APPLIED INTELLIGENCE GROUP, INC.
Table of Contents
Page
PART I
Item 1. Description of Business 1
Item 2. Description of Property 8
Item 3. Legal Proceedings 8
Item 4. Submission of Matters to a Vote of Security
Holders 9
PART II
Item 5. Market for Common Equity and Related
Stockholder Matters 9
Item 6. Management's Discussion and Analysis of
Financial Condition and Operations 9
Item 7. Financial Statements 15
Item 8. Changes in and Disagreement With
Accountants on Accounting and
Financial Disclosure 15
PART III
Item 9. Directors, Executive Officers, Promoters
and Control Persons 15
Item 10. Executive Compensation 18
Item 11. Security Ownership of Certain Beneficial
Owners and Management 20
Item 12. Certain Relationships and Related
Transactions 20
Item 13. Exhibits and Reports and Form 8-K 22
PART 1.
Item 1. Business
General
Applied Intelligence Group, Inc. (the "Company") is engaged in
the business of providing information systems technology to the
retail and wholesale distribution industries. Since its formation
in 1985, the Company's operations have included consulting
services, which were primarily focused on the planning,
designing, building, and installation of computerized information
management systems and computerized checkout or point-of-sale
systems in the retail and distribution industry. In 1993, the
Company began development of viaLink, a subscription service on
the World Wide Web of the Internet (the "Internet"), which was
announced in April 1996, and live services were first delivered
in January 1997. In 1994, the Company began work on its RETAIL
SERVICES APPLICATION ("RSA"), which was released in August 1995.
The Company's Internet home page can be located on the Internet
at http://www.aig.viaLink.com. The Company's principal executive
offices and headquarters are located at 13800 Benson Road,
Edmond, Oklahoma 73013-6417, and its telephone number is (405)
936-2300.
Vantage Capital Resources Inc. Acquisition
On June 12, 1996, Vantage Capital Resources, Inc. ("VCRI"), an
Oklahoma corporation , merged with and into the Company pursuant
to an Agreement and Plan of Merger dated May 8, 1996 (the
"Merger"). On June 5, 1996, VCRI completed a private offering of
250,000 shares of its common stock at an offering price of $1.75
per share and received net proceeds of approximately $394,567
(the "Private Placement Offering"). In consummation of the
Merger, the Company exchanged 610,000 shares of its Common Stock,
on a one-for-one basis, for the outstanding common stock of VCRI.
The merger was accounted for as an acquisition of VCRI by the
Company in a manner similar to the pooling of interests method of
accounting. Pursuant to an Exchange Agreement dated October 14,
1996, each of John Simonelli and Larry E. Howell, exchanged
180,000 shares of Common Stock of the Company received in
connection with the Merger for stock options, each exercisable on
or after November 20, 1998, and on or before November 30, 2001,
for the purchase of Common Stock for $5.00 per share.
Furthermore, during October 1996, the Company redeemed 22,500
shares of Common Stock issued to David B. North, an executive
officer of the Company, pursuant to the Merger and 1,000 shares
of Common Stock issued to a former executive officer pursuant to
the Merger for $1.75 per share (the offering price of the VCRI
common stock under the Private Placement Offering) for an
aggregate amount of $39,375 and $1,750, respectively.
Overview of Products and Services
The Company is engaged in the business of providing information
systems services to retail companies and to the manufacturers,
wholesalers, and other suppliers who provide the products that
these retail companies sell (the "Retail Supply Chain"). These
information systems services include (i) management consulting
and computer system integration services, (ii) proprietary
software products and applications, and (iii) network services
and network-based computer applications. The Company is organized
to provide all three information systems services in several
business areas: Retail Consulting, Store Systems Consulting,
Internet Consulting, viaLink Implementation and
Production/Operations.
Management Consulting and Systems Integration
The Company's consulting services includes designing, building,
installation, and implementation of custom computerized checkout
or point-of-sale systems and integrated custom software products
for customers in the retail and distribution industries. The
Company also selects and then customizes and installs third-party
software for many of its customers.
The Company's consulting services include determination of
business and technology requirements, operating system planning
and implementation, situational and due diligence studies,
information technology plans, business and technology
recommendations, and training. A typical consulting arrangement
may last from two to six months, or longer for more complex
projects. A single consulting and systems integration arrangement
may include multiple projects, using a wide range of the
Company's professional staff.
The Company's systems integration services include various
computer architectures and operating systems for personal
computer("PC") based systems (i.e., DOS, Windows, Windows NT,
UNIX, OS/2, 4680/OS, 4690/OS) and intermediate to large systems
(AS/400, RS/6000, HP, MVS, and VSE). The Company has significant
development and support experience with industry-standard
technologies, such as COBOL, SQL, DB2 and ORACLE. The Company is
also developing software applications using object-oriented
technology, such as the Smalltalk programming language, provided
by ParcPlace-Digitalk, Inc.
Solutions
Many of the Company's customers are retail chains, who are
attempting to implement information management systems in their
headquarters and/or store locations, in addition to accounting,
payroll and other financial management information systems. A
typical in-store retail system includes these components:
* a "front-end" system (i.e., "checkout system", "cash
register system" or "Point-of-Sale system") which records sales
to consumers, provides a cash drawer, prints customer receipts,
etc. Most front-end systems utilize PC hardware, and include
programs that operate the PC and specialized hardware, such as
the cash drawer or barcode scanner;
* a "back-office" system, which typically coordinates the
operation of the registers, and provides store management
applications, such as receiving and inventory control; and
* a "communication" system, which transfers information (e.g.,
sales or inventory) electronically between the store and the
retailer's headquarters.
The Company is a business partner of International Business
Machine Corp. ("IBM") and an authorized reseller of IBM hardware
and point-of-sale software. When implementing in-store systems
for retailers, the Company has historically relicensed and
customized one or more IBM software programs, and installed these
programs on IBM hardware that the Company sold to the retailer.
Such hardware includes point-of-sale registers, radio frequency
hand-held terminals, in-store processors, and other in-store
equipment. The Company also provides programming services to
personalize and customize the in-store software, and
implementation services related to software installation and
personnel training.
In 1994, the Company identified a market need for an in-store
software system that would operate on a wide range of hardware,
including different models of IBM and non-IBM hardware, and on a
variety of non-IBM operating systems such as UNIX and Windows
NTT. The Company subsequently developed its proprietary in-store
software applications for licensing to retailers, as an
alternative to re-licensing and customizing IBM software
applications and programs. The Company's RSA software
application, was first licensed and implemented in a retail chain
in 1995. Because the Company's software applications operate on a
variety of PC operating systems, and with a wide variety of PC
hardware, the Company's software applications now address a
broader market. RSA allows retailers to selectively install new
in-store systems without store-wide or company-wide replacement
of existing hardware.
The Company is also a global solutions partner of the NCR
Corporation ("NCR"). This relationship, along with the IBM
relationship, enables the Company to provide a full-service,
single-source solution for the store automation needs of
retailers. The contractual relationships with IBM and NCR provide
the Company with the ability to relicense software, resell
hardware, and gain access to technical support for the Company's
customers.
The Company has also developed CHAINLINK, a cost-effective, easy-
to-use store communications program, which provides reliable and
consistent movement of data between stores and headquarters.
CHAINLINK is designed to work with RSA, as well as other point-of-
sale software packages. CHAINLINK is currently in use in at least
eight retail chains in the United States.
Together, RSA and CHAINLINK provide the retailer with store
management and point-of-sale applications, including check-out at
the cash register, and store to headquarters communications. RSA
can be customized to meet the specific needs of the retailer. RSA
can provide the store managers and cashiers with the same "look
and feel" on a variety of installed point-of-sale computer
systems, while giving the retailer's information management
systems staff a consistent interface to all of its store systems.
RSA was first installed in 1995, and is currently installed in
three retail chains. The primary target market for RSA is
general merchandise retailers who generally have more than 100
stores, and more than $100 million in sales.
Network Services
The Company provides a full range of network services including
its viaLink subscription service, telecommunications planning
and consulting, Internet-based applications development, and
internal and external Web site development. Through its internal
customer support network, the Company provides Web site hosting
and maintenance.
viaLink is an industry-specific, shared business application
subscription service, developed and maintained by the Company,
with access through telecommunications, including private
networks, and the Internet. Through viaLink, the Company is a
content provider on the Internet.
viaLink establishes a moderately-priced electronic commerce
service for manufacturers, suppliers, retail headquarters and
individual retail stores through which subscribing customers are
connected via the Internet to a database which resides and is
maintained on the Company's computer systems. Using a PC and
commonly available and inexpensive computer programs,
participants can subscribe to the viaLink service, without having
to purchase, install, or implement complex information system
technology. viaLink provides a common set of business systems
and support offerings to subscribers, and allows them to avoid
the costs associated with building and maintaining such network
information systems. viaLink is priced as a monthly subscription
network information service.
In April 1996, the Company introduced the viaLink network
information service for the convenience store industry, which
consists of approximately 68,000 stores operated by approximately
1,650 companies. According to the National Association of
Convenience Stores ("NACS"), only a small percentage of
convenience store companies have implemented in-store
computerized retail information systems. In order to implement
computerization and scanning in a retail store, the retail chain
must first develop and then maintain a "pricebook" which
contains information for all items offered for sale in the store.
The pricebook typically contains descriptions of the items, along
with their Universal Product Codes ("UPCs"), purchase costs,
retail sales prices, and any discounts or rebates to be received
from the supplier. Pricebook maintenance is a difficult problem
for the retail chain to solve. A convenience store chain may
have hundreds of suppliers, and each supplier may have different
prices on the items it supplies to the chain, depending on the
locations of the stores being supplied, which makes pricebook
maintenance difficult, but essential. Pricebook maintenance
typically involves inefficient manual entry of item information,
which can introduce errors into the pricebook. According to
NACSr, maintenance of the pricebook often poses the most
significant challenge to the success of a scanning project and
computerization of the convenience store.
A subscribing retailer can use the viaLink Item Catalog Service
to electronically retrieve product item information (e.g., item
numbers, UPCs, descriptions, pricing information, deal and
promotional pricing) that has been placed in the database by
manufacturers, wholesalers, or other product suppliers. This
information can be electronically loaded into the retailer's
pricebook, which helps the retailer improve the accuracy and
reliability of the pricebook.
Product manufacturers can use viaLink to efficiently introduce
new products, by electronically providing product information to
retailers and wholesalers. Wholesalers and other suppliers can
use viaLink to electronically provide product and pricing
information to retailers by placing this information in the
viaLink databases, and allowing the retailers to access these
prices. The databases in viaLink are specifically designed to
manage the complexity of the arrangements that exist between
retailers and their wholesalers and suppliers, especially related
to prices and promotions. viaLink is offered on a monthly
subscription basis and is accessible through the Internet.
As of March 14, 1997, 14 convenience retail chains, that have in
excess of 1,700 stores, and 12 suppliers have signed subscription
agreements for viaLink. The Company is in the process of
implementing viaLink with these retail chains and suppliers. As
of December 31, 1996, total revenues from viaLink were less than
$1,100.
In addition to the convenience store industry, the Company
intends to deploy viaLink in other segments of the retail
industry, including grocery and chain drug retailers, who share
much of their supply chain (manufacturers and distributors) with
the convenience store industry.
The Company also constructs Internet-based information
applications for its customers, such as NACS. The Company
constructed, operates and maintains the Internet-based
applications and directories which allow NACS to offer services
on the Internet. This site or "home page" is known as "C-Store
Central" and can be found on the Internet at
http://www.cstorecentral.com. NACS places daily news about the
convenience store industry on this site which also allows members
easy access to the viaLink services.
Customer Support
Customers of the Company are provided telephone and on-line
technical support by the Company's customer support group. As of
March 14, 1997, the Company's customer support group consisted of
four full-time representatives. However, all the Company's
technical staff can be used, when appropriate, for resolving
technical problems and supporting specific customer needs.
Sales and Marketing
The Company's services and products are marketed directly to the
Company's customers through its sales and marketing support group
and senior staff members. As of March 14, 1997, the Company's
sales and marketing support group consisted of 12 full-time
employees including the President of the Company. The Company is
actively recruiting a senior sales executive to assume leadership
of the marketing and sales. The sales and marketing team is
responsible for sales lead generation, follow up on customer
referrals, and provides input into the Company's ongoing services
and product development efforts based on customer feedback and
market data. Sales and marketing leads are generated through
advertising, customer referrals, public relations, trade shows,
and strategic relationships with hardware manufacturers and
customers. The Company also utilizes a variety of other
consulting and contractor relationships to help develop and
promote viaLink.
Licenses and Intellectual Property
The Company regards its software as proprietary, and licenses its
software products generally under written license agreements.
Because the Company's software products allow customers to
customize their applications without altering source programs,
the source programs for the Company's products are typically
neither licensed nor provided to customers.
The Company has no patents or patent applications pending. The
Company attempts to protect its products through a combination of
copyright, trademark and trade secret laws. CHAINLINK is a
registered trademark of the Company and trademark applications
are pending with the United States Patent and Trademark Office
for RETAIL SERVICES APPLICATION and viaLink. The Company also
requires employee and third-party non-disclosure and
confidentiality agreements. Despite these precautions, it may be
possible for unauthorized parties to copy certain portions of the
Company's products, reverse engineer or obtain and use
information that the Company regards as proprietary.
Because the software development industry is characterized by
rapid technological change, the Company believes that factors
such as the technological and creative skills of its personnel,
new product developments, frequent product enhancements, name
recognition and reliable product maintenance, are more important
to establishing and maintaining a technology leadership position,
than the various legal protections available for its technology.
Software License Agreements
From time to time, the Company licenses third-party software
components for inclusion principally in its software application
RSA. In January 1994, the Company entered into a non-exclusive
confidential software license agreement with Applied Retail
Solutions Corporation ("ARSC") related to certain computer
software programs, development tools, interfaces and codes (the
"ARS Software") used by the Company in the development and
marketing of RSA for use on certain identified point-of-sale
computer terminals. This agreement had an initial term of two
years and, following the initial term, the agreement has
continued on the same terms and conditions and is subject to
termination on 90 days' notice. The agreement requires the
Company to pay periodic license and support fees. The ARS
Software and all modifications and enhancements to the ARS
Software by the Company remain the property of ARSC.
In March 1994, the Company entered into a five year confidential
Agreement for Licensing of IBM Software with International
Business Machines Corporation ("IBM") pursuant to which the
Company became an authorized reseller and technical support
provider of certain IBM software. Furthermore, in February 1995,
the Company entered into a two-year confidential IBM Business
Partner Agreement and became an authorized remarketer of IBM
computer hardware. Pursuant to these agreements, the Company
receives discounts on the purchase of IBM software and hardware
products. With respect to IBM software, the Company is required
to pay IBM a one-time royalty on each distributed or installed
copy of the IBM software.
Effective January 1, 1996, the Company entered into an 18-month
Global Solutions Partners Agreement with NCR. Pursuant to such
agreement the Company receives discounts on NCR hardware and
software purchases and maintenance, personnel education and
training, software support, and certain commissions and fees
associated with NCR equipment and software installations.
Employees and Consultants
As of March 14, 1997, the Company had a total of 109 full time
employees, of which 12 were employed in sales and marketing
support, including the President of the Company, 20 were employed
in product research and development and Technical Support, 64
were employed in professional services and customer support, and
13 were employed in human resources, administration and finance.
In addition, the Company utilizes the services of two independent
consultants in business and product development and marketing.
The Company's future performance depends in significant part upon
the continued service of its key technical and senior management
personnel, and its continuing ability to attract and retain
highly qualified and motivated personnel in all areas of its
operations. Competition for such personnel is intense, and there
can be no assurance that the Company can retain key managerial
and technical employees or that it can attract, assimilate or
retain other highly qualified personnel in the future. None of
the Company's employees is represented by a labor union. The
Company has not experienced any work stoppages and considers its
relations with its employees to be good.
Government Regulation
The Company is not currently subject to direct regulation by any
government agency, other than regulations applicable to
businesses in general. There are currently few laws or
regulations directly applicable to access to or commerce on the
Internet; however, due to the increasing popularity and use of
the Internet, it is possible that a number of federal and state
laws and regulations may be enacted or adopted with respect to
the Internet, covering issues such as user privacy, taxation,
encryption, authentication technology, pricing, quality of
products or services. The enactment or adoption of any such laws
and regulations may decrease the growth of the Internet and
increase the cost of commerce on the Internet, which could affect
the marketability of viaLink, and, in such event, could have an
adverse effect on the Company's operating results and financial
condition. Furthermore, the applicability to the Internet of
existing laws governing issues such as property ownership, libel
and personal privacy is uncertain.
Competition
The environment within which the Company operates is intensely
competitive and subject to rapid change. To maintain or increase
its market share position in the retail, supplier, and wholesale
distribution industries, the Company will need to continually
develop additional products, introduce new product features and
enhancements, and expand its professional services capability.
The Company currently competes principally on the basis of the
specialized nature of its services and products. Specifically,
the features and functions of the Company's software products
include adaptability and scalability and their interoperability
with other network products, the ability to deploy complex
systems, product quality, ease-of-use, reliability and
performance, company reputation and professional service,
integration with other enterprise and network applications, and
availability on popular operating systems, relational databases
and communications hardware architecture. The Company believes
its products and services compete favorably in all of these
areas.
Competitors vary in size and in the scope and breadth of the
products and services offered. The Company encounters competition
from a number of sources, including the big-six accounting firms,
IBM and other software and hardware manufacturers, local and
regional consulting and software companies most of whom are
privately-held, third-party professional services organizations,
and management information systems departments of potential
customers who are developing custom software. In the market place
of retail and wholesale distribution industries, the Company
competes with numerous, smaller, privately-held companies based
on product features and functionality, as well as larger,
publicly-held companies with greater resources and having greater
product and market diversification. The Company competes with
these companies based upon the specialized nature of its focus on
the retail and wholesale distribution industries and company
reputation.
With respect to its proprietary retail software products, many of
the Company's current and potential competitors, both privately-
held and publicly-held, have greater financial, technical,
marketing and distribution resources than those of the Company.
As a result, they may be able to respond more quickly to new or
emerging technologies and changes in customer requirements, and
devote greater resources to the development and distribution of
their products. In addition, because there are relatively low
barriers to entry in the software marketplace, the Company
expects additional competition from other established or emerging
companies as the network services market continues to expand.
Increased competition may result in pricing pressures, reduced
gross margins and loss of market share, any of which could
materially adversely affect the Company's business and results of
operations. The Company also believes that competition will
increase as a result of software industry consolidations. There
can be no assurance that the Company will be able to compete
successfully against current and future competitors or that
competitive pressures faced by the Company will not materially
adversely affect its business and results of operations.
