================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________ to _____________________
Commission file number 0-22341
-------
AUGMENT SYSTEMS, INC.
----------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
DELAWARE 04-3089539
- --------------------------------------------- ------------------------------
(State or other jurisdiction of incorporation (I.R.S.Employer Identification
or organization) No.)
2 Robbins Road Westford, MA 01886
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
978-392-8626
----------------------------------------------------
(Registrant's telephone number, including area code)
Transitional Small Business Disclosure Format:
Yes No X
----- -----
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirement for the past 90 days. YES X NO
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
Stock, as of the latest practicable date: As of August 14, 1998, the Company had
11,898,951 shares of Common Stock, $.01 par value, issued and outstanding.
================================================================================
<PAGE>
AUGMENT SYSTEMS, INC.
INDEX
<TABLE>
<CAPTION>
PAGES
<S> <C>
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Balance Sheets as of December 31, 1997
and June 30, 1998 3
Results of Operations for the six months and three months
ended June 30, 1998 and 1997 4
Statements of Cash Flows for the six months
ended June 30, 1998 and 1997 5
Notes to Financial Statements 6-8
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-12
PART II OTHER INFORMATION
Item 1 Legal Proceedings 13
Item 2 Changes in Securities 13
Item 3 Defaults Upon Senior Securities 13
Item 4 Submission of Matters to a Vote of Security-Holders 13-14
Item 5 Other Information 14
Item 6 Exhibits and Reports on Form 8-K 14
Signatures 15
</TABLE>
-2-
<PAGE>
AUGMENT SYSTEMS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
------------------------------
1998 1997
---- ----
(unaudited)
ASSETS
Current Assets:
<S> <C> <C>
Cash $ 1,201,952 $ 47,224
Accounts receivable, net 643,943 224,969
Inventories 973,287 1,162,920
Prepaid expenses 383,172 115,100
------------ ------------
Total current assets 3,202,354 1,550,213
Property and equipment, net 320,044 409,848
Other assets 278,745 278,745
------------ ------------
Total assets $ 3,801,143 $ 2,238,806
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable $ 348,414 $ 1,371,632
Accrued expenses 320,632 611,633
Notes payable 717,569 717,569
Bridge financing -- 474,074
Current portion of capital lease obligations 43,930 46,177
------------ ------------
Total current liabilities 1,430,545 3,221,085
Convertible promissory notes 41,495 41,495
Capital lease obligations, less current portion 81,951 81,951
------------ ------------
Total liabilities 1,553,791 3,344,531
============ ============
Stockholders' Equity (Deficit):
Common stock, $.01 par value; 30,000,000
shares authorized; 11,898,952 and 4,713,319
shares issued and outstanding at June 30, 1998,
and December 31, 1997, respectively 118,990 47,133
Additional paid-in capital 21,487,524 15,286,410
Accumulated deficit (19,359,162) (16,439,268)
------------ ------------
Total stockholders' equity (deficit) 2,247,352 (1,105,725)
------------ ------------
Total Liabilities and Stockholders' Equity $ 3,801,143 $ 2,238,806
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
-3-
<PAGE>
AUGMENT SYSTEMS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
---------------------- ---------------------
<S> <C> <C> <C> <C>
Sales $ 330,464 $ 567,233 $ 805,978 $ 567,223
Cost of sales 140,356 247,481 369,755 247,481
------------ ----------- ------------ -----------
Gross margin 190,108 319,742 436,223 319,742
Operating expenses:
Research and development 697,443 662,873 1,417,466 1,126,920
General and administrative 477,081 580,160 706,014 1,069,298
Sales and marketing 482,771 700,400 1,206,450 1,242,087
Total cost and expenses $ 1,657,295 $ 1,943,433 $ 3,329,930 $ 3,438,305
------------ ----------- ------------ -----------
Loss from operations $ (1,467,187) $(1,623,691) $ 2,893,707 $(3,118,563)
------------ ----------- ------------ -----------
Other expense:
Net interest expense $ 2,244 $ 49,771 $ 26,187 $ 143,902
------------ ----------- ------------ -----------
Total other expense, net $ 2,244 $ 49,771 $ 26,187 $ 143,902
------------ ----------- ------------ -----------
Net loss $ (1,469,431) $(1,673,462) $ (2,919,894) $(3,262,465)
------------ ----------- ------------ -----------
Net loss per common share (0.13) (0.43) (0.28) (0.96)
Weighted average common and common 11,485,824 3,902,330 10,318,545 3,410,557
equivalent shares outstanding
</TABLE>
The accompanying notes are an integral part of the financial statements.
-4-
<PAGE>
AUGMENT SYSTEMS, INC.
STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
Six Months Ended
June 30, June 30,
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss (2,919,894) (3,262,465)
Adjustments to reconcile net loss to net cash
used in operating
activities:
Depreciation and amortization 136,516 42,033
(Increase) decrease in operating assets and liabilities:
Accounts receivable (418,974) (513,761)
Inventory 189,633 (1,055,581)
Other assets (267,873) (18,200)
Accounts payable (1,164,041) 488,588
Accrued expenses (626,698) (104,308)
---------- ----------
Net cash used in operating activities (5,071,331) (4,423,694)
---------- ----------
Cash flows from investing activities:
Purchase of property and equipment (41,677) (57,493)
---------- ----------
Net cash used for investing activities (41,677) (57,493)
---------- ----------
Cash flows from financing activities:
Proceeds from issuance of common stock 5,967,736 8,985,240
Proceeds from issuance of short-term promissory notes -- 2,775,000
Proceeds from bridge financing 500,000 --
Repayment of bridge financing (200,000) --
Repayment of short-term advance -- (575,000)
Payments on capital lease obligations -- (9,210)
Payments on short-term promissory notes -- (3,585,000)
Payment on long-term convertible promissory notes -- (20,753)
Interest on short-term promissory notes -- (137,283)
Deferred financing costs -- (716,170)
---------- ----------
Net cash provided by financing activities 6,267,736 6,716,825
---------- ----------
Net increase (decrease) in cash 1,154,728 2,235,638
---------- ----------
Cash at beginning of period 47,224 452,753
---------- ----------
Cash at end of period 1,201,952 2,688,391
---------- ----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
-5-
<PAGE>
AUGMENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1998
1. NATURE OF BUSINESS AND BASIS OF PRESENTATION
From October 1995 and through March 1997, the Company operated as a
development stage company and engaged principally in the development and
integration of cross platform, high performance file servers with Fibre
Channel-Arbitrated Loop technology, resulting in a new paradigm for storing and
transferring large files. During this time, the Company engaged in limited
marketing activities and did not commence shipments of its initial products
until February 1997. During the second quarter ended June 30, 1997, the Company
commenced commercial shipment of its server product and recognized initial
revenues in April 1997. The Company's initial target markets are electronic
prepress, geographic information systems (GIS), medical imaging, and video
editing, all of which require the rapid and efficient movement of large image
and data files over networks.
The accompanying unaudited financial statements are presented in
accordance with the requirements for Form 10-QSB and do not include all the
disclosures required by generally accepted accounting principles for complete
financial statements. Reference should be made to the Company's Form 10-KSB for
the fiscal year ended December 31, 1997 for additional disclosures, including a
summary of the Company's accounting policies.
In the opinion of management of the Company, the financial statements
include all adjustments, consisting of only normal recurring accruals, necessary
for a fair presentation of the financial position of Augment Systems, Inc. The
results of operations for the three-and six month periods ended June 30, 1998 or
any other interim period, are not necessarily indicative of the results to be
expected for the full year.
2. NET LOSS PER SHARE OF COMMON STOCK
The Company follows Statement of Financial Accounting Standards
("SFAS") No. 128, Earnings per Share, issued by the Financial Accounting
Standards Board. Under SFAS No. 128 the basic and diluted net loss per share of
common stock is computed by dividing the net loss by the weighted average number
of common shares outstanding for the period, including stock options issued at
nominal amounts within 12 months of the Company's Initial Public Offering
("IPO"). The weighted average number of common shares outstanding is summarized
as follows:
<TABLE>
<CAPTION>
Six Month Period Ended
June 30, 1998 June 30, 1997
------------- -------------
<S> <C> <C>
Denominator for basic loss per share:
Weighted average common stock shares
outstanding............................................ 10,318,545 3,410,557
Potential dilutive common shares:
Common stock shares issuable under stock
options at nominal amounts within 12
months of IPO.......................................... - 0 - 1,288,672
---------- ---------
Denominator for diluted loss per share 10,318,545 4,699,229
</TABLE>
Stock options issued at nominal amounts within 12 months prior to the
Company's IPO are considered outstanding for all periods presented for the
diluted calculation in accordance with the Securities and Exchange Commission
Staff Accounting Bulletin No. 98. The Company's options, warrants and
convertible debt instruments other than those issued for nominal amounts within
12 months of the Company's IPO are not considered outstanding for the diluted
calculation since their effect is antidilutive.
-6-
<PAGE>
AUGMENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1998
3. STOCKHOLDERS' EQUITY
In April 1997, the Board of Directors declared a three-for-four reverse
stock split of the Company's Common Stock. All Common Stock and per share
information discussed in the financial statements and notes pertaining to
periods prior to April 1997 have been adjusted to give effect to this stock
split.
