed $6,130 on account, received 2,000 Shares, and
warrants (the "Crary Warrants") to purchase 50,000 Shares at $6.00 per Share
through September 14, 1999, as to which the vesting periods are as follows: (i)
warrants to purchase 10,000 shares immediately vest; (ii) warrants to purchase
10,000 shares will vest upon each successive six month anniversary commencing
September 14, 1996.
In September 1997, the Company entered into an agreement with CB
Business Consulting, whose principal is Thomas Payne, for financial public
relations services for a one year term. The agreement can be canceled by either
party with one months notice after March 1, 1998. The terms of the agreement
call for payment of $5,000 per month plus the issuance of an option to purchase
70,000 Shares at $3.00 per share through October 15, 1997 and an option to
purchase 200,000 Shares at $4.25 per share through October 1, 2000. Both options
vested immediately. Thomas Payne exercised the $3.00 option on October 15, 1997.
DESCRIPTION OF SECURITIES
The Company is currently authorized to issue up to 50,000,000 shares of
Common Stock, $.001 par value, of which 7,336,792 shares were outstanding as of
May 26, 1998. The Company is also authorized to issue up to (i) 5,000,000 shares
of Class A Preferred Stock, $.001 par value,
19
<PAGE>
of which 1,000,0000 shares have been designated as Series A Preferred Stock,
of which 692,000 shares were issued and outstanding at May 26, 1998, and (ii)
200,000 shares of Class B Preferred Stock, $10.00 par value, none of which have
been issued or are outstanding.
Common Stock
Subject to the dividend rights of the holders of Preferred Stock,
holders of shares of Common Stock are entitled to share, on a ratable basis,
such dividends as may be declared by the Board of Directors out of funds,
legally available therefor. Upon liquidation, dissolution or winding up of the
Company, after payment to creditors and holders of Preferred Stock that may be
outstanding, the assets of the Company will be divided pro rata on a per share
basis among the holders of the Common Stock.
Each share of Common Stock entitles the holders thereof to one vote.
Holders of Common Stock do not have cumulative voting rights which means that
the holders of more than 50% of the shares voting for the election of Directors
can elect all of the Directors if they choose to do so, and, in such event, the
holders of the remaining shares will not be able to elect any Directors. The
By-Laws of the Company require that only a majority of the issued and
outstanding Shares of the Company need be represented to constitute a quorum and
to transact business at a stockholders' meeting. The Common Stock has no
preemptive, subscription or conversion rights and is not redeemable by the
Company.
Class A Preferred Stock
In December 1994, the Board of Directors of the Company issued an
initial series of Class A Preferred Stock, which was denominated as "Class A,
Series A Preferred Stock" (the "Series A Preferred Stock"). The shares of Series
A Preferred Stock have been assigned a value of $2.00 per share and yield
cumulative dividends of 15% per year, payable in cash or in Common Stock of the
Company and dividends, payable at the time of conversion, but do not bear
interest. The shares of Series A Preferred Stock are redeemable at the Company's
option at $2.00 per share, plus all accrued dividends. Each share of Series A
Preferred Stock is also convertible into two shares of Common Stock, at the
Preferred stockholder's option. The holder of each share of Series A Preferred
Stock is entitled to five (5) votes per share. The Series A Preferred Stock has
a liquidation preference of $2.00 per share.
Class B Preferred Stock
The Board of Directors has authorized the issuance of up to 200,000
shares of Class B Preferred Stock, $10.00 par value, which is denominated as
Class B Convertible Preferred Stock (the "Class B Preferred Stock"). As of the
date hereof, no shares of Class B Preferred Stock have been issued or are
outstanding. Shares of Class B Preferred Stock are entitled to dividends at the
rate of 9% per annum, based upon a value of $10.00 per share, and such dividends
are payable before the payment of dividends to the holders of common stock and
Class A, Series A Preferred Stock. Dividends on the Class B Preferred Stock are
payable in cash or in shares of the Company's common stock, as may be determined
by the Company. The Class B Preferred Stock is entitled to a $10.00 per share
preference over common stockholders in the event of liquidation, dissolution or
winding up of the Company's affairs; however, the Class A, Series A Preferred
Stock shall be senior to the Class B Preferred Stock with respect to the
liquidation preference. The Company has the right to redeem the Class B
Preferred Stock at a redemption price of $10.00 per share, plus accrued
dividends. Commencing six months following issuance, each share of Class B
Preferred Stock is convertible at the option of the Company, into five shares of
common stock, provided that there is a trading market in the Class B Preferred
Stock, and the closing price of the Class B Preferred Stock is at least $3.00
per share for at least 10 consecutive trading days, with an aggregate volume of
not less than 20,000 shares. Holders of Class B Preferred Stock have no voting
rights by reason of their ownership of Class B Preferred Stock (other than as
may be conferred by applicable law).
Class C Preferred Stock
The Board of Directors has authorized the creation of a class of
Preferred Stock, $0.001 par value per share, $10.00 stated value per share,
denominated as Class C $10 6% Cumulative Preferred Stock ("Class C Preferred
Stock"). The Class C Preferred Stock consists of 400,000 shares, none of which
have been issued or are outstanding. Dividends on the Class C Preferred Stock
are payable, in arrears, at the rate of 6% per annum. Holders of Class C
Preferred Stock are not entitled to voting rights. The Class C Preferred Stock
is entitled to a liquidation preference of $10.00 per share, which preference is
payable pari passu with the liquidation preference payable to holders of the
Series A Preferred Stock and Class B Preferred Stock. Each share of Class C
Preferred Stock is convertible into shares of common stock at the greater of
$3.00 per share or 75% of the average closing bid price of the common stock for
the five trading days prior to issuance. The Class C Preferred Stock is also
automatically convertible into common stock at the closing of any future public
offering of the Company's securities.
20
<PAGE>
Common Stock Purchase Warrants
In connection with the Company's private offering of certain of the
Company's securities in July 1996 and October 1996, the Company issued warrants
to purchase an aggregate of 750,000 and 290,500 shares of Common Stock,
respectively (collectively the "PPM Warrants"). These PPM Warrants are
exercisable at $3.00 per share on or prior to December 15, 1998. As of May 26,
1998, 12,500 PPM Warrants had been exercised.
In May 1996, the Company issued warrants (the "Armand Warrants") to
purchase an aggregate of 450,000 Shares for a period of 5 years from the date of
issuance, 150,000 of which are exercisable at $1.75 per Share, 150,000 of which
are exercisable at $3.00 per Share, and 150,000 of which are exercisable at
$4.00 per Share. The Armand Warrants are redeemable by the Company only when the
closing price of the underlying common shares has been above $5.00 per share for
twenty consecutive business days. The $4.00 Armand Warrants cannot be redeemed
by the Company unless the underlying shares exceeds $12.00 per Share for twenty
consecutive business days. The warrant exercise period was extended by six
months to November 22, 2001 by the Board of Directors on January 14, 1998. On
February 12, 1997, Armand Warrants to purchase 150,000 shares, at $1.75 per
share, were exercised.
On September 15, 1996, the Company issued warrants (the "Crary
Warrants") to purchase an aggregate of 50,000 Shares for a period of 3 years
from the date of issuance. The Crary Warrants are exercisable ratably based on
defined events at $6.00 per Share through September 14, 1999, as to which, the
vesting periods are as follows:(i) warrants to purchase 10,000 shares
immediately vest; (ii) warrants to purchase 10,000 shares will vest upon each
successive six month anniversary commencing September 14, 1996; provided
warrants to purchase 20,000 shares will be exercisable in the event (a) the
Company's outstanding Convertible Redeemable Promissory Notes described below
and related Warrants are converted and exercised, or (b) of $5,000,000 in
cumulative financing is completed by the Company, or (c) 40,000 options will
vest in the event $10,000,000 in cumulative financing is completed by the
Company. The warrant exercise period was extended by six months to March 14,
2000 by the Board of Directors on January 14, 1998.
On August 18, 1997, the Company issued warrants to purchase an
aggregate of 100,001 shares at $3.00 per Share for a period of three years. On
September 2, 1997, the Company issued warrants to purchase 15,000 Shares at
$3.50 per Share for a period of three years. The warrant period for all warrants
was extended by six months by the Board of Directors on January 14, 1998.
Between December 4, 1997 and May 15, 1998, the Company issued warrants
to purchase 323,800 shares of common stock at prices ranging from $1.47 per
share to $3.50 per share. Expiration dates range from September 28, 1998 to
October 30, 2001. As of May 26, 1998, 17,007 of these warrants had been
exercised.
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Warrant holders do not have any voting or any other rights as
stockholders of the Company. The Company's outstanding Warrants provide for
adjustment of the exercise price and for a change in the number of shares
issuable upon exercise to protect holders against dilution in the event of a
stock dividend, stock split, combination or reclassification of the Common
Stock. The Warrants may be exercised upon surrender of the Warrant Certificate
on or prior to the expiration date (or earlier redemption date, as applicable)
of such Warrant at the offices of the Company's transfer agent, with the form of
"Election to Purchase" completed and executed as indicated, accompanied by
payment of the full exercise price (by certified or bank check, payable to the
order of the Company), for the number of shares with respect to which the
Warrant is being exercised. Shares issued upon exercise of Warrants and paid for
in accordance with the terms of the Warrants.
Options
As of May 26, 1998, the Company had options outstanding to purchase an
aggregate of 3,610,200 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 that have been issued to employees, consultants,
potential advisory board members and lenders of the Company. On January 14,
1998, the Board of Directors repriced all employee and director stock options
and selected vendor stock options to $1.47 per share. Additionally, the option
period was extended by 6 months. All management options were extended to expire
on January 13, 2003.
Convertible Redeemable Promissory Notes
In connection with the completion of the Company's private offerings of
certain of its securities in July 1996 and December 1996, respectively, the
Company issued aggregate of $1,500,000 and $581,000 Principal Amount Convertible
Redeemable Promissory Notes (collectively the "Notes"), respectively. Each Note
is due and payable on June 1, 1999 unless redeemed by the Company prior thereto
or converted into shares of Common Stock at $2.00 per Share at the holder's
discretion, subject to the conditions discussed below. The Notes are unsecured.
No mandatory redemption is imposed on the Company with respect to the Notes
prior to maturity, nor is there any sinking fund.
Interest at an annual rate of 12% will be paid semi-annually commencing
December 1, 1996. The interest payment to each investor will be for the period
commencing on receipt of each investor's investment through maturity at June 1,
1999.
Each Note is convertible into Common Stock of the Company commencing
September 15, 1996, at a conversion price of $2.00 per share and at the option
of the Note holder. Commencing at anytime following November 1, 1996, the
Company shall have the right to redeem the Notes together with accrued interest,
provided all of the Shares underlying the Notes have been registered for resale
under the Securities Act of 1933, as amended (the "Securities Act"). Any
redemption notice shall be given for all the Notes then outstanding, and 30
days' prior written notice shall be
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provided in connection with any such redemption. Proportioned adjustments shall
be made for stock splits, dividends, mergers, recapitalizations and similar
transactions.
As of May 26, 1998, there were $152,500 of Notes outstanding.