Clients and Customers
The Company's clients and customers range from small, rapidly
growing companies to large corporations, principally within the
retail and wholesale distribution industries. The following is a
partial list of the Company's clients as of March 14, 1997.
ALDI Inc. Duckwall-ALCO Stores, Inc.
Fleming Companies, Inc. Fred's Inc.
Genovese Drug Stores, Inc. Jan-Bell Marketing, Inc.
Michaels' Stores, Inc. Petro PSC, L.P.
Sonic Corp. Crabtree & Evelyn
In 1996, three individual customers each accounted for 17, 14 and
10 percent of the Company's revenues, respectively. Furthermore,
in 1996, five of the Company's customers accounted for 57 percent
of the Company's total revenues. The Company believes that
revenues derived from existing and future large customers will
continue to represent a significant portion of its total
revenues.
Other Business Strategies
The Company's principal business objective is to become a leading
provider of fully-integrated information and network services
linking retailers, distributors and manufacturers throughout the
retail supply chain. Utilizing the Company's experience and
expertise in the retail and distribution industries, the
Company's principal strategy is to continue further development
and enhancement of viaLink as well as further development and
deployment of its Solutions software offerings, RSA and
CHAINLINK, and potentially their integration with viaLink.
The Company has more than 20 customers that use software
solutions that were either specifically developed for them by the
Company or are modified versions of "standard" software packages
that the Company installed and modified for them. The Company
intends to increase revenues generated from its existing customer
base by providing such customers with additional consulting and
systems integration services, enhancements to its existing
products customized to their particular needs, continuing
customer support services and new products offerings.
Security Technologies
To minimize the security risks associated with a shared network
on the Internet, the Company has researched and implemented
security protocols in viaLink. For example, the viaLink service
uses the secure sockets layer of the Internet, so that
confidential information is encrypted as it passes through the
Internet. The Company has also constructed a double "firewall"
between its services and the Internet, which is intended to
restrict unauthorized use and prevent security breaches.
Although the Company has implemented these and other security
measures, viaLink may still be vulnerable to break-ins and
similar security breaches that jeopardize the security of the
information stored in and transmitted through the computer
systems of viaLink subscribers, which may result in significant
liability to the Company and also deter potential subscribers.
Moreover, the security and privacy concerns of potential
subscribers, as well as concerns related to computer viruses, may
inhibit the marketability of viaLink. The Company does not
currently have product liability insurance to protect against
these risks, and there can be no assurance that such insurance
will be available to the Company on commercially reasonable terms
or at all.
Product Development and Enhancement
The Company will continue to make significant investments in
product development and enhancement to continue to provide
technological solutions to its customers' business needs.
Historically, the Company has obtained customer funding to
develop products and services which jointly met the Company's
need to remain competitive and the customer's need to solve
information management problems. Currently, the dynamic nature of
the information technology industry places large research and
development demands on businesses that desire to remain
competitive. Competing with larger firms with substantially
greater capital resources, the Company has devoted significant
portions of available resources to stay abreast of industry
developments and to offer competitive products and services.
As of March 14, 1997, the Company's product development staff
consisted of 20 employees and two independent consultants. The
Company's total expenditures for product development during 1996
and 1995 were approximately $1,204,000 and $1,060,000,
respectively. These expenditures represented 13 percent and nine
percent of total revenues for 1996 and 1995, respectively. Of the
product development costs, the Company capitalized software
development costs and interest totaling $655,248 and $650,158 in
1996 and 1995, respectively. The Company anticipates that it will
continue to commit substantial resources to product development
in the future, including further development and enhancement of
viaLink, RSA and CHAINLINK.
Item 2. Properties
The Company's corporate headquarters consists of a two-story
office facility of approximately 30,000 square feet at 13800
Benson Road, Edmond, Oklahoma, which the Company first occupied
in January 1996. The office facility is leased under a ten-year
lease requiring monthly rental payments of $24,545 during the
first 36 months, $27,500 during the next 48 months, and $28,750
during the remaining term of the lease. The lease expires on June
30, 2006.
The current facility has internal systems consisting of a local
area network with associated servers, a wide area network, high
speed ("T1") connectivity to the Internet, two RS/6000's, an
AS/400, an HP 9000, and approximately 140 workstations. The
facility is designed to support a projected increase in staff for
both traditional and viaLink services and the increased office
space required to house a production computer operations
facility.
Item 3. Legal Proceedings
From time to time, the Company may be involved in litigation
relating to claims arising out of its operations in the normal
course of business. The Company is not currently a party to any
legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during
the fourth quarter ended December 31, 1996.
PART II
Item 5. Market for Registrant's Common Stock and Related
Stockholder Matters
The Common Stock and the Redeemable Common Stock Purchase
Warrants began trading separately in November 1996 (subsequent to
the initial public offering) on the Nasdaq SmallCap Market under
the symbols "IQIQ" and "IQIQW", respectively. The following
table sets forth the high and low closing bid quotations of the
Common Stock and Redeemable Common Stock Purchase Warrants as
reported by the National Association of Securities Dealers
Automated Quotation System ("NASDAQ"). For the fourth quarter of
1996, the bid quotation reflects inter-dealer prices without
adjustment for retail markups, markdowns or commissions and may
not reflect actual transactions. Prior to the fourth quarter of
1996, no established public trading market existed for the Common
Stock and Redeemable Common Stock Purchase Warrants.
<TABLE>
<CAPTION>
Redeemable Common
Common Stock Price Stock Purchase
Warrants Price
------------------ -----------------
High Low High Low
-------- -------- ------- --------
<S> <C> <C> <C> <C>
Fourth Quarter-1996 $6.00 $4.375 $1.75 $.75
</TABLE>
The number of record holders of the Company's Common Stock as of
March 14, 1997, was approximately 750.
The Company has not paid a dividend with respect to its common
stock nor does the Company anticipate paying dividends in the
foreseeable future.
Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations
This Form 10-KSB contains forward-looking statements which
involve risks and uncertainties. The Company's actual results
may differ significantly from the results discussed in the
forward-looking statements.
Overview
The Company is engaged in the business of providing information
systems services to retail companies and to the manufacturers,
wholesalers, and other suppliers who provide the products that
these retail companies sell (the "Retail Supply Chain"). These
information systems services include (i) management consulting
and computer system integration services (Consulting), (ii)
proprietary software products and applications (Solutions), and
(iii) network services and network-based computer applications
(Network Services). The Company is organized to provide all
three information systems services in several business areas:
Retail Consulting, Store Systems Consulting, Internet Consulting,
viaLink Implementation and Production/Operations.
Through its Consulting Services, the Company provides business,
computer and technology consulting and systems integration
services. Through its Solutions, the Company sells computer
hardware and software, including the Company's proprietary
software applications, RSA and CHAINLINK. Through its Network
Services, the Company offers its network information subscription
service, viaLink, and other Web page hosting and subscription
services.
The following table sets forth selected results of operations for
the fiscal years ended December 31, 1996, 1995 and 1994, which
are derived from the audited financial statements of the Company.
<TABLE>
<CAPTION>
For the Years Ended December 31,
------------------------------------------------
1996 1995 1994
----------------- ----------------- ------------------
Amount % Amount % Amount %
---------- ----- ------------ ----- ----------- -----
<S> <C> <C> <C> <C> <C> <C>
Revenues $9,507,370 100.0 $11,590,224 100.0 $11,609,652 100.0
Direct cost of
sales 2,570,840 27.0 3,616,687 31.2 5,262,740 45.3
---------- ----- ------------ ----- ----------- ----
6,936,530 73.0 7,973,537 68.8 6,346,912 54.7
Expenses:
Salaries and
benefits 5,167,571 54.4 5,673,034 49.0 4,336,206 37.4
Selling,
general and
administrative 2,007,999 21.1 1,588,655 13.7 1,168,615 10.1
Interest expense 219,089 2.3 149,042 1.3 121,678 1.0
Depreciation and
amortization 591,205 6.2 511,494 4.4 374,107 3.2
--------- ----- --------- ----- --------- -----
Total expenses 7,985,864 84.0 7,922,225 68.4 6,000,606 51.7
--------- ----- --------- ----- --------- -----
Income (loss)
before income
taxes $(1,049,334) (11.0) $ 51,312 0.4 $ (346,306) 3.0 %
=========== ===== =========== ===== =========== =====
</TABLE>
The Company's revenues declined 18 percent during the year ended
December 31, 1996, compared to the fiscal year 1995, and
moderately decreased .2 percent during the 1995 fiscal year,
compared to the 1994 fiscal year. The decline in revenues was
principally attributable to the reduction in computer hardware
sales and revenues from consulting and system integration
services due to lower overall levels of consulting and computer
systems integration projects, while the Company allocated and
devoted substantial consulting and programming personnel time to
the further development, enhancement and implementation of
viaLink, as the Company increases its focus on recurring revenue
and network services. The decline in hardware sale revenues was
in part attributable to the completion of two large point-of-
sale hardware installations in 1995 and generally overall lower
hardware orders and installations by customers in 1996. The
decline in revenues (0.2 percent) during the 1995 fiscal year
compared to 1994 was principally attributable to the reduction in
computer hardware sales, while revenues from consulting and
system integration services (which included the sale of the
Company's RSA product) increased. Management of the Company
cannot predict whether revenues will further decline and, if the
decline in such revenues continues, the severity or length of
time such declining revenues and the impact upon the financial
condition and results of operations of the Company. Although
there can be no assurance, management of the Company anticipates
increasing revenues through additional sales of the Company's RSA
and subscriptions for the Company's viaLink network information
service, along with consulting revenues.
The Company's quarterly operating results have, in the past,
varied and may in the future vary significantly depending on
factors such as the size, timing and recognition of revenue from
significant customer consulting and systems integration activity,
hardware and software orders, the timing of new product releases
and market acceptance of these new releases, increases in
operating expenses, and to some extent, the seasonal nature of
its business. Thus, the Company's revenues and results of
operations have and may continue to vary significantly from
quarter to quarter, period to period, and year to year based upon
frequency and volume of sales and licensing of the Company's
software applications and providing of consulting services during
such periods, as well as the future volume of viaLink
subscriptions. Due to the relatively fixed nature of certain of
the Company's costs throughout each period, including personnel
and facilities costs, the decline of revenues in any period
typically results in lower profitability. There can be no
assurance that the Company will be successful in achieving and
maintaining profitability on a fiscal year basis or avoiding
losses in any future period.
As a result of the Company's decision to develop and build
certain software applications and viaLink, and to finance the
growth and investment through internally generated cash flows as
much as possible, much of the cost incurred with the internal
projects has been expensed for financial reporting purposes.
Accordingly, the Company's expense levels are based in part on
its expectations as to future revenues. The Company typically
operates on a backlog of consulting and systems integration
projects; however, there are likely to be periods when expenses
exceed revenues.
Results of Operations
Comparison of Fiscal 1996 and 1995
Revenues. During 1996, revenues decreased on an overall basis by
$2,082,854 (an 18 percent decrease) to $9,507,370 compared to
revenues of $11,590,224 during 1995. Fifty-three percent of the
decrease was attributable to declining revenues from computer
hardware sales, which decreased $1,095,965 (a 28 percent
decrease). The decrease in hardware sales revenue was the
result of the completion of two large point-of-sale hardware
installations in 1995, while orders and installations by
customers were generally lower in 1996. In 1995, the Company
made its first significant sale of RSA for approximately $1.3
million, which accounted for a significant portion (78 percent)
of the revenues from proprietary software products and
applications in 1995. The Company made two sales of RSA in 1996
totaling $895,941, which accounted for 90 percent of its total of
$997,499 in revenues from proprietary software products and
applications. Overall, proprietary and software product revenues
decreased $674,193 (a 40 percent decrease) from 1995. Consulting
revenues decreased $427,271 (a 7.5 percent decrease) during 1996.
Consulting revenues decreased primarily as a result of an overall
lower level of consulting and systems integration work having
been performed by the Company for its customers and due to an
increase in utilization of consulting personnel and programmers
for internal research and development of viaLink. These
declines in revenues in 1996 compared to 1995 were offset by an
increase of $114,575 in recurring revenue sources (a 31 percent
increase), as the Company is beginning development of its
recurring revenue base through viaLink and other network
services.
Direct Cost of Sales. Direct cost of sales represents the cost of
hardware and certain point-of-sale software purchased by the
Company as an authorized reseller of IBM equipment and software,
and includes certain required royalty payments based on the
Company's sale of its proprietary software products. As a result
of lower hardware sales, cost of sales decreased accordingly by
$1,045,847 (a 29 percent decrease). As a result of the change in
sales mix to more profitable software applications and consulting
fees, and less hardware sales, the gross margin on revenues
decreased $1,037,007 (a 13 percent decrease) in 1996 compared to
1995.
Salaries and benefits. Total salaries and benefits decreased by
$505,463 (a nine percent decrease) to $5,167,571 during 1996 from
$5,673,034 in 1995. Payroll costs, including taxes and bonuses,
decreased $229,095 (a four percent decrease), as the Company's
total employed personnel remained relatively constant at
approximately 105 throughout 1996. This decrease was in part due
to the hiring in 1995 of several higher-cost temporary
programmers to meet the demand and workload. These programmers
were not employed in 1996. Contract labor was also utilized in
1995 to meet the workload demand. As with the temporary
programmers, these contractors were not employed in 1996,
resulting in a decrease of $331,590 (an 80 percent decrease)in
contract labor costs from 1996 to 1995. In the development of
viaLink and enhancement of RSA a portion of the employee
compensation and associated costs of such personnel were
capitalized as software development costs. The Company
capitalized $600,825 of software development costs in 1996
compared to $628,094 in 1995, exclusive of capitalized interest
costs, a decrease of $27,269 (a four percent decrease). The
Company expects to spend approximately these same amounts on
software development during 1997. Benefits and insurance expenses
increased slightly in 1996 from 1995 by $4,346 (a two percent
increase).
Selling, General and Administrative Expenses. Selling, general
and administrative expenses in 1996 increased by $419,344 (a 26
percent increase) to $2,007,999 compared to $1,588,655 during
1995. On January 5, 1996, the Company completed the relocation
to its new leased office facilities. As a result of this move and
the increased occupancy costs, coupled with the increase in staff
during 1995, many of the individual categories of selling,
general and administrative expenses increased from the 1995
levels. Occupancy costs, including rent of facilities, utilities,
maintenance and insurance, and equipment leases increased by
$142,315 (a 42 percent increase) over 1995 as additional
equipment was leased for development, production and
implementation of viaLinkT . The expenses associated with
personnel development, education and training increased by
$24,222 (a 15 percent increase), due to increased demands on
current technology training. Also with increased communications
requirements and capabilities, telecommunications expenses,
including postage and shipping, increased $66,637 (a 54 percent
increase) during 1996 compared to 1995. Supplies and resources,
due to the relocation and employment growth mentioned above,
increased $86,906 (a 47 percent increase). Advertising and
Promotion expenses, in connection with preparation for the
viaLinkT implementation, increased $20,046 (a 40 percent
increase). Professional fees decreased by $22,774 (a nine
percent decrease) as the Company employed several professional
consultants in connection with the development of viaLink
starting in mid-1995, who were utilized to a lesser extent
during 1996. Other expense increased by $86,712 during 1996,
which consisted primarily of a bad debt provision of $54,783. All
other expenses increased a net total of $15,280.
Interest Expense. Interest expense increased by $70,047 (a 47
percent increase) for 1996 compared to 1995. In July 1995, the
Company entered into a revolving credit agreement with a bank to
replace its IBM line of credit that was in place through July
1995. The revolving credit agreement provided for two separate
notes to provide hardware and software sales financing, working
capital needs, and bridge financing for the continued development
of viaLink. Average outstanding debt during 1995 was
approximately $1,392,000, while the average outstanding debt
during 1996 was approximately $2,277,000, including $361,000 of
capital leases. During 1996, $54,423 of interest costs were
capitalized as a portion of the development costs of viaLink and
RSA, while during 1995, $22,064 of interest costs were
capitalized.
Depreciation and Amortization. Depreciation and amortization
expense increased in 1996 by $79,711 (a 16 percent increase) due
to the expenditure during 1995 on fixed assets and software
development costs of $376,541 and $650,158, respectively, and the
expenditure during 1996 on fixed assets and software development
costs of $625,893 and 655,248, respectively, which resulted in
the increased depreciation and amortization during 1996.
Comparison of Fiscal 1995 and 1994
Revenues. During 1995, revenues decreased $19,428 (a .2 percent
decrease) to $11,590,224 compared to 1994, as the mix in sales
changed due to normal business activities. Consulting and systems
integration service revenues increased by $779,851 (a 16 percent
increase) from 1994 to 1995. Long-term consulting arrangements
with two customers accounted for $2,506,729 (a 44 percent
increase) of the total 1995 consulting fees revenues of
$5,668,846. Hardware sales decreased $2,010,771 (a 34 percent
decrease) as two large customers completed their store roll-outs
of point-of-sale systems during 1995. During 1995 the Company
continued to sell large volumes of hardware to two of its major
customers. Revenues from software product sales increased by
$1,216,133 (a 267 percent increase) over 1994, principally due
to the first sale of the Company's proprietary software
application RSA of approximately $1.3 million. Customer support
network revenue decreased $4,641 (a one percent decrease) from
1994.
Direct Cost of Sales. Direct cost of sales represents the cost of
hardware and certain point-of-sale software acquired for resale.
The decrease in hardware sales resulted in a corresponding
decrease in cost of sales of $1,646,053 (a 31 percent decrease)
to $3,616,687 in 1995 compared to $5,262,740 in 1994. As a result
of the change in sales mix to more profitable software
applications and consulting fees, and less hardware sales, the
gross margin on sales increased $1,626,625 (a 26 percent
increase)to $7,973,537 compared to $6,346,912 in 1994.
Salaries and Benefits. Salaries and benefits increased a total of
$1,336,828 31 percent increase) to $5,673,034 in 1995 form
$4,336,206 in 1994, due to the increase in employed personnel. In
May 1994, the Company embarked on a significant growth pattern,
increasing from 74 to 95 employees by the end of 1994. This
employment level remained constant through 1995, as compared to
an average of five months in 1994, as well as new staff additions
during 1995 increased the employed personnel to a level of 105 as
of December 31, 1995.
