<PAGE>
UNITED STATES SECURITIES & EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[x] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT
For the transition period from __________ to ________
Commission File Number 000-21729
APPLIED INTELLIGENCE GROUP, INC.
(Exact name of registrant as specified in its charter)
Oklahoma 73-1247666
(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification Number)
13800 Benson Road
Edmond, Oklahoma 73013
(Address of principal executive offices)
(405) 936-2300
Registrant's telephone number, including area code
Check whether the Registrant(1) filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act
during the past 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No __
As of November 14, 1997 there were 2,728,386 outstanding
shares of Common Stock, par value $.001 per share.
Transitional Small Business Disclosure Format: Yes ___ No X
<PAGE>
APPLIED INTELLIGENCE GROUP, INC.
FORM 10-QSB
TABLE OF CONTENTS
PART I - CONSOLIDATED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
<S> <C>
Page
Item 1. CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets (unaudited) as of
September 30, 1997 and December 31, 1996 3
Consolidated Statements of Operations (unaudited) for
the three months ended September 30, 1997 and 1996 4
Consolidated Statements of Operations (unaudited) for
the nine months ended September 30, 1997 and 1996 5
Consolidated Statement of Stockholders' Equity
(unaudited)for the nine months ended September 30, 1997 6
Consolidated Statements of Cash Flows (unaudited) for the
nine months ended September 30, 1997 and 1996 7
Notes to Consolidated Financial Statements (unaudited) -
September 30, 1997 8
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 8
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS 15
Item 2. CHANGES IN SECURITIES 15
Item 3. DEFAULTS UPON SENIOR SECURITIES 16
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS 16
Item 5. OTHER INFORMATION 16
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 17
Signatures 17
</TABLE>
<PAGE>
PART I - CONSOLIDATED FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
APPLIED INTELLIGENCE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
ASSETS Sep. 30, December
1997 31, 1996
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<S> <C> <C>
Current assets:
Cash and cash equivalents $ 406,973 $1,821,014
Accounts receivable-trade, net of allowance
for doubtful accounts of $4,036 at September
30, 1997 and $5,631 at December 31, 199 1,581,726 2,009,837
Other receivables 180,452 314,874
Inventory 9,073 28,159
Prepaid expenses 135,075 76,264
---------- ----------
Total current assets 2,313,299 4,250,148
Furniture, equipment & leasehold improvements, net 1,579,136 1,632,147
Software development costs, net 1,534,407 1,308,099
Deferred tax asset 809,158 -
Other assets 171,916 117,141
---------- ----------
Total assets $6,407,916 $7,307,535
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Book overdraft $ 321,515 $ 284,760
Accounts payable and accrued liabilities 1,804,900 1,078,506
Deferred revenue 192,398 332,449
Current portion of notes payable to shareholders - 107,375
Current portion of capital lease obligations 139,515 135,151
Bank line of credit payable 341,000 -
---------- ----------
Total current liabilities 2,799,328 1,938,241
Capital lease obligations, net of current portion 72,496 176,618
Notes payable to shareholders, net of
current portion 482,830 389,000
Deferred income taxes - 62,687
---------- ----------
Total liabilities 3,354,654 2,566,546
Stockholders' equity:
Common stock, $.001 par value;
30,000,000 shares authorized; 2,728,386 and
2,726,500 shares issued and outstanding at
September 30, 1997 and December 31, 1996 2,728 2,727
Additional paid-in capital 4,495,644 4,491,226
Retained earnings (deficit) (1,445,110) 247,036
---------- ----------
Total stockholders' equity 3,053,262 4,740,989
---------- ----------
Total liabilities and stockholders' equity $6,407,916 $7,307,535
========== ==========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
APPLIED INTELLIGENCE GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three Months Ended September 30, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Revenues $2,659,554 $1,869,103
Expenses:
Direct cost of sales 1,147,777 489,985
Salaries and benefits 1,685,366 1,331,625
Selling, general and
administrative 810,383 463,749
Interest expense, net 22,719 62,278
