UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
[X] THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-22365
APOLLO INTERNATIONAL OF DELAWARE, INC.
-------------------------------------------------------------
(Exact name of Small Business Issuer specified in its charter)
DELAWARE 59-3285046
- ------------------------------ -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6542 U.S. HIGHWAY 41, SUITE 215
APOLLO BEACH, FLORIDA 33572
----------------------------------------
(Address of principal executive offices)
(813-645-7677)
--------------------------
(Issuer's telephone number)
Check whether the Issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ].
The number of shares of the Registrant's common stock outstanding at August 1,
1998 was 3,655,115 shares.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
APOLLO INTERNATIONAL OF DELAWARE, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
ASSETS
JUNE 30, DECEMBER 31,
1998 1997
---------- ------------
CURRENT ASSETS
Cash $ 852 $ 41,600
Accounts receivable 45,556 57,512
Inventory 963,212 1,121,870
Other assets 161,827 89,541
---------- ----------
TOTAL CURRENT ASSETS 1,171,447 1,310,523
DEFERRED SOFTWARE COSTS 2,609,458 2,425,583
FIXED ASSETS 226,507 207,077
OTHER ASSETS 13,652 15,492
---------- ----------
TOTAL ASSETS $4,021,064 $3,958,675
========== ==========
(CONTINUED)
2
<PAGE>
APOLLO INTERNATIONAL OF DELAWARE, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(CONTINUED)
LIABILITIES AND STOCKHOLDER'S EQUITY
JUNE 30, DECEMBER 31,
1998 1997
----------- -----------
CURRENT LIABILITIES
Overdraft $ 39,416 $ 7,047
Trade notes and accounts payable
and accrued expenses 1,175,340 718,550
Payroll taxes payable 116,962 55,153
Notes payable - stockholders 1,562,831 1,399,321
Current portion of notes
Payable equipment 4,453 4,871
----------- -----------
TOTAL CURRENT LIABILITIES $ 2,899,002 $ 2,184,942
ACCOUNTS PAYABLE - NONCURRENT 125,000 125,000
NOTES PAYABLE - EQUIPMENT 10,998 9,720
NOTES PAYABLE - LONG-TERM 1,142,983 --
----------- -----------
TOTAL LIABILITIES $ 4,177,983 $ 2,319,662
----------- -----------
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value;
Authorized: 5,000,000 shares;
issued and outstanding: none
Common stock, $.01 par value;
Authorized: 15,000,000 shares;
issued and outstanding: 3,655,115
as of June 30, 1998 and 3,555,115 as of
December 31, 1997 29,717 28,717
Additional paid-in capital 7,014,805 6,830,725
Common stock warrants 200,000
Deficit (7,395,307) (5,193,170)
Less prepaid rent (6,134) (27,259)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY $ (156,919) $ 1,639,013
----------- -----------
TOTAL LIABILITIES
AND STOCKHOLDER'S EQUITY $ 4,021,064 $ 3,958,675
=========== ===========
<PAGE>
<TABLE>
<CAPTION>
APOLLO INTERNATIONAL OF DELAWARE, INC.
AND SUBSIDIARY
STATEMENT OF OPERATIONS
(UNAUDITED)
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
1998 1997 1998 1997
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
SALES $ 38,299 $ 5,460 $ 147,263 $ 443,259
COST OF SALES (32,991) (4,734) (126,193) (239,259)
----------- ----------- ----------- -----------
GROSS PROFIT 5,308 726 21,070 204,000
----------- ----------- ----------- -----------
EXPENSES
Research and development (84,880 (94,830) (176,195) (201,196)
General and administrative (894,144) (442,947) (1,889,010) (837,407)
----------- ----------- ----------- -----------
TOTAL EXPENSES (979,024) (537,777) (2,065,205) (1,038,603)
----------- ----------- ----------- -----------
LOSS FROM OPERATIONS (973,716) (537,051) (2,044,135) (834,603)
INTEREST EXPENSE AND
AMORTIZATION OF DISCOUNT
AND DEFERRED FINANCING COSTS (85,733) (44,306) (135,752) (93,092)
----------- ----------- ----------- -----------
LOSS BEFORE INCOME TAXES (1,059,449) (581,357) (2,179,887) (927,695)
INCOME TAXES ----------- ----------- ----------- -----------
NET LOSS $(1,059,449) $ (581,357) $(2,179,887) $ (927,695)
=========== =========== =========== ===========
AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 3,052,929 2,811,434 3,052,929 2,811,434
=========== =========== =========== ===========
LOSS PER COMMON SHARE $ (0.35) $ (0.21) $ (0.71) $ (0.33)
=========== =========== =========== ===========
</TABLE>
4
<PAGE>
APOLLO INTERNATIONAL OF DELAWARE, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
SIX MONTHS
ENDED JUNE 30,
1998 1997
----------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ($2,179,886) ($927,695)
Adjustments to reconcile net loss
to net cash used in operating
Activities:
Amortization of discount
And deferred financing costs 17,308
Amortization of deferred software cost 191,054 85,646
Depreciation and amortization 30,132 15,549
Amortization of prepaid rent 21,125 3,333
Capitalization of software costs (211,961) (157,203)
Increase (decrease) in cash from
Accounts receivable 11,955 (356,065)
Inventory 158,658 (49,772)
Other current assets (197,462) 5,927
Other assets
Trade notes and accounts
Payable and accrued expenses 857,986 503,409
Payroll taxes payable 63,538 105,755
----------- ---------
NET CASH USED IN OPERATING ACTIVITIES ($1,254,861) ($753,808)
----------- ---------
NET CASH USED IN INVESTING ACTIVITIES
Purchases of fixed assets ($ 49,323) ($ 30,211)
----------- ---------
(CONTINUED)
5
<PAGE>
APOLLO INTERNATIONAL OF DELAWARE, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(CONTINUED)
SIX MONTHS
ENDED JUNE 30,
1998 1997
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common Stock $ 200,000
Proceeds from loans payable - stockholders $ 498,875
Proceeds from note payable - other 1,142,983 183,700
Proceeds from loans payable - line of credit 257,241
Cost of proposed public offering (187,560)
Payments of loans payable (72,500)
NET CASH PROVIDED BY FINANCING
ACTIVITIES 1,270,483 752,256
---------- ----------
INCREASE (DECREASE) IN CASH (33,701) (31,763)
CASH - beginning 34,553 34,099
---------- ----------
CASH - ENDING $ 852 $ 2,336
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid for interest $ 47,709 $ 45,816
========== ==========
6
<PAGE>
APOLLO INTERNATIONAL OF DELAWARE, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. DESCRIPTION OF BUSINESS
Apollo International of Delaware, Inc. (Company) develops, manufactures and
distributes worldwide electric power protection and control products,
utilizing computer and fiber optics technologies for industry and electric
utilities.