Selling, General and Administrative Expenses. Selling, general
and administrative expenses in 1995 increased $420,040 (a 36
percent increase) to $1,588,655 from $1,168,615 in 1994 due to
several factors. Recruiting and staffing expenses increased
$39,882 (a 78 percent increase) due to costs of hiring and
relocating certain key personnel. Travel expenses increased
$102,909, due to the increase in staff and higher levels of
travel associated with training in 1995. Rent and occupancy costs
increased by $52,095 (an 18 percent increase) during 1995 due to
the leasing of three temporary buildings to accommodate increased
employed personnel. As a result of employment growth,
telecommunications and supplies and resources increased a total
of $63,640 (a 22 percent increase). Professional Fees increased
$127,166 (a 91 percent increase) due to legal fees and financing
efforts in connection with development of viaLink and additional
consultants hired by the Company for the development and
marketing of viaLink. All other selling, general and
administrative expenses decreased a net total of $34,438.
Depreciation and Amortization. Depreciation and amortization
expense increased in 1995 by $137,387 (a 37 percent increase) to
$511,494 due to continued high levels of fixed asset and software
development additions. Gross capital expenditures and capitalized
expenditures for software development were $659,140 and
$1,026,699 in 1994 and 1995, respectively.
Interest Expense. In 1995, the Company completed a new credit
facility with a bank to replace the IBM line-of-credit. The new
credit facility established two separate notes payable totaling
$3 million, to provide hardware and software sales financing,
working capital needs, and bridge financing for the continued
development of viaLink. Average outstanding debt, including
shareholder loans, was approximately $1,392,000 and $1,169,000,
during 1995 and 1994, respectively. During 1995, $22,064 of
interest costs were capitalized due to the ongoing development of
viaLink and RSA.
Liquidity and Capital Resources
As of December 31, 1996, the Company had cash and cash
equivalents of $1,821,014. The Company's working capital was
$2,311,907.
Prior to its sale of stock in 1996, the Company financed its
operations and growth through internal operations, cash flows and
borrowings. In July, 1995, the Company entered into two lines-of-
credit arrangements with a local bank to finance the ongoing
product sales operations and to provide working capital and
financing for the continued development and enhancement of
viaLink and RSA until more permanent long-term or equity
financing was completed. In June 1996, Vantage Capital
Resources, Inc. merged with the Company and in November 1996, the
Company completed an initial public offering, and received total
net proceeds of $4,425,969. Costs and expenses of the offerings
totaled $428,162, which was offset against the net proceeds.
After receipt of the net proceeds, the Company paid in full both
lines of credit totaling $2,181,000 as a cash interest cost-
saving measure, and the Company has remaining a single line of
credit of $1,000,000. Total net cash flows provided from
financing activities in 1996 were $3,174,291.
During the fiscal year ended December 31, 1996, the Company used
$90,635 of cash flows from operations, compared to generating
$353,868 in the 1995 fiscal year, and in 1996, used $1,281,141 of
such cash flows for additional investment in furniture, equipment
and leasehold improvements and software development costs. As of
December 31, 1996, and March 14, 1997, the Company did not have
any borrowings outstanding on its line-of-credit financing
arrangement. The borrowing base at December 31, 1996 was
approximately $1,123,000.
The Company's capital expenditures of $1,281,141 for the year
ended December 31, 1996, were primarily for computer hardware and
software, office equipment and furniture, and internal software
development costs associated with the development and/or
enhancement of RSA and viaLink. Of this total, $655,248 relates
to internal software development costs for the Company's network
information services and point-of-sale application. While future
capital expenditures will depend upon a number of factors, the
level of expenditures is expected to increase over the historical
level of such expenditures as the Company expands to deliver its
network information services and continues to enhance its point-
of-sale applications.
As of December 31, 1996, the Company had no borrowings
outstanding under its revolving credit agreement with Liberty
Bank and Trust Company of Oklahoma City, N.A. (the "Bank"). The
amended revolving credit agreement provides for a single line of
credit of $1,000,000, under a promissory note, which matures on
October 1, 1997, and bears interest at the national prime rate,
as defined in the agreement and note, plus one-half percent ( the
prime rate was 8.25 percent at December 31, 1996). Under the
terms of the agreement, the Company can borrow up to the lesser
of $1,000,000 or the borrowing base as defined in the agreement.
Borrowings under the revolving credit agreement and the
promissory note thereunder are secured by the Company's
furniture, fixtures and equipment, accounts receivable, and
inventory. In addition, borrowings are personally guaranteed by
Robert L. Barcum, Robert N. Baker and David B. North up to
$460,000, $460,000 and $50,000, respectively. The notes mature
and any outstanding borrowings thereunder will become payable in
full on October 1, 1997. The agreement requires the Company to
maintain certain financial ratios and restricts and limits the
creation of additional debt, the sale of certain assets, and the
payment of dividends.
At December 31, 1996, pursuant to eleven separate three-year
promissory notes, Robert L. Barcum, Robert N. Baker and Russell
L. Reinhardt, shareholders and executive officers of the Company,
had aggregate outstanding loans to the Company of $457,000 (the
"Shareholders' Loans"). The proceeds of the Shareholders' Loans
were utilized to fund operating costs and development of the
Company's viaLinkT network subscription services and RSA
software application. The Shareholders' Loans bear interest at
rates of 8.5 percent to 10 percent per annum, and mature
commencing January 3, 1997 through March 8, 1999. Furthermore, on
October 15, 1996, the Company issued a promissory note to David
B. North, a shareholder and executive officer of the Company, in
redemption of 22,500 shares of Common Stock of the Company issued
to Mr. North in connection with the merger of VCRI, in the
principal amount of $39,375, bearing interest at the rate of 10
percent per annum, with a maturity date of November 15, 1997.
See Item 12. Certain Relationships and Related Transactions. It
is anticipated that the Shareholders' Loans and the promissory
note held by Mr. North will be repaid as the respective notes
mature from cash flows from operations.
The Company anticipates that its operations and growth strategy
will be financed with cash and cash equivalents , operating cash
flows, capital and operating leases and the existing bank credit
facility of $1,000,000. The Company believes that these sources
of funds will be sufficient to satisfy the Company's capital
requirements for at least 18 months. There may be circumstances,
however, that would accelerate the Company's use of available
capital resources. If this occurs, the Company may, from time to
time, incur indebtedness or issue, in public or private
transactions, equity or debt securities. The company currently
has no arrangements, however, for additional financing, and there
can be no assurance that the Company will be able to obtain
requisite financing when needed on acceptable terms.
Forward Looking Statements
Statements of the Company's or management's intentions, beliefs,
anticipations, expectations and similar expressions concerning
future events contained in this Report 10-KSB constitute "forward
looking statements" as defined in the Private Securities
Litigation Reform Act of 1995. As with any future event, there
can be no assurance that the events described in forward looking
statements made in this Report 10-KSB will occur or that the
results of future events will not vary materially from those
described in the forward looking statements. Important factors
that could cause the Company's actual performance and operating
results to differ materially from the forward looking statements
include, but are not limited to, changes in the general level of
economic activity in the markets served by the Company,
introduction of new products or services by competitors, delays
in implementing the Company's viaLink services, the availability
of capital sufficient to support the Company's level of activity
and the ability of the Company to implement its business
strategies.
Item 7. Financial Statements
The financial statements are included beginning at page F-2. See
page F-1 for the Index to the Financial Statements.
Item 8. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure
None
PART III
Item 9. Directors and Executive Officers of the Registrant
Set forth below is certain information with respect to each
executive officer and Director of the Company. Directors are
generally elected at the annual shareholders' meeting and hold
office until the annual shareholders' meeting three years
following their election and until their successors are elected
and qualify. Executive officers are elected by the Board of
Directors and serve at its discretion. The Bylaws of the Company
provide that its Board of Directors shall consist of not less
than three nor more than fifteen. As of the December 31, 1996,
the Board of Directors of the Company consisted of three members.
<TABLE>
<CAPTION>
Name Age Position
--------------------- --- ------------------------------
<S> <C> <C>
Robert L. Barcum(1)(2) 48 President and Chairman of the
Board
Robert N. Baker(1)(2) 45 Vice President-Network
Services, Secretary and
Director
Russell L. 50 Vice President-Solutions and
Reinhardt(1)(3) Director
David B. North(1) 40 Vice President-Technology,
Assistant Secretary
John M. Duck 54 Vice President, Treasurer,
Chief Financial Officer
- ----------
<FN>
(1) Member of Stock Option Committee of the Applied Intelligence
Group, Inc. 1995 Stock Option Plan. See "Stock Option Plan,"
below.
(2) A Class II Director, whose term expires in 1997.
(3) A Class I Director, whose term expires in 1996.
</FN>
</TABLE>
Background Information of Executive Officers and Directors
The following is a brief description of the business background
of the executive officers and Directors of the Company:
Robert L. Barcum, as a cofounder, has served as a Director and as
an executive officer of the Company since its formation in 1985
and currently serves as Chairman of the Board and President and
Chief Executive Officer. Mr. Barcum is responsible for developing
the Company's national retail practice, including product and
services planning, marketing and business alliances. He also
manages the Consulting and Systems Integration business area. Mr.
Barcum has more than 25 years of experience in management
information systems for retail organizations. He is active in the
National Retail Federation. Since 1991 has served as an outside
Director of Duckwall-ALCO Stores, Inc., a publicly-held retailer
and a Company customer and since 1993, has served as an outside
director of Commercial Distributing Inc. , a distributor of
automotive products in the automobile after-market and a Company
customer. Since 1995, he has served on the Business Advisory
Council of Oklahoma Christian University of Science and Arts
(formerly Oklahoma Christian College), and since 1996 has served
as a member of the Advisory Board of Kent State University.
Robert N. Baker, as a cofounder, has served as a Director and
Vice President of the Company since its formation in 1985 and
currently serves as Vice President-Network Services and Corporate
Secretary. Mr. Baker is responsible for developing the viaLINK
services as well as managing the Network Services business area.
Mr. Baker has over 20 years of experience in management,
technical support and systems development within the retail
industry. He graduated magna cum laude from Oklahoma Christian
University of Sciences and Arts (formerly Oklahoma Christian
College) with a Bachelor of Science in Mathematics.
Russell L. Reinhardt has served as a Director, Vice President and
Secretary since joining the Company in 1986 and currently serves
as Vice President-Solutions. Mr. Reinhardt is responsible for
product development, business partnerships and business
relations, and holds various responsibilities related to business
planning. Mr. Reinhardt manages the Solutions business area. Mr.
Reinhardt has 20 years experience with the IBM Corporation during
which time he held a range of staff and management positions. Mr.
Reinhardt is a graduate of the University of Michigan with a
B.S.E. in Science Engineering.
David B. North has served as Vice President since joining the
Company in 1985 and currently serves as Vice President-Technology
and Assistant Secretary. Mr. North is the Company's chief
computer scientist and serves as project manager, system designer
and technical consultant. Mr. North was an instructor of computer
science at the University of Oklahoma for two years and also an
Instructor, Systems Analyst and Program Developer at Oklahoma
Christian University of Sciences and Arts. Currently he serves in
an advisory capacity to the University of Oklahoma Center for MIS
Studies. Mr. North is a graduate of Oklahoma Christian University
of Sciences and Arts (formerly Oklahoma Christian College) with a
Bachelor of Science in Chemistry. He was awarded a Masters of
Science in Computer Science from the University of Oklahoma and
has completed further graduate studies in Artificial Intelligence
at the University of Oklahoma.
John M. Duck has served as Director of Finance and Administration
since joining the Company in 1991 and currently serves as Vice
President, Treasurer and Chief Financial Officer. Mr. Duck is
responsible for all financial and tax reporting and compliance as
well as for overall direction of the Finance Department of the
Company. Prior to joining the Company, Mr. Duck served as Chief
Financial Officer of Griffin Entities, Inc. as well as Mr. Rooter
Corporation. Mr. Duck currently serves on the Board of Directors
of the Edmond Chamber of Commerce and is a member of the Oklahoma
County Private Industry Council. Mr. Duck is a certified public
accountant and holds a Bachelor of Science in Economics from
Oklahoma City University.
Board of Directors
Pursuant to the terms of the Company's Certificate of
Incorporation , the directors are divided into three classes.
Class I Directors hold office initially for a term expiring at
the annual meeting of shareholders to be held in 1997, Class II
Directors hold office initially for a term expiring at the annual
meeting of shareholders to be held in 1998, and Class III
Directors hold office initially for a term expiring at the annual
meeting of shareholders to be held in 1999. Each director will
hold office for the term to which he or she is elected and until
his or her successor is duly elected and qualified. Mr. Reinhardt
is serving as a Class I Director under a term expiring in 1997,
and Messrs. Barcum and Baker are serving as Class II Directors
under terms expiring in 1998. As of December 31, 1996, no member
of the Board of Directors is serving as a Class III Director. At
each annual meeting of the shareholders of the Company, the
successor or successors to a member of the class of directors
whose term expires at such meeting will be elected to hold office
for a term expiring at the annual meeting of shareholders held
in the third year following the year of his election.
Director Liability and Indemnification
As permitted by the provisions of the Oklahoma General
Corporation Act, the Certificate of Incorporation (the
"Certificate") of the Company, including amendments thereto,
eliminates in certain circumstances the monetary liability of
directors of the Company for a breach of their fiduciary duty as
directors. These provisions do not eliminate the liability of a
director (i) for a breach of the director's duty of loyalty to
the Company or its shareholders; (ii) for acts or omissions by a
director not in good faith or which involve intentional
misconduct or a knowing violation of law; (iii) for liability
arising under Section 1053 of the Oklahoma General Corporation
Act (relating to the declaration of dividends and purchase or
redemption of shares in violation of the Oklahoma General
Corporation Act); or (iv) for any transaction from which the
director derived an improper personal benefit. In addition, these
provisions do not eliminate liability of a director for
violations of federal securities laws, nor do they limit the
rights of the Company or its shareholders, in appropriate
circumstances, to seek equitable remedies such as injunctive or
other forms of non-monetary relief. Such remedies may not be
effective in all cases.
The Certificate and the Bylaws of the Company, as amended,
provide that the Company shall indemnify its directors and
officers to the full extent permitted by the Oklahoma General
Corporation Act. Under such provisions, any director or officer
who, in his capacity as such, is made or threatened to be made a
party to any suit or proceeding, may be indemnified if the Board
of Directors determines such director or officer acted in good
faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the Company. The Certificate and
Bylaws and the Oklahoma General Corporation Act further provide
that such indemnification is not exclusive of any other rights to
which such individuals may be entitled under the Certificate, the
Bylaws, an agreement, vote of shareholders or disinterested
directors or otherwise.
Item 10. Executive Compensation
All of the Directors of the Company are employees of the Company
and do not receive any compensation in their capacity as
Directors of the Company. The following table sets forth the
total cash compensation of the President and each named executive
officer that during 1994, 1995 and 1996 received compensation in
excess of $100,000 during 1996.
<TABLE>
<CAPTION>
Director and Executive Officer Compensation
Annual
Compensation (1)
----------------------------
Name and Principal Position Year Salary(2) Bonus(3)
------------------------------- ---- --------- --------
<S> <C> <C> <C>
Robert L. Barcum(4) 1996 $169,987 $ --
President and Chief Executive 1995 170,710 $ --
Officer 1994 165,406 $15,000
Robert N. Baker(4) 1996 169,150 $ --
Vice President-Network Services, 1995 170,389 $ --
Secretary 1994 163,645 $15,000
Russell L. Reinhardt(4) 1996 171,840 $ --
Vice President-Solutions 1995 171,256 $ --
1994 165,756 $15,000
David B. North 1996 116,248 $ --
Vice President-Technology, 1995 109,194 $ --
Assistant Secretary 1994 106,202 $15,000
- ----------
<FN>
(1) The named executive officer received additional non-cash
compensation, perquisites and other personal benefits; however,
the aggregate amount and value thereof did not exceed 10 percent
of the total annual salary and bonus paid to and accrued for the
named executive officer during the year.
(2) Dollar value of base salary (both cash and non-cash) earned
during the year.
(3) Dollar value of bonus (both cash and non-cash) earned during
the year.
(4) During the years 1996 and 1995, Robert L. Barcum, Robert N.
Baker and Russell L. Reinhardt each were paid the same annual
base salary of $175,127, and during 1994, each were paid the same
base salary of $168,391. The differences in the amounts
presented above are due to different levels of participation of
each individual in the Section 125 Cafeteria Plan offered by the
Company to all employees on a non-discriminatory basis.
</FN>
</TABLE>
Stock Option Plan
The Company established the Applied Intelligence Group, Inc. 1995
Stock Option Plan (the "Stock Option Plan" or the "Plan") in
March 1995, and amended the Plan on April 29, 1996. The Plan
provides for the issuance of incentive stock options ("ISO
Options") and non-incentive stock options ("NSO Options") to
employees and non-employees of the Company, including employees
who also serve as Directors of the Company. The number of shares
of Common Stock authorized and reserved for issuance under the
Plan is 300,000. As of December 31, 1996, options to purchase a
total of 75,208 shares of Common Stock ranging from $.63 to $1.80
(with a weighted average exercise price of $1.06) per share were
outstanding, all of which were exercisable.
The Stock Option Committee, which is currently comprised of Ms.
Kay H. Titchenal and Messrs. Barcum, Baker, Reinhardt and North,
administers and interprets the Plan and has authority to grant
options to all eligible participants and determine the types of
options granted, the terms, restrictions and conditions of the
options at the time of grant.
The option price of the Common Stock is determined by the Stock
Option Committee. The option price of NSO Options may not be less
than 75 percent of the fair market value of the shares on the
date of grant of the option. In the case of an ISO Option, the
option price may not be less than the fair market value of the
Common Stock on the date of the grant of the ISO Option. The fair
market value of a share of the Common Stock is determined by the
Stock Option Committee. Upon the exercise of an option, the
option price must be paid in full, in cash, Common Stock (at the
fair market value thereof) or a combination thereof. For a period
of two years ending November 21, 1998, the Company has agreed
with Barron Chase Securities, Inc., the underwriter of the
Company's initial public offering (the "Underwriting") not to
grant more than 25,000 NSO Options having an option price of less
than fair market value of the shares on the date of grant of the
option, without written consent of the Underwriter.
Options are exercisable during employment and for a period of
three months after the participant ceases to be an employee, a
director, or non-employee service provider of the Company;
however, in the event of death or disability of the participant,
the ISO Options are exercisable for a period of one year
following death or disability. In any event options may not be
exercised beyond the expiration date of the option. NSO Options
may only be granted to key management employees, directors, key
professional employees or key professional non-employee service
providers of the Company, while ISO Options may only be granted
to key management or key professional non-employees of the
Company. No option may be granted after February 28, 2005.
Options are not transferable except by will or by the laws of
descent and distribution.
