SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended
September 30, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES ACT OF 1934
For the transition period from _____________ to _________________
Commission File Number: 0-10329
AW COMPUTER SYSTEMS, INC.
-------------------------
(Exact name of registrant as specified in its charter)
New Jersey 22-1991981
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identifications No.)
9000A Commerce Parkway, Mt. Laurel, New Jersey 08054 08054
----------------------------------------------------------
(Address of principal executive offices)(Zip Code)
609-234-3939
------------
(Registrant's telephone number, including area code)
N/A
---
(Former name, address and former fiscal year, if changed since last report)
Indicate by check mark whether the issuer (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the past 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
As of November 10, 1995, there were issued and outstanding 4,442,544 Class
A Common Shares of the Company.
Traditional Small Business Disclosure Format (Check One): Yes X No
1
PART I
FINANCIAL INFORMATION
(UNAUDITED)
Item 1. Interim Financial Statements
Contents:
Statements of Operations for three and nine month periods ended
September 30, 1995 and 1994.
Balance Sheets as of September 30, 1995 and December 31, 1994.
Statements of Cash Flow for three and nine month periods ended
September 30, 1995 and 1994.
Notes to Interim Financial Statements.
2
AW COMPUTER SYSTEMS, INC.
COMPARATIVE STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1995
AND 1994
(UNAUDITED)
Three Months Nine Months
1995 1994 1995 1994
$ 878,317 $ 790,103 Revenues $ 3,131,765 $ 3,443,930
600,828 590,909 Costs of revenues 2,040,563 2,191,156
------- ------- --------- ---------
277,489 199,194 1,091,202 1,252,774
------- ------- --------- ---------
Selling, general &
787,130 832,566 administrative 2,675,991 2,597,995
51,114 156,079 Development 108,202 227,002
20,099 21,383 Interest 78,423 40,351
------- ------- ------- -------
858,343 1,010,028 2,862,616 2,865,348
------- --------- --------- ---------
8,558 15,334 Interest income 38,567 32,362
Loss before income
(572,296) (795,500) taxes (1,732,847) (1,580,212)
--- (248,217) Income tax benefit (319,758) (482,331)
------- ------- ------- -------
$ (572,296) $ (547,283) Net loss $(1,413,089) $ (1,097,881)
=========== =========== =========== ============
($0.14) ($0.14) Net loss per share ($0.34) ($0.29)
Average shares
3,989,957 3,856,844 outstanding 4,109,813 3,847,011
<FN>
The accompanying notes are an integral part of the financial statements.
</FN>
3
AW COMPUTER SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1995 AND DECEMBER 31, 1994
(UNAUDITED)
ASSETS
1995 1994
---- ----
Current assets:
Cash and cash equivalents $ 539,716 $ 1,468,778
Accounts and contract receivables,
less allowance for doubtful accounts
$488,302 and $231,000 in 1995 and 1994 1,312,742 521,899
Costs and estimated earnings in excess
of billings on uncompleted contracts 909,264 1,418,792
Inventories 598,714 746,254
Income taxes receivable 280,322 574,533
Prepaid and other current assets 33,165 86,808
------ ------
Total current assets 3,673,923 4,817,064
========= =========
Property and equipment, net 750,143 902,742
Computer software, net 296,532 112,814
Other assets 52,106 51,202
------ ------
Total Assets $ 4,772,704 $ 5,883,822
--------- ----------
--------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Line of credit --- $ 550,000
Current portion of long-term debt 291,667 633,333
Current portion of lease obligations 7,697 16,341
Accounts payable 209,020 208,726
Accrued liabilities 163,056 122,218
Billings in excess of costs and
estimated earnings on uncompleted
contracts --- 8,582
Accrued contract costs 294,524 59,525
Other current liabilities 119,707 87,383
------- ------
Total current liabilities 1,085,671 1,686,108
--------- ---------
Long-term debt 550,000 ---
Capitalized lease obligations 9,558 15,461
Pension costs 135,258 108,206
Shareholder's Equity
Common shares:
Class A, $.01 par; authorized 10,000,000
shares; 4,441,514 and 3,898,044 issued and
outstanding in 1995 and 1994, respectively 44,415 38,980
Additional paid-in capital 1,895,032 1,564,695
Retained earnings 1,109,283 2,522,372
Deferred compensation (56,513) (52,000)
------- -------
Total shareholders' equity 2,992,217 4,074,047
--------- ---------
Total liabilities and shareholders'
equity $ 4,772,704 $ 5,883,822
=========== ===========
<FN>
The accompanying notes are an integral part of the financial statements.