2. FINANCIAL STATEMENTS
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all the information
and footnotes required by generally accepted accounting principles for
financial statements. For further information, refer to the audited
financial statements and notes thereto for the year ended December 31, 1997.
In the opinion of the Company, all adjustments, consisting only of normal
recurring adjustments necessary for a fair presentation of the financial
statements have been made.
The accompanying unaudited financial statements have been prepared assuming
that the Company will continue operations on a going-concern basis, which
contemplates the realization of assets and the satisfaction of liabilities
in the normal course of business. However, the Company has incurred net
losses since inception and, as of June 30, 1998, its current liabilities
exceeded its current assets by approximately $1,727,555. These factors raise
doubt about the Company's ability to continue as a going concern. The
Company's ability to continue as a going concern is dependent upon obtaining
additional financing and significantly increasing its sales. Management has
received additional financing for working capital, however, there is no
assurance that the Company will be able to obtain additional financing if
necessary, or if such financing is obtained, attain profitable operations
and continue operations as a going concern.
3. LOSS PER SHARE
Loss per share was computed based upon the weighted average number of common
shares and common share equivalents outstanding during the three months and
six months ended June 30, 1998 and 1997. Fully-dilutive loss per common
share has not been presented because it was anti-dilutive.
In February 1997, the FASB issued Statement No. 128, "Earnings Per Share",
which changes the calculations and disclosures of earnings per share. As of
January 1, 1997 the Company adopted Statement No. 128 without material
effect.
7
<PAGE>
4. PUBLIC OFFERING
In July 1997, the Company closed its initial public offering and sold
800,000 shares of common stock at $5.00 per share, and 920,000 warrants at
$.25 per warrant, resulting in net proceeds of approximately $3.16 million,
all of which proceeds have been utilized.
5. CONVERTIBLE NOTES PAYABLE
Through March 19, 1998, the Company borrowed an aggregate of $1,000,000,
payable in two years, with interest at 8%, per annum, payable quarterly as
to $250,000 and monthly as to $750,000. The notes are collateralized by
accounts receivable and inventory and are convertible into common stock at
$3.25 per share. In connection with the borrowing, the Company paid a fee to
a consultant of $100,000 and 325,000 warrants. Each warrant is exercisable
to purchase one share of common stock at $3.25 per share, commencing July
11, 1999 through February 8, 2003.
On June 22, 1998, the Board of Directors of the Company approved the terms
of an agreement (Omnibus Agreement) with Oak Point Investments, Inc. as
Lender, and Frank J. Mancini as Line Lender, whereby the Company would
receive cash advances up to an aggregate of $790,000 for operating capital,
and up to a total of $250,000 as a creditors fund for the payment of
outstanding accounts payable of the Company. In addition, a revolving line
of credit up to $100,000 was set up for the sole purpose of purchasing
material required to produce products. The cash advances and funds paid from
the creditors fund shall be evidenced by a secured convertible promissory
note, which note shall be convertible into the Company's common stock at a
$1.00 per share conversion price (subject to underwriter's lock-up until
July 10, 1999). The security for the cash advances and creditors funds drawn
down by the Company will be a first security interest in the common stock of
the Company's subsidiary, Trans-World Powernet, Inc. The line of credit will
be evidenced by a secured promissory note, and will be secured by the
Company's accounts receivable. Through June 30, 1998, the Company received
$53,000.
As part of the above Omnibus Agreement, the Company's outstanding debt as of
May 31, 1998, in the amount of $2,428,045 (exclusive of accounts payable or
funds subsequently received under the Omnibus Agreement) shall be
convertible on a pro rata basis into the Company's common stock at a $1.00
per share conversion price subject to the underwriter's lock-up, and the
exercise price for certain outstanding common stock purchase warrants shall
be reduced to $1.00 per share also on a pro rata basis. The pro rata basis
will be equal to the amount Lender provides the Company as a percentage of
the total funding of $1,040,000. A finders fee is payable to G.A.R., Inc.,
equal to 4% of the loan proceeds actually advanced to or on behalf of the
Company under the Omnibus Agreement.