On May 16, 1997, the Company completed its initial public offering of
1,800,000 shares of its Common Stock at a price of $5.50 per share and 2,070,000
Redeemable Common Stock Purchase Warrants at $.15 per warrant. Each Redeemable
Common Stock Purchase Warrant entitles the holder to purchase one share of
Common Stock for $6.60 during the four-year period commencing May 12, 1998. The
net proceeds from the Company's initial public offering, after deducting
underwriting discounts and commissions and certain estimated expenses payable by
the Company were approximately $8,220,000.
In January 1998, the Company had a first closing on a private placement of
6,180,000 shares of the Company's Common Stock at a price of $1.00 per share. In
addition, the Company issued to the private placement agent as part of the
agent's commission 378,910 shares of the Company's Common Stock, in lieu of cash
compensation. In May 1998, the Company closed on an additional 575,000 shares of
the Company's Common Stock at a price of $1.00 per share and terminated the
private placement. In addition, the Company issued to the private placement
agent as part of the agent's commission 51,722 shares of the Company's Common
Stock, in lieu of cash compensation. The shareholders that participated in the
private placement of 6,755,000 shares in January and May 1998 of the Company's
Common Stock and the placement agent will receive an additional one-half (1/2)
share, or 3,592,816 shares of the Company's Common Stock, should the Company not
meet specific revenue targets by the end of fiscal year 1998.
On June 29, 1998, the stockholders of the Company approved an increase in
the number of authorized shares of common stock from 30,000,000 to 50,000,000, a
one-for-three reverse stock split of the Company's Common Stock and the issuance
of an additional 10,000,000 shares of Common Stock in connection with a proposed
private placement to be undertaken by the Company. The reverse stock split may
only be effected upon the closing of a private placement of the Company's Common
Stock.
4. FINANCING ARRANGEMENTS
In October 1997, the Company entered into a note agreement with Fleet
National Bank in the principal amount of $750,000 with interest at the bank's
prime rate plus 2%. This loan was originally payable by December 31, 1997, or
upon completion of a financing resulting in net proceeds of at least $5,000,000.
In accordance with the original terms of the bridge loan, the Company issued
detachable warrants to purchase 100,000 shares of the Company's Common Stock at
an exercise price of $3.00 per share exercisable over 5 years. Gross proceeds
were $750,000. The Company allocated proceeds of $81,077 to the detachable
warrants and $668,923 to the note. The discount on the debt is being amortized
over 5 months, the term of the extended loan. As of December 31, 1997, $48,646
was charged to interest expense. In December 1997, the loan agreement was
amended to extend the due date on the loan to February 28, 1998. In
consideration of the extension, the exercise price of the detachable warrants
was reduced from $3.00 per share to $1.00 per share. The term of this loan was
further extended until April 1,
-7-
<PAGE>
1998 and subsequently to July 31, 1998 pursuant to agreements between the
Company and Fleet National Bank. On July 31, 1998, the Company made a payment in
the amount of $300,000 to Fleet National Bank to partially pay down the loan. At
that time, the bank orally agreed to extend the term of the loan an additional
two weeks until August 15, 1998, pending the completion of a proposed bridge
financing being undertaken by the Company.
In August 1998, the Company entered into a financing arrangement with
an investment bank to secure $1,500,000 in bridge financing of secured
convertible promissory notes and common stock purchase warrants. The Company
intends to use a portion of the proceeds of the bridge financing to repay in
full its indebtedness to Fleet National Bank. Although no assurance can be
given, the Company anticipates the bridge financing to close on or before August
17, 1998. The Company and the investment bank have the right to extend the
bridge financing for up to an additional thirty (30) days. In the event the
bridge financing is not completed by August 17, 1998, then the Company will need
to seek an extension of the term of its loan with Fleet National Bank. No
assurance can be given that Fleet National Bank will agree to any additional
extension of the term of the Loan.
5. MATERIAL SUBSEQUENT EVENTS
In February 1998, the NASD changed the listing requirements for
companies whose securities are listed on the NASDAQ SmallCap Market. In light of
those changes, on February 26, 1998, NASDAQ informed the Company it was to have
net tangible assets of $5,000,000 by June 30, 1998, and granted the Company a
temporary listing exception until that time. Since, at June 30, 1998, the
Company did not meet the net tangible assets requirement, on July 7, 1998 NASDAQ
informed the Company that it's securities were no longer eligible for listing on
the NASDAQ SmallCap Market. The Company's Common Stock is currently listed on
OTC Bulletin Board under the symbol of "AUGS" and the Company's Common Stock
Purchase Warrants are listed under the symbol "AUGWS."