Depreciation and amortization 197,182 145,604
---------- ----------
Total expenses 3,863,427 2,493,241
---------- ----------
Loss before income taxes (1,203,873) (624,138)
Benefit for income taxes (420,000) (237,173)
---------- ----------
Net loss $ (783,873) $(386,965)
========== ==========
Net loss per common share $ (0.29) $ (0.22)
========== ==========
Weighted average common share
equivalents outstanding 2,727,444 1,755,628
========== ==========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
APPLIED INTELLIGENCE GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Nine Months Ended September 30, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Revenues $ 6,585,490 $7,235,857
Expenses:
Direct cost of sales 1,838,822 2,150,305
Salaries and benefits 4,600,660 3,800,545
Selling, general and
administrative 2,064,264 1,465,486
Interest expense, net 52,821 175,232
Depreciation and amortization 592,914 404,710
---------- ---------
Total expenses 9,149,481 7,996,278
---------- ----------
Loss before income taxes (2,563,991) (760,421)
Benefit for income taxes (871,845) (288,961)
---------- ----------
Net loss $(1,692,146) $ (471,460)
========== ==========
Net loss per common share $ (.62) $ (.27)
========== ==========
Weighted average common share
equivalents outstanding 2,727,114 1,755,628
========== ==========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
APPLIED INTELLIGENCE GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
For the Nine Months Ended September 30, 1997
<TABLE>
<CAPTION>
Additional Retained
Common Stock Paid-in Earnings
Shares Amount Capital (Deficit)
--------- ------- ---------- ----------
<S> <C> <C> <C> <C>
Balance, December 31, 1996 2,726,500 $ 2,727 $4,491,226 $ 247,036
Exercise of stock options 444 - 279 -
Stock issued under Employee
Stock Purchase Plan 1,442 1 4,139 -
Net loss - - - (1,692,146)
--------- ------- ---------- ----------
Balance, September 30,1997 2,728,386 $ 2,728 $4,495,644 $(1,445,110)
========= ======= ========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
APPLIED INTELLIGENCE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Nine Months Ended September 30, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
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<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,692,146) $ (471,460)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 592,914 404,710
Deferred income tax benefit (871,845) (318,715)
Decrease in accounts receivable 428,111 354,424
Decrease in other receivables 134,422 53,659
Decrease (increase) in inventory 19,086 (91,928)
Increase in prepaid expenses (58,811) (36,057)
Increase in other assets (54,775) (51,867)
Increase in accounts payable and
accrued liabilities 726,394 258,734
Increase (decrease) in deferred revenue (140,051) 65,309
---------- -----------
Net cash provided by (used in)operating activities (916,701) 166,809
Cash flows from investing activities:
Capital expenditures (319,158) (476,863)
Capitalized expenditures for software
development (447,053) (477,607)
---------- -----------
Net cash used in investing activities (766,211) (954,470)
Cash flows from financing activities:
Increase (decrease) in book overdraft 36,755 (57,454)
Increase in deferred offering costs - (246,659)
Proceeds from bank borrowings 1,061,000 4,849,000
Proceeds from shareholder notes 6,455 -
Proceeds from exercise of stock options 279 -
Proceeds from employee stock purchase plan 4,140 -
Payments of capital lease obligations (99,758) (71,418)
Payments of shareholder loans (20,000) -
Payments of bank borrowings (720,000) (4,097,000)
Net proceeds from sale of common stock - 394,927
---------- -----------
Net cash provided by financing activities 268,871 771,396
---------- -----------
Net decrease in cash (1,414,041) (16,265)
Cash and cash equivalents at beginning of
period 1,821,014 18,499
---------- -----------
Cash and cash equivalents at end of period $ 406,973 $ 2,234
========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
APPLIED INTELLIGENCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 1997
NOTE 1. DESCRIPTION OF BUSINESS
Applied Intelligence Group, Inc. (the "Company") provides a
diversified range of management consulting and computer systems
integration services, along with providing network services and
network-based computer applications. All services are focused
primarily on the retail and wholesale distribution industries.
