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The Exhibit Index can be found on Page 13.
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 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 March 31, 1996
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 Identifications No.)
incorporation or organization)
9000A Commerce Parkway, Mt. Laurel, New Jersey 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 May 10, 1996, there were issued and outstanding 4,822,194 Class A Common
Shares of the Company.
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PART I
FINANCIAL INFORMATION
Item 1. Interim Financial Statements
Contents:
Consolidated Statements of Operations for three months ended
March 31, 1996 and 1995.
Consolidated Balance Sheets as of March 31, 1996 and December 31,
1995.
Consolidated Statements of Cash Flow for three months ended March
31, 1996 and 1995.
Notes to Interim Consolidated Financial Statements for three
months ended March 31, 1996.
Item 2. Management's Discussion and Analysis or Plan of Operation
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AW COMPUTER SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996
AND MARCH 31, 1995
(UNAUDITED)
1996 1995
---- ----
Revenues $ 345,873 $ 974,095
Costs of revenues 395,897 708,466
--------- ---------
Gross Profit ( 50,024) 265,629
--------- ---------
Selling, general, and
administrative expenses 765,834 1,079,639
Development expense 68,332 32,834
Interest expense 18,415 30,593
Other (income) - net ( 7,087) ( 15,068)
--------- ---------
845,494 1,127,998
--------- ---------
Loss before income taxes ( 895,518) ( 862,369)
Income tax (benefit) --- ( 298,294)
--------- ---------
Net (loss) $( 895,518) $( 564,075)
========== ==========
Per share statistics:
Net (loss) per share $(0.19) $(0.14)
==== ====
Average shares outstanding 4,642,119 3,897,969
The accompanying notes are an integral part of the consolidated
financial statements.
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AW COMPUTER SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1996 AND DECEMBER 31, 1995
ASSETS
(Unaudited)
1996 1995
Current assets:
Cash and cash equivalents $ 1,112,168 $ 848,560
Accounts and contract receivable, less
allowance for doubtful accounts of
$110,000 in 1996 and $454,000 in 1995 193,188 604,957
Costs and estimated earnings in excess of
billings on uncompleted contracts 411,225 458,237
Inventories 511,522 514,791
Income taxes receivable --- 280,445
Prepaid and other current assets 44,274 101,558
---------- ----------
Total current assets 2,272,377 2,808,548
Property and equipment, net 687,559 669,194
Computer software, net 387,804 363,626
Other assets 55,041 52,885
---------- ----------
Total assets $ 3,402,781 $ 3,894,253
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Line of credit $ 550,000 $ 550,000
Current portion of long-term debt 91,667 225,000
Current portion of lease obligations 6,349 6,918
Accounts payable 189,629 291,870
Accrued liabilities 159,106 134,515
Accrued compensation 101,843 71,984
Accrued contract costs 276,777 332,653
Other current liabilities 50,582 51,057
---------- ----------
Total current liabilities 1,425,953 1,726,400
Capitalized lease obligations 7,640 8,542
Pension benefit 135,259 135,259
Commitments and contingent liabilities
Shareholders' equity
Common shares:
Class A, $.01 par; authorized
10,000,000 shares; 4,816,694 and
4,467,544 issued and outstanding
in 1996 and 1995, respectively 48,167 44,676
Additional paid-in capital 2,518,059 1,895,992
Retained earnings ( 714,162) 181,354
Deferred compensation $( 18,135) ( 35,556)
---------- ----------
Total shareholders' equity 1,833,929 2,086,456
---------- ----------
Total liabilities and shareholders' equity $ 3,402,781 $ 3,894,253
========== ==========
The accompanying notes are an integral part of the consolidated
financial statements.