6. LOANS PAYABLE
On April 24, 1998, the Company entered into a 60 day loan agreement with
Rainfest, Ltd. in the amount of $50,000. The loan was non-interest bearing,
but included the issuance of 20,000 shares of common stock of the Company,
subject to the underwriter's lock-up. The loan was secured by the accounts
receivable of Trans-World Powernet, Inc., a subsidiary of Apollo, and
personal guarantees by David W. Clarke, President, and Christine Clewes,
Vice
8
<PAGE>
President of Marketing. On June 2, 1998, the loan to Rainfest was repaid
through a personal loan by John Tang, President of Trans-World Powernet,
Inc. in the amount of $25,000, and a personal loan by Christine Clewes in
the amount of $13,000. The balance of the amount due Rainfest of $12,000 was
paid by the Company from operating funds. Both John Tang and Christine
Clewes have their loan secured by the accounts receivable of Trans-World.
On June 5, 1998, the Company entered into a loan agreement with Oak Point
Investments, Inc. in the amount of $60,000. Repayment of the loan is to be
made from the first $60,000 received by the Company of Trans-World Powernet,
Inc. accounts receivable, with said receivables secured by a Lock Box. As
part of this loan, 24,000 shares of the common stock of the Company, subject
to the underwriter's lock-up, shall be issued to Oak Point Investments, Inc.
7. SECURITIES AND EXCHANGE COMMISSION
In March 1998 the Company received an informal letter of inquiry from the
Securities and Exchange Commission ("SEC") requesting copies of certain
documentation. The letter indicated that the inquiry was confidential and
should not be regarded as an indication by the SEC that any violation of law
has occurred, or as a reflection upon the merits of the Company's securities
or upon any person or entity who effected transactions in the Company's
securities. However, although the inquiry is informal, there is no assurance
that a more formal inquiry will not follow. As a result of the preliminary
nature of the inquiry, the Company is unable to predict whether this will
result in adverse consequences to the Company. As of June 30, 1998, the
Company had provided the SEC with copies of all requested documentation. The
Company had not been notified by the SEC of any change to the status of this
informal inquiry.
8. OBSOLETE INVENTORY
Due to the difficulties the Company experienced with the FPR1 and the CMPR2
in the field, major redesigns of both units were undertaken (See Factors
Affecting Operating Results). As a result of these engineering redesigns,
certain inventories became obsolete. After taking advantage of all returns
to vendors, the net effect to the Company was a write-down of inventory in
the amount of $202,714.39.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This report contains forward-looking statements within the meaning of Section
21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
which represent the Company's expectations and beliefs, including, but not
limited to statements concerning the Company's expected growth. The words
"believe," "anticipate," "estimate," "project," "intend," and similar
expressions identify forward looking statements, which speak only as of the date
such statements were made. These statements by their nature involve substantial
risks and uncertainties, certain of which are beyond the Company's control and
cannot be predicted or quantified. Actual results may differ materially
depending on a variety of important factors, including, among others referenced
herein and in the Company's annual report on Form 10-KSB (File No. 0-22365),
problems commonly encountered by companies seeking to commercialize new products
such as unexpected delays in product development, production, and marketing;
sources for sufficient capital for the Company's growth and operations; economic
and political factors in nations of the Company's international customers;
changes in economic conditions; demand for the Company's products and changes in
the competitive environment.
9
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain selected
historical operating results for the Company as a percentage of net sales.
SIX MONTHS
ENDED JUNE 30,
1998 1997
------- ------
Net Sales 100.0% 100.0%
Cost of Goods Sold 85.7% 54.0%
------- ------
Gross Profit 14.3% 46.0%
Operating Expenses 1402.4% 234.3%
------- ------
Loss from Operations (1388.1)% (188.3)%
REVENUES. Gross revenues for the three months and six months ended June
30, 1998 were $38,299 and $147,263 respectively, generating gross profits of
$5,308 and $21,070 for those same periods. During the comparable prior year
periods, revenues were $5,460 and $443,259, which generated gross profits of
$726 and $204,000. The increase in revenues between the second quarter of 1998
as compared to the same quarter in 1997 is due to an increase in the number of
relays that were shipped during the period. For the six months ended June 30,
1998 and 1997, revenues were $295,996 less in 1998 primarily because of fewer
overall relays that were shipped. This reduction in shipments was due to both
financial constraints as well as the impact on sales caused by the need for the
Company to redesign its FPR1 relay. Because of problems encountered in the
field, a quality committee was formed late in 1997 to analyze all the problems
experienced in the field and to determine and correct all of the root causes for
defects. Based on this approach, it was decided by the Company that the
mechanical portion of the relay had to be redesigned. The Company has engineered
additional mechanical features into the FPR1 feeder protection relay, now called
the FPR1A, which the Company completed on June 15, 1998. Subject to test
results, this improved version of the FPR1 is expected to be in production in
the third quarter of 1998.