Through the Company's wholly-owned subsidiary, ijob, Inc., the
Company also provides human resource recruiting and job candidate
matching capabilities, with access to the database through the
Internet. The Company's clients and customers range from small,
rapidly growing companies to large corporations and are
geographically dispersed throughout the United States.
NOTE 2. BASIS OF PRESENTATION
Reference is made to the Company's Annual Report on Form 10-
KSB for the year ending December 31, 1996.
The accompanying unaudited consolidated financial statements
have been prepared by the Company in accordance with generally
accepted accounting principles for interim financial information
and with the instructions to Form 10-QSB. Accordingly, they do not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of
normal recurring items) considered necessary for a fair
presentation have been included. These interim unaudited
consolidated financial statements should be read in conjunction
with the audited financial statements and related notes included
in the Company's Annual Report on Form 10-KSB as filed on March
31, 1997.
Operating results for the nine month period ended September
30, 1997 are not necessarily indicative of the results that may be
expected for the full year ended December 31, 1997.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Statements of the Company's or management's intentions,
beliefs, anticipations, expectations and similar expressions
concerning future events contained in this Form 10-QSB 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 Form 10-QSB 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.
The Company's expectations with respect to future results of
operations that may be embodied in oral and written forward-
looking statements, including any forward-looking statements that
may be included in this Form 10-QSB, are subject to risks and
uncertainties that must be considered when evaluating the
likelihood of the Company's realization of such expectations.
The Company's actual results could differ materially. Factors
that could cause or contribute to such differences include, but
are not limited to, those discussed in Item 5 of Part II of this
Report.
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,
(ii) proprietary software products and applications, and (iii)
network services and network-based computer applications.
In 1993, the Company recognized early in the evolution the
importance of electronic commerce in the future and began
development of viaLink. viaLink is a common industry network
application, enabling retailers, manufacturers, wholesalers and
other suppliers to share and communicate consumer product data.
viaLink is an information and subscription database service, which
was announced in April 1996 and live services were first delivered
in January 1997, which is accessible and available on the World
Wide Web of the Internet (the "Internet"). In 1994, the Company
began work on its RETAIL SERVICES APPLICATION ("RSA"), which was
released in August 1995. RSA provides the retailer with a
complete store point-of-sale solution from front register check-
out functions and integrated with the Company's Chainlink product,
complete store-to-headquarters communications. RSA is presently
installed in approximately 415 stores.
The Company has also recently developed and introduced ijob, an
internet based human resources application. During the second
quarter 1997, ijob, Inc. was formed as a wholly-owned subsidiary
of the Company, and commenced operations as a separate entity on
June 30, 1997. As of November 14, 1997, this wholly-owned
subsidiary had 21 employees, with locations at the Company's
principal offices in Edmond and two satellite recruiting centers
located in the metropolitan Oklahoma City area.
ijob is a network based human resource recruiting application
deployed through either the Internet or accessible by telephone.
ijob uses these communications systems as a medium to bring
together people seeking employment and companies searching for
employees. ijob utilizes a database to collect, catalog and match
information to screen and pre-qualify job candidates with the
human resources needs of employers who subscribe to the ijob
network services application.
The Company believes this system represents a technological
improvement over current Internet "resume web sites" where career
material is simply posted on unscreened databases or on bulletin
boards. With ijob, the subscribing employer benefits by receiving
a list of pre-qualified applicants who have greater probability of
meeting the employer's human resource needs. Computer assisted
structured interviews ("CASI") and skill testing are used to help
determine if the applicant will meet the required needs. This
predictive system enables employers to conduct focused searches,
saving time
and money. People looking for jobs also benefit by using the ijob
system. Free to job seekers, ijob maintains all information in its
active database until the applicant requests its withdrawal.
Since inception through September 30, 1997, ijob has earned
$368,416 in revenues. Since the inception of ijob the Company
expended approximately $778,000, in excess of revenues, to launch
and implement this new service. The Company anticipates that ijob
represents a significant source of growth opportunity for the
Company.