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PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S
COMMON EQUITY AND OTHER STOCKHOLDER MATTERS
The Company's Common Stock is traded on the OTC Bulletin Board under
the symbol "NDSS" and commenced its trading on January 13, 1983. The following
table sets forth the high and low bid quotations for the Common Stock for the
periods indicated. These quotations reflect prices between dealers, do not
include retail mark-ups, mark-downs, commissions and may not necessarily
represent actual transactions.
Period High Low
- ------ ---- ---
First Quarter ended 9/30/96 $9.50 $4.62
Second Quarter Ended 12/31/96 $10.87 $4.87
Third Quarter ended 3/31/97 $9.50 $4.00
Fourth Quarter ended 6/30/97 $5.00 $3.16
First Quarter ended 9/30/97 $6.31 $3.06
Second Quarter ended 12/31/97 $5.87 $1.50
Third Quarter ended 3/31/98 $2.88 $1.34
Fourth Quarter ended 6/30/98 $4.53 $2.00
- ---------------
As of May 26, 1998, there were approximately 600 holders of record
of the 7,336,792 shares of Common Stock that were issued and outstanding. The
transfer agent for the Shares is Atlas Stock Transfer Co., 5899 South State
Street, Salt Lake City, Utah 84107, telephone (801) 266-7151.
The Company has never paid cash dividends on its Common Stock. The
Company presently intends to retain future earnings, if any, to finance the
expansion of its business and does not anticipate that any cash dividends will
be paid in the foreseeable future. The future dividend policy will depend on the
Company's earnings, capital requirements, expansion plans, financial condition
and other relevant factors.
The Securities and Exchange Commission has adopted regulations which
generally define a "penny stock" to be any equity security that has a market
price (as defined) of less than $5.00 per share, subject to certain exceptions.
The Company's Common Stock may be deemed to be a "penny stock" and thus will
become subject to rules that impose additional sales practice requirements on
broker/dealers who sell such securities to persons other than established
customers and accredited investors, unless the Common Stock is listed on The
Nasdaq SmallCap Market. Consequently, the "penny stock" rules may restrict the
ability of broker/dealers to sell the Company's securities, and may adversely
affect the ability of holders of the Company's Common Stock to resell their
shares in the secondary market.
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ITEM 2. LEGAL PROCEEDINGS.
The Company is involved in legal proceedings arising in the ordinary
course of business. The Company is not involved in any legal proceedings that it
believes will result, individually or in the aggregate, in a material adverse
effect upon its financial condition or results of operations.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS.
On January 20, 1997, Grant Thornton, L.L.P. ("Grant Thornton") resigned
as the Company's independent auditors and was replaced by Albright, Persing &
Associates, Ltd. ("Albright"), as determined by the Company's management.
Neither Grant Thornton's report of audit for the fiscal years ended June 30,
1995 and June 30, 1996 or Albright's report of audit for the fiscal year ended
June 30, 1997 contains any adverse opinions, disclaimers of opinion, nor has any
opinion been qualified as to uncertainty, audit scope or accounting principles,
with the exception of a "going concern" qualification.
During the Company's two most recent fiscal years and subsequent
interim periods preceding the change in independent auditors, there were not any
disagreements with Grant Thornton on any matter of accounting principles or
practices, financial statement disclosure or auditing scope or procedure.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES.
In June 1995, Greg Johnson, the Company's CEO, President and, then a
Director, William Tomerlin, the then Chairman of the Board of Directors, John C.
Kelly, a Director of the Company, and Les Lorentzen, then a Director of the
Company exchanged an aggregate of $636,479 of principal and interest accrued at
15% per annum due by the Company to them for an aggregate of 662,500 shares of
Series A Preferred Stock, which is convertible into two shares of Common Stock
for every one share of Preferred Stock. As of the date hereof, 150,000 shares of
the Series A Preferred Stock had been converted. These securities were issued to
stockholders who were accredited or otherwise knowledgeable investors, had
pre-existing relationships with the Company and had relevant information
concerning the Company and the issuance of such securities was exempt from the
registration requirements of the Securities Act pursuant to the exemption set
forth in Section 4(2) of the Securities Act.
In July and August 1995, the Company issued Common Stock to two
employees in connection with certain services performed by each of them. These
included 50,000 shares issued to Frank Katsuda, the then Chief Financial Officer
in consideration for $5,000 of services and 35,000 shares issued to Robert
Lewandowski, an employee of the Company, otherwise not affiliated with any
officer, director or principal shareholder, in consideration for $3,500 of
services. These securities were issued to stockholders who were accredited or
otherwise knowledgeable investors, had pre-existing relationships with the
Company and had relevant information concerning the Company and the issuance of
such securities was exempt from the registration requirements of the Securities
Act pursuant to the exemption set forth in Section 4(2) of the Securities Act.
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In October 1995, the Company sold 250,000 Shares in connection with an
Offshore Securities Subscription Agreement with a non-U.S. person pursuant to
Regulation S of the Securities Act. The purchaser tendered an international
certificate of deposit in the amount of $500,000 that was to mature on April 14,
1996. The bank defaulted on the certificate of deposit and the Company made a
demand of the purchaser for the full amount due or to return the Common Stock
issued. During September 1996, the purchaser returned the shares to the Company
and the Company canceled the offering. All persons involved were provided with
information and had access to relevant information concerning the Company.
Accordingly, the issuance of the securities was exempt from registration
requirements pursuant to the exemption set forth in Section 4(2) and Regulation
S of the Securities Act.
Since October 1995, the Company has issued options to purchase
4,005,800 Shares to various key employees, officers, Directors, potential board
of advisors, and consultants of the Company and of which options to purchase
290,100 shares of the Company's Common Stock had been exercised and options to
purchase 405,000 shares of the Company's Common Stock have been canceled.
Inasmuch as all of such persons were either accredited or otherwise qualified
investors, or had a pre-existing relationships with the Company and had access
to relevant information concerning the Company, the issuance of such securities
was exempt from the registration requirements pursuant to the exemption set
forth in Sections 4(2) of the Securities Act.
On December 15, 1995, and as part of a financing arrangement with LNB
Investment Corporation ("LNB"), the Company issued 40,500 shares of Series B
convertible preferred stock to LNB for which it received $70,000 in cash,
$60,000 of other consideration and a $275,000 note which LNB later defaulted on.
Additionally, the Company issued 2,500,000 shares of the Company's Common Stock
on August 25, 1995 to the investor as collateral in exchange for fourteen weekly
funding commitments of $135,000 each and final funding of $110,000, totaling
$2,000,000. No funding occurred in conjunction with the funding schedule and the
investor defaulted on the agreement in fiscal year 1996. As a result of the
default, the Company filed a complaint on May 21, 1996 against the investor
whereby it demanded the return of the 2,500,000 Shares and certain of the Series
B convertible preferred stock. Since then, 100% of the Common Stock and 100% of
the Series B convertible preferred stock has been returned to the Company. On
September 25, 1997 the Company issued 35,000 Shares to Bruce and Linda Goldman,
the principals of LNB, as consideration for the $70,000 received from LNB. LNB
had access to relevant information, including financial, concerning the Company
and as such, the securities were issued pursuant to Section 4(2) of the
Securities Act.
In May 1996, the Company issued warrants to purchase an aggregate of
450,000 Shares (the "Armand Warrants") in consideration for certain business,
advisory and consulting services performed by the Armand Group Ltd. on behalf of
the Company. The Armand Group is an accredited investor and had access to all
relevant information concerning the Company and thus, these Armand Warrants were
issued pursuant to Section 4(2) of the Securities Act.
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In June 1996, the Company issued 16,553 Shares each to Dr. John C.
Kelly and to Mr. Douglas Swanson, each a Director of the Company for Shares
which would have been issued to them from XRF Corporation (the predecessor of
the Company) before it merged with the Company. Inasmuch as each of such persons
were either accredited or otherwise qualified investors, or had a pre-existing
relationships with the Company and had access to relevant information concerning
the Company, the issuance of such securities was exempt from the registration
requirement of the Securities Act pursuant to the exemption set forth in Section
4(2) and of the Securities Act.
Pursuant to a private offering of certain of the Company's securities
in July 1996 (the "July 1996 Offering"), the Company issued an aggregate of 60
units at $25,000 per unit to a limited group of accredited and otherwise
qualified investors based on their financial resources and knowledge of
investments. In addition, each of the investors was provided with information
and had access to relevant information concerning the Company. Accordingly, the
issuance of the securities was exempt from the registration requirements of the
Securities Act pursuant to the exemption set forth in Section 4(2) and Rule 506
of the Securities Act. Each unit consisted of (i) a $25,000 Note and (ii)
warrants to purchase 12,500 Shares exercisable at $3.00 per share through
December 15, 1998. Investors included Janet Gookin and Brandon Wilson, the
sister and nephew of Greg Johnson, the Company's CEO and Chairman of the Board,
who purchased .13 units for $3,252; Dr. John C. Kelly, a former Director of the
Company, who purchased 1.320 units for $33,000; and Ruth Swanson, the mother of
Douglas Swanson, a principal stockholder of the Company who purchased .8 units
for $20,000. The Company received gross cash proceeds of $1,386,000, and a total
of $114,000 in other forms of consideration, of which (i) $35,000 was in
satisfaction of certain funds loaned to the Company by an unrelated third party,
(ii) $50,000 was in exchange for a portion of the Company's lease obligations
for its facility, and (iii) $29,000 was in consideration for certain business,
advisory and other consulting services performed on behalf of the Company.
Warrants to purchase 375,000 shares of common stock were also issued in
connection with this transaction.
Between July 1, 1994 and December 31, 1997, the Company issued an
aggregate of 128,932 Shares to certain persons in connection with certain
business, advisory and other consulting services performed by each of them on
behalf of the Company. Inasmuch as each of the consultants had a pre-existing
relationship with the Company and access to relevant information concerning the
Company, the issuance of such securities was exempt from the registration
requirements of the Securities Act pursuant to the exemption set forth in
Section 4(2) of the Securities Act.
On May 1, 1996, the Company entered into an Agreement and Plan of
Reorganization (the "May Agreement") with Visual Listings, Inc. ("VLI"), a
California corporation pursuant to a plan of reorganization whereby in exchange
for all of the issued and outstanding capital stock of VLI, the Company issued
an aggregate of 280,000 Shares of the Company, subject to adjustments. These
shares were issued to a limited group of accredited or otherwise qualified
investors based on their financial resources and knowledge of investments. In
addition, each of the stockholders were provided with information and had access
to relevant information concerning the Company. Accordingly, the issuance of the
shares was exempt from the registration requirements of the Securities Act
pursuant to the exemption set forth in Section 4(2) of the Securities Act. The
stockholders of VLI included, among others, John Giaimo, the Company's
President, Chief
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Operating Officer and a Director and Mr. Giaimo's wife, Melinda. The closing
occurred on May 8, 1996. The May Agreement provided that in the event the
Company transfers or sells its interest in VLI prior to May 2001, John Giaimo
shall have the right of first refusal to match any such offer.