</FN>
4
AW COMPUTER SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1995
AND 1994
(UNAUDITED)
Three Months Nine Months
1995 1994
1995 1994
Cash flows, operating
activities:
$ (572,296) $ (547,283) Net loss: $(1,413,089) $(1,097,881)
Adjustments to reconcile
net loss to net cash
provided by/(used) in
operating activities:
Depreciation and
102,435 84,846 amortization 287,354 238,547
Amortization of unearned
8,437 (11,547) unearned compensation 29,237 (5,629)
--- (3,820) Deferred income taxes --- (24,992)
Decrease (increase)in:
341,532 631,892 Accounts receivable (790,843) 1,862,394
Costs and estimated
earnings on uncompleted
(8,072) 125,266 contracts 509,528 (207,176)
68,008 51,735 Inventories 147,540 (272,884)
--- (248,217) Income tax receivable 325,678 (482,331)
9,638 89,139 Prepaid expenses 21,272 (27,349)
Increase (decrease) in:
145,594 (17,962) Accounts payable 294 (226,078)
62,297 (121,726) Accrued liabilities 116,572 (98,717)
81,565 --- Accrued cost 234,999 ---
Billing in excess of cost
and estimated earnings on
(224,391) (17,768) uncompleted contracts (8,582) (56,696)
(37,348) 162,047 Other current liabilities (16,360) 245,050
------- ------- ------- -------
Net cash provided by (used in)
(22,601) 176,602 operating activities (556,400) (153,742)
------- ------- -------- --------
Cash flows, investing
activities:
(23,732) (39,238) Capital expenditures (77,103) (329,903)
(77,795) --- Computer software capitalized (241,368) (2,223)
------- ------ -------- ------
Net cash (used in) investing
(101,527) (39,238) activities (318,471) (332,126)
-------- ------- -------- --------
Cash flows, financing
activities:
Net borrowing (payments):
Long-term debt and lease
(230,710) 495,397 obligations (356,213) 930,782
Proceeds from issuance
--- 28,658 of common shares 302,022 35,758
------- ------ ------- ------
Net cash provided by (used in)
(230,710) 524,055 financing activities (54,191) 966,540
-------- ------- ------- -------
Increase (decrease), cash and
(354,838) 661,419 cash equivalents (929,062) 480,672
Cash and cash equivalents:
(894,554) 1,273,248 Beginning of period 1,468,778 1,453,995
-------- --------- --------- ---------
$ (539,716) $ 1,934,667 End of period $ 539,716 $ 1,934,667
=========== =========== =========== ===========
<FN>
7
The accompanying notes are an integral part of the financial Statements.
</FN>
5
AW COMPUTER SYSTEMS, INC.
NOTES TO INTERIM FINANCIAL STATEMENTS
SEPTEMBER 30, 1995
(UNAUDITED)
1. The consolidated financial statements include the accounts
of the Company and its wholly-owned subsidiary. All
significant intercompany transactions and balances have been
eliminated. All adjustments consisting only of normal
recurrent adjustments which, in the opinion of management,
are necessary for a fair statement of the results for this
interim period have been made.
2. Prior year balance sheet and cashflow statements are
restated to conform to present year presentation.
3. The Company failed to meet the net profit debt covenant
under its Loan Agreements as of December 31, 1994 and the
Company failed to repay the $550,000 Grid Note due on May
30, 1995. The Bank and the Company have agreed to
restructure the debt as follows: the outstanding balance of
the $400,000 Term Note of $125,000 was paid in full on
August 1, 1995. The $500,000 Fixed Rate Note bearing
interest of 7.95% will be paid in eleven monthly
installments of $33,333 beginning August 1, 1995 with a
final payment of $25,000 on July 1, 1996. The Company will
continue to make interest payments on the $550,000 Grid Note
at one and one-half percent above the bank's prime rate
(9.75% on September 30, 1995). The Grid Note will mature on
December 31, 1996. The Agreement prohibits the payment of
dividends and requires the Company to maintain a net worth
of $2,500,000 and working capital of $1,000,000. The
covenant requiring a ratio of net profit after depreciation,
amortization and interest to current portion of long term
debt of at least 1.25 to 1 has been permanently waived.
4. In order to raise funds for the development of new products
and for the support of ongoing operations, on May 15, 1995
certain officers and directors of the Company and other
individuals purchased a total of 394,000 units, each unit
consisting of one share of the Company's Class A Common
Stock and one warrant to purchase an additional share of Class
A Common Stock at an exercise price of $2.00 per share. The warrants
are exercisable for five years from the date of grant. The
purchase price was $.55 per unit. The total proceeds to the
Company, net of expenses, were $206,000. The securities
sold are not registered for public sale under the Securities
Act of 1933 or any state securities law and the purchasers
acquired no registration rights with respect thereto.