All outstanding options granted pursuant to the Plan will become
fully vested and immediately exercisable in the event that (i)
within any 12-month period, the Company sells an amount of Common
Stock that exceeds 50 percent of the number of shares of Common
Stock outstanding immediately prior to such 12-month period, (ii)
the Company completes an initial public offering of its stock, or
(iii) a "change of control" occurs. For purposes of the Plan, a
"change of control" is defined as the acquisition in a
transaction or series of transactions by any person, entity or
group (two or more persons acting as a partnership, limited
partnership, syndicate or other group for the purpose of
acquiring securities of the Company) of beneficial ownership of
50 percent or more (or less than 50 percent as determined by a
majority of the directors of the Company) of either the then
outstanding shares of Common Stock or the combined voting power
of the Company's then outstanding voting securities.
Profit Sharing Plan
In 1987, the Company adopted the Applied Intelligence Group, Inc.
Profit Sharing Plan (the "Profit Sharing Plan"). The Profit
Sharing Plan covers all employees of the Company who have
completed at least one year of service with the Company as of the
enrollment date under the Profit Sharing Plan. The Company may
make an annual contribution to the Profit Sharing Plan on behalf
of employees which, if made, begins to vest for each employee's
account after the employee has completed two years of service
with the Company. Thereafter, each employee's account vests
ratably as to 20 percent of the employee's account following each
subsequent year of completed service with the Company. Vested
contributions will normally be distributed to an employee upon
(i) the employee's retirement, (ii) the employee's death or
disability, (iii) the termination of the employee's employment
with the Company or (iv) the termination of the Profit Sharing
Plan. The Company did not make any contributions to the Profit
Sharing Plan for the fiscal years ended December 31, 1994, 1995
and 1996.
In 1993, the Company amended the Profit Sharing Plan to include a
401(k) deferred compensation feature, whereby eligible
participants may elect to defer up to 15 percent of their
salaries, not to exceed the annual statutory limits, pursuant to
a voluntary salary reduction agreement. The Company may determine
matching levels of contributions from time to time, at the
discretion of the administrative committee. No matching
contributions were made by the Company during 1994, 1995 and
1996. All employee contributions under the 401(k) feature are
fully vested at all times.
Keyman Life Insurance
The Company maintains keyman policies insuring the lives of
Messrs. Barcum, Baker and Reinhardt for $1,250,000, $1,250,000
and $820,000, respectively, the proceeds of which are payable to
the Company.
Item 11. Security Ownership of Certain Beneficial Owners and
Management
The following table presents certain information as to the
beneficial ownership of the Common Stock of the Company as of
March 14, 1997, of (i) each person who is known by the Company to
own beneficially more than five percent of the outstanding Common
Stock, (ii) each Director of the Company, (iii) each
executive officer named in the Summary Compensation Table
and (iv) all current executive officers and Directors as a group,
together with their percentage holdings of the outstanding
shares. All persons listed have sole voting and investment power
with respect to their shares unless otherwise indicated, and
there is no family relationship between the executive officers
and Directors of the Company.
<TABLE>
<CAPTION>
Shares Percent of
Name (and Address) Beneficially Outstanding
of Beneficial Owner Owned Shares
- --------------------------- ------------- -----------
<S> <C> <C>
Robert L. Barcum(1) 554,529 20.33%
Robert N. Baker(1) 554,529 20.33%
Russell L. Reinhardt(1) 316,081 11.59%
David B. North(1) 74,861 2.74%
Executive Officers
and Directors as a 1,502,056 55.07%
group (five persons)(2)
- ----------
<FN>
(1) The business address of the named person is 13800 Benson
Road, Edmond, Oklahoma 73013-6417.
(2) The number of shares and percent include 2,056 shares of
Common Stock issuable pursuant to stock options held and
exercisable by an executive officer of the Company.
</FN>
</TABLE>
Item 12. Certain Relationships and Related Transactions
On June 12, 1996, Vantage Capital Resources, Inc., an Oklahoma
corporation ("VCRI"), merged with and into the Company (the
"Merger"). VCRI was organized on March 28, 1996, by John
Simonelli and Larry E. Howell with an initial capitalization of
$360. On June 5, 1996, VCRI completed a private placement
offering of 250,000 shares of VCRI common stock at an offering
price of $1.75 per share, with net proceeds to VCRI of $394,567 (
the "VCRI Private Placement"). Pursuant to the VCRI Private
Placement offering, David B. North, an executive officer and
Director of the Company, purchased 22,500 shares of VCRI common
stock, and James R. Stepp, a former executive officer of the
Company, purchased 1,000 shares of VCRI common stock; however,
all of such shares were subsequently redeemed by the Company, as
described below. In consummation of the Merger, the Company
issued 610,000 shares of its Common Stock, on a one-for-one
basis, for the outstanding Common Stock of VCRI.
In connection with the organization of VCRI, each of Messrs.
Simonelli and Howell were issued 180,000 shares of VCRI Common
Stock for $.001 per share. Prior to the Merger, VCRI had not
engaged in any operations other than the negotiation of the
Merger and the offering of its Common Stock pursuant to a private
placement offering. Upon consummation of the Merger, each of
Messrs. Simonelli and Howell, as well as the other shareholders
of VCRI, exchanged their shares of VCRI Common Stock, on a one-
for-one basis, for the Company's Common Stock. Furthermore, upon
closing of the Merger, Messrs. Simonelli and Howell entered into
three-year employment agreements with the Company and were
elected to the Board of Directors and appointed executive
officers of the Company. In connection with the Merger and the
transactions related thereto, an independent determination of
fairness and reasonableness of the terms of the transactions was
not obtained; however, the transactions were negotiated on an
arm's-length basis by the respective parties (which included all
of the shareholders of the Company) and are believed by
respective parties and management of the Company to have been
fair.
In connection with the Company's application with The Nasdaq
Stock Market, Inc. ("Nasdaq") for listing of the Common Stock and
Warrants on the Nasdaq SmallCap Marketr, the staff of Nasdaq
raised investor protection concerns regarding (i) the 360,000
shares of Common Stock received by Messrs. Simonelli and Howell
in consummation of the Merger and their employment with the
Company pursuant to certain three-year employment agreements, and
(ii) the VCRI Private Placement of the VCRI common stock at $1.75
per share followed by the exchange of such shares for the Common
Stock of the Company. In addition, the staff of Nasdaq orally
expressed concerns regarding the purchase of the shares of VCRI
common stock by Messrs. North and Stepp. Initially the staff of
Nasdaq denied listing of the Company's securities on the Nasdaq
SmallCap Marketr, and the Company appealed the staff's decision
to the Nasdaq appeal panel (the "Panel"). In an effort to
alleviate the concerns of the staff of Nasdaq and obtain the
listing on appeal, the Company, pursuant to agreements with
Messrs. Simonelli and Howell, North and Stepp completed the
transactions described below, including the redemption of the
shares of Common Stock received by Messrs. North and Stepp in
consummation of the Merger. However, the Panel in its written
appeal decision of October 28, 1996, did not require such
redemption.
Pursuant to an Exchange Agreement dated October 14, 1996 (the
"Exchange Agreement"), each of Messrs. Simonelli and Howell
exchanged 180,000 shares of Common Stock for stock options
exercisable on or after November 30, 1998 and on or before
November 30, 2001 for the purchase of 180,000 shares of Common
Stock for $5.00 per share. The stock options and the Common Stock
or other securities issuable under the stock options may not be
offered for sale except in compliance with the applicable
provisions of the Securities Act of 1933, as amended. The Company
has agreed that if it files with the Securities and Exchange
Commission a post-effective amendment to the registration
statement, a new registration statement, or similar offering
document, Messrs. Simonelli and Howell (or other holders of the
stock options) shall have the right through December 31, 2001, to
include in such registration statement or offering statement the
Common Stock or other securities issuable upon exercise of the
stock options at no expense to Messrs. Simonelli and Howell. In
addition, pursuant to the Exchange Agreement, Messrs. Simonelli
and Howell resigned as executive officers and Directors of the
Company, and their employment agreements were terminated
effective April 1, 1996, without any payment of or continuing
right to receive compensation under such employment agreements.
Although not required pursuant to the Panel's written appeal
decision, on October 14, 1996, the Company redeemed the shares of
Common Stock issued to James R. Stepp, a former executive officer
of the Company, in exchange for the 1,000 shares of VCRI common
stock that he purchased in connection with the VCRI Private
Placement Offering, for $1.75 per share and for an aggregate
amount of $1,750. Also, on October 15, 1996, the Company redeemed
the shares of Common Stock issued to David B. North in exchange
for the 22,500 shares of VCRI common stock that he purchased in
connection with the VCRI Private Placement Offering for $1.75 per
share for an aggregate amount of $39,375. In redemption of the
shares, the Company issued to Mr. North a promissory note in the
principal amount of $39,375, bearing interest at the rate of 10
percent per annum (payable at maturity), with a maturity date of
November 15, 1997. Management of the Company believes that the
terms of the promissory note were at least as favorable as could
be obtained from unaffiliated third-party lenders. These
redemptions were completed based solely in reliance upon the oral
concerns expressed by the Nasdaq staff and were completed in
anticipation that the Panel's appeal decision would require such
redemptions. The Company does not intend to redeem any of the
remaining outstanding shares of Common Stock of the Company
issued to the shareholders of VCRI in consummation of the Merger.
Pursuant to eleven separate promissory notes, Robert L. Barcum,
Robert N. Baker and Russell L. Reinhardt have loaned to the
Company, in the aggregate, $457,000 (the "Shareholders'
Loans"). The Shareholders' Loans are each evidenced by a
promissory note, bearing interest at rates of 8.5 percent to 10
percent per annum, with maturity dates three years from the date
of the note. With respect to the Shareholders' Loans, the
interest paid or accrued for payment to each of Robert L. Barcum,
Robert N. Baker and Russell L. Reinhardt was $13,055, $13,900,
and $16,600, respectively, during 1996, and $9,503, $10,487 and
$11,915,respectively, during 1995. Management of the Company
believes that the terms of the Shareholders' Loans were at least
as favorable as could be obtained from unaffiliated third-party
lenders.
The Company has adopted policies that any loans to officers,
directors and five percent or more shareholders ("affiliates")
and any future transactions between the Company and any
affiliates will be subject to approval by a majority of the
disinterested independent directors of the Company and will be on
terms no less favorable than could be obtained from unaffiliated
parties. As of December 31, 1996, the Board of Directors is
comprised of three members, none of whom are independent
directors.
Item 13. Exhibits and Reports on Form 8-K
The following documents are filed or incorporated by reference as
part of this Form 10-KSB:
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- ------------------------------------------------------------------
<S> <C>
2.1 The Agreement and Plan of Merger among Registrant,
Vantage Capital Resources, Inc., John Simonelli, Larry E. Howell,
Robert L. Barcum, Robert N. Baker, and David B. North, dated
May 8, 1996*
3.1 Registrant's Certificate of Incorporation*
3.2 Registrant's Bylaws*
4.1 Form of Certificate of Common Stock of Registrant
4.2 Form of Underwriter's Warrant Agreement between Barron
Chase Securities, Inc. and Registrant*
4.3 Form of Warrant Agreement between Liberty Bank & Trust
Company of Oklahoma City, Oklahoma, N.A. and Registrant*
4.4 Form of Certificate of Redeemable Common Stock Purchase Warrant*
4.5 Stock Option Agreement between John Simonelli and Registrant, dated
October 15, 1996*
4.6 Stock Option Agreement between Larry A. Howell and Registrant,
dated October 15, 1996*
10.1 Lease between Oklahoma Christian Investment Corporation and
Registrant, dated October 3, 1994*
10.2 Employment Agreement (Amended and Restated) between John Simonelli
and Registrant, with an effective date of June 12, 1996*
10.3 Employment Agreement (Amended and Restated) between Larry A. Howell
and Registrant, with an effective date of June 12, 1996*
10.4 Applied Intelligence Group, Inc. Profit Sharing Plan*
10.5 Global Solutions Partners Agreement with NCR Corporation, having an
effective date of January 1, 1996*
10.6 IBM Business Partner Agreement with International Business Machines
Corporation, dated February 20, 1995*
10.7 Agreement for Licensing of IBM Software between International
Business Machines Corporation, executed by Registrant on
March 18, 1996*
10.8 Master Software License Agreement with Applied Retail Solutions,
Inc., dated January 28, 1994*
10.9 Form of Merger and Acquisition Agreement between Barron Chase
Securities, Inc. and Registrant*
10.10 Master Arrangement Letter agreement with Fred's Inc. and Registrant,
dated December 1, 1995*
10.11 Master Arrangement Letter agreement with Fleming Companies, Inc.
and Registrant, dated May 3, 1995*
10.13 Master Arrangement Letter agreement with Fleming Companies, Inc.
and Registrant, dated May 3, 1995*
10.14 Master Arrangement Letter agreement with Fleming Companies, Inc.
and Registrant, dated September 28, 1995*
10.15 Arrangement Letter agreement with Fleming Companies, Inc. and
Registrant Dated May 12, 1995*
10.16 Arrangement Letter agreement with Fleming Companies, Inc. and
Registrant dated May 31, 1995*
10.17 Arrangement Letter agreement with Fleming Companies, Inc. and
Registrant dated June 29, 1995*
10.18 Arrangement Letter agreement with Fleming Companies, Inc. and
Registrant dated May 18, 1995*
10.19 Arrangement Letter agreement with Fleming Companies, Inc. and
Registrant dated October 31, 1995*
10.20 Arrangement Letter agreement with Fleming Companies, Inc. and
Registrant dated November 8, 1995*
10.21 Arrangement Letter agreement with Fleming Companies, Inc. and
Registrant dated September14, 1995*
10.22 Arrangement Letter agreement with Fleming Companies, Inc. and
Registrant dated May 10, 1995*
10.23 Arrangement Letter agreement with Fleming Companies, Inc. and
Registrant dated June 16, 1995*
10.24 Arrangement Letter agreement with Fleming Companies, Inc. and
Registrant dated August 9, 1995*
10.25 Arrangement Letter agreement with Fleming Companies, Inc. and
Registrant dated September 28, 1995*
10.26 Arrangement Letter agreement with Fleming Companies, Inc. and
Registrant dated October 4, 1995*
10.27 Arrangement Letter agreement with Fleming Companies, Inc. and
Registrant dated December 15, 1995*
10.28 AIG Computer Software License Agreement between ALDI Inc. and
Registrant, dated August 28, 1995*
10.29 Arrangement Letter agreement with ALDI Inc. and Registrant, dated
January 7, 1994*
10.30 Arrangement Letter agreement with ALDI Inc. and Registrant, dated
February 7, 1995*
10.31 Master Arrangement Letter agreement with ALDI Inc. and Registrant,
dated May 4, 1995*
10.32 Memorandum agreement with ALDI Inc. and Registrant, dated May 30,
1995*
10.33 Master Arrangement Letter agreement with ALDI Inc. and Registrant,
dated August 3, 1995*
10.34 Master Arrangement Letter agreement with ALDI Inc. and Registrant,
dated September 21, 1995*
10.35 Master Arrangement Letter agreement with ALDI Inc. and Registrant,
dated February 7, 1995*
10.36 Exchange Agreement among Registrant, Robert L. Barcum, Robert N.
Baker, Russell L. Reinhardt, and David B. North, John
Simonelli, and Larry A. Howell, dated October 15, 1996*
10.37 Stock Redemption and Employment Severance Agreement between
Registrant and James R. Stepp, dated October 14, 1996*
10.38 Stock Redemption Agreement between Registrant and David B. North,
dated October 15, 1996*
10.39 Master Arrangement Letter agreement with Sonic Corp. and Registrant,
dated July, 31, 1996
10.40 Addendum No. 3 to Arrangement Letter agreement with Sonic Corp. and
Registrant, dated October 24, 1996
10.41 Arrangement Letter agreement with Dollar General Corporation and
Registrant, dated January 30, 1997
10.42 Addendum, dated December 12, 1996, to Arrangement Letter agreement
between ALDI Inc. and Registrant, dated August 3, 1995
24.4 Consent of Coopers & Lybrand L.L.P.
27.1 Financial Data Schedule
* Incorporated by reference to Exhibit of same number of the
Registrant's Registration Statement on Form SB-2 (Registration
No. 333-5038-D) as filed with the Central Regional Office of the
Commission.
</TABLE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the
Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of
Edmond, Oklahoma, on this 28th day of March, 1997.
APPLIED INTELLIGENCE GROUP, INC.
BY: /s/ROBERT L. BARCUM
Robert L. Barcum
President
Pursuant to the requirements of the Securities Act of 1934,
this report has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
<S> <C> <C>
/s/ ROBERT L. BARCUM Chairman of the March 28, 1997
Robert L. Barcum Board of Directors
/s/ ROBERT N. BAKER Vice President and March 28, 1997
Robert N. Baker Director
/s/ RUSSELL L. REINHARDT Vice President and March 28, 1997
Russell L. Reinhardt Director
/s/ DAVID B. NORTH Vice President March 28, 1997
David B. North
/s/ JOHN M. DUCK Vice President and March 28, 1997
John M. Duck Chief Financial
Officer
</TABLE>
Item 7. Financial Statements
INDEX TO FINANCIAL INFORMATION
Page
Report of Independent Accountants F-2
Balance Sheets as of December 31, 1996 and 1995 F-3
Statements of Operations for the Years Ended
December 31, 1996, 1995 and 1994 F-4
Statements of Stockholders' Equity for the Years Ended
December 31, 1996, 1995 and 1994 F-5
Statements of Cash Flows for the Years Ended
December 31, 1996, 1995 and 1994 F-6
Notes to Financial Statements F-7
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Applied Intelligence Group, Inc.
We have audited the accompanying balance sheets of Applied
Intelligence Group, Inc. as of December 31, 1996 and 1995 and the
related statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1996.
These financial statements are the responsibility of the
Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of Applied Intelligence Group, Inc. as of December 31, 1996 and
1995 and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1996 in conformity
with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Oklahoma City, Oklahoma
March 7, 1997
<PAGE>
<TABLE>
<CAPTION>
APPLIED INTELLIGENCE GROUP, INC.