The Company has made significant expenditures for
development, implementation and marketing of its software license
products, RSA and network information system offerings, viaLink
and ijob. During the three months ended September 30, 1997, the
Company expensed approximately $424,000 in such development costs
compared to approximately $128,000 during the three months ended
September 30, 1996. During the first nine months of 1997, the
Company expensed approximately $1,014,000 in such development
costs compared to approximately $608,000 in the first nine months
of 1996. It is expected the Company will continue, only as it is
able, to fund and develop these new product offerings.
RESULTS OF OPERATIONS
REVENUES. Revenues increased $790,451 (42 percent) to
$2,659,554 for the third quarter of 1997 from $1,869,103 for the
comparable quarter of 1996. Revenues in the first nine months of
1997 decreased $650,367 (9 percent) to $6,585,490 from $7,235,857
for the first nine months of 1996. The third quarter increase in
gross revenue was principally due to an increase in the Company's
hardware sales, network services and network based computer
applications revenues, which was slightly offset by a decrease in
consulting revenues. The decrease in gross revenues for the nine
months ended September 30, 1997 was due to decreases in hardware
and product sales, solution revenues and consulting fees. These
revenue decreases were partially offset by increased revenues from
the Company's network services, network based computer
applications, customer support revenues and commissions.
Hardware and product sales increased $890,290 (163 percent)
from revenues of $548,011 in the third quarter of 1996 to revenues
of $1,438,301 in the third quarter of 1997. Hardware and product
sales for the first nine months of 1997 decreased $105,005 (5
percent) from $2,319,319 for the first nine months of 1996 to
$2,214,314 for 1997. The increase for the third quarter of 1997
was mainly due to purchases by a large client of point-of-sale
terminals for 101 new stores opened in the third quarter of 1997.
During the same period in 1996 the client only opened 26 new
stores. The decrease for the first nine months of 1997 was due to
the transition and changing of focus to higher margin revenue
streams, and less focus on hardware sales which generally have
lower profit margins. Furthermore, one customer purchased the
majority of its point-of-sale hardware directly from the vendor
for the first five months of 1997, whereas in the same period in
1996, the customer made it purchases through the Company. However,
the Company received commissions on these sales of $157,513 for
the nine months ended September 1997, which offsets the decrease
in gross revenues caused by decreased hardware sales. The Company
received no commissions from such transactions in the first nine
months of 1996.
Solutions revenues increased $600 (1 percent) from reported
revenues of $49,984 in the third quarter of 1996 to $50,584 in the
same period of 1997. Revenues for the first nine months of 1997
were $106,216, a decrease of $889,706 (89 percent) from $995,922
for 1996. A sale of the Company's RSA product totaling $898,000
was made during the nine months ended 1996, whereas no such large
sale of RSA has been made during 1997.
Consulting fees earned during the three months ended
September 30, 1997 totaled $827,506 compared to $1,115,880 for the
same period in 1996, a decrease of $288,374 (26 percent).
Consulting fees for the first nine months of 1997 were $3,105,428
compared to $3,565,005 for 1996, a decrease of $459,577 (13%). The
decrease for both the quarter and the first nine months of 1997
was due, in part, to the conclusion of the revenue stream from
several large consulting projects in the first quarter and during
the second quarter of 1997 that have not been completely replaced
with consulting revenue from new sales in the third quarter of
1997. The decreases were also due in part to the transition and
changing of focus to recurring revenue streams, viaLink and ijob,
which moved personnel from the consulting area to these recurring
revenue areas. For the fourth quarter and moving into 1998 the
Company is again focusing more resources than previously this year
on the consulting and systems integration area of the business and
aggressively pursuing new clients and projects. Since the end of
the third quarter the Company has entered into contracts with six
new clients for consulting projects totaling $241,500. These new
relationships represent growth potential beyond these initial
projects. The Company expects to initiate even more new consulting
projects during the remainder of 1997; however, there is no
assurance as to the commencement and timing of such projects.
Customer support revenues increased $581 (less than one
percent) to $93,809 for the third quarter of 1997 from $93,228 for
the third quarter of 1996. Customer support revenues for the
first nine months of 1997 increased $45,534 (16 percent) to
$339,145 from $293,611 for the same period in 1996. These
increases were due to additional contracts obtained in 1997 and
higher levels of billings for hours in excess of the standard
contract levels than were billed in 1996.