In June 1996, the Company issued an aggregate of 32,903 Shares in
consideration for loans made by The Pacific Acquisition Group, Inc. ("PAG") and
a limited number of accredited or otherwise qualified investors based on their
financial resources and knowledge of investments in an aggregate amount of
$113,000 plus interest accruing at 11% per annum. In addition, each of the
investors were provided with information and had access to relevant information
concerning the Company. Accordingly, the issuance of the Shares was exempt from
the registration requirements of the Securities Act pursuant to the exemption
set forth in Section 4(2) of the Securities Act. On August 19, 1996, the Company
satisfied all of the obligations described herein..
In August 1996, options to purchase 10,000 shares of the Company's
Common Stock were exercised by an option holder for which the Company
received $20,000. Inasmuch as the option holder had a pre-existing relationship
with the Company and access to relevant information concerning the Company, the
issuance of such securities was exempt from the registration requirements of the
Securities Act pursuant to the exemption set forth in Section 4(2) of the
Securities Act.
In August 1996, the Company sold a total of 300,000 Shares whereby the
Company received gross proceeds of $600,000 pursuant to two stock purchase
agreements. The purchasers were considered to be accredited or otherwise
qualified investors based on their financial resources and knowledge of
investments. In addition, each of the investors were provided with information
and had access to relevant information concerning the Company. Accordingly, the
issuance of the shares was exempt from the registration requirements of the
Securities Act pursuant to the exemption set forth in Section 4(2) of the
Securities Act
In September 1996, the Company issued 94,000 shares of the Company's
Common Stock to two consultants, pursuant to agreements whereby the consultants
are to provide for certain business, advisory and other consulting services on
behalf of the Company. Inasmuch as the consultants had a pre-existing
relationships with the Company and access to relevant information concerning the
Company, the issuance of such securities was exempt from the registration
requirements of the Securities Act pursuant to the exemption set forth in
Section 4(2) of the Securities Act.
In September 1996, the Company issued warrants to purchase an aggregate
of 50,000 Shares to a consultant in consideration for certain financial advisory
services performed by the consultant on behalf of the Company. Inasmuch as the
option holder had a pre-existing relationship with the Company and access to
relevant information concerning the Company, the issuance of such securities was
exempt from the registration requirements of the Securities Act pursuant to the
exemption set forth in Section 4(2) of the Securities Act.
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The Company issued an aggregate of 23.24 units at $25,000 per unit in
connection with a private offering of certain of the Company's securities in
October 1996 (the "October 1996 Offering"). These units were issued to a limited
group of accredited or otherwise qualified investors based on their financial
resources and knowledge of investments. In addition, each of the investors were
provided with information and had access to relevant information concerning the
Company. Accordingly, the issuance of the shares was exempt from the
registration requirements of the Securities Act pursuant to the exemption set
forth in Section 4(2) of the Securities Act. Each unit consisted of a $25,000
promissory note, convertible into Common Stock at $2.00 per Share, and warrants
to purchase 6,250 Shares exercisable at $3.00 per share through December 15,
1998. The Company received gross proceeds of $581,000.
In October 1996, the Company issued 16,695 Shares at $6.50, in
connection with the acquisition of certain technology. Inasmuch as the seller
had a pre-existing relationship with the Company and access to relevant
information concerning the Company, the issuance of such securities was exempt
from the registration requirements of the Securities Act pursuant to the
exemption set forth in Section 4(2) of the Securities Act.
In December 1996, the Company issued 13,897 Shares as payment of
accrued interest, at the option of the debt holders, on a portion of the
outstanding Convertible Redeemable Promissory Notes issued in both the July 1996
Offering and the October 1996 Offering. These shares were issued to a limited
group of accredited or otherwise qualified investors based on their financial
resources and knowledge of investments. Accordingly, the issuance of the shares
was exempt from the registration requirements of the Securities Act pursuant to
the exemption set forth in Section 4(2) of the Securities Act.
In February 1997, Griffin Partners exercised the Armand Warrants for
150,000 shares of common stock at $1.75 per share. Griffin Partners is an
accredited investor and had access to all relevant information concerning the
Company and thus, these securities were issued pursuant to Section 4(2) of
the Securities Act.
Between June 1997, and November 1997, convertible redeemable
promissory note holders converted approximately $1,800,000 of debt and accrued
interest into 885,367 Shares. These holders had access to or otherwise were
provided with information, including financial, of the Company and accordingly,
the securities were exempt from the registration requirements pursuant to the
exemption set forth in Section 4(2) of the Securities Act.
In August 1997, the Company sold a total of 100,000 Shares to three
investors whereby the Company received gross proceeds of $300,000. Warrants to
purchase an aggregate of 100,000 shares, exercisable for three years, at $3.00
per share, were also issued to these investors. The purchasers were considered
to be accredited or otherwise qualified investors based on their financial
resources and knowledge of investments. In addition, each of the investors were
provided with information and had access to relevant information concerning the
Company. Accordingly, the issuance of the shares was exempt from the
registration requirements of the Securities Act pursuant to the exemption set
forth in Section 4(2) of the Securities Act.
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In August 1997, the Company issued 12,934 Shares to employees as
compensation for a temporary salary decrease. Inasmuch as the employees had a
pre-existing relationship with the Company and access to relevant information
concerning the Company, the issuance of such securities was exempt from the
registration requirements of the Securities Act pursuant to the exemption set
forth in Section 4(2) of the Securities Act.
During September and October 1997, employees exercised options to
purchase 23,100 Shares at option prices from $2.00 per share to $5.62 per share
whereby the Company received gross proceeds of $124,300. Inasmuch as the
employees had a preexisting relationship with the Company and access to relevant
information concerning the Company, the issuance of such securities was exempt
from the registration requirements of the Securities Act pursuant to the
exemption set forth in Section 4(2) of the Securities Act.
During October 1997, Thomas Payne, a principal of CB Consulting and a
consultant to the Company, exercised his option to purchase 70,000 Shares at
$3.00 per share, with the Company receiving $210,000 in gross proceeds. Inasmuch
as the option holder had a pre-existing relationship with the Company and access
to relevant information concerning the Company, the issuance of such securities
was exempt from the registration requirements of the Securities Act pursuant to
the exemption set forth in Section 4(2) of the Securities Act.
During November 1997, one investor purchased 40,000 Shares for
$120,000 and a second investor purchased 50,000 Shares for $150,000. Inasmuch as
the investors had a preexisting relationship with the Company and access to
relevant information concerning the Company, the issuance of such securities was
exempt from the registration requirements of the Securities Act pursuant to the
exemption set forth in Section 4(2) of the Securities Act.
During December 1997, two investors purchased 20,000 Shares for
$60,000. Warrants to purchase 20,000 shares, exercisable for three years, at
$2.50 per share, were also issued in this transaction. The investors were
considered to be accredited or otherwise qualified investors based on their
financial resources and knowledge of investments. In addition, each of the
investors were provided with information and had access to relevant information
concerning the Company. Accordingly, the issuance of the shares was exempt from
the registration requirements of the Securities Act pursuant to the exemption
set forth in Section 4(2) of the Securities Act.
During December 1997, Mr. William Tomerlin, the former Chairman of the
Board and principal stockholder of the Company who is also a beneficial owner of
more than 5% of the outstanding securities of the Company, purchased 134,500
shares of Series A Preferred Stock for $269,000. Inasmuch as Mr. Tomerlin had a
pre-existing relationship with the Company and access to relevant information
concerning the Company, the issuance of such securities was exempt from the
registration requirements of the Securities Act pursuant to the exemption set
forth in Section 4(2) of the Securities Act.
During December 1997, an investor was issued 45,000 shares of Series A
Preferred Stock as consideration for satisfying $90,819 of the Company's debt
and accrued interest owed to a note holder. Inasmuch
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as the investor had a pre-existing relationship with the Company and access to
relevant information concerning the Company, the issuance of such securities was
exempt from the registration requirements of the Securities Act pursuant to the
exemption set forth in Section 4(2) of the Securities Act.
In September 1997 and January 1998, the Company issued warrants to
purchase 19,000 shares of common stock, exercisable for three years, at $3.50
per share, in connection with a loan made to the Company. Inasmuch as the lender
had access to relevant information concerning the Company, the issuance of these
warrants was exempt from the registration requirements of the Securities Act by
reason of Section 4(2) thereof.
During February 1998 Mr. William Tomerlin, the former Chairman of the
Board and principal stockholder of the Company who is also a beneficial owner of
more than 5% of the outstanding securities of the Company, converted 150,000
shares of his Series A Preferred Stock into 300,000 common shares. Inasmuch as
Mr. Tomerlin had a pre-existing relationship with the Company and access to
relevant information concerning the Company, the issuance of such securities was
exempt from the registration requirements of the Securities Act pursuant to the
exemption set forth in Section 4(2) of the Securities Act.
During February 1998, the Company issued warrants to purchase 150,000
shares, exercisable at $1.47 per share, to a public relations firm as partial
consideration for services rendered. The warrants expire on various dates
between September 28, 1998 and October 30, 2001. 17,001 of these warrants were
exercised in February 1998. Inasmuch as this firm had a preexisting relationship
with the Company and was provided access to relevant information concerning the
Company, the issuance of these securities was exempt from the registration
requirements of the Securities Act by reason of Section 4(2) thereof.
During March 1998, the Company issued a three year warrant to purchase
75,000 shares of common stock, exercisable at $3.00 per share, for a purchase
price of $5,000. The purchaser was accredited or otherwise had such experience
in financial and business matters so that he was able to evaluate the risks and
merits of an investment in the Company, and was provided access to relevant
information concerning the Company. The investor also had a pre-existing
business relationship with the Company. Accordingly, this transaction was exempt
from the registration requirements of the Securities Act by reason of Section
4(2) thereof and the rules and regulations thereunder.
Between April 30, 1998 and May 15, 1998, the Company issued 458,000
shares of common stock and warrants to purchase 45,800 shares of common stock at
$2.00 per share, for a period of three years. These securities were sold to 13
individuals or entities for an aggregate of $916,000. Each of the investors was
provided with information and had access to relevant information concerning the
Company. Accordingly, the issuance of these securities was exempt from the
registration requirements of the Securities Act pursuant to the exemption set
forth in Section 4(2) of the Securities Act.
No underwriters were involved in any of the transactions described
above, nor were any commissions paid in connection therewith except as indicated
above.
ITEM 5: INDEMNIFICATION OF OFFICERS AND DIRECTORS
Section 78.751 of the Nevada General Corporation Law, provides as
follows:
1. A corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative,
except an action by or in the right of the corporation, by reason of the fact
that he is or was a Director, officer, employee or agent of the corporation, or
is or was serving at the request of the corporation as a Director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise, against expenses, including attorneys' fees, judgments, fines
and amounts paid in settlement actually and reasonably incurred by him in
connection with the action, suit or proceeding if he acted in good faith and in
a manner which he reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent, does not, of
itself, create a presumption that the person did not act in good faith and in a
manner which he reasonably believed to be in or not opposed to the best
interests of the corporation, and that, with respect to any criminal action or
proceeding, he had reasonable cause to believe that his conduct was unlawful.