6
Item 2
Management's Discussion and Analysis of Financial
Condition and Results of Operations.
AW's success depends upon the number of new computer
systems which the Company is able to develop, customize and
deliver to retailers who wish to use existing point-of-sale
("POS") equipment in conjunction with the POS systems
manufactured and sold by the three major suppliers in the United
States; IBM, the Global Information Solutions division of AT&T
("ATT/GIS" formerly NCR), or Fujitsu-ICL Systems, Inc. ("FJ-
ICL"). Because these systems are critical to the information and
customer service systems of AW's clients, they take care, through
extensive evaluation and testing, to ensure operation compatible
with the needs of their organizations. Therefore, the selling
cycle frequently takes over a year to complete from the
introductory marketing through customization and in-store "Pilot"
system testing to the multiple store implementation or "Rollout"
of the system
As of November 11, 1995, AW had a backlog of firm orders
for delivery within one year of $814 thousand compared to $2.3
million on November 15, 1994. Because of the size of the backlog
and the length of the selling cycle described above, the Company
believes that the volume of operations will remain at the
relatively low level experienced in the first nine months of this
year until its sales efforts can generate an increase in the flow
of revenues. The Company is making arrangements with its
customers to perform special programming tasks in order to
generate revenues quickly. Although sales efforts have been
intensified, there is no assurance that these efforts will be
successful.
Continuation of Company operations beyond the first quarter of
1996 will be dependent on the successful completion of either or both
of the Company's new products: The Checker Productivity Analzyer
("CPA") and The Wizard of Point-of-Sale ("Wizard"). The CPA Project,
being developed under contract with a large supermarket chain, which
does not include any guaranteed minimum purchase, is designed to
enhance the economic efficiency in the handling of goods by super-
market operators. CPA has been installed at a Pilot Store and is
expected to begin testing in December.
The Wizard brings the familiarity of Microsoft's graphical
Windows environment to the retail Point-of-Sale operation. Unlike
existing graphical POS systems that demand total replacement of a
retailer's hardware and software, the Wizard adds graphical capability
to existing environments. The Tudor version of Wizard has been
installed at a Pilot Store and is being testing.
Operations
For the nine months ended September 30, 1995, revenues were
$3,132,000, 9% lower than the same period in 1994, due to
virtually no revenue generation by the CPA Project partially
offset by increases in software services revenue. For the
quarter ended September 30, 1995, revenues were $878,000,
compared with $790,000 in 1994, an increase of 11% due to a
significant increase in software services revenue for the
quarter.
7
Gross profit for the nine months ended September 30, 1995
was $1,091,000 or 35% of Revenues compared to $1,253,000 or 36%
in the same period last year. During the third quarter of 1995
Gross profit was $277,500 or 32% compared to $199,000 or 25% in
the prior year third quarter. Gross profit margins were negatively
effected by the CPA Project. The Project has exceeded its $1.7
million contractual budget, as such, the Company has booked a
loss provision of $175 thousand representing the estimated
cost to complete the project. This loss provision was offset by
the reversal of accrued contract costs of $125 thousand pertaining
to the cancellation of an unrelated contract during the
quarter, the canceled contract provided for guaranteed
minimum payments which have been received, therefore, there is no
negative impact on revenues as a result of the cancellation. The
loss provision was further offset by a significant increase in
high margin software services revenue in the third quarter.
During the first quarter, the Company set aside $143,000 of
inventory and incurred $42,000 of labor cost in preparing to ship
an Aware system pursuant to a letter of intent from a large
foreign retail chain. Although the letter of intent contemplated
delivery prior to April 30, 1995, management of the retail chain
has advised the Company that the decision on the Aware purchase
will be made by the foreign entities American Joint Venture
Partner. As a result of this event, there is no assurance that
the contract will be awarded to AW.
For the nine months ended September 30, 1995, selling,
general and administrative (S.G.&A.) costs increased $78,000 (3%)
over the same period in 1994. For the year-to-date periods,
S.G.&A represented 85% of revenues compared with 75% in 1994.
During the quarter ended September 30, 1995, S.G.&A. decreased
$45,000 or 5% over the same period in 1994. These changes are
primarily due to a $213 thousand provision for bad debt related
to a development contract for one of the Company's business
partners that had difficulties selling its product, offset by
decreased compensation costs related to a staff reduction of 15%
on May 15, 1995. At September 30, 1995, AW had 49 employees, a
decrease of eleven from the same period in 1994.