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AW COMPUTER SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(UNAUDITED)
1996 1995
---- ----
Cash flows from operating activities:
Net (loss): $( 895,518) $( 564,075)
Adjustments to reconcile net (loss) to
net cash provided by (used in) operating
activities:
Depreciation and amortization 71,119 89,560
Amortization of unearned compensation 17,431 10,400
Decrease (increase) in:
Accounts receivable 411,769 ( 221,303)
Costs incurred and estimated earnings
on uncompleted contracts 47,012 531,522
Inventories 3,269 ( 74,944)
Income taxes receivable 280,445 ( 311,924)
Prepaid expenses 55,128 10,689
Increase (decrease) in:
Accounts payable ( 102,241) ( 90,369)
Accrued liabilities 29,859 12,609
Accrued cost ( 55,876) 118,153
Accrued compensation 24,591 ---
Billing in excess of costs incurred and
estimated earnings on uncompleted
contracts --- 9,168
Other current liabilities ( 475) 86,943
--------- ---------
Net cash (used in) operating activities ( 113,487) ( 393,571)
--------- ----------
Cash flows from investing activities:
Capital expenditures ( 89,484) ( 56,562)
Computer software capitalized ( 24,178) ( 60,580)
--------- ---------
Net cash (used in) investing activities ( 113,662) ( 117,142)
---------- ---------
Cash flows from financing activities:
Net borrowing (payments):
Payments on long-term debt ( 133,333) ( 66,667)
Payments on lease obligations ( 1,469) ( 4,326)
Net (advances) repayments of related party
loans --- ( 1,538)
Proceeds from issuance of common shares 625,559 ---
---------- ----------
Net cash provided (used) by financing activities 490,757 ( 72,531)
---------- -----------
Increase (Decrease) in cash and equivalents 263,608 ( 583,244)
Cash and cash equivalents, beginning of year 848,560 1,468,778
---------- ----------
Cash and cash equivalents, end of period $ 1,112,168 $ 885,534
========== ===========
The accompanying notes are an integral part of the consolidated
financial statements.
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NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
(UNAUDITED)
1. The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary. All significant inter-company 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 cash flow 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 originally due May 30, 1995. The Bank and the Company
have agreed to restructure the debt as follows: the outstanding balance on
the $400,000 Term Note of $125,000 was paid in full on August 1, 1995. The
term of the $500,000 Fixed Rate Note bearing interest at 7.95% was
accelerated from June 1999 to July 1996. This acceleration changed the
monthly installments from $8,333 through June 1999 to eleven (11)
installments of $33,333 and one 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 above the bank's prime rate (9.25% on March 31,
1996). The Grid Note will mature on December 31, 1996. The Bank permanently
waived provisions requiring the Company to maintain any ratio of debt to
net worth and/or any ratios related to net operating profit so long as the
Company continues to make payments under the Agreement. The Agreement
prohibits the payment of dividends.
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Item 2 Management's Discussion and Analysis or Plan of Operation
AW's future is dependent on the successful completion and receipt of a
significant deposit on an order(s) for either or both of the Company's new
products, The Checker Productivity Analyzer ("CPA") and/or the Wizard of
Point-of-Sale ("Wizard"), or on the Company's ability to raise additional
capital to maintain its operations until these products are completed. The
Company expects that its existing capital resources will enable it to maintain
its current operations through the second quarter of 1996. Thereafter, the
Company will need to raise substantial additional capital to remain in business.
The Company intends to seek such additional funding, as well as attempting to
obtain deposits from customers. There can be no assurance that additional
financing will be available on acceptable terms or at all.
As of May 13, 1996, AW had a backlog of firm orders for delivery within one
year of $700 thousand compared to $1.6 million at May 11, 1995. Because of the
size of the backlog the Company believes that the volume of operations will
remain at the relatively low level experienced in the first quarter of this year
until the successful completion and market acceptance of either CPA or Wizard.
Acceptance of either or both of these products would generate future revenues,
however there can be no assurance that the Company will not experience delays or
problems with these products or that the Company's marketing efforts will be
successful.
Although development of the Company's computer vision based CPA
product is substantially complete, it has only recently commenced live testing
in an actual supermarket environment, which tests are likely to take three
months or more. There can be no assurance that the tests will be successful or
that the CPA product will achieve commercial acceptance.