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2. A corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the corporation to procure a judgment in its favor by
reason of the fact that he is or was a Director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
Director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against expenses, including amounts paid in
settlement and attorneys' fees actually and reasonably incurred by him in
connection with the defense or settlement of the action or suit if
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he acted in good faith and in a manner which he reasonably believed to be in or
not opposed to the best interests of the corporation. Indemnification may not be
made for any claim, issue or matter as to which such a person has been adjudged
by a court of competent jurisdiction, after exhaustion of all appeals therefrom,
to be liable to the corporation or for amounts paid in settlement to the
corporation, unless and only to the extent that the court in which the action or
suit was brought or other court of competent jurisdiction determines upon
application that in view of all the circumstances of the case, the person is
fairly and reasonably entitled to indemnity for such expenses as the court deems
proper.
3. To the extent that a Director, officer, employee or agent of a
corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in subsections 1 and 2, or in defense of
any claim, issue or matter therein, he must be indemnified by the corporation
against expenses, including attorneys' fees, actually and reasonably incurred by
him in connection with the defense.
4. Any indemnification under subsections 1 and 2, unless ordered by a
court or advanced pursuant to subsection 5, must be made by the corporation only
as authorized in the specific case upon a determination that indemnification of
the Director, officer, employee or agent is proper under the circumstances. The
determination must be made:
(a) By the stockholders;
(b) By the board of Directors by majority vote of a quorum
consisting of Directors who were not parties to the act, suit or proceeding;
(c) If a majority vote of a quorum consisting of Directors who
were not parties to the act, suit or proceeding so orders, by independent legal
counsel in a written opinion; or
(d) If a quorum consisting of Directors who were not parties
to the act, suit or proceeding cannot be obtained, by independent legal counsel
in a written opinion.
5. The articles of incorporation, the bylaws or an agreement made by
the corporation may provide that the expenses of officers and Directors incurred
in defending a civil or criminal action, suit or proceeding must be paid by the
corporation as they are incurred and in advance of the final disposition of the
action, suit or proceeding, upon receipt of an undertaking by or on behalf of
the Director or officer to repay the amount if it is ultimately determined by a
court of competent jurisdiction that he is not entitled to be indemnified by the
corporation. The provisions of this subsection do not affect any rights to
advancement of expenses to which corporate personnel other than Directors or
officers may be entitled under any contract or otherwise by law.
6. The indemnification and advancement of expenses authorized in or
ordered by a court pursuant to this section:
32
<PAGE>
(a) Does not exclude any other rights to which a person
seeking indemnification or advancement of expenses may be entitled under the
articles of incorporation or any bylaw, agreement, vote of stockholders or
disinterested Directors or otherwise, for either an action in his official
capacity or an action in another capacity while holding his office, except that
indemnification, unless ordered by a court pursuant to subsection 2 or for the
advancement of expenses made pursuant to subsection 5, may not be made to or on
behalf of any Director or officer if a final adjudication establishes that his
acts or omissions involved intentional misconduct, fraud or a knowing violation
of the law and was material to the cause of action.
(b) Continues for a person who has ceased to be a Director,
officer, employee or agent and inures to the benefit of the heirs, executors and
administrators of such a person.
Article IX of the Company's Revised Bylaws provides as
follows:
Every person who was or is a party or is threatened to be made a party
to or is involved in any action, suit or proceeding, whether civil,
criminal, administrative or investigative, by reason of the fact that
he or a person of whom he is the legal representative is or was a
Director or officer of the Corporation or is or was serving at the
request of the Corporation or for its benefit as a Director or officer
of another corporation, or as its representative in a partnership,
joint venture, trust or other enterprise, shall be indemnified and held
harmless to the fullest extent legally permissible under the General
Corporation Law of the State of Nevada from time to time against all
expenses, liability and loss (including attorneys' fees, judgments,
fines and amounts paid or to be paid in settlement) reasonably incurred
or suffered by him in connection therewith. Such right of
indemnification shall be a contract right which may be enforced in any
manner desired by such person. Such right of indemnification shall not
be exclusive of any other right which such Directors, officers or
representatives may have or hereafter acquire and, without limiting the
generality of such statement, they shall be entitled to their
respective rights of indemnification under any by-law, agreement, vote
of Shareholders, provision of law or otherwise, as well as their rights
under this Article.
The Board of Directors may cause the Corporation to purchase and
maintain insurance on behalf of any person who is or was a Director or
officer of the Corporation, or is or was serving at the request of the
Corporation as a Director or officer of another corporation, or as its
representative in a partnership, joint venture, trust or other
enterprise against any liability asserted against such person and
incurred in any such capacity or arising out of such status, whether or
not the Corporation would have the power to indemnify such person.
The indemnification provisions above provided shall include, but not be
limited to, reimbursement of all fees, including amounts paid in
settlement and attorneys' fees actually and reasonably incurred, in
connection with the defense or settlement of any
33
<PAGE>
action or suit if such party to be indemnified acted in good faith and
in a matter reasonably believed to be in or not opposed to the best
interests of the Corporation. Indemnification may not be made for any
claim, issue or matter as to which the person claiming after exhaustion
of all appeals therefrom to be liable to the Corporation or for amounts
paid in settlement to the Corporation unless and only to the extent
that the court in which the action or suit was brought or other court
of competent jurisdiction determines upon application that the person
is fairly and reasonably entitled to indemnify for such expenses as the
court deems proper.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to Directors, officers or persons controlling the
Company pursuant to the foregoing provisions, the Company has been informed
that, in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as express in the act and is therefore
unenforceable.
PART F/S
FINANCIAL STATEMENTS AND EXHIBITS
The following unaudited Financial Statements for the Company include
the audited balance sheet as of June 30, 1997 and the unaudited balance sheet as
of March 31, 1998, the unaudited statements of income for the nine months ending
March 31, 1998 and 1997 and the three months ending March 31, 1998 and 1997, the
unaudited statements of stockholders' equity (deficit) for the nine months ended
March 31, 1998 and 1997, and the unaudited statements of cash flows for the nine
months ending March 31, 1998 and 1997. The following audited Financial
Statements for the Company include the reports of independent certified public
accountants for the years ended June 30, 1997 and 1996, audited balance sheet as
of June 30, 1997 and the related audited statements of income, changes in
Shareholders' deficit and cash flows for each of the years in the two year
period ended June 30, 1997.
34
<PAGE>
HomeSeekers.com, Inc. (Formerly NDS Software, Inc.)
Consolidated Balance Sheets
<TABLE>
<CAPTION>
(Unaudited) (Audited)
March 31, June 30,
1998 1997
------------- -----------
<S> <C> <C>
ASSETS
Current Assets:
Cash $ 119,768 $ 32,222
Accounts receivables, net of allowance for uncollectible
accounts of $4,413 in 1998 and $4,413 in 1997 235,731 99,826
Inventories 57,070 2,951
Prepaid expenses 14,604 -
------------- -----------
Total current assets 427,173 134,999
Investments - 477,225
Account receivable - related party (to be converted into cash beyond
twelve months) 484,197
Property and equipment, net 455,577 433,711
Goodwill, net of accumulated amortization of $249,278 in 1998 and
$148,797 in 1997 429,783 488,899
Investments in related businesses 557,394 -
Other assets 28,664 35,640
------------- -----------
$ 1,898,591 $ 2,054,671
============= ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 312,886 403,128
Accrued liabilities 319,971 491,893
Current portion of capital lease obligations - 16,799
Notes payable 34,698 150,616
Notes payable - related parties 37,075 157,103
Deferred revenue 1,221,177 1,213,744
------------- -----------
Total Current liabilities 1,925,807 2,433,283
Convertible debt 377,500 2,056,000
Stockholders' deficit:
Class 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 692 663
Class 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 4,606
Additional paid-in capital 9,936,582 5,334,895
Accumulated deficit (9,530,161) (7,574,001)
Unrealized loss on securities (700,000) (330,775)
Dividends on Series A convertible preferred stock (118,725) -
------------- -----------
Total stockholders' equity (deficit) (404,716) (2,434,612)
------------- -----------
$ 1,898,591 $ 2,054,671
============= ===========
</TABLE>
See accompanying notes.
F-1
<PAGE>
HomeSeekers.com, Inc. (Formerly NDS Software, Inc.)
Consolidated Statements of Operations
UNAUDITED
<TABLE>
<CAPTION>
For the Quarter For the Nine Months
ended March 31, ended March 31,
1998 1997 1998 1997
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net Sales $ 581,195 $ 280,360 $ 1,178,135 $ 993,927
Cost of sales 109,228 59,674 213,657 122,254
--------------- --------------- --------------- ---------------
Gross Profit 471,967 220,686 964,478 871,673
Selling, general and admin. expenses 1,123,880 746,805 2,809,636 2,296,049
--------------- --------------- --------------- ---------------
Net loss from operations (651,913) (526,120) (1,845,158) (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 (676,307) (594,561) (1,956,105) (1,612,843)
Provision for income taxes - 1,177 55 1,177
--------------- --------------- --------------- ---------------
Net loss $ (676,307) $ (595,739) $(1,956,160) $(1,614,021)
=============== =============== =============== ===============
Net loss per common share ($0.11) ($0.13) ($0.34) ($0.36)
=============== =============== =============== ===============
Shares used in per share calculations 6,395,886 4,511,369 5,750,779 4,426,022
=============== =============== =============== ===============
</TABLE>
See accompanying notes.
F-2
<PAGE>
HomeSeekers.com, Inc. (Formerly NDS Software, Inc.)
Consolidated Statements of Stockholders' Deficit
UNAUDITED
<TABLE>
<CAPTION>
Series A Series B
Preferred Stock Preferred Stock Common Stock Additional
------------------ ----------------- ------------------- 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
Unrealized Loss on WebQuest Stock
Stock issued as collateral in LLC
Net loss
--------- -------- ------- ---------- --------- -------- ------------
Balance at March 31, 1998 692,000 $ 692 - $ - 6,895,742 $ 6,896 $ 9,936,582
========= ======== ======= ========== ========= ======== ============
See accompanying notes.
(RESTUBBED TABLE)
Receivable Unrealized Dividends on
from Loss on Accumulated Series A
Stockholder Securities Deficit Preferred Stock Total
------------- ------------ ----------- --------------- -----
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 - 1,531,396
Issuance of common stock for
stock options exercised - 379,500
Conversion of convertible debt and
accrued interest to common - 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
Unrealized Loss on WebQuest Stock (700,000) (700,000)
Stock issued as collateral in LLC -
Net loss (1,956,160) (1,956,160)
----------- ----------- ----------- ----------- ------------
Balance at March 31, 1998 $ - $ (700,000) $(9,530,161) $ (118,725) $ (404,716)
=========== =========== =========== =========== ============
</TABLE>
See accompanying notes.
F-3
<PAGE>
HomeSeekers.com, Inc. (Formerly NDS Software, Inc.)
Consolidated Statements of Cash Flows
Nine months ended March 31,
UNAUDITED
<TABLE>
<CAPTION>
1998 1997
-------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,956,160) $ (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) -
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 (284,234) 152,557
-------------- ---------------
Net adjustments (162,200) 242,639
-------------- ---------------
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.
F-4
<PAGE>
HomeSeekers.com, Inc. (Formerly 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.