OPERATING EXPENSES. Operating expenses for the three months ended June 30,
1998 and 1997 were $894,144 and $442,947, respectively. This increase of
$451,197, or 101.9.1%, while extremely significant, was primarily due to the
transition undertaken by the Company in moving forward from a development stage
company with no infrastructure to an operating company. For the six months ended
June 30, 1998 and 1997, operating expenses were $1,051,603 greater in 1998 as
compared to 1997. Through most of 1997, the Company proceeded to slowly build
the infrastructure, leased its own manufacturing facility, developed sales and
marketing literature, hired several regional sales managers, and other personnel
as needed. Because of the transition from a development stage company to an
operating company, the increase in operating expenses is not entirely
comparable. Some of the major increases are the amortization of deferred
software costs, payroll expenses, rent, telephone, travel, professional fees
including legal, accounting, and consulting, manufacturing rework, the scrapping
of obsolete inventory (See Note 8 to Financial Statements), and business
insurance. Further, some of these increases relate to the integration of
Trans-World Powernet, Inc., an acquisition the Company made on November 24,
1997.
10
<PAGE>
When sales did not grow as expected (due to product and production
difficulties), the Company embarked on a cost reduction program in December 1997
which continued into 1998. In order to reduce its payroll and payroll related
costs, the Company terminated some employees and eliminated certain personnel
positions at the start of 1998. The Company also combined some other positions
and responsibilities as it deemed necessary. On April 24, 1998, Steven D. Smith,
the Company's Executive Vice President of Operations and a Director resigned
both his position as an executive of the Company as well as his position as a
member of the Company's Board of Directors. In April, 1998, the Company reduced
the salary of David W. Clarke, the Company's President and Chief Executive
Officer, to $100,000 from $150,000. On May 27, 1998, Christine Clewes, the
Company's Vice President of Marketing and a Director resigned her position as an
executive of the Company. On June 22, 1998 the Board of Directors accepted her
resignation. On June 22, 1998, the Employment Agreement between David W. Clarke,
President, and the Company was mutually terminated, except that the
confidentiality and non-competition provisions of the Employment Agreement shall
survive termination of such agreement. Mr. Clarke will be employed by the
Company on an "at will" basis as the Company's President at a base salary of
$100,000 per year. On June 22, 1998, Stuart M. Frank, the Company's Chief
Financial Officer was appointed Chief Executive Officer, replacing Mr. Clarke in
that position. Mr. Frank will retain his duties and position as Chief Financial
Officer of the Company. The net dollar effect reduction of these personnel
changes will amount to approximately $1,000,000 on an annualized basis.
RESEARCH AND DEVELOPMENT. Research and development expenses consist
primarily of salaries and consulting fees to support technological product
development. Costs of software to be sold and incurred after technological
feasibility has been established and available for general release are
capitalized. Salaries and other material costs are expensed. The Company
believes that continuous development will occur for new products and to enhance
and upgrade existing products to provide an extra package of protective relay
products for the Company's heavy industrial and utility customers.
For the three months ended June 30, 1998 and June 30, 1997, the Company
incurred $84,880 and $94,830 of research and development costs respectively. The
decrease of $9,950 was due primarily to less development costs being capitalized
during this comparable period. For the six months ended June 30, 1998 and 1997,
research and development costs were $176,195 and $201,196 respectively. The
reduction in engineering staff also contributed to this decrease.
FACTORS AFFECTING OPERATING RESULTS
As a result of the Company's limited operating history, the Company does
not have historical financial data for a significant number of periods on which
to base planned operating expenses. Additionally, the Company's expense levels
are based entirely on its expectations as to future revenues and to a large
extent are variable.
The Company anticipated that beta testing of the CMPR1, FPR2, and
FPR3 products would commence in the second quarter of 1997 and would be ready
for commercial marketing in the second and third quarter of 1997. Further, the
Company anticipated that its most advanced NOVA relays would commence beta
testing in the third quarter of 1997. However, the development, testing and
commercialization of these products were delayed beyond the control of the
Company. The Company experienced some difficulty with field units of the CMPR2,
which product is the foundation from which the CMPR1 and other motor protection
relays are derived.
11
<PAGE>
After various modifications and tests done in-house by the Company, the Company
realized that a major redesign of the hardware was necessary in order to satisfy
customer demands and to enhance the product's marketability. This project, which
began in August, 1997, was completed in February 1998. The focusing of
engineering on the further enhancement of the CMPR2 caused delays in anticipated
shipments. However, the redesigned CMPR2 has been successfully shipped and
installed beginning in February, with current outstanding orders from a number
of customers for this unit. Although the Company believes that all issues
regarding the CMPR2 product have been resolved, there is no assurance that new
issues will not arise in the field which would require further modification.
The Company also experienced some difficulty with the FPR1, a feeder
protection relay in the Company's Solaris family of products. A team of
engineers was established as a "quality circle" to identify and correct the root
causes for each reported problem. Although the FPR1 was marketable in its
present form, the Company redesigned the unit in order to improve its
performance and to make manufacturing the product easier by significantly
reducing the production labor content of each unit. The Company recently
completed the engineering phase and is in the process of beta testing this unit.
Depending on test results, it is anticipated that marketing and production will
commence in the third quarter of this year.
Although the Company believes that it has resolved functional and
quality control issues with its commercialized CMPR2 and FPR1 products, there is
no assurance that new issues regarding these or other products will not arise in
the future. Any delays in production and marketing as a result of new problems
with existing products or products in development may demand more financial and
other resources than available to the Company which will have a material adverse
effect on the Company and its operations.
The Company, being cognizant of the fact that its product development
schedules have been delayed, has entered into an agreement with a foreign
protective relay manufacturer that will provide the Company with additional
products to sell that are the functional equivalent of the Company's more
advanced Solaris products that the Company planned to develop. The Company and
its European counterpart are currently having translated into English the
product software, documentation and spec sheets, which, for the most part, has
been accomplished. These products will enable the Company to market this proven
technology in the third quarter of 1998 while continuing to develop
strategically positioned advanced products.