-8-
<PAGE>
AUGMENT SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 1998 COMPARED
TO THE THREE AND SIX MONTHS ENDED JUNE 30, 1997
INTRODUCTION
Augment Systems, Inc. develops, manufactures, sells and distributes Storage Area
Networking solutions for managing large image and data files. From October 1995
and through March 1997, the Company operated as a development stage company and
engaged principally in the development and integration of cross platform, high
performance file servers with Fibre Channel-Arbitrated Loop technology,
resulting in a new paradigm for storing and transferring large files. During
that time, the Company engaged in limited marketing activities and did not
commence shipments of its initial products until February 1997. During the
second quarter ended June 30, 1997, the Company commenced commercial shipment of
its server product and recognized initial revenues in April 1997. The Company's
initial target markets are electronic prepress, geographic information systems
(GIS), medical imaging, and video editing, all of which require the rapid and
efficient movement of large image and data files over networks.
RESULTS OF OPERATIONS
The Company recognized product revenues of $330,464 and $805,978 for the three
months and six months ended June 30, 1998, respectively, as compared to product
revenues of $567,223 and $567,223 for the same periods in 1997, respectively.
Gross product margins on product sales were 59% and 55% for the three month and
six months ended June 30 1998, respectively, as compared to 56% and 56% for the
same periods in 1997, respectively. Contributing to the improved margins during
the three month period ended June 30, 1998 was recognition of a software license
fee of $100,000 to a major customer in the video market. The Company anticipates
revenues for the balance of 1998 will remain fairly consistent with the first
half of the year, as the main focus of the Company will be on continued product
development. Gross product margins may vary slightly with the distribution of
products to original equipment manufacturers ("OEM's"), third party resellers,
end users and potential competition from other suppliers. Prior to the second
quarter ended June 30, 1997, the Company was a development stage company and had
not recognized revenues.
The Company recognized a net loss of $1,469,431 and $2,919,894 for the three and
six months ended June 30, 1998, respectively, as compared to net losses of
$1,673,462 and $3,262,465 for the same periods in 1997, respectively. The
decreases in net loss of $204,031 and $342,571 for the three and six month
periods, respectively, is attributable to an decrease in operating spending in
sales and marketing expenses and a reduction administrative costs associated
with legal fees, accountants fees and outside consultants fees. The Company
anticipates a slight decrease in operating spending for the second half of 1998,
as the Company reduces spending associated with its European operation and makes
a transition from engineering contractors to full time employees.
Research and development costs for the three and six months ended June 30, 1998
were $697,443 and $1,417,466, respectively, as compared to $662,873 and
$1,126,920 for the same periods in 1997, respectively. The $290,546 increase for
the six month period, is primarily due to a increase in engineering supplies and
prototype spending and outside contractors associated with product development
of the Company's server. The Company anticipates that research and development
costs will go down slightly for the second half of 1998 as the Company makes a
transition from engineering contractors and consultants to full time employees.
-9-
<PAGE>
General and administrative costs for the three and six months ended June 30,
1998 were $477,081 and $706,014, respectively, as compared to $580,160 and
$1,069,298 for the same periods in 1997, respectively. The $103,079 and $363,284
decreases for the three and six month periods, respectively, is primarily
attributable to a reduction in administrative support personnel, and a reduction
in spending for outside legal, accounting and consulting services.
Selling and marketing costs for the three and six months ended June 30, 1998
were $482,771 and $1,206,450, respectively, as compared to $700,400 and
$1,242,087 for the same periods in 1997, respectively. The $217,629 and $35,637
decreases for the three and six month periods, respectively is attributable to
an decreases in marketing support and sales personnel in the Far East and Europe
and decreased spending on promotional material. The Company anticipates that
selling and marketing expenses will increase slightly toward the end of 1998 as
the Company develops its sales and distribution channels and expands its
marketing efforts.
The Company currently has 24 full-time employees and 8 independent contractors
and plans to hire an additional 12 full-time employees in various capacities
over the next 12 months. Additional personnel may be required depending on the
level of business activity. The Company expects, however, to continue its
current practice of utilizing independent consultants on an as-needed basis
rather than exclusively hiring additional full-time employees.