F-5
<PAGE>
HomeSeekers.com, Inc. (Formerly 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.
F-6
<PAGE>
HomeSeekers.com, Inc. (Formerly NDS Software, Inc.)
Notes To Consolidated Financial Statements
March 31, 1998 and 1997
1. Description of Business and Financing Requirements
These financial statements include all adjustments that in the opinion of
management are necessary in order to make the financial statements not
misleading.
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.
NDS changed its name to HomeSeekers.com, Inc. on July 1, 1998.
F-7
<PAGE>
HomeSeekers.com, Inc. (Formerly 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 $1,956,160
for the nine months ending March 31, 1998. The Company has an accumulated
deficit of $9,530,161 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".
F-8
<PAGE>
HomeSeekers.com, Inc. (Formerly 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, 43% of the Company's revenues were received from one
customer from the sale of customer leads.
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.
F-9
<PAGE>
HomeSeekers.com, Inc. (Formerly 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.
F-10
<PAGE>
HomeSeekers.com, Inc. (Formerly 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.
F-11
<PAGE>
HomeSeekers.com, Inc. (Formerly 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.
F-12
<PAGE>
HomeSeekers.com, Inc. (Formerly 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
On January 16, 1998, the Company entered into a Limited Liability Company
("LLC") with a 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.
F-13
<PAGE>
HomeSeekers.com, Inc. (Formerly 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%.
F-14
<PAGE>
HomeSeekers.com, Inc. (Formerly 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.
F-15
<PAGE>
HomeSeekers.com, Inc. (Formerly 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
Class A, 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 Class 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 Class A preferred stock.
Class 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. Class B convertible
preferred stock is not entitled to the voting rights of common stock.
F-16
<PAGE>
HomeSeekers.com, Inc. (Formerly NDS Software, Inc.)
Notes To Consolidated Financial Statements
March 31, 1998 and 1997
(Continued)
10. Stockholders' Equity (Deficit) (continued)
Preferred Stock (continued)
The Board of Directors has authorized the creation of a class of Preferred
Stock, $0.001 par value per share, $10.00 stated value per share, denominated as
Class C $10 6% Cumulative Preferred Stock ("Class C Preferred Stock"). The Class
C Preferred Stock consists of 400,000 shares, none of which have been issued or
are outstanding. Dividends on the Class C Preferred Stock are payable, in
arrears, at the rate of 6% per annum. Holders of Class C Preferred Stock are not
entitled to voting rights. The Class C Preferred Stock is entitled to a
liquidation preference of $10.00 per share, which preference is payable pari
passu with the liquidation preference payable to holders of the Series A
Preferred Stock and Class B Preferred Stock. Each share of Class C Preferred
Stock is convertible into shares of common stock at the greater of $3.00 per
share or 75% of the average closing bid price of the common stock for the five
trading days prior to issuance. The Class C Preferred Stock is also
automatically convertible into common stock at the closing of any future public
offering of the Company's securities.
As of March 31, 1998, $118,725 in dividends have been declared, and paid in the
form of common stock, on Class A convertible preferred stock. No dividends have
been declared or paid on Class B convertible preferred stock or on Class C
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.
F-17
<PAGE>
HomeSeekers.com, Inc. (Formerly NDS Software, Inc.)
Notes To Consolidated Financial Statements
March 31, 1998 and 1997
(Continued)
11. 1996 Stock Option Plan (continued)
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:
Nine Month Period Ended March 31,
---------------------------------
1998 1997
---- ----
Net Income (Loss)
-----------------
As reported $ (1,956,160) $ (1,614,021)
============= =============
Pro forma $ (4,244,931) $ (5,899,055)
============= =============
Primary Earnings Per Share
--------------------------
As reported $ (.34) $ (.36)
============= =============
Pro forma $ (.74) $ (1.33)
============= =============
Fully Diluted Earnings Per Share
--------------------------------
As reported $ (.34) $ (.36)
============= =============
Pro forma $ (.74) $ (1.33)
============= =============
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.
F-18
<PAGE>
HomeSeekers.com, Inc. (Formerly 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>
F-19
<PAGE>
HomeSeekers.com, Inc. (Formerly NDS Software, Inc.)
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>
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>
F-20
<PAGE>
HomeSeekers.com, Inc. (Formerly NDS Software, Inc.)
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,
$30,479
1998
1999 115,422
2000 24,392
----------
$170,293
Minimum lease payments
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.
F-21
<PAGE>
HomeSeekers.com, Inc. (Formerly NDS Software, Inc.)
Notes To Consolidated Financial Statements
March 31, 1998 and 1997
(Continued)
14. Restated Financial Statements
Related Party Transaction
In previously published financial statements as of March 31, 1998, the Company
recorded common stock it received as partial payment for services rendered from
WebQuest International, Inc. ("WebQuest"), a related party. The Company has also
received $658,000 in cash from WebQuest for services from January 1997 through
August 1998. The common stock was 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 still not trading on any stock
exchange or over-the-counter ("OTC") market as of August 31, 1998. Therefore,
Company management has reversed this non-cash transaction.
This restatement resulted in a reduction in sales and in increases in net losses
for the nine months ending, and the three months ending March 31, 1998 of
$685,000 ($.12 per share) and $160,000 ($.03 per share), respectively.
Investments of $700,000, included in current assets, was reduced to zero,
deferred revenue included in current liabilities was increased by $685,000 and
the $700,000 value of the stock was recorded as an "Unrealized loss on
securites" in stockholders' deficit.
WebQuest has filed its Form 10-SB, Amendment number 1 with the Securities and
Exchange Commission, and has represented to Company management that this stock
will be traded on the NASD's Over the Counter Bulletin Board soon. The Company
will recognize the $700,000 of revenue when the stock becomes a marketable
asset.
F-22
<PAGE>
Index to Consolidated Financial Statements
Report of Independent Certified Public Accountants on June 30,
1997, financial statements ........................................ F-24
Report of Independent Certified Public Accountants on June 30,
1996, financial statements......................................... F-25
Consolidated Balance Sheet at June 30, 1996 and 1997.................. F-26
Consolidated Statements of Operations for the years ended June 30,
1996 and 1997....................................................... F-27
Consolidated Statements of Stockholders' Deficit for the years ended
June 30, 1996 and 1997.............................................. F-28
Consolidated Statements of Cash Flows for the years ended June 30,
1996 and 1997....................................................... F-29-F-30
Notes to Consolidated Financial Statements............................ F-31-F-51
F-23
<PAGE>
Report of Independent Certified Public Accountants
--------------------------------------------------
To the Board of Directors and Stockholders of NDS Software, Inc.:
We have audited the accompanying consolidated balance sheet of NDS Software,
Inc. (a Nevada corporation) as of June 30, 1997, and the related consolidated
statements of operations, stockholders' deficit, 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 audits. The financial statements of NDS Software, Inc.
for the year ended June 30, 1996, were audited by other auditors whose report
thereon, dated August 31, 1996, expressed a qualified opinion due to a going
concern uncertainty.
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 reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of NDS Software, Inc.
as of June 30, 1997, and the consolidated results of its operations and its
consolidated cash flows for the year then ended in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 1, the Company's ability
to generate sufficient cash flows to meet its obligations and sustain its
operations, either through future revenues and/or additional debt or equity
financing, cannot be determined at this time. These uncertainties raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ Albright, Persing & Associates, Ltd.
- ----------------------------------------
Reno, Nevada
November 13, 1997
F-24
<PAGE>
Report of Independent Certified Public Accountants
--------------------------------------------------
To the Board of Directors and Stockholders
of NDS Software, Inc.
We have audited the accompanying consolidated balance sheet of NDS Software,
Inc. (a Nevada corporation) as of June 30, 1996, and the related consolidated
statements of operations, stockholders' deficit, and cash flows for the years
ended June 30, 1995 and 1996. 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 reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of NDS Software, Inc.
as of June 30, 1996, and the consolidated results of its operations and its
consolidated cash flows for the years ended June 30, 1995 and 1996 in conformity
with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 1, the Company's ability
to generate sufficient cash flows to meet its obligations and sustain its
operations, either through future revenues and/or additional debt or equity
financing, cannot be determined at this time. These uncertainties raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ Grant Thornton LLP
- ------------------------
Reno, Nevada
August 31, 1996 (except for notes 10 and
13, as to which the date is October 9,1996)
F-25
<PAGE>
<TABLE>
<CAPTION>
NDS Software, Inc.
Consolidated Balance Sheets
June 30,
1997 1996
-------------------------------
ASSETS
<S> <C> <C>
Current Assets:
Cash $ 32,222 $ 165,769
Accounts receivables, net of allowance for uncollectible accounts
of $4,413 in 1997 and -0- in 1996 99,826 56,269
Inventories 2,951 30,218
Prepaid expenses - 48,483
-------------------------------
Total current assets 134,999 300,739
Investments 477,225 -
Account receivable - related party (to be converted into cash beyond twelve months) 484,197 -
Property and equipment, net 433,711 327,593
Goodwill, net of accumulated amortization of $148,797 in 1997 and $21,257 in 1996 488,899 616,439
Other assets 35,640 22,670
-------------------------------
$ 2,054,671 $ 1,267,441
===============================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 403,128 $ 326,470
Accrued liabilities 491,893 297,268
Current portion of capital lease obligations 16,799 23,115
Notes payable 150,616 44,698
Notes payable - related parties 157,103 218,803
Deferred revenue 1,213,744 185,635
-------------------------------
Total Current liabilities 2,433,283 1,095,989
Convertible debt 2,056,000 1,461,748
Long-term portion of capital lease obligations - 16,800
Commitments - -
Stockholders' deficit:
Series A convertible preferred stock, $0.001 par value,
5,000,000 shares authorized; 662,500 shares issued and outstanding
at June 30, 1997 and 1996 663 663
Series B convertible preferred stock, $10.00 par value,
200,000 shares authorized; 13,000 shares issued and outstanding
at June 30, 1997 and 1996 130,000 130,000
Common stock, $.001 par value, 50,000,000 shares authorized;
4,605,815 shares and 4,258,723 shares issued and outstanding at
June 30, 1997 and 1996, respectively 4,606 4,258
Additional paid-in capital 5,334,895 4,510,078
Receivable from stockholder - (500,000)
Accumulated deficit (7,574,001) (5,452,095)
Unrealized loss on securities (330,775) -
-------------------------------
Total stockholders' deficit (2,434,612) (1,307,096)
-------------------------------
$ 2,054,671 $ 1,267,441
===============================
</TABLE>
F-26
<PAGE>
NDS Software, Inc.
Consolidated Statements of Operation
Years Ended June 30,
1997 1996
---- ----
Net Sales $1,589,658 $526,618
Cost of sales 223,624 87,170
----------- -----------
Gross Profit $1,366,034 $439,448
Operating expenses:
Selling, general and administrative 2,882,161 2,446,880
Research and development 339,072 192,645
----------- -----------
3,221,233 2,639,525
Net loss from operations ($1,855,199) ($2,200,077)
Other income (expense):
Interest expense (290,331) (119,390)
Other 23,624 7,508
----------- -----------
Loss before provision for income taxes ($2,121,906) ($2,311,959)
Provision for income taxes - -
Net loss ($2,121,906) ($2,311,959)
=========== ===========
Net loss per common share ($0.48) ($0.65)
=========== ===========
Shares used in per share calculations 4,438,333 3,548,232
F-27
<PAGE>
<TABLE>
<CAPTION>
NDS Software, Inc.