Development expense for the three and nine months in 1995
was $105,000 and $119,000 less than the comparable periods in
1994. During the third quarter of 1994 the Company began
research and development on new products, since that time one of
the Company's new products "The Wizard" has reached technological
feasibility, as such , expenses in the amount of $171,000 related
to this project have been capitalized during 1995 in accordance
with Generally Accepted Accounting Principles.
Interest expense was higher in 1995 due to the interest
associated with the term loan and line of credit borrowed in
first half of 1994. Interest income was lower due to lower
balances on the company's interest bearing cash accounts.
8
Loss before income taxes decreased for the three months
ended September 30, 1995 compared to the same period in 1994 by
$223,000 from a loss of $795,500 to a loss of $572,300 while the
loss increased $153,000 for the nine months ended September 30,
1995 compared to same period last year. In the third quarter
and first nine months of 1995 the effective income tax benefit
was 0% and 18% of the Net loss before income taxes compared to an
effective tax rate of 31% for the same periods of 1994. These
effective tax rates vary from the 34% corporate income tax rate
due primarily to the lack of a net loss carryback provision in
the New Jersey State Income Tax Code and the inability to
carryback any additional losses to offset past income for Federal
Income Tax purposes.
Liquidity
From December 31, 1994 to September 30, 1995, working
capital decreased $543 thousand to $2,588 thousand or 136 days of
costs and expenses compared to $3,131 thousand or 157 days of
costs and expenses at December 31, 1994. Current assets
decreased $1,143 thousand due to decreases in inventory and
income taxes receivable of $148 thousand and $294 thousand,
respectively. Additionally, as a result of progress billings on
revenue contracts, costs in excess of billings decreased by $510
thousand which accounts for most of the increase in accounts
receivable of $791 thousand. Current liabilities decreased $600
thousand over the period due to a decrease in current debt of
$892 thousand as a result of the debt restructuring in July 1995
(see footnote 3), and a decrease of $16 thousand in leases
payable and billings in excess of cost. These decreases were
offset by an increase of $235 thousand in accrued contract costs
and an increase of $73 thousand in other accrued liabilities.
During this same period, cash and cash equivalents decreased
by $929 thousand. The primary factors for this decrease were
$556 consumed by operations, $319 thousand of investments in non-
current assets, and $356 thousand in debt reduction offset by
$302 thousand in proceeds from the sale of common stock. Cash and
cash equivalents beyond the first quarter of 1996 will be dependent
on the successful completion and roll out of the CPA or Wizard
Projects.
Financial Resources
The primary source of funds in the near future is expected
to be the Company's operations, cash and accounts receivable. At
September 30, 1995 the Company had $1.85 million in cash and
accounts receivable compared to $1.78 million in total
liabilities. The Company's principle fixed payment obligations
at September 30, 1995 were the lease for its facilities and the
payments on the bank loans which are approximately $615 thousand
over the next 12 months. The Company intends to continue making
additional expenditures for capital equipment and software
development in the future.
In order to raise funds for the development of new products
and for the support of ongoing operations, on May 15, 1995
certain officers and directors of the Company and other
individuals purchased a total of 394,000 units, each consisting
of one share of the Company's Class A Common Stock and one
warrant to purchase an additional share of Class A Common Stock
at an exercise price of $2.00 per share. The warrants are
exercisable for five years from the date of grant. The purchase
price was $.55 per unit. The total proceeds to the Company, net
of expenses, were $206,000. The securities sold are not
registered for public sale under Securities Act of 1933 or any
state securities law and the purchasers acquired no registration
rights with respect thereto.
9
PART II
OTHER INFORMATION
Item 1. Legal Proceedings - None.
Item 2. Changes in Securities - None.
Item 3. Defaults Upon Senior Securities - None.
Item 4. Submission of Matters to a Vote of Security Holders -
None.
Item 5. Other Information - None.
Item 6. Exhibits and Reports on Form 8-K - None.
10
Signatures
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Dated: November 13, 1995 AW COMPUTER SYSTEMS, INC.
/s/Charles W. Welch
Charles W. Welch
CEO/President
/s/Robert O'Connor
Robert O'Connor
Controller-Treasurer
11
EXHIBIT INDEX
Rule 0-3(b) Page
Exhibit Description Number Where the
Number Exhibit can be Found
20-A Post-Effective Amendment #1 to Form S-8 ?
(Registration Statement No. 33-64686)
20-B Registration on Form S-8 ?
12