BALANCE SHEETS
December 31, 1996 and 1995
ASSETS 1996 1995
---------- ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents $1,821,014 $ 18,499
Accounts receivable - trade, net of
allowance for doubtful accounts
for doubtful accounts of $5,631 in 2,009,837 2,373,517
1996 and $19,557 in 1995
Other receivables 314,874 218,879
Inventory 28,159 22,392
Prepaid expenses 76,264 96,238
--------- ---------
Total current assets 4,250,148 2,729,525
Furniture, equipment and leasehold
improvements, net 1,632,147 1,220,485
Software development costs 1,308,099 829,607
Other assets 117,141 48,443
---------- ----------
Total assets $7,307,535 $4,828,060
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Book overdraft $ 284,760 $ 169,466
Accounts payable and accrued
liabilities 1,078,506 1,263,107
Deferred revenue 332,449 124,463
Current portion of notes payable to
shareholders 107,375 -
Current portion of capital lease
obligation 135,151 59,144
--------- ---------
Total current liabilities 1,938,241 1,616,180
Capital lease obligations, net of current
portion 176,618 158,034
Long-term debt - 1,295,000
Notes payable to shareholders, net of
current portion 389,000 457,000
Deferred income taxes 62,687 304,417
--------- ---------
Total liabilities 2,566,546 3,830,631
Commitments and contingencies (Notes 7 and 10) - -
Stockholders' equity:
Common stock, $.001 par value;
30,000,000 shares authorized; 2,726,500
and 1,500,000 shares issued and
outstanding at December 31, 1996
and 1995, respectively 2,727 1,500
Additional paid-in capital 4,491,226 66,484
Retained earnings 247,036 929,445
--------- --------
Total stockholders' equity 4,740,989 997,429
--------- --------
Total liabilities and
stockholders' equity $7,307,535 $4,828,060
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial
statements.
<PAGE>
<TABLE>
<CAPTION>
APPLIED INTELLIGENCE GROUP, INC.
STATEMENTS OF OPERATIONS
For the years ended December 31, 1996, 1995 and 1994
1996 1995 1994
---------- ----------- -----------
<S> <C> <C> <C>
Revenues $9,507,370 $11,590,224 $11,609,652
Direct cost of sales 2,570,840 3,616,687 5,262,740
---------- ----------- -----------
6,936,530 7,973,537 6,346,912
---------- ----------- -----------
Expenses:
Salaries and benefits 5,167,571 5,673,034 4,336,206
Selling, general and
administrative 2,007,999 1,588,655 1,168,615
Interest expense, net 219,089 149,042 121,678
Depreciation and
amortization 591,205 511,494 374,107
---------- ----------- -----------
Total expenses 7,985,864 7,922,225 6,000,606
---------- ----------- -----------
Income (loss) before
income taxes (1,049,334) 51,312 346,306
Provision (benefit) for income
taxes (366,925) 42,754 138,123
----------- ---------- -----------
Net income (loss) $ (682,409) $ 8,558 $ 208,183
=========== ========== ===========
Net income (loss) per common
share $ (.37) $ .005 $ .123
=========== ========== ===========
Weighted average common share
equivalents outstanding 1,838,522 1,755,628 1,689,070
=========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these financial
statements.
<PAGE>
<TABLE>
<CAPTION>
APPLIED INTELLIGENCE GROUP, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended December 31, 1996, 1995 and 1994
Additional
Common Stock Paid-in Retained Treasury Stock
Shares Amount Capital Earnings Shares Amount
--------- ------ -------- -------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance, 1,979,922 $1,980 $28,975 $852,504 554,600 $(140,000)
December 31,
1993
Sale of common
stock 74,678 75 37,509 - - -
Retirement of
treasury
shares (554,600) (555) - (139,800) (554,600) 140,000
Net Income - - - 208,183 - -
--------- ------ ------- -------- -------- --------
December 31,
1994 1,500,000 1,500 66,484 920,887 - -
Net income - - - 8,558 - -
--------- ------ ------ ------- -------- --------
December 31,
1995 1,500,000 1,500 66,484 929,445 - -
Vantage Capital
Resources,
Inc., Merger 610,000 610 394,317 - - -
Stock
redemptions (383,500) (383) (40,742) - - -
Initial public
offering 1,000,000 1,000 4,071,167 - - -
Net loss - - - (682,409) - -
---------- -------- ----------- -------- --------- ------
December 31,
1996 2,726,500 $2,727 $4,491,226 $247,036 - -
========== ======= ========== ========= ========= ======
</TABLE>
The accompanying notes are an integral part of these financial
statements.
<PAGE>
<TABLE>
<CAPTION>
APPLIED INTELLIGENCE GROUP, INC.
STATEMENTS OF CASH FLOWS
For the years ended December 31, 1996, 1995 and 1994
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating
activities:
Net income (loss) $(682,409) $ 8,558 $208,183
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization 591,205 511,494 374,107
Deferred income tax provision
(benefit) (241,730) 158,237 (21,530)
Loss on disposal of fixed assets 5,720 35 314
Decrease(increase) in accounts
receivable 363,680 (602,282) 37,823
Increase in other receivables (95,995) (143,580) (20,104)
Decrease (increase) in inventory (5,767) 1,484 (16,753)
Decrease (increase) in prepaid
expeneses 19,974 (75,473) 3,324
Decrease (increase) in other
assets (68,698) 119,747 (19,714)
Increase (decrease) in accounts
payable and accrued liabilities (184,601) 308,505 206,131
Increase (decrease) in deferred
revenue 207,986 67,143 (262,645)
---------- ---------- ----------
Cash flow provided by (used in)
operating activities (90,635) 353,868 489,136
---------- ---------- ----------
Cash flows from investing
activities:
Proceeds from sale of assets - - 1,505
Capital expenditures (625,893) (376,541) (515,359)
Capitalized expenditures for
software development (655,248) (650,158) (143,781)
---------- ---------- ----------
Net cash used in investing
activities (1,281,141) (1,026,699) (657,635)
---------- ---------- ----------
Cash flows from financing
activities:
Increase in book overdraft 115,294 169,466 -
Net proceeds from (payments of)
wholesale financing plan - (1,020,126) 264,811
Proceeds from long-term debt 5,609,000 2,435,000 -
Proceeds from shareholder loans 39,375 76,000 68,000
Proceeds from sale of stock 4,425,969 - 37,584
Payments of capital lease
obligations (111,347) (24,610) -
Payments on long-term debt (6,904,000) (1,140,000) (119,453)
---------- ---------- ----------
Net cash provided by financing
activities 3,174,291 495,730 250,942
----------- ---------- ----------
Net increase (decrease) in cash 1,802,515 (177,101) 82,443
Cash and cash equivalints at
beginning of period 18,499 195,600 113,157
---------- ---------- ----------
Cash and cash equivalents at end
of period $1,821,014 $ 18,499 $ 195,600
========== ============ ===========
Supplemental disclosures of cash
flow information:
Cash paid for interest $ 251,967 $ 138,575 $ 114,055
========== ============ ==========
Cash paid for income taxes, net
of cash received for income $ (10,000) $ 127,871 $ 50,000
========== ============ ==========
Supplemental disclosures of noncash
investing and financing activities:
Capital lease obligation
incurred $ 205,938 $ 241,788 $ -
========== ============ ==========
</TABLE>
The accompanying notes are an integral part of these financial
statements.
<PAGE>
APPLIED INTELLIGENCE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
General Description of Business: Applied Intelligence
Group, Inc. ("the Company") provides a diversified range of
management consulting and computer system integration
services, focused primarily on the retail and wholesale
distribution industries. The Company's clients and
customers range from small, rapidly growing companies to
large corporations and are geographically disbursed
throughout the nation.
Use of Estimates: The preparation of financial statements
in conformity with generally accepted accounting principles
requires the use of management's estimates and assumptions
in determining the carrying values of certain assets and
liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts for certain revenues and expenses during
the reporting period. Actual results could differ from
those estimated.
Cash and Cash Equivalents: For purposes of the statement of
cash flows, the Company considers all highly liquid
investments with a maturity of three months or less at the
time of purchase to be cash equivalents. Cash and cash
equivalents includes short term repurchase agreements of
$1,800,000 at December 31, 1996.
Risks from Concentrations: Financial instruments which
potentially subject the Company to concentrations of credit
risk consist principally of temporary cash investments and
accounts receivable. The Company places its temporary cash
investments with high credit quality financial institutions.
Concentrations of credit risk with respect to accounts
receivable are limited due to the size of customers and
their dispersion across different regions. The Company does
not believe a material risk of loss exists with respect to
its financial position due to concentrations of credit risk.
The Company's revenues are in part dependent on large
license fee and systems integration contracts from a limited
number of customers. In 1996 and 1995, three customers
individually accounted for 17, 14, and 10 percent and 17,
12, and 11 percent of the Company's total revenues,
respectively. In 1996, approximately 57 percent of the
Company's total revenues were attributable to five clients,
and approximately 54 percent from five clients in 1995. It
is anticipated that the Company's revenue derived from
current and future large clients will continue to represent
a significant portion of its total revenues. The loss of,
or reduced demand for products or related services from, any
of the Company's major clients could have a material adverse
effect on the Company's business and results of operations.
Furniture, equipment and leasehold improvements: Furniture,
equipment and leasehold improvements are stated at cost.
Expenditures for repairs and maintenance are charged to
expense as incurred. Upon disposition, the cost and related
accumulated depreciation are removed from the accounts and
the resulting gain or loss is reflected in operations for
the period. The Company depreciates furniture and equipment
using the straight-line method over their estimated useful
lives ranging from 5 to 10 years. Leasehold improvements
are amortized over the lease term using the straight-line
method.
Revenue Recognition: The Company recognizes revenues as the
services are provided. Revenues collected in advance are
deferred and recognized as earned. Revenues for fixed-price
contracts are recognized using the percentage of completion
method. Accounts receivable include unbilled amounts of
$534,756, $584,678, and 261,372 at December 31, 1996, 1995
and 1994, respectively.
Direct Cost of Sales: Direct Cost of sales represents the
cost of hardware and certain point-of-sale software acquired
for resale, including royalty payments required for sale of
the Company's proprietary software products. No allocation
has been made for salaries, taxes, benefits or other
corporate overhead.
Earnings per Share: Earnings per share computations are
based on the weighted average number of shares of Common
Stock outstanding and the dilutive effect of stock options
and warrants using the treasury stock method. The dilutive
effect between primary and fully dilutive earnings per share
is less than 3% or is anti-dilutive for all periods
presented and is therefore not disclosed in the accompanying
statements of operations.
Income Taxes: The Company accounts for income taxes under
the liability method. Accordingly, deferred taxes are
determined based on the difference between the financial
statement and tax bases of assets and liabilities using the
enacted tax rate in effect in the years in which the
differences are expected to reverse. Deferred tax expense
represents the change in the net deferred tax liability
balance.
Costs of Product Development: The Company incurred costs
and expenses of approximately $1,204,000, $1,060,000, and
$780,000 for product development in 1996, 1995, and 1994,
respectively. A substantial portion of these costs relate
to development of a value-added network that the Company
made available to subscribers in January of 1997. Certain
of these costs are capitalized as Software Development Costs
(See Note 4).
Recently Issued Accounting Pronouncements: In February 1997,
the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings Per Share
("FAS 128"). FAS 128 will change the computation.,
presentation and disclosure requirements for earnings per
share. FAS 128 requires presentation of basic and diluted
earnings per share, as defined, on the face of the income
statement for all entities with complex capital structures.
FAS 128 is effective for financial statements issued for
periods ending after December 15, 1997 and requires
restatement of all prior period earnings per share amounts.
The Company has not yet determined the impact that FAS 128
will have on its earnings per share when adopted.
Reclassifications: Certain reclassifications of prior year
balances have been made to conform to the current year
presentation.
2. WHOLESALE FINANCING PLAN:
During 1995, the Company had a wholesale financing agreement
and Flexible Payment Plan with IBM Credit Corporation
("IBMCC"). The credit agreement generally called for a
credit line of $1,500,000, with the borrowing base or
advance rate calculated at 75% of accounts receivable and
100% of IBM inventory items. The credit agreement was
collateralized by the accounts receivable, inventories and
fixed assets of the Company.
The balance due under this plan of $1,209,186 was
extinguished on July 25, 1995 and the financing agreement
was canceled.
3. FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS:
Furniture, equipment and leasehold improvements at December
31, 1996 and 1995 consists of the following:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Furniture and fixtures $ 461,203 $ 317,352
Computer equipment 1,788,312 1,451,699
Computer software 595,730 474,805
Leasehold improvements 47,727 110,662
----------- -----------
2,892,972 2,354,518
Less: accumulated depreciation
and amortization (1,260,825) (1,134,033)
----------- ----------
Furniture, equipment and leasehold
improvements, net $ 1,632,147 $1,220,485
=========== ==========
</TABLE>
Included in furniture and fixtures at December 31, 1996 was
$125,886 of assets under a capital lease. Included in
computer equipment were $321,840 and $241,788 of assets
under capital leases at December 31, 1996 and 1995,
respectively. The accumulated depreciation for all assets
under capital leases at December 31, 1996 and 1995 was
$105,636 and $22,765,respectively.
4. SOFTWARE DEVELOPMENT COSTS:
The Company capitalizes certain costs, including interest,
that are directly related to the development of software.
In accordance with Statement of Financial Accounting
Standards No. 86, capitalization of costs begins when
technological feasibility has been established and ends when
the product is available for customers. Capitalized software
development costs are amortized using the straight-line
method over the estimated useful life of five years.
Amortization of capitalized software costs for December 31,
1996, 1995, and 1994 was $176,756, $193,246 and $148,304,
respectively. Accumulated amortization at December 31, 1996
and 1995 was $516,989 and $634,233, respectively.
The Company continually assesses whether the unamortized
capitalized cost of software development is impaired. This
assessment is based on the future cashflows expected to be
generated by the related product. If an impairment is
determined, the amount of such impairment is calculated
based on the estimated net realizable value of the related
asset. During 1996, the Company wrote-off $294,000 of fully
amortized capitalized software development costs.
Total interest costs for the year ended December 31, 1996,
1995, and 1994 were $291,089, $171,106 and $121,678,
respectively, of which $54,423 and 22,064, were capitalized
in 1996 and 1995, respectively. No interest was capitalized
in 1994.
5. LONG-TERM DEBT:
On July 19, 1995, the Company entered into a revolving
credit agreement (the "Agreement") with a bank whereby the
Company could borrow, under two separate notes, up to the
lesser of $3,000,000 or the borrowing base as defined in the
agreement. Pursuant to the terms of the revolving credit
agreement, upon successful completion of the Company's
initial public offering, the working capital note of
$800,000 was paid in full on November 27, 1996, and the
terms of the remaining note were renegotiated to a credit
line of $1,000,000. Interest on the note was 8.75% at
December 31, 1996. The note matures on October 1, 1997 and
is collateralized by the Company's furniture, fixtures and
equipment, accounts receivable, and inventory. The
agreement requires the Company to maintain certain financial
ratios and restricts the incurrence of additional debt, the
sale of certain assets and the payment of dividends. The
indebtedness is personally guaranteed, up to $970,000, by
Robert L Barcum, Robert N. Baker, and David B. North,
executive officers of the Company. At December 31, 1996,
the borrowing base supporting the credit line was
$1,123,000, and no funds were advanced on the credit line.
6. NOTES PAYABLE TO SHAREHOLDERS:
Notes payable to shareholders, who are also executive
officers of the Company, at December 31, 1996 and 1995,
consist of the following:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
8.50% notes payable to shareholders, due
at maturity on January 3, 1997 $ 40,000 $ 40,000
10.00% note payable to shareholder, due
at maturity on July 28, 1997 28,000 28,000
10.00% note payable to shareholder, due
at maturity on November 15, 1997 39,375 -
10.00% note payable to shareholder, due
at maturity on January 5, 1998 55,000 55,000
8.50% note payable to shareholder, due
at maturity on April 1, 1998 43,000 43,000
10.00% notes payable to shareholders,
due maturity on December 21, 1998 231,000 231,000
8.50% notes payable to shareholders, due
at maturity on March 8, 1999 60,000 60,000
------- -------
496,375 457,000
Less current portion 107,375 -
-------- --------
$389,000 $457,000
======== ========
</TABLE>
<TABLE>
<CAPTION>
Combined aggregate maturities of long-term debt are as
follows at December 31, 1996:
<S> <C>
1997 $107,375
1998 329,000
1999 60,000
--------
$496,375
========
</TABLE>
7. STOCKHOLDERS' EQUITY:
On April 30, 1996, the Company amended its Certificate of
Incorporation to eliminate its previously authorized and
designated classes of Voting Common Stock and Non-Voting
Common Stock, to authorize a single class of Common Stock
with 30,000,000 shares authorized, par value $.001 per
share, and to authorize 10,000,000 shares of Preferred
Stock, $.001 par value per share. Furthermore, the Company
made a stock dividend distribution to its existing
shareholders to cause the number of shares of the Company's
Common Stock outstanding to increase from 541,000 to
1,500,000. All stockholders' equity amounts have been
restated to reflect this stock dividend.
On June 12, 1996, the Company merged with Vantage Capital
Resources, Inc. ("VCRI"). To consummate the merger, the
Company exchanged 610,000 shares of its Common Stock for all
of the outstanding common shares of VCRI. VCRI has no
operations and, at the time of the merger, had total assets
of $541,151 and total liabilities of $103,291.
On October 14, 1996, the Company redeemed 1,000 shares of
common stock issued to a former executive officer in
consummation of the merger of VCRI with the Company, for
$1.75 per share for an aggregate amount of $1,750. On
October 15, 1996, the Company redeemed 22,500 shares of
common stock that was also issued to an executive office and
director in consummation of the merger of VCRI with the
Company, for $1.75 per share for an aggregate amount of
$39,375. In redemption of the shares, the Company issued a
promissory note in the principal amount of $39,375, bearing
interest at the rate of 10 percent per annum (payable at
maturity), with a maturity date of November 15, 1997.
Pursuant to an Exchange Agreement dated October 15, 1996,
two former executive officers and directors exchanged
360,000 shares of common stock, which were issued in
consummation of the merger of VCRI with the Company for
stock options, excercisable on November 20, 1998, to
purchase 360,000 shares of common stock for $5.00 per share
on or before November 30, 2001. The Company has agreed that
if it files a registration statement or an amendment to a
registration statement under the Securities Act of 1933 with
the United State Securities and Exchange Commission, the
holders of the stock options have the right through December
31, 2001, to include in such registration statement the
stock options and or the common stock or other securities
issuable upon exercise of the stock options at no expense to
the holders of the stock options. In addition, the
executive officers and directors resigned as executive
officers and directors of the Company, and their employment
agreements were terminated effective June 12, 1996, without
any payment of or continuing right to receive compensation
under such employment agreement.