Consolidated Statements of Stockholders' Deficit
Series A Series B
Preferred Stock Preferred Stock Common Stock
--------------------------- ------------------------- ---------------------------
Shares Amount Shares Amount Shares Amount
------------- ------------ ----------- ------------ -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at July 1, 1995 $ 662,500 $ 663 - $ - 3,122,352 $ 3,122
Issuance of preferred stock - - 13,000 130,000 - -
Issuance of common stock - - - - 246,621 247
Issuance of common stock through
a private placement offering - - - - 250,000 250
Issuance of common stock through
a private placement offering - - - - 324,750 324
Issuance of common stock for purchase
of VLI - - - - 280,000 280
Issuance of common stock through
employment agreements - - - - 35,000 35
Net loss - - - - - -
------------- ------------ ----------- ------------ -------------- -----------
Balance at June 30, 1996 662,500 663 13,000 130,000 4,258,723 4,258
Issuance of common stock to vendors
for payment of goods/services - - - - 124,592 125
Issuance of common stock through
a private placement offering - - - - 200,000 200
Issuance of common stock for
stock options exercised. - - - - 10,000 10
Conversion of Debt and accrued interest
to common stock - - - - 12,500 13
Unrealized Loss on Securities - - - - - -
Net loss - - - - - -
------------- ------------ ----------- ------------ -------------- -----------
Balance at June 30, 1997 $ 662,500 $ 663 13,000 $ 130,000 4,605,815 $ 4,606
============= ============ =========== ============ ============== ===========
(TABLE CONTINUED)
Additional Receivable Unrealized
Paid in from Loss on Accumulated
Capital Stockholder Securities Deficit Total
--------------- --------------- --------------- ---------------- ----------------
Balance at July 1, 1995 $ 2,392,209 $ - $ - $ (3,140,136) $ (744,142)
Issuance of preferred stock - - - 130,000
Issuance of common stock 426,784
Issuance of common stock through - - 427,031
a private placement offering 499,750
Issuance of common stock through (500,000) - -
a private placement offering 628,150 - - 628,474
Issuance of common stock for purchase
of VLI 559,720 - - 560,000
Issuance of common stock through
employment agreements 3,465 - - 3,500
Net loss - - (2,311,959) (2,311,959)
---------------- --------------- --------------- --------------- ----------------
Balance at June 30, 1996 4,510,078 (500,000) - (5,452,095) (1,307,096)
Issuance of common stock to vendors
for payment of goods/services 387,540 - - 387,664
Issuance of common stock through
a private placement offering 362,300 500,000 - 862,500
Issuance of common stock for
stock options exercised. 19,990 - - 20,000
Conversion of Debt and accrued interest
to common stock 54,988 - - 55,000
Unrealized Loss on Securities - - (330,775) - (330,775)
Net loss - - - (2,121,906) (2,121,906)
--------------- ---------------- --------------- --------------- ----------------
Balance at June 30, 1997 $ 5,334,895 $ - $ (330,775) $ (7,574,001) $ (2,434,612)
=============== ================ =============== =============== ================
</TABLE>
F-28
<PAGE>
<TABLE>
<CAPTION>
NDS Software, Inc.
Consolidated Statements of Cash Flows
Years Ended June 30,
1997 1996
---------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (2,121,906) $ (2,311,959)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 263,923 99,401
Common stock issued for goods and services 287,665 497,863
Preferred stock issued for goods and services - 20,000
Convertible debt issued for goods and services - 32,510
Common stock received in exchange for services (298,000) -
Changes in operating assets and liabilities:
Trade receivables (527,754) (31,122)
Inventories 27,267 33,709
Prepaid expenses 48,483 1,517
Accounts payable 76,658 (157,646)
Accrued liabilities 194,625 135,933
Deferred revenue 518,109 (226,178)
---------------------------------
Net cash used in operating activities (1,530,930) (1,905,972)
---------------------------------
Cash flows from investing activities:
Purchase of property and equipment (138,915) (149,790)
Net change in other assets
(16,556) (10,996)
Cash received in acquisition and merger - 1,427
---------------------------------
Net cash used in investing activities (155,471) (159,359)
---------------------------------
Cash flows from financing activities:
Proceeds from convertible debt 619,252 1,347,748
Principal payments on capital lease obligations (23,116) (23,256)
Proceeds from notes payable - related parties 130,000 369,143
Payments on notes payable - related parties (191,700) (188,077)
Proceeds from notes payable 200,000 59,700
Payments on notes payable (94,082) (49,700)
Net proceeds from sale of common stock 912,500 561,143
Net proceeds from sale of preferred stock-series B - 70,000
(Increase) decrease in receivables from officers/stockholders - 67,241
---------------------------------
Net cash provided by financing activities 1,552,854 2,213,942
---------------------------------
Net (decrease) increase in cash (133,547) 148,611
Cash at beginning of year 165,769 17,158
---------------------------------
Cash at end of year $ 32,222 $ 165,769
=================================
</TABLE>
F-29
<PAGE>
NDS Software, Inc.
Consolidated Statements of Cash Flows - Continued
Years ended June 30,
1997 1996
------------------------
Supplemental disclosure of cash flow information:
Cash paid for interest $ 59,886 $ 71,898
=========== ===========
Supplemental disclosure of noncash investing and financing activities:
During 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. (Note 10).
During 1997, the Company issued 12,500 shares of common stock in redemption of a
convertible debt note in the amount of $25,000.
During 1997, the Company wrote down certain securities classified as
available-for-sale in the amount of $330,775.
During 1997, the Company issued 124,592 shares of common stock in exchange for
goods and services.
During 1996, the Company purchased all of the outstanding stock of Visual
Listings, Inc. by issuing 280,000 shares of common stock valued at $2 per share
in exchange for $38,379 in assets and $116,075 in liabilities.
During 1996, the Company issued 213,515 shares of common stock at $2 per share
for goods and services.
See accompanying notes.
F-30
<PAGE>
NDS Software, Inc.
Notes to Consolidated Financial Statements
June 30, 1997 and 1996
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.
Effective May 8, 1996, NDS acquired 100% of the outstanding stock of Visual
Listings, Inc. ("VLI") located in Brea, California. The acquisition of VLI has
been accounted for as a purchase which resulted in the Company recording
$637,696 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.
The consolidated financial statements include the accounts of NDS and its
division (the "Company"). All significant inter-company balance and transactions
have been eliminated in consolidation.
The Company has not yet generated significant revenue and has funded its
operation primarily through the issuance of equity and convertible debt.
Accordingly, the Company's 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's management is exploring several funding options and expects to raise
additional capital in 1998 and to continue to develop the Company's 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. The Company has an accumulated deficit of
$7,574,001 as of June 30, 1997.
F-31
<PAGE>
NDS Software, Inc.
Notes To Consolidated Financial Statements
June 30, 1997 and 1996
(Continued)
1. Description of Business and Financing Requirements (continued)
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.
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 which, at times, may exceed federally insured limits. At
June 30, 1997, substantially all of the accounts receivables are due from
customers within the real estate and related industries.
F-32
<PAGE>
NDS Software, Inc.
Notes to Consolidated Financial Statements
June 30, 1997 and 1996
(Continued)
2. Significant Accounting Policies (continued)
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. In addition,
approximately 47% of the Company's revenues were received from an agreement for
advertising with one customer for the year ended June 30, 1996. The customer has
not renewed the contract for subsequent years. Additionally, for the year ended
June 30, 1997, 32% of the Company's revenues were received from one customer
from an agreement to access the Company's customer list and 19% of the Company's
revenues were received from a related party for a one-time option payment for
the right to market software.
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.
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.
F-33
<PAGE>
NDS Software, Inc.
Notes To Consolidated Financial Statements
June 30, 1997 and 1996
(Continued)
2. Significant Accounting Policies (continued)
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 year ended June 30, 1997, the Company had $477,225 in available-for-sale
securities.
Inventory
Inventory is recorded at the lower of cost (first-in, first-out method) or
market and consists primarily of diskettes, manuals and packaging products.
Property and Equipment
Property and equipment are stated at cost. Depreciation is calculated using the
straight-line method over estimated useful lives of 5 years, or the lease term,
whichever is shorter.
F-34
<PAGE>
NDS Software, Inc.
Notes To Consolidated Financial Statements
June 30, 1997 and 1996
(Continued)
2. Significant Accounting Policies (continued)
Goodwill
The Company has classified as goodwill the cost in excess of fair value of the
net assets of VLI acquired in a purchase transaction. Goodwill is being
amortized on a straight-line method over 5 years. Amortization charged to
continuing operations amounted to $21,257 and $127,540 for the years ended June
30, 1996 and 1997, respectively. Accumulated amortization at June 30, 1997 was
$148,797. At each balance sheet date, the Company evaluates the realizability of
goodwill based upon expectations of nondiscounted cash flows and operating
results of VLI. Based upon its most recent analysis, the Company believes that
no material impairment of goodwill exists at June 30, 1997.
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.
Advertising
The Company periodically places advertisements in newspapers and magazines.
Costs of advertising are expensed when paid. Total advertising costs for the
years ended June 30, 1996 and 1997 were $197,116 and $49,045, respectively.
Net Loss Per Share
Net loss per share is based on the weighted 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.
F-35
<PAGE>
NDS Software, Inc.
Notes To Consolidated Financial Statements
June 30, 1997 and 1996
(Continued)
2. Significant Accounting Policies (continued)
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. The Company has disclosed the proforma
net loss and earnings per share effect, as if the Company had used the fair
value based method prescribed under SFAS No. 123 in Note 11.
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.
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.
The unaudited consolidated results of operations on a pro-forma basis as though
VLI had been acquired as of the beginning of the Company's fiscal year ended
June 30, 1996 are as follows:
1996
----
Net Sales $606,796
Net Loss (2,429,534)
Net Loss Per Common Share (0.68)
F-36
<PAGE>
NDS Software, Inc.
Notes To Consolidated Financial Statements
June 30, 1997 and 1996
(Continued)
4. Investments
Investments in securities are summarized as follows at June 30, 1997:
<TABLE>
<CAPTION>
Gross Gross
Unrealized Gain Unrealized Loss Fair Value
--------------- --------------- ----------
<S> <C> <C> <C>
Available for sale securities:
Common Stock $ - $(330,775) $477,225
================ ========== ========
</TABLE>
As of June 30, 1997, the Company has written down common stock it received as
payment for services rendered from $808,000 to $477,225. The common stock is
classified on the balance sheet as securities available-for-sale at its
estimated realizable value of $477,225 as of June 30, 1997. Stockholders' equity
as of June 30, 1997 includes an unrealized loss on available-for-sale securities
of $330,775. The Company may be issued additional shares in the future if
several conditions are met, which could have the effect of increasing the value
of these marketable investments back up to $808,000.
F-37
<PAGE>
NDS Software, Inc.