Revenues from the Company's network services and network
based computer applications were $237,220 for the three months
ended September 30, 1997, an increase of $175,220 (283 percent)
compared to $62,000 for the third quarter of 1996. Such revenues
for the nine months ended September 30, 1997 were $662,874, an
increase of $600,874 (969%) from $62,000 for the comparable period
in 1996. These services are a part of the Company's transition to
and development of a recurring revenue business area. The Company
has and will, as it is able, continue to make significant
expenditures for investment in and development of these services
in order to shift the Company's focus from single consulting
projects to recurring network service revenues with expected
higher profit margins and increasing revenue streams. The viaLink
subscriber list for both retailers and subscribers has grown from
20 in January to 63 at the end of the third quarter, representing
more than 2,500 stores.
DIRECT COST OF SALES. Direct cost of sales, which consists of
purchased hardware and certain software for resale, and costs
associated with the Company's proprietary software products,
increased $657,792 (134 percent) to $1,147,777 in the third
quarter of 1997 from $489,985 in the third quarter of 1996. For
the first nine months of 1997 direct cost of sales decreased
$311,483 (15%) to $1,838,822 from $2,150,305 for the first nine
months of 1996. The increase in cost of sales for the third
quarter of 1997 and the decrease in cost of sales for the nine
months ended September 30, 1997 were both in line with the
increase and decreases in hardware and solution sales for the
corresponding periods.
SALARIES AND BENEFITS. Salaries, wages, taxes and related
benefits, and contract labor expenses totaled $1,685,366 for the
three months ended September 30, 1997 compared to $1,331,625 for
the same period in 1996, an increase of $353,741 (27 percent).
Salaries, wages, taxes and related benefits, and contract labor
expenses totaled $4,600,660 for the first nine months of 1997
compared to $3,800,545 for the same period in 1996, an increase of
$800,115 (21 percent).
During 1997, the Company utilized contract programmers for
client engagements to a greater extent than in 1996 during which
virtually no contract programmers were utilized. In addition, late
in the first quarter of 1997, a contract sales executive was hired
to promote sales in the solutions business area of the Company.
Contract labor expenses totaled $93,590 during the third quarter
of 1997 compared to a total of $17,828 for the same quarter in
1996, an increase of $75,762 (425 percent). Contract labor
expenses totaled $374,255 during the nine months ended September
30, 1997 compared to a total of $31,942 during the nine months
ended September 30, 1996, an increase of $342,313 (1072 percent).
Furthermore, contract labor expenses for implementation and
operation of ijob increased the total contract labor costs by
$124,624 for the first nine months of 1997, which were not present
anytime in 1996. Certain of the ijob contract labor expenses were
converted to salaried employees on June 30, 1997.
Direct payroll costs of salaries and wages increased
$325,228(22 percent) from $1,442,412 for the three months ended
September 30, 1996 to $1,767,640 for the same period in 1997.
Direct payroll costs of salaries and wages increased $457,371 (11
percent) from $4,206,468 for the first nine months of 1996 to
$4,663,839 for the comparable period in 1997. The increases were
due to increased employed personnel, in part associated with the
startup of ijob. The ongoing implementation of ijob added 10 new
staff during the third quarter of 1997, bringing total ijob
personnel to 21 at November 14, 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling,
general and administrative expenses (SG&A) increased $346,634 (75
percent) to $810,383 for the quarter ended September 30, 1997 from
$463,749 for the quarter ended September 30, 1996. For the nine
months ended September 30, 1997, SG&A increased $598,778 (41
percent) to $2,064,264 from $1,465,486 for 1996.
Travel expenses increased $43,090 (74 percent), to $101,413
in the third quarter of 1997 from $58,323 in the same quarter of
1996. Travel expenses for the nine months ended September 30,
1997 increased 45,709 (19 percent) to $282,254 from $236,545 for
the same period in 1996. The increase for both the quarter and the
first nine months of 1997 was primarily attributable to the travel
expenses incurred by three full-time viaLink sales representatives
that the Company began hiring in February of 1997, and by travel
expenses associated with sales and marketing activities for the
Company's ijob product.