The Company's initial public offering was consummated on
November 20, 1996, pursuant to which the Company sold a
total of 1,000,000 common shares at an offering price to the
public of $5 per share, and 920,000 redeemable common stock
purchase warrants, including the underwriter's over-
allotment option, at $.125 per share. Each warrant entitles
the holder to purchase one share of common stock at $5.00
per share (subject to adjustment) during the three-year
period commencing November 20, 1996. The warrants are
redeemable by the Company, for $.125 per warrant, on not
less than 30 nor more than 60 days' written notice if the
average closing price per share of common stock is at least
$7.00 per share during a period of 30 consecutive trading
days ending not earlier than 20 days before the date the
warrants are called for redemption and provided that there
is then a current effective registration statement under the
Securities Act of 1933, as amended, with respect to the
issuance and sale of the common stock upon exercise of the
warrants. The net proceeds from the initial public offering
to the Company were approximately $4,071,000, after
deducting expenses of $428,162 and underwriting discounts.
8. STOCK OPTION PLAN:
In 1995, the Company created the 1995 Stock Option Plan (the
"Plan"). The Plan provides for incentive stock options and
non-incentive stock options to directors, key employees and
key non-employee service providers of the Company. In April
1996, the Company amended the Plan to authorize and reserve
up to 300,000 shares of Common Stock for issuance of options
under the Plan.
The Plan permits the issuance of qualified and nonqualified
stock options. All options pursuant to the Plan expire
after ten years from the original grant date and are
exerisable as of December 31, 1996. Additionally, the
Company issued 360,000 options not pursuant to the Plan (see
Note 7), which become exerisable after 2 years and expire
after 5 years from the original grant date. The exercise
price for all options granted to date was based on the fair
market value on the date of the grant.
Activity pertaining to the options is as follows:
<TABLE>
<CAPTION>
Weighted
Average
Number of Exercise
Shares Price
--------- ---------
<S> <C> <C>
Outstanding at January 1,1995 - $ -
Granted 45,513 0.63
Exercised - -
Canceled - -
------
Outstanding at December 31, 1995 45,513 0.63
Granted 396,238 4.69
Exercised - -
Canceled (6,543) 0.80
-------
Outstanding at December 31, 1996 435,208 $ 4.32
=======
</TABLE>
<TABLE>
<CAPTION>
Outstanding Options
________________________________________
Weighted
Exercise Remaining Average
Exercise Number of Contractual Exercise
Price Shares Life Price
------------- ---------- ----------- --------
<S> <C> <C> <C>
$0.63 - $1.80 75,208 9 years $1.06
$5.00 360,000 5 years $5.00
</TABLE>
The Company applies APB Opinion 25 in accounting for its
stock options issued pursuant to the Plan. Accordingly,
based on the nature of the Company's grants of options, no
compensation cost has been recognized in 1996 and 1995. Had
compensation been determined on the basis of fair value
pursuant to FASB Statement No. 123, net income (loss) and
net income (loss) per share would not have been materially
impacted.
9. INCOME TAXES:
The components of the provision (benefit) for income taxes
for the years ended December 31, 1996, 1995 and 1994 are as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- --------
<S> <C> <C> <C>
Current $(125,195) $(115,483) $159,653
Deferred (241,730) 158,237 (21,530)
---------- ---------- --------
Provision (benefit) for
income taxes $(366,925) $ 42,754 $138,123
========== ========== ========
</TABLE>
The difference in federal income taxes at the statutory rate
and the provision for income taxes for the years ended
December 31, 1996, 1995, and 1994 are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------- ------ -------
<S> <C> <C> <C>
Income tax expense (benefit) at
federal statutory rate $(356,773) $17,446 $117,744
State income taxes (41,973) 2,052 13,852
Nondeductible expenses 6,071 15,960 7,980
Revision of prior year estimate 14,273 - -
Other 11,477 7,296 (1,453)
Provision (benefit) for income ---------- ------- --------
taxes $(366,925) $42,754 $138,123
========== ======= ========
</TABLE>
Deferred tax assets (liabilities) are compromised of the
following:
<TABLE>
<CAPTION>
December 31,
---------------------
1996 1995
---------- ---------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts $ 2,140 $ 7,432
Compensated absences 40,977 46,716
Tax carryforwards 22,929 20,105
Net operating loss carryforward 452,613 -
--------- ---------
518,659 74,253
Deferred tax liabilities:
Intangible assets (497,078) (315,250)
Depreciation and amortization (84,268) (63,420)
--------- ---------
Net deferred tax liability $ (62,687) $(304,417)
=========== ==========
</TABLE>
At December 31, 1996, the Company had net operating loss
("NOL") carryforwards for Federal and State purposes of
approximately $1,100,000 and $1,500,000, respectively, and
other carryforwards of approximately $60,000. The NOL
carryforwards expire in 2011.
10. LEASES:
The Company leases its office and storage space under
operating leases. The terms range from month-to-month up to
ten years and include options to renew. The Company leases
office equipment under various noncancelable lease
agreements. Total rental expense in 1996, 1995 and 1994 for
all leases was $333,225, $210,962 and $192,524,
respectively.
Future minimum lease payments under noncancelable leases at
December 31, 1996 follows:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
-------- ---------
<S> <C> <C>
1997 $166,424 $ 376,483
1998 146,132 371,606
1999 46,019 407,066
2000 - 401,258
2001 - 332,211
Thereafter
- 1,356,000
------- ----------
Future minimum lease payments 358,575 $3,244,624
Less amount representing interest 46,806
Present value of minimum lease
payments $311,769
========
</TABLE>
11. RETIREMENT PLAN:
The Company has a profit sharing plan ("the Plan") for
certain eligible employees who have attained the age of 18
and completed one year of service. Under the Plan, employer
contributions are made at management's discretion.
Participants may contribute up to 6% of earnings as eligible
contributions and up to 15% of earnings in total for any
Plan year. The Company's discretionary matching percentage
is equal to each participant's share of total eligible
contributions for a year. No contributions were made by the
Company in 1996, 1995, and 1994.
12. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The carrying values of cash, accounts receivable, accounts
payable and financial instruments included in notes
receivable and other assets approximate their fair values
principally because of the short-term maturities of these
instruments.
The carrying values of financial instruments included in
long-term debt approximate their fair values due to the
nature and terms of the instruments involved.
Master Agreement CONFIDENTIAL INFORMATION
EXHIBIT 10.39
MASTER AGREEMENT
dated July 31, 1996
between
SONIC CORP.
and
APPLIED INTELLIGENCE GROUP, INC.
SONIC CORP. and its subsidiaries ("Sonic") and Applied Intelligence Group,
Inc. ("AIG") enter into the following understanding:
WHEREAS, Sonic desires to invest in its business and will demonstrate this
by committing to develop information systems consistent with Sonic's needs
as it moves into the Year 2000; and
WHEREAS, AIG desires to act in concert with Sonic throughout the
full process of upgrading Sonic's Point-of-Sale (POS) systems by
providing expertise, services, and products coordinated with achieving
Sonic's desired outcomes; and
WHEREAS, both Sonic and AIG understand the need to develop a working
relationship to accomplish the mutually defined and agreed upon goals to
complete the POS upgrade project;
THEREFORE, this day Sonic and AIG enter into this Master
Agreement outlining the respective roles of the two organizations
and committing both organizations to engage their best efforts to
successfully utilize the talents, skills, and resources of both
parties throughout the process of upgrading Sonic's POS systems.
OVERALL GOAL
Sonic and AIG agree that the overall goal for this mutual
commitment is to develop an ongoing working relationship between
Sonic and AIG, focusing on Sonic's POS upgrade project.
It is anticipated that this project will extend over more than
one year and involve many different activities and components,
all of which must be integrated into the overall plan to achieve
maximum results and to minimize costs and efforts. Therefore,
the provisions contained in this Agreement will serve as the
basis on which ongoing work is planned, evaluated, and
implemented.
ACTIVITY PRIORITIES
Initially, Sonic and AIG have concurred that developing a POS
system that meets Sonic's needs for reliability, ease-of-use,
reporting capabilities, management functions, and other
designated features on a timely and cost-effective basis has a
major priority.
PROJECT SCOPE AND APPROACH
The terms and conditions as set out in this Agreement will apply
to all POS-related projects for specific services and/or products
to be provided to Sonic by AIG as agreed by the two parties. In
addition, separate addenda to this Master Agreement will be
developed and executed by both parties, detailing timeframe,
costs, and other agreed upon information specific to the scope
and approach of each project phase.
ASSUMPTIONS
Within each addendum to this Master Agreement, assumptions used
by AIG to develop scheduling and pricing will be clearly stated,
with additional details about allocation of resources, assignment
of personnel, and other related matters to be outlined as
necessary.
TERMS AND CONDITIONS
PROJECT MANAGEMENT
Sonic agrees that it will provide a suitable Project Manager
for each phase of this overall project to coordinate all
related project activities. Wes Jablonski, or any other
person designated in writing by Sonic, will serve as the
project's Executive Sponsor with overall responsibility for
project implementation and direction within Sonic.
AIG will also provide a Project Manager who will be Sonic's
primary project contact and will present updated project
status reports on a regular basis to the Sonic Project
Manager and Executive Sponsor. In addition, James Stepp
will serve as AIG's Executive Sponsor for all ongoing
projects within this Agreement's framework, with overall
responsibility for coordination within AIG.
OWNERSHIP
For all work performed by AIG related to Sonic's POS system,
Sonic and AIG agree that all of the tools, methods,
techniques, software, and documentation owned by AIG at the
beginning of this project will remain the sole property of
AIG. AIG hereby grants to Sonic a perpetual, world-wide,
royalty-free, non-exclusive license under any and all rights
AIG now has or later may have with regard to any and all of
the methods, techniques, software and documentation used or
incorporated in the work performed by AIG for Sonic under
this Agreement. Without limiting the foregoing provision,
Sonic shall have the right to make, have made, use, sell,
lease, offer for sale or lease, copy, reproduce, maintain,
service, modify, prepare derivative works of, distribute to
Sonic's employees and Sonic's franchisees, and display any
of the methods, techniques, software and documentation used
or incorporated in the work performed by AIG for Sonic under
this Agreement.
AIG acknowledges and agrees that all aspects of the Sonic
Point-of-Sale System, as defined in the following paragraph,
constitute the sole and exclusive property of Sonic and all
updates, modifications, enhancements and improvements to the
Sonic Point-of-Sale System developed by AIG and/or Sonic
pursuant to this Agreement shall remain and shall become the
sole and exclusive property of Sonic. AIG shall keep, hold
and safeguard the confidentiality of the information
regarding the Point-of-Sale System it acquires pursuant to
this Agreement and otherwise, including (without limitation)
any updates, modifications, enhancements and improvements to
the Point-of-Sale System developed by AIG and/or Sonic
pursuant to this Agreement. AIG shall not use the foregoing
confidential information for any purpose other than to
perform its obligations under this Agreement.
For the purpose of this Agreement, the Sonic Point-of-Sale
(POS) System is defined as the hardware, software and all
intellectual property and property rights developed by
Flight-Ware and purchased by Sonic from Flight-Ware for the
operation of a point-of-sale system which allows a drive-in
restaurant to receive and process customer orders through a
speaker system connected to one or more switchboards,
station monitors, and manager workstations, including
(without limitation) all related source and object codes,
copyrights, inventions, patents, documentation, training
materials, and other proprietary information and
intellectual property rights.
AIG shall communicate with Sonic, or its representatives,
any facts known to AIG regarding all updates, modifications,
enhancements and improvements to the Sonic Point-of-Sale
system and shall testify in any legal proceedings, sign all
lawful papers, and execute all applications and all
necessary assignment papers to cause the issuance and
ownership of any and all updates, modifications,
enhancements and improvements to the Sonic Point-of-Sale
system pursuant to this Agreement to vest in Sonic. In
addition, AIG shall make all rightful oaths and generally do
everything necessary or desirable to aid Sonic, its
successors, and its assigns to obtain and enforce proper
protection for the foregoing in the United States and its
territorial possessions and in any and all foreign
countries. AIG shall provide the foregoing assistance at
Sonic's expense but without any additional compensation to
AIG. AIG hereby waives and shall waive all moral rights
relating to all updates, modifications, enhancements and
improvements to the Sonic Point-of-Sale system pursuant to
this Agreement, including (without limitation) any and all
rights of identification or authorship and any and all
rights of approval, restriction or limitation on use or
subsequent modification of the foregoing.
AIG shall notify Sonic in writing of any third-party
software for which Sonic must obtain a license at Sonic's
expense to use in connection with the Point-of-Sale system.
AIG shall indemnify and hold Sonic harmless with respect to
any claim, proceeding, action or cause of action initiated
by any third party, except for Flight-Ware and those parties
from whom AIG has notified Sonic in writing of the need to
obtain a license as set forth above, based in whole or in
part upon any products or services provided by AIG to Sonic
under the terms of this Master Agreement.
CONFIDENTIALITY
AIG recognizes the confidential nature of Sonic's business
plans and strategies and agrees to receive in confidence and
treat these plans and strategies appropriately. Likewise,
AIG's tools, techniques, and proprietary documentation are
important company assets which AIG considers to be
confidential and proprietary. Sonic agrees to receive and
treat AIG materials, plans, and strategies in the same
confidential manner as its own materials.
AIG shall keep, hold and safeguard the confidentiality of
the information regarding the Point-of-Sale system it
acquires pursuant to this Agreement and otherwise, including
(without limitation) any updates, modifications,
enhancements, and improvements to the Point-of Sale system
developed by AIG and/or Sonic pursuant to this Agreement.
AIG shall receive Sonic's confidential information in
confidence and shall not use the confidential information
for any purpose other than to perform its obligations under
this Agreement.
Both companies agree that no confidential information will
be released or disclosed to any persons other than Sonic's
or AIG's employees or consultants who have a need to know.
Both companies also agree to label confidential information
as such before information is exchanged.
LIMITATION OF LIABILITY
In no event will AIG be liable for any damages, for any
reason, beyond the total amount paid to AIG for any services
performed within the scope of this Master Agreement and any
subsequent addenda. AIG disclaims any and all liability for
special, incidental or consequential damages. This
disclaimer includes any loss of profit arising out of or
related to any service provided under the terms of this
Master Agreement or subsequent addenda. This limitation of
liability applies even if AIG was aware of the possibility
of such damage.
*HIRING OF PERSONNEL
Sonic and its staff agree not to solicit, and will instruct
their staff not to solicit, AIG staff members. If Sonic
hires any AIG staff person who works with Sonic on any
activity related to this Master Agreement within twelve
months of project completion, then Sonic agrees to
compensate AIG in the amount of that staff member's annual
salary, including benefits. AIG agrees to be bound by the
same terms regarding the hiring of Sonic's personnel.
*RIGHTS AND REMEDIES
The rights and remedies granted to AIG and Sonic are in
addition to and not in lieu of any rights and remedies
granted by law or in equity. No action arising out of this
Master Agreement, regardless of form, may be brought more
than one year after the cause of action has accrued.
*TAXES
Sonic agrees to pay any applicable state, county, or local
sales taxes or assessments and other applicable expenses
related to activities, services, or products provided under
the terms of any addenda to this Agreement.
*ORIGIN OF AGREEMENT
This Agreement will be deemed to be made in the State of
Oklahoma.
*RESOLUTION OF DISPUTES
The following provisions shall apply to any controversy
between AIG and Sonic (including any director, officer,
employee, agent or affiliate of Sonic) and relating (a) to
this Agreement (including any claim that any part of this
Agreement is invalid, illegal or otherwise void or voidable)
or (b) to Sonic's business activities with AIG whether or
not related to this Agreement.
(a) Arbitration. The parties shall resolve the controversy
by final and binding arbitration in accordance with the
Rules for Commercial Arbitration (the "Rules") of the
American Arbitration Association in effect at the time of
the execution of this Agreement and pursuant to the
following additional provisions:
(1) Applicable Law. The Federal Arbitration Act (the
"Federal Act"), as supplemented by the Oklahoma
Arbitration Act (to the extent not inconsistent with
the Federal Act), shall apply to the arbitration and
all procedural matters relating to the arbitration.
(2) Selection of Arbitrators. The parties shall select
one arbitrator within 10 days after the filing of a
demand and submission in accordance with the Rules. An
individual with experience in handling disputes in
software licensing matters shall serve as the
arbitrator. If the parties fail to agree on an
arbitrator within that 10-day period or fail to agree
to an extension of that period, the arbitration shall
take place before an arbitrator (with the experience
described above) selected in accordance with the Rules.
(3) Location of Arbitration. The arbitration shall take
place in Oklahoma City, Oklahoma, and the arbitrator
shall issue any award at the place or arbitration. The
arbitrator may conduct hearings and meetings at any
other place agreeable to the parties or, upon the
motion of a party, determined by the arbitrator as
necessary to obtain significant testimony or evidence.
(4) Discovery. The arbitrator shall have the power to
authorize all forms of discovery (including
depositions, interrogatories and document production)
upon the showing of (a) a specific need for the
discovery, (b) that the discovery likely will lead to
material evidence needed to resolve the controversy,
and (c) that the scope, timing and cost of the
discovery is not excessive.
(5) Authority of Arbitrator. The arbitrator shall not
have the power (a) to alter, modify, amend, add to, or
subtract from any term or provision of this Agreement
or (b) to grant interim injunctive relief prior to the
award.
(6) Enforcement of Award. The prevailing party shall have
the right to enter the award of the arbitrator in any
court having jurisdiction over one or more of the
parties or their assets. The parties specifically
waive any right they may have to apply to any court for
relief from the provisions of this Agreement or from
any decision of the arbitrator made prior to the award.
(b) Attorneys' Fees and Costs. The arbitrators may award
reasonable attorneys' fees to the prevailing party as an
element of the cost of arbitration.
*WARRANTY
Full details about any warranties, if applicable, that AIG
may offer for services or products provided to Sonic for
projects related to this Master Agreement will be detailed
in its addenda.
*INTEGRATION CLAUSE
This Agreement and the subsequent addenda to this Agreement
entered into by the parties shall constitute the entire
Agreement of the parties and shall supersede all other
written and oral statements relating to the subject matter
of this Agreement and subsequent addenda.
This Agreement will be in effect for a minimum of ninety days
from the effective date of signature and shall continue in effect
after the initial ninety-day period unless either party cancels
the Agreement by notifying the other in writing sixty days prior
to the date of the cancellation. Any project which has begun
pursuant to an addendum to this Agreement will continue under the
terms of this Agreement even if such cancellation has occurred.
The "Effective Date" of this Agreement shall be the later of the
dates shown below. The responsibilities for payment of fees, all
limitations of liability, all terms regarding ownership of
products and techniques, the rights and remedies clause,
resolutions of disputes, and the restrictions regarding
confidentiality shall survive the expiration or cancellation of
this Master Agreement.
Detailed addenda containing pricing, timeframe, and
specifications for future projects are anticipated to be drafted
by both parties and to reference this document and become part of
it.
Sonic and AIG agree and acknowledge that they have read this
Master Agreement, understand it, and that they shall be bound by
its terms and conditions.