The Company expects to experience significant fluctuations to future
quarterly operating results that may be caused by many factors, including demand
for the Company's products, introduction of new technological developments, the
introduction, enhancement, and market acceptance of new and existing products,
the introduction of competing products, and general economic conditions.
Further, the Company's products have long sales cycles. As a result, the Company
believes that period to period comparisons of its results of operations will not
necessarily be meaningful and should not be relied upon as any indication of
future performance.
IMPACT OF THE YEAR 2000
The Year 2000 issue is the result of computer programs and other
business systems being written using two digits rather than four to represent
the year. All of the Company's software applications used in all of its products
are in compliance with the Year 2000 issue, and therefore, the Company believes
there will be no material impact on its business.
12
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of capital have been the sales of its
equity securities in the form of an initial public offering of common stock
which occurred on July 16, 1997, proceeds from stockholders loans, proceeds from
the Company's line of credit, and the proceeds from other loans payable.
The Company's negative cash flow from operating activities was
$1,254,861 in the first six months of 1998 as compared to a negative cash flow
of $753,808 during the comparable prior year period. The decrease in cash from
operating activities between the comparable periods resulted primarily from the
net loss sustained due to lower sales and higher costs, reflective of the need
to build an infrastructure, and the transition from a development stage company
to an operating company. Also contributing to the negative cash flow from
operating activities was an increase in capitalization of software costs.
The Company received $1,270,483 net cash provided by financing
activities for the six months ended June 30, 1998 as compared to $752,256 in the
first six months of 1997. Proceeds from loans in the amount of $1,142,983 and
the conversion of warrants in the amount of $200,000 accounted for the net cash
provided by financing activities.
As is typical of Company's which seek to develop new technologies or
introduce products to a new market, delays in development and production of the
Company's products have occurred, resulting in decreased revenues which the
Company had otherwise anticipated would be available. The Company's learning
curve and production problems encountered in the past resulted in higher costs
than anticipated, which will be reflected in a higher cost of sales and
continued pressure on gross profit margins for the products the Company delivers
during 1998. Thus, the Company may not show profitability during 1998 and could
show losses at the end of the 1998 fiscal year. Further, as indicated in Note 2
in the Notes to Financial Statements accompanying this Report, the Company has
incurred net losses since inception and, as of June 30, 1998, its current
liabilities exceeded its current assets by approximately $1,727,555. These
factors raise doubt about the Company's ability to continue as a going concern.
The Company's ability to continue as a going concern is dependent upon its
ability to obtain additional financing and significantly increase sales. The
Company is in the process of seeking immediate additional financing for
operations and to further fund product development and expansion through
marketing existing products during the next six months. Such additional capital
may be accomplished through equity or debt financings. Although the Company
expected certain funding under the Omnibus Agreement (See Note 5 to the
Financial Statement), as of August 7, 1998, the Company has received net cash
advances of $288,080. There is no assurance that any additional financing will
be available to the Company on acceptable terms, or at all. To the extent that
the Company's available cash resources are insufficient to allow the Company to
engage in operations sufficient to generate meaningful revenues or achieve
profitable operations, the inability to obtain additional financing will have a
material adverse effect on the Company and the Company may have to curtail its
operations. Additional equity financing may involve substantial dilution to the
interests of the Company's existing shareholders.
13
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company's subsidiary, Trans-World, and certain of Trans-World's
employees, and Chihkai John Tang, President of Trans-World and a director of the
Company, are defendants in a suit instituted by Tasnet, Inc. ("Tasnet") in or
about May 1997 in the Circuit Court for the 6th Judicial District of Pinellas
County, Florida. The plaintiff's complaint seeks injunctive relief and
unspecified damages against certain employees of Trans-World based upon their
alleged violations of covenants not to compete and against Trans-World and Mr.
Tang for tortious interference with contractual relationships between Tasnet and
the defendant-employees, and seeking to enjoin Trans-World from marketing its
products and disgorgement of profits from sale of its products. Trans-World and
the other defendants have denied liability. Mr. Tang and the other selling
shareholders of Trans-World have agreed to indemnify the Company against any
losses incurred in connection with this litigation and plan to vigorously defend
the lawsuit. Trans-World and the Company believe that the lawsuit is without
merit. However, there can be no assurance as to the outcome of the litigation. A
result adverse to Trans-World would have a material adverse impact on the
Company's business.
The Company is involved in other litigation relating to claims arising
out of its operations in the normal course of business, none of which claims
exceed ten percent of the Company's current assets. The Company does not believe
that the adverse outcome of any such litigation would have a material adverse
effect on the Company's operations.
ITEM 2. CHANGES IN SECURITIES
The foregoing securities will be issued in reliance on Section 4(2) of
the 1933 Act because the transactions did not involve a public offering. The
recipients were provided information about the Company and afforded an
opportunity to ask questions about the information received, and the securities
were acquired with investment intent and will bear a legend accordingly.
On June 22, 1998, the Board of Directors of the Company approved the
issuance of 95,000 shares of Rule 144 common stock to several key employees of
the Company. These shares were vested at 50% on July 17, 1998 with the balance
being vested on December 31, 1998, provided they are employed by the company on
that date.
On June 5, 1998, the Company approved the issuance of 24,000 shares of
common stock of the Company to Oak Point Investments, Inc. in connection with a
loan of $60,000.