Telecommunications expense increased $46,735 (127 percent)
from $36,685 for the three months ended September 30, 1996 to
$83,420 in the same period of 1997. Telecommunications expenses
for the nine months ended September 30, 1997 increased $71,623 (63
percent) to $184,582 from $112,959 for the same period in 1996.
These increases were due to (i) the startup of ijob operations and
the opening of a new service center during the second quarter,
(ii) the expansion of the Company's communication systems for
viaLink and web site hosting services, (iii) and greater long
distance usage due to the increased sales and marketing activities
of the Company.
Advertising and promotion expenses totaled $80,167 for the
third quarter of 1997 compared to $15,745 for the same quarter in
1996, an increase of $64,422 (409 percent). For the first nine
months of 1997, advertising and promotion expenses totaled
$167,646 compared to $53,354 for the comparable period of 1996, an
increase of $114,292 (214 percent). The increases were due to
increased sales and marketing promotion activities for the
Company, specifically viaLink and ijob. The Company anticipates
that advertising and promotion expenses will continue to be at
higher levels than prior periods due to the increased efforts
associated with marketing of viaLink and ijob. Expected revenues
from viaLink and ijob due to higher levels of selling and
marketing expenses may not occur until late 1997 or 1998 or may
not occur, depending upon market acceptance.
Professional fees increased $104,999 (267 percent) to
$144,263 in the three months ended September 30, 1997 compared to
$39,264 in the three months ended September 30, 1996.
Professional fees increased $238,839 (126 percent) to $428,273 for
the nine months ended September 30,1997 compared to $189,434 for
the same period in 1996. These increased expenses relate to the
use of professional consultants for the continued marketing and
further development of the Company's viaLink Item Catalog Service
and newly introduced CSP MarketLink and for legal and certain
operating costs recorded as professional fees associated with the
startup costs, formation, implementation and operation of ijob.
See "Overview." These projects are part of the recurring
revenue business area, as the Company shifts its focus from single
consulting projects to recurring network service revenues with
expected higher profit margins on growing revenue streams.
All other SG&A increased a net of $87,388 (28 percent) to
$401,120 for the third quarter of 1997 from $313,732 for the same
quarter in 1996. All other SG&A for the nine months ended
September 30, 1997 increased a net of $128,315 (15 percent)to
$1,001,509 from $873,194 for the same period in 1996.
INTEREST EXPENSE. Net interest expense decreased $39,559 (64
percent) to $22,719 for the three months ended September 30, 1997
from $62,278 for the same period in 1996. Net interest for the
first nine months of 1997 decreased $122,411 (70 percent) to
$52,821 from $175,232 for the same period in 1996. The decrease
was due to the repayment of outstanding bank debt, which was used
largely to finance the development of viaLink, RSA and Chainlink
during the preceding two years. Proceeds of the Company's initial
public offering in November 1996 were utilized to pay off the bank
debt. During the second and third quarter of 1997, certain
borrowings were made under the Company's bank line-of-credit with
an outstanding balance of $341,000 at September 30, 1997. Average
total outstanding debt during the third quarter and the first nine
months of 1997 was $1,048,000 and $893,000, respectively, compared
to average total outstanding debt for the third quarter and the
first nine months of 1996 of $2,832,000, and $2,511,000,
respectively.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization
expense totaled $197,182 for the third quarter ended September 30,
1997 compared to $145,604 for the same quarter ended 1996, an
increase of $51,578 (35 percent). Depreciation and amortization
expenses totaled $592,914 for the first nine months of 1997
compared to $404,710 for the same period in 1996, an increase of
$188,204 (47 percent). The increase was due to capital asset
expenditures made during 1996 and the first nine months of 1997,
totaling $625,893 and $319,158, respectively, and capitalized
software development costs of $655,248 and $447,053, respectively.
Furthermore, the Company commenced amortization of software
development costs associated with the viaLink Item Catalog Service
system placed in service in January 1997. The Company does not
anticipated significant capital expenditures doing the fourth
quarter of 1997.