Applied Sonic
Intelligence Corp.
Group, Inc.
Signature: /S/James R. Stepp Signature: /S/Wes Jabloski
Name: James R. Stepp Name: Wes Jabloski
Title: VP Sales & Title: VP Technology Services
Marketing
Date: 7/3/96 Date: 8/1/96
Master Arrangement Letter Confidential Information
APPLIED INTELLIGENCE GROUP, INC.
13800 Benson Road, Edmond, OK 73013-6417
October 24, 1996 EXHIBIT 10.40
ADDENDUM #3 (P3)
TO
MASTER AGREEMENT
between
SONIC CORP.
and
APPLIED INTELLIGENCE GROUP, INC.
On this 24th day of October, 1996, SONIC CORP. ("Sonic") and
Applied Intelligence Group, Inc. ("AIG") agree to the following
Addendum to the Master Agreement dated July 31, 1996, and signed
by AIG and Sonic on July 31, 1996, and August 1, 1996,
respectively.
PROJECT SCOPE AND APPROACH
AIG's scope of work for this project focuses on developing the
Sonic POS on an NT platform with limited enhancements. The
following points highlight the scope of our work:
RE-WRITE SONIC'S CURRENT POS APPLICATIONS
AIG will re-write, convert, and replace the current Sonic
SCO POS applications with Microsoft NT compliant code.
AIG's re-write will produce a system that:
Can be maintained and improved without losing the
functionality of the current system
Minimizes the need for additional order taker
documentation and training (because of similarity with
SCO functionality)
Provides the ability to make hardware improvements now
and in the future
Runs under the Microsoft NT operating system
IMPLEMENT PREVIOUSLY WRITTEN SONIC POS APPLICATIONS
AIG's POS re-write will include the conversion of previously
implemented Sonic SCO POS/Host applications to the NT
platform (Detailed Item Movement Collection, Daily Sales and
Cash Balancing, and Payroll Time Card Collection).
IMPLEMENT NT COMMUNICATIONS POLLING APPLICATION
AIG will modify the in-store communication package provided
by AIG to operate with the SCO operating system so that it
will operate with the in-store NT platform. Functionalities
acquired with the communication package under the SCO
operating system will continue under the NT system.
SUPPORT RMS INTERFACES
AIG's conversion of Sonic's POS to NT will include the
current data format interfaces to support Flight-Ware RMS
functions.
T-LOG
AIG will develop a T-Log application that will provide the
mechanism to record data which is transmitted to the host.
Examples include:
Detailed item movement
DSR data
Employee time card information
DEVELOP POS ENHANCEMENTS
AIG will also implement some enhancements to the Sonic POS
system during the conversion, including:
A standardized flexible keyboard interface that will
allow Sonic to make changes to the store keyboards and
provide a platform for customized changes.
Simplified Start-of-Day and End-of-Day procedures
designed to minimize user interaction.
SUPPORT PILOT INSTALLATION
AIG will provide two days of on-site support at Sonic's
pilot installation location to assist Sonic in installing
the software and monitoring its functionality. Following
this two-day period, Sonic will contact the AIG Customer
Support Network (CSN) for assistance and problem-resolution.
ASSUMPTIONS
The assumptions AIG used to develop scheduling and pricing are
listed in this section. If any of these assumptions need to
change, AIG reserves the right to adjust our proposed costs and
timeframes. For this project, AIG assumes:
1) All existing Sonic hardware, software, and peripherals are
supportable under the Microsoft NT operating system
(Version 4.0), including the PC, operator keyboards and
monitors, scanners and keypads, bumpbars, register tapes
printers, and manager line printers.
2) AIG will develop code to run on the current configuration
of Sonic hardware.
3) Host applications will run on the headquarters AS/400.
4) Communications will interface to both the store NT system
and the headquarters AS/400.
5) AIG will not modify any RMS application.
6) Sonic will pay for the installation and monthly cost of
dial phone communications and leased telephone lines.
7) Sonic will provide the AS/400 disk storage required for
storing the information related to this project.
8) AIG will continue to use the production polling hardware
and supporting program products provided by Sonic during
implementation of the Sonic SCO POS application
enhancements and host interfaces, as described in the
Addendum #2, dated October 16, 1996, and signed by AIG and
Sonic on October 16 and October 18, 1996, respectively.
9) Sonic will provide AIG with two functional in-store
systems to support development of the Sonic POS application
by November 1, 1996.
10) Sonic will select a store location in the Oklahoma City
metropolitan area for the pilot installation of the NT
version of POS.
11) AIG will use the version of Sonic's POS code provided to
AIG by Sonic, labeled Version 3.01, for the NT conversion
that will produce an NT system with comparable functions to
Sonic's current SCO version. No additional changes made by
Flight-Ware to Sonic's POS code, or additional versions of
Sonic's POS code produced by Flight-Ware, will be used by
AIG during the conversion process.
12) Sonic will approve design documents and written requests
for information or respond with recommendations in a timely
manner.
13) AIG will build and support interfaces that have the same
data requirements and layouts as the current SCO version.
14) If AIG's lab environment or hardware or software becomes
inoperable, Sonic and or Flight-Ware will provide timely
replacement or assistance.
15) Sonic will provide an NT compatible version of the RMS
software to AIG by March 1, 1997.
16) Sonic will get from Flight-Ware the necessary interface
requirements to Flight-Ware RMS application by December 15,
1996.
17) After AIG tests and installs the NT version of the Sonic
POS system in the lab, Sonic will have two weeks to
perform its acceptance testing.
18) At the end of that two-week period, Sonic will provide AIG
with a written statement identifying any issues or observations
that may require AIG problem-resolution efforts. After AIG has
installed the NT version in the pilot store, all Sonic assistance requests
or problem resolution issues will be handled through normal AIG CSN
procedures.
TERMS AND CONDITIONS
All terms and conditions set out in the Master Agreement dated
July 31, 1996, including, but not limited to, terms regarding
project management, ownership, confidentiality, limitation of
liability, hiring of personnel, rights and remedies, taxes,
origin of agreement, resolution of disputes, and warranty govern
this Addendum. In the event of any inconsistency between the
terms of this Addendum and the Master Agreement or any earlier
addendum, the terms of this Addendum will prevail.
<TABLE>
<CAPTION>
<S> <C> <C> <S>
End of October 1996 $ 125,000 End of March 1997 $ 100,000
End of November 1996 $ 125,000 End of April 1997 $ 100,000
End of December 1996 $ 125,000 End of May 1997 $ 100,000
End of January 1997 $ 100,000 End of June 1997 $ 100,000
End of February 1997 $ 100,000
</TABLE>
Payments are due within 30 days of the date of invoice. Out-of
pocket expenses will be invoiced monthly as they are incurred.
AIG may include charges on invoices for late payment that will
accrue at the rate of one and one-half percent (1 1/2 %) per
month (or the maximum rate allowed by law, whichever is less) on
the unpaid balance from the due date until the payment is
received by AIG.
PROJECT TIMEFRAME / TERMINATION OF ADDENDUM
AIG will begin working on this project immediately upon the
signing of this Addendum by both parties and expects that this
project will be completed by June 30, 1997.
This Addendum will terminate ninety (90) days after completion of
the project, unless both parties mutually agree to extend the
Addendum. The responsibilities for payment of fees agreed to in
this Addendum shall survive it. All limitations of liability,
all terms regarding ownership of products and techniques, the
rights and remedies clause, provisions for resolution of
disputes, the restrictions regarding confidentiality, and other
relevant terms and conditions agreed to in the Master Agreement
dated July 31, 1996, shall survive this Addendum.
EXPIRATION OF OFFER
This offer expires 15 days from the date of this Addendum, unless
accepted and signed by both parties.
Sonic and AIG agree and acknowledge that they have read this
Addendum, and the attached Exhibit A entitled "Responsibility
Matrix", that they understand it, and that they shall be bound by
the terms and conditions. The "Effective Date" of this Addendum
shall be the later of the dates shown below.
Applied Intelligence Group, Inc. Sonic Corp.
Signature: /s/James H. Callison Signature: /s/Lewis B.Kilbourne
Name: James H. Callison Name: Lewis B. Kilbourne
Title: Sr. Account Executive Title: Senior Vice President
Date: October 24, 1996 Date: November 6, 1996
<PAGE>
<TABLE>
<CAPTION>
Exhibit A
Responsibility Matrix
Path 2
<S> <C> <C> <C> <C>
TASK AIG SONIC CCI F-W
Project Management X
Configure Sonic POS Hardware X X
Evaluate Hardware Configuration
Alternatives X X
Install Hardware in Lab X X
Re-write Sonic POS to NT X
Standardize Item File on POS X
Develop T-Log Processing X
Set-Up Format for Polling X
Standardize Flexible Keyboard X
Simplify Start-of-Day/End-of-Day X
Standardize Price and Discounts X
Complete Design Document for NT
Conversion X
Approve Design for NT Conversion X
Develop Application Code X
Test Code X X
Perform Acceptance Testing X
Acquire Software Licenses X
Install Pilot Location X
Rollout to All Locations X
Construct Documentation X
Perform Store Training X
Provide Help Desk Support X
Internet/Phone Charges and Hardware X
Acquire and Install NT Version of RMS X X
Perform Acceptance Testing of NT
Version of RMS X
Convert Current RMS Interfaces X
</TABLE>
Arrangement Letter Confidential Information
APPLIED INTELLIGENCE GROUP, INC.
3800 Benson Road,
Edmond, OK 73013-6417
January 30, 1997 EXHIBIT 10.41
Mr. Holger Jensen
Vice President - Information Resources
Dollar General Corporation
104 Woodmont Blvd., Suite 500
Nashville, TN 37205
Dear Mr. Jensen:
Applied Intelligence Group, Inc. (AIG) is pleased to present this
Arrangement Letter (Letter) defining the agreement between our
firms for services related to implementing Island Pacific
(IP)systems that AIG will provide for Dollar General Corporation
(Dollar General).
PROJECT SCOPE
The scope of AIG's work for this project focuses on assisting
Dollar General in Phase 1 of the successful implementation of the
Island Pacific Merchandising System. AIG's Phase 1 work includes
building the Project Plan and the AS/400 interfaces required for
Dollar General to execute the following functions by February 1,
1998:
* Define items on the Island Pacific System
* Define vendors on the Island Pacific System
* Define stores on the Island Pacific System
* Enable Dollar General to do automatic allocations on the
Island Pacific System and pass those allocations to the DEC
* Enable Dollar General to post DC and store manifest
receiving information from the DEC to the AS/400
* Enable Dollar General to create purchase orders on the
Island Pacific System and pass the new order information to the
DEC
* Enable Dollar General to pass re-order information from the
DEC to the AS/400
Applied Intelligence Group's scope of services for this project
include:
* Consulting
- Build the Project Plan and Responsibility Matrix for Phase 1
of the Island Pacific Merchandising System implementation
- Build an overall System Responsibility Document (SRD) for
the AS/400 interfaces as described above
- Build an overall System Architecture Plan (SAP) for the
AS/400 interfaces as described above
- Assist Dollar General's Project Manager in implementing and
managing the Plan
- Build a project management process for Phase 1 which
provides regular status reporting and feedback to key Dollar
General personnel
Item Definition Interface - DEC will "own" the item
numbering. This interface will move essential new item data from
the DEC to the AS/400. The "key" will be the DG SKU number. The
interface will allow DG personnel to enter the additional item
information required by the IP system.
- Assist Dollar General with the Item Definition Interface
planning and design
- Build system design and program specifications for the
AS/400 processes
- Provide programming for the AS/400 processes
- Assist Dollar General with system testing and user
acceptance testing
- Prepare system and user documentation for the AS/400
processes developed by AIG
- Turn over system to Dollar General
Vendor Maintenance Interface - DEC will "own" the vendor
file. This interface will move required new vendor information
from the DEC to the AS/400. Standard IP system functionality
will be used to enter the remainder of the vendor information
required by the IP system.
- Assist Dollar General with the Vendor Maintenance Interface
planning and design
- Build system design and program specifications for the
AS/400 processes
- Provide programming for the AS/400 processes
- Assist Dollar General with system testing and user
acceptance testing
- Prepare system and user documentation for the AS/400
processes developed by AIG
- Turn over system to Dollar General
Store Maintenance Interface - The Lawson system will "own"
the store numbering. An interface will pass key store
information from the Lawson system to the IP system. Standard IP
system functionality will be used to enter the remainder of the
store information required by the IP system.
- Assist Dollar General with the Store Maintenance Interface
planning and design
- Build system design and program specifications for the
AS/400 processes
- Provide programming for the AS/400 processes
- Assist Dollar General with system testing and user
acceptance testing
- Prepare system and user documentation for the AS/400
processes developed by AIG
- Turn over system to Dollar General
Purchase Order Interfaces (Data Entry and Reorder) - Dollar
General personnel will be able to create new purchase orders on
the IP system. The interface will pass these orders to the DEC.
In addition, the interface will pass all re-orders created on the
DEC system to the AS/400 for subsequent Purchase Order generation
in Island Pacific.
- Assist Dollar General with the Purchase Order Interfaces
planning and design
- Build system design and program specifications for the
AS/400 processes
- Provide programming for the AS/400 processes
- Assist Dollar General with system testing and user
acceptance testing
- Prepare system and user documentation for the AS/400
processes developed by AIG
- Turn over system to Dollar General
Receiving Interface - All distribution center receiving
information will be passed from the DEC to the AS/400. This
information will be passed to the IP batch receiving function and
will then be processed with standard IP functionality.
- Assist Dollar General with the Receiving Interface planning
and design
- Build system design and program specifications for the
AS/400 processes
- Provide programming for the AS/400 processes
- Assist Dollar General with system testing and user
acceptance testing
- Prepare system and user documentation for the AS/400
processes developed by AIG
- Turn over system to Dollar General
Allocation (Automatic Process) Interface - Automatic
allocations will be created on the IP system. The interface will
pass these allocations to the DEC.
- Assist Dollar General with the Allocation Interface planning
and design
- Build system design and program specifications for the
AS/400 processes
- Provide programming for the AS/400 processes
- Assist Dollar General with system testing and user
acceptance testing
- Prepare system and user documentation for the AS/400
processes developed by AIG
- Turn over system to Dollar General
PROJECT APPROACH
AIG's approach for this project includes the following elements.
AIG and Dollar General will use proven project management
methodology to build and execute the Phase 1 project plan.
AIG and Dollar General will plan frequent design review (at
least bi-weekly) and written status reporting (at least weekly)
to facilitate regular communications and keep the project moving.
AIG will prepare written System Responsibility, System
Architecture and Program Specification Documents for review and
approval by the Dollar General Project Manager in a timely
manner.
AIG will use the approved SRD and SAP documents to proceed
with the interface development
DELIVERABLES
This list details specific deliverables to be provided to Dollar
General by AIG within the scope of this Phase 1 project.
Phase 1 Project Plan
Phase 1 Responsibility Matrix
SRD for all the interfaces
SAP for all the interfaces
Implemented Item Definition interface and program
specifications
Implemented Vendor Maintenance interface and program
specifications
Implemented Store Maintenance interface and program
specifications
Implemented Purchase Order (Data Entry and Reorder)
interfaces and program specifications
Implemented Receiving interface and program specifications
Implemented Allocation interface and program specifications
System and technical documentation for all the interfaces
User documentation for on-line interface programs (5-10
pages for each on-line interface)
ASSUMPTIONS
The assumptions AIG used to develop scheduling and pricing are
listed in this section. If any of these assumptions needs to
change, AIG reserves the right to adjust our proposed costs and
timeframes.
At the end of the initial design phase of the project
(approximately March 31, 1997) AIG will produce a detailed plan
for completion of Phase 1 of the project. At that time, AIG will
re-estimate the effort to complete AIG's responsibilities for
Phase 1 of the project. This evaluation will be used to validate
the scope of the project. If this evaluation results in
additional professional services costs due to increased scope,
AIG will prepare an estimate of the costs for additional
professional services required to complete the project. AIG
will report the results to Dollar General's Executive Sponsor for
the project.
Dollar General will provide a Project Manager (Bernadette
Korth) to coordinate planning, training and other aspects of the
system implementation. This person will also be responsible for
coordinating Island Pacific resources for the Phase 1 project.
Holger Jensen will serve as the Executive Sponsor with overall
responsibility for project implementation and direction within
Dollar General.
AIG's project timeframe assumes that Dollar General's
personnel will be made available on timely basis to:
- Define requirements
- Execute design reviews
- Review business processes
- Approve written documents quickly
This agreement includes design and development for only
those interfaces listed in the Scope and Deliverable sections of
this Letter. If any other interfaces are required, AIG will
provide Dollar General with an estimate of the cost of additional
services required.
AIG will develop all interfaces using RPGIII.
Dollar General will provide resources for requirements
definition, system design and programming on the DEC.
The new version of Island Pacific code being developed for
Dollar General will be ready for "demo testing" by April 1, 1997.
AIG will develop all interfaces to integrate with the Island
Pacific code to be delivered on April 1,1997. Interface
modifications required because of changes to the IP code made
after this date are not included in the scope of this agreement.
Island Pacific is responsible to correct any defects in it's
base system code or modifications of it's base system code.
The Island Pacific system will not be used for store
perpetual inventories for the Phase 1 project.
The Island Pacific system will not be used to generate "want
list" orders.
All Island Pacific technical questions will be resolved by
Island Pacific or Dollar General personnel.
Dollar General will provide a dial-up communication line for
AIG to access the Dollar General AS/400 from Edmond, OK.
Dollar General will be responsible for delivering store
polling data to the Island Pacific Sales Audit System.
Communications tools to move data between the DEC and the
AS/400 are in place.
SPECIFIC INTERFACE ASSUMPTIONS
Item Definition
- Item Definition is only used to change item maintenance data
from the DEC. The process will not allow for adding or deleting
items, or adding or deleting item maintenance.
- The DEC will send batch and forward item maintenance
information.
- IP item related files that will be populated as new items
are added are Item Master, Item Stock Ledger, Item History, Item
Price.
- Item Definition does not include updating of IP Merchandise
Hierarchy.
- Item Definition does not include history updating or
conversion.
Store Maintenance
- Maintenance program will build store level adds, changes and
deletes by comparing Lawson store file with an image of the old
IP store file.
- Pre-process application will be available to add additional
data elements as required. This process will not allow for
adding or deleting stores, or adding or deleting store
maintenance.
- Lawson will only have one store file.
- Store Maintenance does not include updating of IP store
hierarchy.
Purchase Orders
- Dollar General will build reorder purchase orders from the
DEC and make them available to the AS/400 via the communications
tool.