On April 24, 1998, the Company approved the issuance of 20,000 shares
of common stock of the Company to Rainfest, Ltd. in connection with a loan of
$50,000.
On June 22, 1998, The Board of Directors of the Company approved for
Stuart M. Frank, as an incentive for remaining with the Company and for assuming
the additional duties of Chief Executive Officer, a common stock purchase
warrant exercisable for 100,000 shares of the Company's common stock at an
exercise price of $1.00 per share, and 100,000 shares of Rule 144 common stock
as bonus shares. The warrant has a term of five years and is first exercisable
as to
14
<PAGE>
the number of shares and schedule as follows, provided on each such date Mr.
Frank's employment with the Company has not been terminated for cause under his
employment agreement with the Company or Mr. Frank has not voluntarily
terminated his employment with the Company: 50,000 shares on June 14, 1998;
25,000 shares on September 30, 1998; and 25,000 shares on December 31, 1998. The
Rule 144 common stock as bonus shares according to the following schedule, with
the same employment requirements as under the warrant provisions above: 50,000
shares on December 31, 1998; 25,000 shares on March 31, 1999; and 25,000 shares
on June 30, 1999.
On June 22, 1998, as part of the Omnibus Agreement (See Note 5 to
Financial Statements), the Board of Directors of the Company approved the
issuance of a common stock purchase warrant to Helene W. Mancini, the wife of a
Director and shareholder of the Company, exercisable for 160,000 shares of the
Company's common stock at an exercise price of $1.00 per share, subject to the
underwriter's lock-up. If Lender provides the Company with less than $1,040,000
(the loan proceeds), then such warrant shall be converted to $1.00 per share on
a pro rata basis equal to the amount Lender provides the Company as a percentage
of the total loan proceeds.
On June 22, 1998, as part of the Omnibus Agreement (See Note 5 to
Financial Statements), the Board of Directors of the Company approved the
issuance a common stock purchase warrant to Frank J. Mancini, a Director and a
shareholder of the Company, exercisable for 40,000 shares of the Company's
common stock at an exercise price of $1.00 per share, subject to the
underwriter's lock-up. If Lender provides the Company with less than $1,040,000
(the loan proceeds), then such warrant shall be converted to $1.00 per share on
a pro rata basis equal to the amount Lender provides the Company as a percentage
of the total loan proceeds.
ITEM 5. OTHER INFORMATION
On June 22, 1998, as part of the Omnibus Agreement (See Note 5 to
Financial Statements), the Board of Directors of the Company approved the
re-pricing of outstanding stock options of current employees to $2.00 per share,
the fair market value at that date as set forth under the Company's 1996 Stock
Option Plan. Also in connection with the Omnibus Agreement, the Board of
Directors approved the change in exercise price for outstanding common stock
purchase warrants held by Perryman Corporation, N.V. from $3.00 per share to
$1.00 per share; a change in exercise price for outstanding common stock
purchase warrants held by East Jet, Inc. from $3.25 per share to $1.00 per
share; and a change in exercise price for outstanding common stock purchase
warrants held by Imagine Holdings, Inc. from $5.50 per share and $4.00 per share
to $1.00 per share. The Omnibus Agreement states that in the event Lender
provides the Company with less than $1,040,000 (the loan proceeds), then the
outstanding common stock purchase warrants indicated above as held by Perryman
Corporation, N.V., East Jet, Inc., and Imagine Holdings, Inc. shall be converted
to $1.00 per share on a pro rata basis equal to the amount Lender provides the
Company as a percentage of the total loan proceeds.
[REMAINDER OF PAGE LEFT INTENTIONALLY BLANK]
15
<PAGE>
ITEM 6. EXHIBITS AND FORM 8-K.
REPORTS ON FORM 8-K: None
EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT FILING-STATUS-INCORPORATED
NUMBER EXHIBIT DESCRIPTION BY REFERENCE TO
- -------- ------------------- ------------------------------------
<S> <C> <C>
3.1 Amended and Restated Articles of Exhibit 3.1 to Form SB-2 Registration
Incorporation Statement, filed on December 17, 1997,
File No. 333-18071
3.2 Amended and Restated ByLaws Exhibit 3.2 to Form SB-2 Registration
Statement, filed on December 17, 1996,
File No. 333-18071
3.2.1 Amendment to ByLaws Exhibit 3.2.1 to Amendment No. 2 to Form
SB-2 Registration Statement, filed on
April 29, 1996, File No. 333-18071
4.1 Specimen of Common Stock Certificate Exhibit 4.1 to Amendment No. 2 to Form
SB-2 Registration Statement, filed on
April 29, 1997, File No. 333-18071
4.2 Specimen of Warrant Certificate Exhibit 4.2 to Report on Form 10-QSB,
filed on August 14, 1997, File No.