Operations
Revenues for the first quarter of 1995 were $628 thousand (or 64%)
lower than revenues in the first quarter of 1995 due primarily to: (i) very
little revenue ($8 thousand) from AWare equipment sales to supermarket
operators; and (ii) only $76 thousand in contract revenue from contracts in
progress. Most of the revenue generated during the quarter was from software
services ($145 thousand) and from software maintenance ($116 thousand).
Gross profit decreased $316 thousand (or 119%) compared to the same period
last year. The gross margin decreased from 27% in 1995 to -14% in 1996 due to
approximately $220 thousand in cost related to the development of the CPA
contract with corresponding revenue from the contract of only $51 thousand. As
of March 31, 1996, $1,583,000 and $2,300,000 have been recognized as revenues
and cost under the CPA Agreement respectively. The Project has exceeded its
$1,700,000 contractual budget, as such, the Company has recognized an additional
loss provision of $250,000 representing the estimated cost to complete the
project. Due to uncertainties inherent in the estimation process, it is
reasonably possible that the completion costs for the Project will be further
revised in the near term.
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During the first quarter of 1995, the Company set aside $143,000 of
inventory and incurred $42 thousand 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 system 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, the Company does not expect to be awarded this contract. The
Company used a portion of inventory set aside for other projects and the labor
cost was expensed in 1995.
Selling, general and administrative expenses ("SG&A") were $314
thousand (or 29%) lower in the first quarter of 1996 than in the same period
last year. As a percentage of revenues, these expenses were 221% versus 111% in
the first quarter of 1995. The decrease in the dollar amount was due primarily
to a $213 thousand provision for bad debt, during the first quarter of 1995,
related to a development contract for one of the Company's business partners
that has had difficulty selling its product. The Company had a staff reduction
in May 1995 which also contributed in the decrease of SG&A for the first quarter
of this year over the same period last year.
Development expense was $35 thousand (or 108%) higher in the March
quarter of 1996 compared to the first quarter of 1995, this is primarily due to
increased development classification on the Company's new products.
In the first quarter of 1996, the effective income tax benefit was 0%
of the Net loss before income taxes compared to an effective tax rate of 35% in
the first quarter of 1995, this change is due to the lack of a net loss
carryback provision in New Jersey State Income Tax code and the inability to
carryback any additional losses to offset past income for Federal Income Tax
purposes.
As a result of the factors discussed above, operations in the first
quarter of 1996 resulted in a loss of $896 thousand (or $0.19 per share)
compared to net loss of $564 thousand (or $0.14 per share) in the same period
last year.
Liquidity
During the quarter, working capital decreased $236 thousand to $846
thousand (or 42 days) of costs and expenses compared to $1,082 thousand (or 54
days) of costs and expenses at December 31, 1995. Current assets decreased $537
thousand primarily due to decreases in Accounts receivable ($412 thousand),
prepaid assets ($58 thousand), and costs in excess of billing of ($47 thousand).
Current liabilities decreased $300 thousand primarily due to decreases in
current debt of $133 thousand, decrease in accounts payable of $100 thousand and
a decrease in accrued contract costs of $56 thousand.
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During the first quarter of 1995, cash and cash equivalents increased
$264 thousand. The primary factors in this increase were $113 thousand of cash
consumed by operations, $114 thousand consumed by investment in equipment, $135
used to pay debt, offset by $626 thousand in proceeds from the issuance of
common shares (see Financial Resources for details). The availability of cash
and cash equivalents beyond the second quarter of 1996 will be dependent on the
successful completion and significant deposit on either a CPA or Wizard
contract, or on the Company's ability to raise additional capital through a
public or private offering of equity or through the issuance of debt, should
none of these events occur the Company will not be able to continue operations
much beyond the second quarter of 1996.
Financial Resources
The Company expects to require continued significant product
development efforts and capital expenditures for equipment in 1996. The Company
believes its competitive position must be maintained by the development of new
proprietary hardware and software products. Expenditures for these items will be
funded from cash flow and from potential future financing as can be arranged.