Notes to Consolidated Financial Statements
(Continued)
<TABLE>
<CAPTION>
5. Property and Equipment
Year End June 30,
Property and equipment consist of the following: 1997 1996
---- ----
<S> <C> <C>
Computer equipment $ 534,240 $ 398,037
Software 100,000 -
Furniture and office equipment 65,758 63,046
Leasehold improvements 13,542 13,542
Equipment under capital lease 68,758 68,9976
-------------- --------------
782,516 543,601
Less:
Accumulated depreciation and amortizatio (314,991) (195,989)
Accumulated amortization under capital l (33,814) (20,019)
-------------- --------------
$ 433,711 $ 327,593
============== ==============
6. Accrued Liabilities
Year End June 30,
Accrued liabilities consist of the following: 1997 1996
---- ----
<S> <C> <C>
Accrued payroll and related expenses $ 271,877 $ 125,889
Accrued consulting - 142,638
Other accrued liabilities 220,016 28,741
-------------- ---------------
$ 491,893 $ 297,268
-------------- ---------------
</TABLE>
F-38
<PAGE>
NDS Software, Inc.
Notes To Consolidated Financial Statements
June 30, 1997 and 1996
(Continued)
7. Notes Payable
On May 30, 1996, the Company issued a $44,698 short-term note payable to a
vendor in exchange for advertising services. The term of the note is one year
and includes simple interest at 12% per annum which is payable in monthly
installments beginning June 1, 1996. The entire principle amount of the note
became due and payable May 30, 1997 and was paid off in full subsequent to June
30, 1997.
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
During 1996, the Company received advances for working capital from certain
stockholders, officers, and directors totaling $120,000. The Company incurred
interest at rates between 10% and 18% on these advances. At June 30, 1997,
$120,000 remains outstanding to four stockholders.
During August and September of 1995, the Company issued $113,000 in promissory
notes to a group of investors in return for cash. Interest at 11% is payable
quarterly, commencing November 1, 1995. The notes and unpaid interest are due
August 1, 1996. The terms of the agreement call for a total loan commitment of
$250,000 as well as financial and business management advice for a two-year
period in return for 4.9% of the total of each and every type of stock which was
outstanding as of June 2, 1995 (estimated at a total of 156,800 shares). The
group of investors were able to raise only 113,000 of the committed $250,000.
Therefore, a pro-rata amount of 70,874 shares were issued, and any remaining
business relationship was terminated. The Company recognized consulting fees in
an amount equal to the fair market value of the stock issued, and accordingly,
$141,748 of consulting fees were charged to the results of operations for the
year ended June 30, 1996.
The Company has three notes payable to related parties totaling 37,103 at June
30, 1997, 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 June 30, 1997, the weighted average interest rate on all short-term
borrowings including related party borrowings was 12%. The Company incurred
$94,865 and $26,806 in related party interest expense for the years ended June
30, 1996, and 1997, respectively.
F-39
<PAGE>
NDS Software, Inc.
Notes To Consolidated Financial Statements
June 30, 1997 and 1996
(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. At June 30, 1996, the Company had placed approximately 58.47
units in the amount of $1,461,748. In July 1996, the Company completed the
placement and received an additional $38,252, resulting in the placement of all
60 units.
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. At June 30, 1997, the
Company had placed 23.24 units and received $581,000.
The Notes mature June 1, 1999 and accrue interest at 12% per annum payable
semi-annually beginning December 1, 1996. The Notes are 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 are 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 June 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 June 30, 1996,
Warrants to purchase 730,874 shares of the Company's common stock have been
issued to the note holders. In July 1996, the Company issued Warrants to
purchase an additional 19,126 shares of the Company's common stock in completion
of the placement.
F-40
<PAGE>
NDS Software, Inc.
Notes To Consolidated Financial Statements
June 30, 1997 and 1996
(Continued)
10. Stockholders' Deficit
Common Stock
As of June 30, 1997 the Company has reserved a total of 6,358,800 shares of
common stock pursuant to outstanding warrants, options, convertible preferred
stock and convertible redeemable promissory notes.
In November 1994, the Company commenced a Regulation D - Rule 504 offering under
the Securities Act of 1933 where it sold 180,000 shares of common stock at $2
per share producing net proceeds of $358,140, of which $6,000 was tendered in
services to the Company as of June 30, 1995. The offering was completed in
February 1996 when it sold 324,750 shares of common stock at $2 per share
producing net proceeds of $628,475 of which $67,332 was tendered in services to
the Company.
On October 19, 1995, the Company sold 250,000 shares of common stock in a
Regulation S offering under the Securities Act of 1933. The purchaser tendered
an international certificate of deposit in the amount of $500,000 that was to
mature on April 14, 1996. The bank defaulted on the certificate of deposit and
the Company made a demand of the purchaser for the full amount due or to return
the common stock issued. At June 30, 1996, the certificate of deposit was still
in default, and the Company converted the amount of the certificate of deposit
into a receivable from the shareholder. Subsequent to year end, the Company
recovered the common stock certificate from the stockholder and canceled the
offering.
Redeemable Common Stock Warrants
In May 1996, and in consideration for assisting the Company in raising at least
$2,500,000 in financing which included the convertible redeemable promissory
notes (Note 9) and placement of the certificate of deposit (discussed above),
the Company entered into a consulting agreement with a partnership to perform
business advisory services in exchange for three (3) redeemable warrants to
purchase 150,000 shares of common stock each, 50,000 shares of common stock and
$50,000. The warrants each have a five year life from the date of issuance and
are exercisable at $1.75, $3 and $4 per share. On February 12, 1997, this
partnership exercised 150,000 of these warrants at $1.75 per share.
F-41
<PAGE>
NDS Software, Inc.
Notes To Consolidated Financial Statements
June 30, 1997 and 1996
(Continued)
10. Stockholders' Deficit (continued)
Preferred Stock
Series A preferred stock has a par value of $.001 and is entitled to a
cumulative dividend, when declared, of 15% per annum based upon a value of $2
per share. At the option of the board of directors, each share of stock can be
redeemed at $2 per share or can be converted to common stock at a rate of one
share 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.
As of June 30, 1997, no dividends have been declared on the Series A or Series B
convertible preferred stock.
During fiscal year 1996 and as part of a financing arrangement with a private
company (the "Investor"), the Company issued 40,500 shares of Series B
convertible preferred stock to the investor for which it received $70,000 in
cash, $60,000 of other consideration and a $275,000 note receivable which was
not paid as of June 30, 1996. Additionally, the Company issued 2,500,000 shares
of the Company's common stock on August 25, 1995 to the investor as collateral
in exchange for fourteen weekly funding commitments of $135,000 each and a final
funding of $110,000, totaling $2,000,000. No funding occurred in conjunction
with the funding schedule and the investor defaulted on the agreement in fiscal
year 1996. As a result of the default, the Company filed a complaint on May 21,
1996 against the investor whereby it demanded the return of the 2,500,000 shares
of common stock and certain of the Series B preferred shares. Subsequent to year
end, the investor returned the 2,500,000 shares of common stock to the Company.
The suit was mediated to a settlement on August 21, 1996, which allows the
Company to reclaim 27,500 shares of Series B preferred stock.
F-42
<PAGE>
NDS Software, Inc.
Notes To Consolidated Financial Statements
June 30, 1997 and 1996
(Continued)
10. Stockholders' Deficit (continued)
Preferred Stock (continued)
The financial statements reflect 13,000 shares of Series B preferred stock
outstanding at June 30, 1996 and no amounts have been recorded for the related
note receivable due to the mediated settlement subsequent to year end which did
not provide for its collection. See Note 14, "Lawsuits" for the final resolution
of this issue.
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 2,500,000 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 in 1997 or 1996. 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:
F-43
<PAGE>
NDS Software, Inc.
Notes To Consolidated Financial Statements
June 30, 1997 and 1996
(Continued)
11. 1996 Stock Option Plan (continued)
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C> <C>
Net Income (Loss)
-----------------
As reported $(2,121,906) $(2,311,959)
============ ============
Professional forma $(5,842,768) $(4,913,379)
============ ============
Primary Earnings Per Share
--------------------------
As reported $ (.48) $ (.65)
================ ===============
Professional forma $ (1.32) $ (1.38)
================ ===============
Fully Diluted Earnings Per Share
--------------------------------
As reported $ (.48) $ (.65)
================ ===============
Professional forma $ (1.32) $ (1.38)
================ ===============
</TABLE>
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 100.99%
Compensation expense that would have been charged to operations had the
provisions of FASB 123 been applied were $3,720,862 in 1997 and $2,601,420 in
1996.
F-44
<PAGE>
NDS Software, Inc.
Notes To Consolidated Financial Statements
June 30, 1997 and 1996
(Continued)
11. 1996 Stock Option Plan (continued)
Following is a summary of the status of options outstanding during the years
ended June 30, 1997 and 1996:
<TABLE>
<CAPTION>
YEAR ENDED 6-30-97 YEAR ENDED 6-30-96
------------------ ------------------
# of Shares Weighted # of Shares Weighted
----------- Average ----------- Average
Exercise Exercise
Price Price
----- -----
<S> <C> <C> <C> <C>
<C>
Outstanding at July 1 2,040,800 $ 2.01 -0- $ -
Granted 980,000 5.06 2,090,800 2.01
Canceled (30,000) 6.38 (50,000) 2.00
Exercised (25,000) 2.00 - -
-------- ---- ---------- ---------
Outstanding at June 30 2,965,800 2.97 2,040,800 2.01
Options exerciseable at June 30 2,965,800 2.97 2,040,800 2.01
Weighted average fair value of options 3.92 1.27
granted during 1997 and 1996
</TABLE>
F-45
<PAGE>
NDS Software, Inc.
Notes To Consolidated Financial Statements
June 30, 1997 and 1996
(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 June 30, 1997 and
1996 are as follows:
<TABLE>
<CAPTION>
Deferred tax assets:
1997 1996
---- ----
<S> <C> <C> <C>
Net operating loss carryover
$1,773,441 $1,300,283
Deferred revenue 424,810 64,972
Capitalized software costs - 24,482
Employee salaries issued in stock 14,175 -
Allowance for bad debts
1,544 -
----------- ------------
2,213,970 1,389,737
Deferred tax liabilities
Depreciation
(6,816) (1,750)
------------ -------------
2,207,154 1,387,987
Less: Valuation allowance
(2,207,154) (1,387,987)
------------ --------------
Net deferred taxes:
$ -0- $ -0-
============ ==============
</TABLE>
The increase in the valuation allowance was $819,167 and $649,759 for the years
ended June 30, 1997 and 1996, respectively.
The Company has available at June 30, 1997, $5,066,973 of unused operating loss
carryforwards that may be applied against future taxable income and that expire
in various years from 2008 to 2012.
F-46
<PAGE>
NDS Software, Inc.