0-22365
4.3 Warrant Agreement between the Company and Exhibit 4.3 to Report on Form 10-QSB,
American Stock Transfer & Trust Company, filed on August 14, 1997, File No.
as Warrant Agent, dated July 16, 1997 0-22365
10.1 Form of Warrant issued to investors in the Exhibit 4.4 to Form SB-2 Registration
Company's private placement, dated August Statement, filed on December 17, 1996,
5, 1996 through November 14, 1996 File No. 333-18071
10.2 Warrant dated September 26, 1996 in favor Exhibit 4.5 to Form SB-2 Registration
of Steven D. Smith, as amended Statement, filed on December 17, 1996,
File No. 333-18071
10.3 Warrant dated September 26, 1996 in favor Exhibit 4.6 to Form SB-2 Registration
of Don P.Louw, as amended Statement, filed on December 17, 1996,
File No. 333-18071
10.4 Amended Warrant dated October 29, 1996 in Exhibit 10.4 to Form 10-QSB filed on
favor of Perryman Corporation N.V. August 14, 1997, File No. 0-22365
10.5 Warrant dated June 25, 1996 in favor of Exhibit 4.10 to Form SB-2 Registration
Imagine Holdings Statement filed on December 17, 1996,
File No. 333-18071
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT FILING-STATUS-INCORPORATED
NUMBER EXHIBIT DESCRIPTION BY REFERENCE TO
- -------- ------------------- ------------------------------------
<S> <C> <C>
10.6 Warrant dated December 15, 1996 in favor of Exhibit 4.11 to Amendment No. 1 to
Matthias E. Lukens, Jr. Form SB-2 filed on March 6, 1997,
File No. 333-18071
10.7 Form of Registration Rights Agreement Exhibit 4.12 to Form SB-2 Registration
between the Company and private placement Statement filed on December 17, 1996
investors dated August 5, 1996 through File No. 333-18071
November 14, 1996
10.8 Form of Registration Rights Agreement Exhibit 4.13 to Form SB-2 Registration
between the Company and certain investors Statement filed on December 17, 1996,
dated in May, 1996 File No. 333-18071
10.9 Warrant dated June 30, 1996 in favor of Exhibit 4.14 to Amendment No. 1
Imagine Holdings Form SB-2 Registration Statement
filed on March 6, 1996,
File No. 333-18071
10.10 Warrant dated November 1, 1996 in favor of Exhibit 4.15 to Amendment No. 1 to
Robert Swatland Form SB-2 Registration Statement
filed on March 6, 1997,
File No. 333-18071
10.11 Underwriters' Warrant dated July 16, 1997 Exhibit 10.11 to Form 10-QSB filed
on August 14, 1997, File No. 0-22365
10.12 1996 Stock Option Plan Exhibit 10.1 to Form SB-2 Registration
Statement filed on December 17, 1996,
File No. 333-18071
10.13 Stock Purchase Agreement between the Exhibit 10.2 to Form SB-2 Registration
Company and Christine Clewes, dated June Statement filed on December 17, 1996,
13, 1996 File No. 333-18071
10.14 Stock Purchase Agreement between the Exhibit 10.3 to Form SB-2 Registration
Company and Frank Mancini, dated Statement filed on December 17, 1996,
June 24, 1996 File No. 333-18071
10.15 Stock Purchase Agreement between the Exhibit 10.4 to Form SB-2 Registration
Company and Framan, a business entity, Statement filed on December 17, 1996,
dated June 24, 1996 File No. 333-18071
10.16 Consulting Agreement between the Company Exhibit 10.5 to Form SB-2 Registration
and Perryman Corporation, N.V., dated Statement filed on December 17, 1996,
May 10, 1996 File No. 333-18071
10.17 Amended and Restated Consulting Agreement Exhibit 10.6 to Form SB-2 Registration
between the Company and Imagine Holdings, Statement filed on December 17, 1996,
dated June 1, 1996 File No. 333-18071
10.18 Lease between the Company and South Exhibit 10.7 to Amendment No. 1 to
Hillsborough Community Bank Office/Complex, Form SB-2 Registration Statement,
Richard L. Phagan, dated October 31, 1995 filed on March 6, 1997,
File No. 333-18071
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT FILING-STATUS-INCORPORATED
NUMBER EXHIBIT DESCRIPTION BY REFERENCE TO
- -------- ------------------- ------------------------------------
<S> <C> <C>
10.18.1 Lease between the Company and South Exhibit 10.7.1 to Form SB-2 Registration
Hillsborough Community Bank Office/Complex, Statement filed on December 17, 1996,
dated October 24, 1996 File No. 333-18071
10.19 Amended and Restated Consulting Agreement Exhibit 10.8 to Form SB-2 Registration
between the Company and Matthias E. Lukens, Statement filed on December 17, 1996,
Jr. dated November 30, 1996 File No. 333-18071
10.20 Consulting Agreement between the Company Exhibit 10.9 to Form SB-2 Registration
and Frank J. Mancini dated December 20, 1996 Statement filed on December 17, 1996,
File No. 333-18071
10.21 Agreement between the Company and Exhibit 10.10 to Form SB-2 Registration
Phasetronics, Inc. dated January 31, 1996 Statement filed on December 17, 1996,
File No. 333-18071
10.22 Agreement between the Company and Exhibit 10.11 to Form SB-2 Registration
Phasetronics, Inc. dated January 31, 1996 Statement filed on December 17, 1996,
File No. 333-18071
10.23 Sale of Accounts Receivable Agreement Exhibit 10.12 to Form SB-2 Registration
between the Company and Queensbury, Inc. Statement filed on December 17, 1996,
dated October 31, 1996 File No. 333-18071