LIQUIDITY AND CAPITAL RESOURCES
Since October 1995, the Company has funded its operations principally from a
combination of debt and equity financings totaling approximately $21,220,000. On
May 16, 1997, the Company completed its initial public offering of 1,800,000
shares of its Common Stock at a price of $5.50 per share and 2,070,000
Redeemable Common Stock Purchase Warrants at $.15 per warrant. Each Redeemable
Common Stock Purchase Warrant entitles the holder to purchase one share of
Common Stock for $6.60 during the four-year period commencing May 12, 1998. The
net proceeds from the Company's initial public offering, after deducting
underwriting discounts and commissions and estimated expenses payable by the
Company, were approximately $8,220,000.
In July 1997, the Company obtained a $3,000,000 working line of credit from
Fleet National Bank. Borrowings on the facility will bear interest at prime plus
.50%. Borrowings are limited to 75% of eligible domestic accounts receivable and
are secured by all assets of the Company. In October 1997, the use of this
facility was temporarily suspended until the Company complies with certain
financial covenants.
In October 1997, the Company obtained a $750,000 loan from Fleet National Bank.
The loan is secured by all of the Company's assets, bears interest at Fleet
National Bank's prime rate plus 2% and was originally payable by December 31,
1997 or upon completion of a financing resulting in net proceeds to the Company
of at least $5,000,000. Pursuant to the original terms of this loan, the Company
issued detachable warrants to purchase 100,000 shares of Common Stock at an
exercise price of $3.00 per share exercisable over five years. This loan was
extended through and until February 28, 1998 and the exercise price for the
warrants issued in conjunction with this loan was lowered from $3.00 per share
to $1.00 per share. The term of this loan was further extended until April 1,
1998 and subsequently to July 31, 1998 pursuant to agreements between the
Company and Fleet National Bank. On July 31, 1998, the Company made a payment in
the amount of $300,000 to Fleet National Bank to partially pay down the loan. At
that time, the bank orally agreed to extend the term of the loan an additional
two weeks until August 15, 1998, pending the completion of a proposed bridge
financing being undertaken by the Company, which is described below.
In December 1997, the Company entered into an agreement with Sunrise Securities
Corp. ("Sunrise Securities"), a New York based investment bank, to raise a
minimum of $6,000,000 and a maximum of $9,000,000 in a private placement of the
Company's Common Stock. During December 1997 and January 1998, Sunrise
Securities secured $1,000,000 in bridge financing from institutional and private
investors in anticipation of the private placement. The bridge financing
promissory notes accrued interest at 8% per annum with interest and principal
payable at maturity on the initial closing of the private placement. In
addition, the Company issued to the bridge investors five year warrants to
purchase up to 750,000 shares in
-10-
<PAGE>
the aggregate of the Company's Common Stock at $1.00 per share. In February
1998, the Company repaid $200,000 of these promissory notes plus interest and
the holders of $800,000 of these promissory notes converted their notes into
shares of the Company's Common Stock at $1.00 per share. In January 1998, the
Company closed on an initial amount of $6,180,000 of a private placement
initiated in December 1997. In early May 1998, the Company closed on an
additional $575,000 and terminated the offering started in December 1997.
In August 1998, the Company entered into an agreement with a New York-based
investment bank to raise $1,500,000 in bridge financing, of secured convertible
promissory notes and common stock purchase warrants. The Company intends to use
a portion of the proceeds of the bridge financing to repay in full its
indebtedness to Fleet National Bank. Although no assurance can be given, the
Company anticipates the bridge financing to close on or before August 17, 1998.
The Company and the investment bank have the right to extend the bridge
financing for up to an additional thirty (30) days. In the event the bridge
financing is not completed by August 17, 1998, then the Company will need to
seek an extension of the term of its loan with Fleet National Bank. No assurance
can be given that Fleet National Bank will agree to any additional extension of
the term of the Loan. which is anticipated to close by the end of August 1998.
In addition, the Company anticipates raising an additional $4,000,000 to
$6,000,000 in a private placement of its Common Stock during the fourth quarter
of 1998. The additional funds raised in the private placement may be used to
repay any portion of the promissory notes issued in the bridge financing that
are not converted to Common Stock upon the closing of such additional private
placement and will be used to support ongoing product development and ongoing
operations of the Company.
There can be no assurance, however, that the Company will be able to complete
the bridge financing in August 1998, or complete the subsequent private
placement anticipated in the fourth quarter of 1998, nor can there be any
assurance that the Company will be able to obtain additional funding on terms
favorable to the Company, if at all. If cash flow from operations, the bridge
financing and the private placement is not sufficient, there will be a material
adverse affect on the Company's ability to continue to fund new product
development, expand its sales distribution channels, and continue as an ongoing
operation. Success of future operations is subject to a number of risks,
including: the risk that the Company will not be successful in developing future
products; the risk of rapid technological changes in the server industry; the
Company's limited operating history, history of losses, and accumulated deficit;
the Company's need for additional capital; the highly competitive nature of the
server industry; and future unanticipated shortfalls in the Company's revenues.