TAX BENEFIT. The Company recorded a tax benefit of $420,000
related to the pre-tax loss of $1,203,873 for the three months
ended September 30, 1997 and a tax benefit of $871,845 related to
the pre-tax loss of $2,563,991 for the nine months ended September
30, 1997. Such tax benefit will be carried forward to future
periods and will expire in 2012. The cumulative deferred tax asset
at September 30, 1997 is $809,158. Management believes realization
of such deferred tax benefit is more likely than not based upon
expected future taxable income and therefore a valuation allowance
has not been provided.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1997 the Company had cash and cash
equivalents of $406,973, and a working capital deficit of
$486,029, with a working capital ratio of .83 to 1.
The Company currently has an available bank line-of-credit
facility, which was extended to December 31, 1997 pursuant to
which it may borrow up to $500,000, secured by accounts receivable
and all tangible assets of the Company. As of September 30, 1997,
the Company had borrowed $341,000 under this facility. Prior to
the Company's initial public offering in November 1996, the
Company financed its operations and growth through internally
generated cash flows and borrowings. The Company is in
discussions with several financial institutions regarding
replacement of its current line-of-credit facility, and as of
November 14, 1997, the Company had received one written proposal.
The Company anticipates replacement of its current line-of-credit
facility, with a $1,000,000 borrowing base, prior to 1998.
During the nine months ended September 30, 1997, net cash
decreased a total of $1,414,041. This decrease was caused
primarily by the loss for the nine months of $1,692,146 and cash
used in investing activities for expenditures of capital and
software development, offset by the collection of accounts
receivable.
The Company used cash in operating activities of $916,701 for the
first nine months of 1997 compared to net cash flow provided in
the nine months ended September 30, 1996 of $166,809. A loss of
$1,692,146 for the nine months was recorded compared to a loss of
$471,460 for the same period of 1996. Accounts receivable
decreased a net $428,111 during the nine months ended September
30, 1997 partly due to decreased revenues for the period and an
aggressive collection effort by the Company of its accounts
receivable. Accounts payable and accrued liabilities increased a
net of $726,394 during the nine months ended September 30, 1997
due to the timing of payments owed for cost of goods sold related
to the large volume of hardware sales made in the third quarter of
1997.
During the nine months ended September 30, 1997 the Company
expended cash for investing activities of $319,158 in various
fixed assets, hardware and software and $447,053 for software
development costs of its proprietary software products, compared
to total expenditures of $476,863 and $477,607, respectively, for
the same items in the nine months ended September 30, 1996.
During the nine months ended September 30, 1997, $268,871 was
provided by financing activities, which was mainly provided by net
borrowings under the bank line-of-credit facility of $341,000.
Net cash decreased during the nine months ended September 30, 1997
by $1,414,041, compared to a net decrease in cash during the nine
months ended September 30, 1996 of $16,265.
During the fourth quarter and moving into 1998, the Company
expects to focus more resources than previously this year on the
consulting and systems integration area of the business. Since
September 30, 1997, the Company has added six new clients and
consulting projects totaling $241,500. These new relationships
represent growth potential beyond these initial projects. The
Company expects to initiate even more new consulting projects
during the remainder of 1997; however, there is no assurance as to
the timing or commencement of such projects.
The Company anticipates that its operations and growth
strategy will be financed through cash and cash equivalents,
operating cash flow, capital lease sources and the line-of-credit
facility. In addition, The Company has been notified that its
current line-of-credit will not be renewed and currently has no
arrangements for additional financing. The Company is in
discussions with several financial institutions regarding
replacement of its current line-of-credit facility, and as of
November 14, 1997, the Company had received one written proposal.
The Company anticipates replacement of its current line-of-credit
facility, with a $1,000,000 borrowing base, prior to 1998. The
Company believes that these sources of funds will be sufficient to
satisfy the Company's operating and capital requirements for at
least twelve months. There may be circumstances, however, that
would accelerate the Company's use of such financing sources. If
this occurs, the Company may, from time to time, incur
indebtedness or issue, in public or private transactions, equity
or debt securities. There can be no assurance that the Company
will be able to obtain requisite financing when needed on
acceptable terms.