10.24 Cash Advance and Security Agreement and Exhibit 10.13 to Form SB-2 Registration
amendment thereto between Frank J. Mancini Statement filed on December 17, 1996,
and the Company File No. 333-18071
10.24.1 Second Amendment to Cash Advance and Exhibit 10.13.1 to Form SB-2 Registration
Security Agreement dated May 19, 1997 Statement filed on December 17, 1996,
File No. 333-18071
10.24.2 Third Amendment to Cash Advance and Exhibit 10.13.2 to Form SB-2 Registration
Security Agreement dated May 27, 1997 Statement filed on December 17, 1996,
File No. 333-18071
10.25 Form of Indemnification Agreement for Exhibit 10.14 to Form SB-2 Registration
directors and officers Statement filed on December 17, 1996,
File No. 333-18071
10.26 Revolving Line of Credit Agreement between Exhibit 10.15 to Form SB-2 Registration
the Company and Queensbury, Inc. Statement filed on December 17, 1996,
File No. 333-18071
10.27 Amended and Restated License Agreement Exhibit 10.16 to Form SB-2 Registration
between the Company and Matthias E. Lukens, Statement filed on December 17,
Jr., d/b/a WHR Partners, dated File No. 1997 333-18071
December 16, 1996,
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT FILING-STATUS-INCORPORATED
NUMBER EXHIBIT DESCRIPTION BY REFERENCE TO
- -------- ------------------- ------------------------------------
<S> <C> <C>
10.28 Stock Purchase Agreement between the Exhibit 10.17 to Form SB-2 Registration
Company and Matthias E. Lukens, Jr., d/b/a Statement filed on December 17, 1996,
WHR Partners dated December 16, 1997 File No. 333-18071
10.29 Executive Employment Agreement between the Exhibit 10.18 to Form SB-2 Registration
Company and David W. Clarke Statement filed on December 17, 1996,
File No. 333-18071
10.30 Executive Employment Agreement between the Exhibit 10.19 to Form SB-2 Registration
Company and Christine Clewes Statement filed on December 17, 1996,
File No. 333-18071
10.31 Executive Employment Agreement between the Exhibit 10.20 to Form SB-2 Registration
Company and Donald P. Louw Statement filed on December 17, 1996,
File No. 333-18071
10.32 Executive Employment Agreement between the Exhibit 10.21 to Form SB-2 Registration
Company and Steven D. Smith Statement filed on December 17, 1996,
File No. 333-18071
10.33 Executive Employment Agreement between the Exhibit 10.22 to Form SB-2 Registration
Company and Robert Swatland Statement filed on December 17, 1996,
File No. 333-18071
10.34 Financial Advisor and Investment Banking Exhibit 10.23 to Amendment No. 1
Agreement between the Company and May Davis to Form SB-2 Registration Statement
Group, Inc. dated July 16, 1997 filed on March 6, 1997, File No. 333-18071.
10.35 Lease Agreement dated September 1, 1997 Exhibit 10.35 to Form 10QSB filed
on November 18, 1997, File No. 0-22365
10.36 Agreement and Plan of Merger Exhibit 10.1 to Form 8-K filed on
December 9, 1997, File 0-22365
10.37 Executive Employment Agreement between Exhibit 10.2 to Form 8-K filed on
Trans-World and Chihkai J. Tang December 9, 1997, File 0-22365
10.38 Shareholder's Voting Agreement dated Exhibit 10.3 to Form 8-K filed on
November 24, 1997 December 9, 1997, File 0-22365
10.39 Form of Loan and Security Agreement Exhibit 10.39 to Form 10-KSB filed
on May 15, 1998, File 0-22364
10.40 Secured Convertible Note for $750,000 Exhibit 10.40 to Form 10-KSB filed
on May 15, 1998, File 0-22364
10.41 Secured Convertible Note for $100,000 Exhibit 10.41 to Form 10-KSB filed
on May 15, 1998, File 0-22364
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT FILING-STATUS-INCORPORATED
NUMBER EXHIBIT DESCRIPTION BY REFERENCE TO
- -------- ------------------- ------------------------------------
<S> <C> <C>
10.42 Secured Convertible Note for $100,000 Exhibit 10.42 to Form 10-KSB filed
on May 15, 1998, File 0-22364
10.43 Secured Convertible Note for $50,000 Exhibit 10.43 to Form 10-KSB filed
on May 15, 1998, File 0-22364
10.44 Form of Registration Rights Agreement Exhibit 10.44 to Form 10-KSB filed
on May 15, 1998, File 0-22364
10.45 Consolidated Promissory Note for $750,000 Exhibit 10.45 to Form 10-KSB filed
on May 15, 1998, File 0-22364
10.46 Warrant in favor of Polynos Investments, Exhibit 10.45 to Form 10-KSB filed
N.V. on May 15, 1998, File 0-22364
10.47 Warrant in favor of East Jet, Inc. Exhibit 10.47 to Form 10-QSB filed
on May 20, 1998, File 0-22365
10.48 Warrant in favor of East Jet, Inc. Exhibit 10.48 to Form 10-QSB filed
on May 20, 1998, File 0-22365
27 Financial Data Schedule Filed herewith
99.1 Form of domestic distribution agreement Exhibit 99.3 to Amendment No. 1 to
Form SB-2 Registration Statement
filed on March 6, 1997, File No.
333-18071
99.2 Form of international distribution agreement Exhibit 99.4 to Amendment No. 1 to
Form SB-2 Registration Statement
filed on March 6, 1997, File No.
333-18071
</TABLE>
20
<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.
Date: August _____, 1998. APOLLO INTERNATIONAL OF
DELAWARE, INC.
By:
-------------------------
David W. Clarke
President
By:
-------------------------
Stuart Frank
Chief Financial Officer
21
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