There can be no assurance that additional financing will be available on
acceptable terms or at all.
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 $0.55 per unit. The total
proceeds to the Company, net of expenses, were $206,000.
On May 15, 1996, the Company filed a Form S-3 with the Securities
Exchange Commission with the intent of registering these Private Placement
shares and their attached Warrants, the participants in the May 15, 1995 Private
Placement.
On March 8, 1996, the Company, in a private cash transaction, sold
250,000 Class A Common Shares to Winn-Dixie Stores, Inc. As additional
consideration for the purchase of the shares by Winn-Dixie Stores, Inc., the
Company modified the strike price of the warrants held by Winn-Dixie, pursuant
to a Warrant Agreement dated October 28, 1993, which was entered into in
consideration of the Company receiving exclusive marketing rights to the CPA
project, from the previously amended price of $3.062 to $2.00 per share. By
operation of the anti-dilution provision of the warrants, the number of shares
into which Winn-Dixie could convert the warrants automatically and without
additional consideration increased from 200,000 to 236,773 on May 15, 1995, as a
result of the private placement to certain officers and directors noted above.
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The Company has engaged an investment banking firm to assist the
Company in financial areas and in matters necessary to bring its new products to
market.
The Company maintains three credit arrangements with a bank. The
Company borrowed $400,000 and $500,000 at a fixed rate of interest of 8% and
7.95%, payable in equal monthly installments through September 1996 and June
1999, respectively. The Company also owes the bank $550,000 with interest at the
bank's prime rate (9.0% at March 31, 1995) plus one and one-half percent. The
note matures on May 30, 1995. The credit facilities are collateralized by
substantially all of the Company's assets. The loan agreements prohibit the
payment of dividends and require the Company to maintain: (i) a net worth of
$2,500,000; (ii) working capital of $1,000,000; (iii) a ratio of net profit
after depreciation, amortization and interest to current portion of long-term
debt of at least 1.25-to-1, measured annually.
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 originally due May 30, 1995. The bank and the Company have agreed to
restructure the debt as follows: the outstanding balance on the $400,000 Term
Note of $125,000 was paid in full on August 1, 1995. The term of the $500,000
Fixed Rate Note bearing interest at 7.95% was accelerated from June 1999 to July
1996. This acceleration changed the monthly installments from $8,333 through
June 1999 to eleven (11) installments of $33,333 and one 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 above the bank's prime rate (9.25% on
March 31, 1996). The Grid Note will mature on December 31, 1996. The Bank
permanently waived provisions requiring the Company to maintain any ratio of
debt to net worth and/or any ratios related to net operating profit so long as
the Company continues to make payments under the Agreement. The Agreement
prohibits the payment of dividends.
The Company's capital obligations consist of capitalized lease
obligations for equipment and an operating lease commitment for its offices
which expires in 1999. The Company anticipates satisfying these obligations
(approximately $275,000 annually) with funds generated from operations or from
future financing as can be arranged.
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PART II
OTHER INFORMATION
Item 1. Legal Proceedings - No material developments.
Item 2. Changes in Securities - None.
Item 3. Defaults Upon Senior Securities - None, except as described in Part
I, Item 2, Financial Resources.
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
a. Exhibits
99-A AW's Registration Statement on Form S-3 as filed with
the Securities and Exchange Commission on May 14, 1996
is incorporated herein by reference.
b. Reports on Form 8-K - None.
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Signatures
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
AW COMPUTER SYSTEMS, INC.
(REGISTRANT)
Date: May 10, 1996 \s\Charles Welch
Charles Welch
Chief Executive Officer/President
Date: May 10, 1996 \s\Robert O'Connor
Robert O'Connor
Controller and Treasurer
(Principal Financial Officer)
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EXHIBIT INDEX
Rule 0-3(b) Page
Number Where the
Exhibit Can
Exhibit Number Description be Found
99-A AW's Registration Statement on 11
Form S-3 as filed with the Securities
and Exchange Commission on May 15,1996.