Notes To Consolidated Financial Statements
June 30, 1997 and 1996
(Continued)
12. Income Taxes (continued)
The principal reasons for the difference between the effective income tax rate
and the federal statutory income tax rate are as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Federal benefit expected at statutory rate $ (742,667) $ (809,186)
Operating losses with no current benefit 390,545 881,455
Taxable deferred revenue 359,838 (79,163)
Amortization of software costs (22,472) (24,884)
Depreciation (14,627) 16,604
Employee salaries issued in stock 14,175 -
Allowance for bad debts 1,544 -
Non-deductible expenses 13,664 15,174
---------- -----------
$ -0- $ -0-
========== ===========
</TABLE>
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 capital and operating lease agreements. The following is
a schedule, by years, of the future minimum lease payments under both capital
and operating leases, together with the present value of the net minimum lease
payments as of June 30, 1997.
F-47
<PAGE>
NDS Software, Inc.
Notes To Consolidated Financial Statements
June 30, 1997 and 1996
(Continued)
13. Commitments
Leases (continued)
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
------- ---------
<S> <C> <C>
Years ending June 30,
1998 $18,650 $121,913
1999 - 115,422
2000 - 24,392
------------- ------------
Net minimum lease payments $18,650 $261,727
Amount representing interest (1,851)
-------------
Present value of net minimum lease payments 16,799
Current portion of capital lease obligations 16,799
-------------
Present value of capital lease obligations - non-current $ -0-
portion =============
</TABLE>
Rental expense for all operating leases was $84,261 and $119,000 for the years
ended June 30, 1996 and 1997, respectively. Amortization expense under capital
leases was $13,795 and $13,795 for the years ended June 30, 1996 and 1997,
respectively.
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 $70,00 and an annual bonus of 4% of pre-tax earnings.
Effective September 1, 1996, each officer's annual salary increased to $100,000.
An additional increase called for in the agreements to $144,000 effective March
4, 1997 has been accrued as a liability in the financial statements.
F-48
<PAGE>
NDS Software, Inc.
Notes To Consolidated Financial Statements
June 30, 1997 and 1996
(Continued)
13. Commitments (continued)
Past Due Obligations
The Company is currently in default under the terms of its notes payable to
outside third parties wherein the required payments at the maturity dates of the
notes payable in the amount of $150,616 have not been paid. The Company is
currently working with its two lenders to extend the maturity dates.
In addition, the Company is currently delinquent in the payment of employer and
employee payroll taxes and a number of accounts payable. The Company is
attempting to payoff these outstanding obligations as soon as practicable given
its cash flow requirements.
14. Subsequent Events
Equity & Debt Transactions
In July, 1997, the Company issued 22,659 shares of stock to convertible debt
holders for payment of interest due on the debt. The Company also issued 13,439
shares of stock in July to employees as consideration for a temporary wage
reduction. A portion of the issuance relieved an accrued liability for wages at
June 30, 1997. Also in July, the Company amended its articles of incorporation
for capitalization, authorizing a total of 60 million shares, broken down into
50 million common shares at $.001 par value, 5 million Class A preferred stock
at $.001 par value, 200,000 Class B preferred stock at $10.00 par value, and
4,800,000 undesignated preferred shares at $.001 par value.
In August, 1997, the Company borrowed $68,000 from related parties with interest
at 12% per annum. Two notes, totaling $18,000 are demand notes, and the
remaining note for $50,000 matures in August, 1998. All notes are unsecured.
Also in August, the Company sold a total of 100,000 shares of common stock
priced at $3.00 per share to three investors and received gross proceeds of
$300,000. These investors were given stock warrants to purchase 100,000 shares
of NDS common stock at $3.00 per share. A portion of these warrants were for
consideration in this funding transaction, and a portion were for consulting
services. The Company also issued 15,937 shares of common stock in August as
payment for vendor accounts payable.
F-49
<PAGE>
NDS Software, Inc.
Notes To Consolidated Financial Statements
June 30, 1997 and 1996
(Continued)
14. Subsequent Events (continued)
Equity & Debt Transactions (continued)
In September 1997, the Company raised $250,000 of debt due in five years, with
interest at 14%, collateral includes 202,000 shares of Finet Holdings common
stock, and a warrant to purchase 15,000 shares of Company common stock at $3.50
per share. Also in September, employees exercised options on shares for total
gross proceeds of $94,500 to the Company. Per share amounts ranged from $2.00 to
$3.62 per share. The Company also received $60,000 from three stock option
holders for the exercise of their stock options at $2.00 per share.
In September, 1997, the Company accepted 700,000 shares of restricted common
stock from a related party for payment on an outstanding account receivable.
In October 1997, an option holder exercised his option to purchase 70,000 shares
of common stock at $3.00 per share, with the Company receiving $210,000 of gross
proceeds.
During the months of July through October, the Company issued options to
purchase 625,000 shares of its common stock at prices ranging from $3.00 to
$5.62. Directors, stockholders and employees received options to purchase
355,000 shares, and investment bankers received options to purchase 270,000
shares.
Between July 1, 1997, and November 11, 1997, the Company converted, at the
request of it debt holders, $1,613,252 of convertible debt into equity at the
rate of one share of common stock for every $2.00 of indebtedness.
Lawsuits
On September 30 1997, the Company settled a lawsuit it had brought against two
individuals who had committed to a $2,000,000 private placement to the Company,
but then defaulted on their agreement after an initial funding of $70,000. The
settlement provided for return of 40,500 shares of the Company's Series B
Preferred Stock. In return, the Company issued 35,000 shares of common stock as
compensation for the $70,000 cash that the individuals paid to the Company. (See
Note 9).
F-50
<PAGE>
NDS Software, Inc.
Notes To Consolidated Financial Statements
June 30, 1997 and 1996
(Continued)
14. Subsequent Events (continued)
Lawsuits (continued)
In October 1997, the Company settled a lawsuit against it from the software
developer who developed the HomeSeekers product. The Company is to make up any
difference between the $108,513 owed and the amount that the software developer
obtains from selling 16,695 shares of the Company's common stock. This will most
likely be about $40,000, which has been included in accounts payable at June 30,
1997.
Acquisitions and New Business Agreements
On August 22, 1997, the Company formed a Limited Liability Company (LLC) to
conduct international expansion of its current line of business.
Also during August, 1997, the Company formed a LLC to develop the real estate
foreclosure market on the internet.
As of November 11, 1997, the Company was in the final stages of acquiring a
small publishing company for 20,000 shares of common stock.
F-51
<PAGE>
<TABLE>
<CAPTION>
PART III
ITEM 1. INDEX TO EXHIBITS
Exhibits Description of Document
- -------- -----------------------
<S> <C>
3.1(a) Articles of Incorporation of Aurora Energy, Inc. dated January 13, 1983(1).
3.1(b) Amendment to Articles of Incorporation of Aurora Energy, Inc. dated March 23,
1983 to change name to Aurora Tech, Inc.(1)
3.1(c) Amendment to Articles of Incorporation of Aurora Tech, Inc. dated June 25, 1984 re: governance(1)
3.1(d) Amendment to Articles of Incorporation of Aurora Tech, Inc. dated May 12, 1988
changing the name to XRF Corporation(1)
3.1(e) Articles of Incorporation of NDS Software, Inc. dated September 29, 1994(1)
3.1(f) Amendment to the Articles of Incorporation of NDS Software, Inc. dated November 15, 1995(1)
3.1(g) Articles of Incorporation of Nevada Data Systems, Inc. dated October 28, 1987(1)
3.1(h) Amendment to Articles of Incorporation of Nevada Data Systems, Inc. dated February 27, 1989 changing
name to NDS Software(1)
3.1(i) Amendment to Articles of Incorporation of NDS Software dated May 3, 1990 changing authorized stock(1)
3.1(j) Amendment to Articles of Incorporation of NDS Software dated December 31, 1990 changing authorized stock(1)
3.1(k) Amendment to Articles of Incorporation of NDS Software dated September 15, 1993 changing authorized stock(1)
3.1(l) Amendment to Articles of Incorporation of NDS Software dated June 20, 1994 changing authorized stock(1)
3.1(m) Amendment to Articles of Incorporation of XRF Corporation dated July 26, 1994 changing name(1)
3.1(n) Amendment to Articles of Incorporation of NDS Software dated July 15, 1997 changing authorized stock.(1)
3.1(o) Amendment to Articles of Incorporation of NDS Software dated July 1, 1998 changing name.(1)
3.2 Bylaws of NDS Software(1)
4.1 Certificate of Designation for Class A, Series A Preferred Stock.(1)
4.2 Amendment to Certificate of Designation for Class A Series A Preferred Stock.(1)
4.3 Certificate of Designation for Class B Convertible Preferred Stock.(1)
4.4 Certificate of Designation for Class C Convertible Cumulative Preferred Stock.(1)
6.1 Stock Option Plan dated October 9, 1996(1).
6.2 Articles, Plan and Agreement of Merger between XRF Corporation and NDS Software dated June 13, 1994(1)
6.3 Agreement and Plan of Reorganization between NDS Software and Visual Listings, Inc. dated May 8, 1996(1)
6.4 Agreement and Plan of Reorganization between the Company and Focus
Publications, Inc. dated August 11, 1997 including Articles of Exchange filed December 31, 1997(1)
6.5 Articles, Plan and Agreement of Merger between NDS Software, Inc., a Utah Corporation and NDS Software, Inc., a
Nevada Corporation, dated September 26, 1994(1)
6.6 Employment Agreement between the Company and John Giaimo dated May 8, 1996(1)
6.7 Employment Agreement between the Company and Greg Johnson dated June 13, 1996(1)
6.8 Employment Agreement between the Company and Doug Swanson dated June 13, 1996(1)
6.9 Amendment to Stock Option Plan dated October 9, 1996(1)
6.10 Form of MLS Agreement (1)
6.11 LLC Operating Agreement with Finet Holdings Corporation(1)
6.12 Licensing and Marketing Agreement re:IPONG International, Inc.(1)
6.13 Harte-Hanks Shoppers, Inc. Marketing Alliance (1)
16 Accountant's Letter(1)
27 Financial Data Schedule(2)
</TABLE>
- -------------
(1) Previously filed.
(2) Filed herewith.
<PAGE>
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934,
the Registrant caused this Amendment to its Form 10-SB to be signed on its
behalf by the undersigned, thereunto duly authorized.
HOMESEEKERS.COM, INCORPORATED
Date: October 6, 1998 By: /s/ Greg Johnson
-------------------------------------
Greg Johnson, Chief Executive Officer
<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> 0
<RECEIVABLES> 240,144
<ALLOWANCES> 4,413
<INVENTORY> 57,070
<CURRENT-ASSETS> 427,173
<PP&E> 917,762
<DEPRECIATION> 462,185
<TOTAL-ASSETS> 1,898,591
<CURRENT-LIABILITIES> 1,925,807
<BONDS> 0
0
692
<COMMON> 6,896
<OTHER-SE> (412,304)
<TOTAL-LIABILITY-AND-EQUITY> 1,898,591
<SALES> 581,195
<TOTAL-REVENUES> 581,195
<CGS> 109,228
<TOTAL-COSTS> 1,123,880
<OTHER-EXPENSES> (11,129)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,265
<INCOME-PRETAX> (676,307)
<INCOME-TAX> 0
<INCOME-CONTINUING> (676,307)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (676,307)
<EPS-PRIMARY> (.11)
<EPS-DILUTED> (.11)
</TABLE>