The Company is dependent on its ability to obtain additional financing to fund
new product development and expand its sales distribution channels, generate
sufficient funds from the sales of products in the normal course of business,
and ultimately to generate profitable operations. As a result of the Company's
recurring losses, the Company's auditors have expressed substantial doubt about
the Company's ability to continue as a going concern. The accompanying financial
statements do not include any adjustments relating to the recovery and
classification of recorded asset amounts or the amounts and classifications of
liabilities that might be necessary should the Company be unable to continue as
a going concern.
The Company does not have any material commitments for capital expenditures at
this time.
YEAR 2000
Certain computer programs and microprocessors use two digits rather than four to
define the applicable year. Any computer program that has date-sensitive
software and microprocessors may recognize a date using "00" and the year 1900
rather than 2000. This phenomenon could cause a disruption of the Company's
operations, including, among other things, a temporary inability to send
invoices, or engage in similar normal business activities. Management believes
the Company is substantially year 2000 compliant with respect to its sales,
administration, and general operations. Prior to purchasing any new equipment or
software, it is Company policy to ensure that the specifications include year
2000 compliance. However, there can be no guarantee that the systems of other
companies on which the Company's system will rely will be converted on a timely
basis, or that a failure to convert by another company, or a conversion that is
incompatible with the Company's systems, would not have a material impact on the
Company. Based on its current assessment, management believes that year 2000
compliance will not have a material adverse impact on the future operations of
the Company.
-11-
<PAGE>
FORWARD LOOKING STATEMENTS
Some of the statements in this Form 10-QSB Quarterly Report, as well as
statements by the Company in periodic press releases, oral statements made by
the Company's officials to analysts and shareholders in the course of
presentations about the Company and conference calls following quarterly
earnings releases, constitute "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. Words or phrases denoting
the anticipated results of future events such as "anticipate," "believe,"
"estimate," "will likely," "are expected to," "will continue," "project,"
"trends" and similar expressions that denote uncertainty are intended to
identify such forward-looking statements. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors that may cause
the actual results, performance or achievements of the Company to be materially
different from any future results, performance or achievements expressed or
implied by the forward-looking statements. Such factors affecting future results
include, but are not limited to, the Company's limited operating history, the
Company's need for additional financing, rapid technology changes, regulatory
uncertainty, level of demand for the Company's products and services, product
acceptance, industry wide competitive factors, timing of completion of major
equipment projects, retention of qualified personnel, the Company's dependence
on proprietary technology of other third parties and political, economic or
other conditions. Furthermore, market trends are subject to changes that could
adversely affect future results. Because of these and other factors, past
financial performance is not necessarily indicative of future performance,
historical trends should not be used to anticipate future operating results, and
the trading price of the Company's common stock may be subject to wide
fluctuations in response to quarter-to-quarter variations in operating results
and market conditions.
-12-
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In March 1998, the Company's former President and CEO, Lorrin
Gale, left the Company at the request of the Board of
Directors. On May 29, 1998, Mr. Gale filed a complaint against
the Company in the Superior Court of the Commonwealth of
Massachusetts seeking relief for breach of an employment
contract. The Company intends to vigorously defend this
lawsuit and violation of the Massachusetts Wage Payment
Statute and management believes that it has defenses against
Mr. Gale's claims of (i) $250,000 in severance pay, (ii)
accrued vacation pay of approximately $7,200 pertaining to
fiscal year 1998 , (iii) continuation of health and life
benefits, (iv) treble damages for any loss of wages and (v)
interest and related legal fees and expences.
The Company has received a letter from a printing vendor
claiming that the Company owes the vendor approximately
$50,000 for printing services rendered. The Company's position
is that it has provided consideration to the vendor for the
printing services in the form of equipment and software, in
accordance with an understanding between the parties
established in November 1996. The Company is currently
negotiating a settlement of the matter. No formal claim has
been filed in any court with respect to this matter.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
In October 1997, the Company obtained a $750,000 loan from
Fleet National Bank. The loan is secured by all of the
Company's assets, bears interest at Fleet National Bank's
prime rate plus 2% and was originally payable by December 31,
1997 or upon completion of a financing resulting in net
proceeds to the Company of at least $5,000,000. This loan was
extended until February 28, 1998 and further extended until
April 1, 1998 and subsequently to July 31, 1998 pursuant to
agreements between the Company and Fleet National Bank. On
July 31, 1998, the Company made a payment in the amount of
$300,000 to Fleet National Bank to partially pay down the
loan. At that time, the bank orally agreed to extend the term
of the loan an additional two weeks until August 15, 1998,
pending the completion of a proposed $1,500,000 bridge
financing being undertaken by the Company. The Company intends
to use a portion of the proceeds of the bridge financing to
repay in full its indebtedness to Fleet National Bank.