EXPECTED LOSS
The Company expects to report a loss for 1997. As the Company is
able it expects to continue the high level of expenditures for
sales and marketing of its new network information systems,
viaLink and ijob, as well as, continuing to make large investments
in these and other systems. The extent of the Company's 1997 loss
will depend on revenues from products and services sales, which
will be affected by product availability, new product
introductions into the retail supply chain and market acceptance
of the Company's products and services. The Company's investment
in new network information systems facilitates their plan to shift
from single consulting projects to recurring network service
revenues with higher profit margins. As a result of the high
level of expenditures for selling and marketing and investments in
network services the Company anticipates profitability in future
periods; however, there is no such assurance.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders
during the third quarter ended September 30, 1997.
ITEM 5. OTHER INFORMATION
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company does not provide forecasts of its future
financial performance. However, from time to time, information
provided by the Company or statements made by its employees may
contain "forward-looking" information that involve risks and
uncertainties. In particular, statements contained in this Form 10-
QSB that are not historical facts constitute forward-looking
statements and are made under the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. The Company's
actual results of operations and financial condition have varied
and may in the future vary significantly from those stated in any
forward-looking statements. The Company's future operating results
are subject to risks and uncertainties and are dependent upon many
factors, including, without limitation, (i) changes in the general
level of economic activity in the markets served by the Company,
(ii) introduction of new products or services by competitors,
(iii) the availability of capital sufficient to support the
Company's level of activity, (iv) the ability of the Company to
implement its business strategies, (v) delays in implementing the
Company's viaLink services, (vi) the ability of the Company to
understand, anticipate and respond to rapidly
changing technologies, market trends and customer needs, and (vii)
the ability of the Company to recruit and retain highly talented
professionals in a competitive job market. The Company's ability
to market and sell its products could also be adversely affected
by the emergence of new competitors in the market place and by
changes resulting in increased government regulation. In addition,
a significant portion of the Company's revenues are
attributable to a limited number of individual customers, the
immediate loss of any of which may adversely affect the Company's
business and results of operations. Each of these factors, and
others, are discussed from time to time in the filings made by the
Company with the Securities and Exchange Commission, including,
but not limited to, the Company's Form SB-2
Registration Statement (no. 333-5058-D) which became effective on
November 20, 1996 and the Company's Annual Report on Form 10-KSB
filed on March 31, 1997.
POTENTIAL FLUCTUATIONS IN OPERATING RESULTS
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 sales, 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 period, as well as software applications developed by the
Company. Due to the relatively fixed nature of certain of the
Company's costs throughout each quarterly period, including
personnel and facilities costs, the decline of revenues in any
quarter typically results in lower profitability in that quarter.
There can be no assurance that the Company will be successful in
achieving profitability or avoiding losses in any future period.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
APPLIED INTELLIGENCE GROUP, INC.
By: /s/ ROBERT L. BARCUM
Robert L. Barcum
Chairman of the Board
President and Chief Executive
Officer
November 14, 1997
By: /s/ JOHN M.DUCK
John M. Duck
Vice President and Chief
Financial Officer
November 14, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION FROM THE BALANCE SHEET FOR
SEPTEMBER 30, 1997 AND THE STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 406,973
<SECURITIES> 0
<RECEIVABLES> 1,585,762
<ALLOWANCES> 4,036
<INVENTORY> 9,073
<CURRENT-ASSETS> 2,313,299
<PP&E> 3,212,130
<DEPRECIATION> 1,632,993
<TOTAL-ASSETS> 6,407,916
<CURRENT-LIABILITIES> 2,799,328
<BONDS> 0
0
0
<COMMON> 2,728
<OTHER-SE> 3,050,534
<TOTAL-LIABILITY-AND-EQUITY> 6,407,913
<SALES> 0
<TOTAL-REVENUES> 6,585,490
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 9,096,660
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 52,821
<INCOME-PRETAX> (2,563,991)
<INCOME-TAX> (871,845)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,692,146)
<EPS-PRIMARY> (.62)
<EPS-DILUTED> 0
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