- Dollar General will extract from the communications tool new
purchase orders and update them into the existing DEC purchase
order system. It may be possible to use the purchase order
acknowledgment EDI document and create a purchase order for
receiving.
- Dollar General will interface the purchase orders into the
"scheduler" system.
- All purchase orders are required to be placed on the DEC to
do receiving.
- IP will handle changes to new orders. The DEC will handle
changes to reorders.
- Changes to new orders and reorders will result in
cancellation of the PO and issuance of a new PO
Receiving
- Dollar General will provide the daily receipt log to the
AS/400 via the communications tool
Allocation (Automatic)
- Dollar General will interface the data from IP into the
order processing application on the DEC.
WARRANTY
For details about AIG's warranty for the services to be provided
under the terms of this Letter, see Exhibit B.
SPECIFIC TERMS AND CONDITIONS
The specific terms and conditions related to the services that
AIG will provide to Dollar General within the scope of this
agreement are listed in the following sections.
PROJECT MANAGEMENT
Dollar General will provide a suitable Project Manager to
coordinate site preparation, training, installation, and
other aspects of system implementation. Holger Jensen will
serve as the project's Executive Sponsor with overall
responsibility for project implementation and direction
within Dollar General. AIG's proposed project timeframe
assumes that Dollar General's personnel are available to
participate in the project as required.
AIG will also provide a Project Manager. The AIG Project
Manager will be Dollar General's primary project contact and
will present updated project status reports on a regular
basis to the Dollar General Project Manager and Executive
Sponsor.
GENERAL TERMS AND CONDITIONS
For the General Terms and Conditions section of this Letter, Dollar
General will be referred to as the Client.
OWNERSHIP
AIG and the Client agree that the tools, methods, techniques and
documentation developed by AIG for the Client are confidential
and proprietary. The Client may not sell, share, lease, loan,
transfer, or give these assets to any other entity without prior
written approval from AIG.
CONFIDENTIALITY
AIG recognizes the confidential nature of our clients' business
plans and strategies and agrees to treat these plans and
strategies appropriately. Likewise, AIG's tools, techniques, and
proprietary documentation are important company assets which we
consider to be confidential and proprietary. The Client agrees
to treat AIG materials, plans, and strategies in the same
confidential manner as your own materials.
Both companies agree that no confidential information will be
released or disclosed to any persons other than the Client's or
AIG's employees. Both companies also agree to label confidential
information as such before information is exchanged.
LIMITATION OF LIABILITY
In no event will AIG be liable for any damages, for any reason,
beyond the total amount paid to AIG for services performed within
the scope of this Letter. AIG disclaims any and all liability
for special, incidental or consequential damages. This
disclaimer includes any loss of profit arising out of or related
to any service provided under the terms of this Letter. This
limitation of liability applies even if AIG was aware of the
possibility of such damage.
HIRING OF PERSONNEL
The Client and their staff agree not to solicit, and will
instruct their staff not to solicit, AIG staff members. If the
Client hires any AIG staff person who works with the Client on
this engagement within twelve months of project completion, or
within twelve months from any CSN contract period, then the
Client agrees to compensate AIG in the amount of that staff
member's annual salary, including benefits. AIG agrees to be
bound by the same terms regarding the hiring of the Client's
personnel.
RIGHTS AND REMEDIES
The rights and remedies granted to AIG are in addition to and not
in lieu of any rights and remedies granted by law or in equity.
No action arising out of this Letter, regardless of form, may be
brought more than one year after the cause of action has accrued.
TAXES
The Client will pay any applicable state, county, or local sales
taxes or assessments and other applicable expenses.
ORIGIN OF AGREEMENT
This agreement will be deemed to be made in the State of
Oklahoma.
RESOLUTION OF DISPUTES
In the event that AIG and/or the Client disagree and are not able
to come to resolution about the execution of either party's
responsibilities regarding the terms of this Letter, AIG and the
Client mutually agree to enter into binding arbitration for quick
resolution of issues. The arbitration process will be governed
by the Commercial Arbitration Rules of the American Arbitration
Association (AAA). The AAA will appoint an individual with
experience in handling disputes in software licensing matters as
the chairperson and neutral arbitrator, with any additional
arbitrators to be selected by the parties from individuals with
background and training in the computer industry.
Venue for all hearings shall be established by the party
initiating the arbitration. The cost of arbitrators shall be
borne equally by the parties, but other costs for arbitration,
i.e. travel, exhibits, copies, attorney, shall be borne by the
company incurring the costs. The parties will have no right to
take discovery of the other party by any method. The arbitrators
may award reasonable attorneys' fees to the prevailing party as
an element of the cost of arbitration, and judgment upon the
award may be entered in any court having jurisdiction.
EXPIRATION OF THIS OFFER
This offer expires thirty days from the date of this Letter, unless
accepted and signed by both parties.
TERMINATION OF AGREEMENT
This agreement will terminate fourteen months from the date of
signature of this Letter unless both parties mutually agree to extend
the Letter. The responsibilities for payment of fees, all limitations
of liability, all terms regarding ownership of products and
techniques, the rights and remedies clause, resolutions of disputes,
the restrictions regarding confidentiality, and any outstanding
warranty coverage or support services shall survive the expiration of
this agreement.
PROJECT TIMEFRAME AND COST
Based upon Dollar General's verbal approval to proceed, AIG will
begin the project on January 28, 1997 and expect it to last until
February 1, 1998.
The cost for AIG's professional services is $784,000, plus expenses.
AIG will make it's best efforts to keep expenses reasonable.
The following table defines AIG's planned invoices for professional
services with payment due within thirty days of the date of the
invoice. Out of pocket expenses will be invoiced monthly as they are
incurred.
<TABLE>
<CAPTION>
<S> <C>
February 1, 1997 $171,250
May 1, 1997 $171,250
August 1, 1997 $171,250
November 1, 1997 $171,250
Project Completion $100,000
</TABLE>
AIG invoices may include charges for late payment which will accrue at
the rate of one and one-half percent (1 1/2%) per month (or the
maximum rate allowed by law, whichever is less) on the unpaid balance
from the due date until the date the payment is received by AIG.
EXHIBITS
Exhibit A defines details the Responsibility Matrix for this project.
Exhibit B contains the Warranty Provisions for this project.
Exhibit C is a list of Other Provisions related to this project.
APPROVAL
This Letter, attached Exhibits, and its terms and conditions are
agreed to by both Dollar General and AIG on this day.
Applied Intelligence Group, Inc. Dollar General Corporation
Signature: /s/ Dennis Krautsack Signature: /s/J. H. Jenson
Name: Dennis Krautsack Name: J. H. Jenson
Title: Account Executive Title: Vice President
Date: 1/30/97 Date: 2/12/97
<PAGE>
Exhibit A
Project Responsibility Matrix
The attached pages contain the Project Responsibility Matrix for this
project. This matrix was developed by Bernadette Korth of Dollar
General. AIG has used the tasks and resource assumptions of the
matrix to estimate the work for this project.
<PAGE>
Exhibit B
Warranty Provisions
In this Exhibit, Dollar General will be referred to as the "Client".
WARRANTY COVERAGE
The work AIG performs will be done in a professional and workmanlike
manner, and our analysis and recommendations will be based on the
information provided to AIG by the Client.
AIG agrees to use its best efforts to correct any material deviations
between the deliverables and the related documentation furnished by
AIG (defects) in the code or in the systems integration services
provided under the terms of this Letter as long as they are reported
in writing by the Client to AIG within thirty (30) days of the date of
acceptance testing of each interface.
AIG warrants the interface software developed by AIG only to the
Client and only if the Client or any third party have not modified any
of AIG's work. The interface software provided under this agreement
may contain third-party software. The Client agrees that all warranty
of third-party software will be provided exclusively by the third
party.
AIG does not warrant the interface software if defects are caused by:
Operation of the system by the Client in a manner inconsistent
with requirements listed in the documentation for the system or in
this agreement
Use of software not developed or approved by AIG specifically for
use with the system
Failure by the Client to implement software corrections or
updates provided by AIG
Failure of hardware or any third-party software
Negligence, accident, or any other reason not attributable to AIG
AIG and the Client agree that the Client is solely responsible for the
selection, use, and results obtained from the use of the system, and
that AIG does not warrant AIG's interface software meets the business
needs, expectations, or requirements of the Client, whether or not AIG
knows, has reason to know, has been advised, or is in fact aware of
the Client's business purposes. Nor does AIG warrant that any part of
the system will operate without interruption.
Finally, AIG and the Client agree that the services provided by AIG to
the Client are for commercial use and are not consumer goods. AIG's
express warranties and representations to the Client in this agreement
take the place of all implied warranties or conditions of title, and
all representations regarding the code and services within the scope
of this Letter, including noninfringement, merchantability, or fitness
suitability that arise by law, by reason of custom or usage in the
trade, or by course of dealing.
NORMAL WARRANTY HOURS
Warranty service will be provided by AIG's Customer Support Network
(CSN) Monday through Friday, excluding holidays, from 8:00 a.m. to
5:00 p.m. CST. AIG will provide warranty service outside of these
hours at the Client's request at our then-current, off-hours rates.
At the end of the 30-day warranty, additional maintenance services may
be provided by AIG only under the terms of a separate Services
Agreement executed by AIG and the Client.
WARRANTY INITIATION
The Client's Information Systems management and designated staff are
authorized to initiate warranty problem resolution.
RESPONSE TIME
AIG will use its best efforts to respond to calls placed with the CSN
within two (2) hours. "Response time" is defined as the time between
registering a call with the CSN Help Desk and the time that a call is
returned to the Client. "Resolution time" will depend upon the issues
or problems encountered.
START DATE AND END DATE
Warranty coverage will begin on the day after successful completion of
the acceptance test for each interface and will continue for a period
of thirty (30) days.
<PAGE>
Exhibit C
Other Provisions
In this Exhibit Dollar General will be referred to as the "Client".
ENTIRE AGREEMENT
This Letter and Exhibits constitute the entire agreement between AIG
and the Client concerning the subject matter of this Letter.
Agreement is defined as the Arrangement Letter to which this Exhibit
is attached, this Exhibit, and any other exhibits, amendments,
supplements, and addenda, including any future written amendments,
modifications, or supplements to these documents.
MODIFICATION
Any modification or amendment to this agreement must be in writing and
signed by the parties. For AIG, the writing must be signed by an
officer of the corporation. Any written document that is inconsistent
with this agreement or adds to its terms and conditions will not be
binding on either AIG or the Client. AIG's failure to object to any
provision outside of this Letter shall not be considered to be a
waiver of the terms and conditions of this Letter or an acceptance of
such a provision.
BINDING
This agreement is binding on AIG, the Client, and their respective
successors and assigns to the extent permitted by this agreement.
AUTHORITY
AIG and the Client, as parties to this agreement, warrant to each
other that:
If organized as a corporation, partnership, limited partnership,
or other non-natural person, the party is organized and subsisting
under the laws of the jurisdiction of its incorporation or existence.
The party has full power and authority to enter into this
agreement.
The persons executing this agreement have actual authority to
bind the parties to this agreement.
SINGULAR/PLURAL
Singular words will include the plural and vice versa. Masculine,
feminine, and neuter genders will include the others. The word
"person" will include corporations, firms, partnerships, joint
ventures, trusts, or estates, in addition to natural persons.
FORCE MAJEURE
Except for the obligation to make payments due under the terms of this
agreement, neither AIG nor the Client will be held liable for failure
to perform due to circumstances beyond the control of the parties.
These circumstances include, but are not limited to: accidents; acts
of God; labor disputes; supplier or material shortages; embargoes;
rationing; fuel shortages; actions of local, state or national
governments, or governmental agencies or authorities, or military
authorities; utility or communication failures; delays in
transportation; fire, flood, epidemics, riots, or strikes; war or
criminal activities; delays in delivery or failure to manufacture or
deliver.
CAPTIONS
The captions of various paragraphs in this Letter are for convenience
only. They are not intended to be part of the body or text of this
agreement. They are also not intended to be referred to in construing
any of the provisions of the agreement.
COUNTERPARTS
This agreement may be executed in any number of counterparts, any of
which will be deemed to be an original.
INDEPENDENT CONTRACTORS
AIG and the Client are strictly independent contractors. Neither
party has the right to bind the other in any manner. Nothing in this
agreement should be interpreted to make either party the agent or
legal representative of the other, or to make the parties joint
venturers or partners.
OTHER INSTRUMENTS
The Client agrees to execute any instruments or documents that may be
required in order to effect the terms, conditions, purpose, or
objective of this agreement.
OTHER TRANSACTIONS
In addition to the services provided under the terms of this
agreement, AIG may perform other services or provide other products
through separate written agreements which must be executed by AIG
before AIG is bound. AIG and the Client agree that these additional
products and services cannot be the subject of an oral agreement.
AUDIT
In order to enforce any of AIG's rights under the terms of this
agreement, AIG retains the right to audit the Client's compliance with
the provisions of this Letter. To accomplish this, AIG will perform
any audit at AIG's expense during normal business hours. AIG retains
the right to perform any audit without advance notice to the Client.
ASSIGNMENT
The Client agrees to obtain prior written consent from AIG before
assigning this agreement, or the rights and obligations created under
this agreement, to any third party.
SEVERABILITY
The parties agree that if any provision of this agreement is invalid
or unenforceable, the remaining provisions of this Letter will be
valid and enforceable to the fullest extent permitted by law.
NONWAIVER
AIG's failure at any time to require the Client to perform any
provision of this agreement will in no way affect AIG's right at a
later time to require performance of that provision. AIG's waiver of
any breach of a provision of this agreement will not be construed as a
waiver of:
Succeeding breaches of that provision
That provision itself
Any right under this agreement
TRADEMARK USAGE
The Client agrees not to make use of any of AIG's trademarks, service
marks, or trade names for any reason without the prior, express,
written consent of AIG.
NOTICE
All communications and notices related to this agreement will be made
in writing and delivered to the following addresses:
Applied Intelligence Group, Inc.
13800 Benson Road
Edmond, OK 73013-6417
Dollar General
104 Woodmont Blvd., Suite 500
Nashville, TN 37205
Address changes will be communicated by written notice to the other
party on a timely basis. Communications and notices may be delivered
by any of the following methods with effective date as listed:
Delivered personally with same day effective date
Mailed by certified mail, postage prepaid, with effective date
five business days after mailing
Sent by overnight courier with effective date one day after
sending
Addendum Confidential
Information
December 12, 1996 EXHIBIT 10.43
Mr. Kent Leichty
ALDI Inc.
1200 North Kirk Road
Batavia, IL 60510-1477
Dear Kent:
Applied Intelligence Group, Inc. (AIG) is pleased to present this Addendum
(Addendum) to our Arrangement Letter (AL) to ALDI Inc. (ALDI) dated
August 3, 1995 and signed by Mr. Michael Curry on August 22, 1995 for
the purchase of merchandise from AIG. This Addendum is considered part of,
and is governed by, AIG's AL to ALDI dated August 3, 1995.
DISCOUNTS
This section details the discounts for IBM merchandise AIG will provide to
ALDI within the terms of this Addendum. Discounts specified in the
August 3, 1995 AL will continue in effect and are restated below.
<TABLE>
<CAPTION>
Item Percentage
of
Discounts
<S> <C>
POS Terminals 37%
Controller 9%
Hardware/Features
</TABLE>
NOTE: Final price is calculated by applying the
discount to the Base/List price, but cannot be less
than AIG's cost plus 4%.
EXPIRATION OF AGREEMENT
This section replaces the Expiration of Agreement section of AIG's
Arrangement Letter to ALDI dated August 3, 1995.
The AL will continue in effect until December 31, 1997. Any
modifications to the agreement are subject to approval by both parties. The
agreement can be canceled by either party with 30 days written notice. The
responsibilities for payment of fees, merchandise warranty, all limitations
of liability, all terms regarding ownership of products and techniques, the
rights and remedies clause, resolutions of disputes, hiring of personnel, and
the restrictions regarding confidentiality, shall survive the expiration of
the agreement.
APPROVAL
This Addendum and its terms and conditions are agreed to by both
ALDI Inc. and AIG on this day.
Applied Intelligence Group, Inc. ALDI Inc.
/S/Rick Place /S/Kent Leichty
Rick Place Kent Leichty
Account Executive Corporate Director Scanning
Systems
December 12, 1996 Jan 10, 1997
APPLIED INTELLIGENCE GROUP, INC. 1 3800 Benson Road,
Edmond, OK 73013-0417
CONSENT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Shareholders
Applied Intelligence Group, Inc.
We consent to the incorporation by reference in the registration
statement of Applied Intelligence Group, Inc. on Form S-8 (File
No. 333-22227) of our report dated March 7, 1997, on our audits
of the financial statements of Applied Intelligence Group, Inc.
as of December 31, 1996 and 1995, and for each of the three years
in the period ended December 31, 1996, which report is included
in this Annual Report on Form 10-KSB.
COOPERS & LYBRAND L.L.P.
Oklahoma City, Oklahoma
March 27, 1997
[ARTICLE] 5
[LEGEND]
This schedule contains summary financial information extracted from SEC Form
10-KSB and is qualified in its entirety by reference to such financial
statements.
<TABLE>
<S> <C>
[PERIOD-TYPE] YEAR
[FISCAL-YEAR-END] DEC-31-1996
[PERIOD-END] DEC-31-1996
[CASH] 1,821,014
[SECURITIES] 0
[RECEIVABLES] 2,015,468
[ALLOWANCES] 5,631
<OTHER RECEIVABLES> 314,874
[INVENTORY] 28,159
76,264
[CURRENT-ASSETS] 4,250,148
[PP&E] 2,892,972
[DEPRECIATION] 1,260,825
<OTHER ASSETS> 1,425,240
[TOTAL-ASSETS] 7,307,535
[CURRENT-LIABILITIES] 1,938,241
[BONDS] 0
<OTHER LONG-TERM LIABILITIES> 628,305
<TOTAL LIABILITIES> 2,566,546
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[COMMON] 2,727
[OTHER-SE] 4,738,262
[TOTAL-LIABILITY-AND-EQUITY] 7,307,535
[SALES] 0
[TOTAL-REVENUES] 9,507,370
[CGS] 0
[TOTAL-COSTS] 2,570,840
[OTHER-EXPENSES] 7,766,775
[LOSS-PROVISION] 0
[INTEREST-EXPENSE] 219,089
<LOSS-PRETAX> 1,049,334
<INCOME-TAX BENEFIT> 366,925
<LOSS-CONTINUING> 682,409
[DISCONTINUED] 0
[EXTRAORDINARY] 0
[CHANGES] 0
<NET-LOSS> 682,409
[EPS-PRIMARY] .37
[EPS-DILUTED] .37
</TABLE>