Although no assurance can be given, the Company anticipates
the bridge financing to close on or before August 17, 1998.
The Company and the investment bank have the right to extend
the bridge financing for up to an additional thirty (30) days.
In the event the bridge financing is not completed by August
17, 1998, then the Company will need to seek an extension of
the term of its loan with Fleet National Bank. No assurance
can be given that Fleet National Bank will agree to any
additional extension of the term of the Loan.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following matters were submitted to a vote of the
stockholders of the Company at a Special Meeting in lieu of an
Annual Meeting of Stockholders held on June 29, 1998. The
holders of 6,430,790 shares of Common Stock were present or
represented by proxy, and accordingly, a quorum was present
and matters were voted on as follows:
(a) The following persons were elected directors:
<TABLE>
<CAPTION>
Votes for Votes against Votes withheld
--------- ------------- --------------
<S> <C> <C> <C>
Laurence S. Liebson 6,423,300 7,490 - 0 -
Duane A. Mayo 6,423,300 7,490 - 0 -
Fred L. Chanowski 6,423,300 7,490 - 0 -
Jeffrey Leventhal 6,423,300 7,490 - 0 -
</TABLE>
-13-
<PAGE>
(b) The following resolutions were submitted to a vote of
the shareholders at the meeting:
(1) To approve an amendment to the Restated
Certificate of Incorporation to increase the
number of authorized shares of Common Stock
from 30,000,000 to 50,000,000. The
resolution was passed; 6,398,499 shares
voting in favor, 23,294 shares voting
against and 8,997 shares abstaining.
(2) To approve an amendment to the Company's
1995 Stock Option Plan to increase the
number of shares authorized for issuance
under the Plan from 800,000 to 4,800,000.
The resolution was passed; 6,371,205 shares
voting in favor, 50,588 shares voting
against and 8,997 shares abstaining.
(3) To approve the issuance of up to 10,000,000
shares of Common Stock in connection with a
proposed private placement. The resolution
was passed 6,425,490 shares voting in favor
and 5,300 shares abstaining.
(4) To approve an amendment to the Restated
Certificate of Incorporation to adopt a 1
for 3 reverse stock split of the Company's
issued and outstanding Common Stock. The
resolution was passed; 6,405,106 shares
voting in favor, 25,684 shares voting
against.
(5) To ratify the designation of BDO Seidman LLP
as independent accountants for the period
ending December 31, 1999. The resolution was
passed; 6,424,490 shares voting in favor,
5,300 shares voting against and 5,300 shares
abstaining.
ITEM 5. OTHER INFORMATION
In February 1998, the NASD changed the listing requirements
for companies whose securities are listed on the NASDAQ
SmallCap Market. In light of those changes, on February 26,
1998, NASDAQ informed the Company it was to have net tangible
assets of $5,000,000 by June 30, 1998, and granted the Company
a temporary listing exception until that time. Since, at June
30, 1998, the Company did not meet the net tangible assets
requirement, on July 7, 1998 NASDAQ informed the Company that
it's securities were no longer eligible for listing on the
NASDAQ SmallCap Market. The Company's Common Stock is
currently listed on OTC Bulletin Board under the symbol of
"AUGS" and the Company's Common Stock Purchase Warrants are
listed under the symbol "AUGWS."
If a stockholder intends to present a proposal at the Annual
Meeting of Stockholders of the Company in 1999 (the "1999
Annual Meeting") and does not submit such proposal on or
before February 1,1999, such proposal will not be included in
the proxy statement and proxy card related to the 1999 Annual
Meeting. Nonetheless, such stockholder may raise such a
proposal at the 1999 Annual Meeting; however, as a result of
the adoption by the SEC on May 21, 1998 of new rule 14a-4 (C)
(1) under the Securities Exchange Act of 1934, as amended, if
a proponent of a shareholder proposal fails to notify the
Company at least 45 days prior to June 15, 1999 (June 15,
being the month and day of mailing the Company's 1998 proxy
statement), then management proxies would be allowed to use
their discretionary voting authority when such shareholder
proposal is raised at the annual meeting, without any
discussion of the matter in the proxy statement.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
3(i) Articles of Amendment to Articles of Incorporation filed
July 14, 1998.
(b) Reports on Form 8-K:
A report on Form 8-K was filed on April 1, 1998 announcing
that Lorrin Gale, the former President and CEO would be
leaving the Company.
A report on Form 8-K was filed on April 17, 1998 pursuant to a
request from NASD to file its unaudited Balance Sheet as of
January 31, 1998.
-14-
<PAGE>
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.
AUGMENT SYSTEMS, INC.
Date: August 14, 1998 By: /s/ Laurence Liebson
------------------------------------
Laurence Liebson
President & Chief Executive Officer
(Principal Executive Officer)
Date: August 14, 1998 By: /s/ Duane A. Mayo
------------------------------------
Duane A. Mayo
Chief Financial Officer, Treasurer
and Secretary (Principal Financial &
Accounting Officer)
-15-
<PAGE>
STATE OF DELEWARE
OFFICE OF THE SECRETARY OF STATE
--------------------------------
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELEWARE, DO HEREBY
CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF AMENDMENT
OF "AUGMENT SYSTEMS, INC.", FILED IN THIS OFFICE ON THE FOURTEENTH DAY OF JULY,
A.D. 1998, AT 11 O'CLOCK.
[STATE SEAL] /s/ Edward J. Freel
-----------------------------------
EDWARD J. FREEL, SECRETARY OF STATE
AUTHENTICATION:
2229490 8100 9246947
981314422 DATE: 08-11-98
EXHIBIT 3(I)
AUGMENT SYSTEMS, INC.
CERTIFICATE OF AMENDMENT
OF
RESTATED CERTIFICATE OF INCORPORATION
Augment Systems, Inc., a corporation organized and existing under the laws
of the State of Deleware (the"Corporation"), hereby certifies as follows,
pursuant to Section 242 of the General Corporation Law of the State of Deleware:
I. That the Board of Directors of Augment Systems, Inc., by Special Meeting
of the Board of Directors on May 21, 1998, duly adopted this resolution in
accordance with Section 242 of the General Corporation Law of the State of
Deleware (i) proposing amendment of the Certificate of Incorporation of the
Corporation, subject to the approval of the Stockholders of the Corpration, (ii)
declaring such amendment to be advisable and in the best interest of the
Corporation, and (iii) directing that such amendment be submitted to and be
considered by the Stockholders of the Corporation. The resolution setting forth
the amendment in its entirety is as follow:
RESOLVED: That the directors hereby recommended that the stockholders of the
Corporation approve a proposal to increase the number of shares of Common Stock,
$.01 par value, that the Corporation shall have authority to issue from
30,000,000 shares to 50,000,000 shares.
"FOURTH: The total number of shares of all classes of stock which the
Corporation shall have authority to issue is 50,000,000 shares of Common Stock,
$.01 par value per share and 2,000,000 shares of Preferred Stock, $.01 par value
per share."
II. This Certificat of Amendment of the Restated Certificate of
Incorporation was duly adopted pursuant to a vote of the Stockholders on June
29, 1998 and the Stockholders holding a majority of capital stock of the
corporation, voting together as a single class, voted in favor of the Amendment
in accordance with the provisions of Sections 228 and 242 of the General
Corporation Law of the State of Deleware and the Corporation's Certificate of
Incorporation, and written notice of the adoption of the Certificate of
Amendment of Certificate of Incorporation has been given as provided by Section
228(d) of the General Corporation Law of the State of Deleware to every
shareholder entitled to such notice.
IN WITNESS WHEREOF, Augment Systems, Inc. has caused this Certificate of
Amendment of Certificate of Incorporation to be signed by its President and
attested to by its Assistant Secretary, this 13th day of July, 1998.
/s/ Laurence S. Liebson
------------------------------
Laurence S. Liebson, President
Attested to:
/s/ Duane Mayo
- -------------------------
Duane Mayo, Secretary
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS FOR THE PERIOD ENDED JUNE 30, 1998, AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 1,201,952
<SECURITIES> 0
<RECEIVABLES> 643,943
<ALLOWANCES> 0
<INVENTORY> 973,287
<CURRENT-ASSETS> 3,202,354
<PP&E> 320,044
<DEPRECIATION> 0
<TOTAL-ASSETS> 3,801,143
<CURRENT-LIABILITIES> 1,430,545
<BONDS> 0
0
0
<COMMON> 118,990
<OTHER-SE> 2,247,352
<TOTAL-LIABILITY-AND-EQUITY> 3,801,143
<SALES> 805,978
<TOTAL-REVENUES> 805,978
<CGS> 369,755
<TOTAL-COSTS> 3,329,930
<OTHER-EXPENSES> 26,187
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,919,894)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,919,894)
<EPS-PRIMARY> (0.28)
<EPS-DILUTED> (0.28)
</TABLE>
