<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 June 30, 1998
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 August 11, 1998 there were 2,740,990 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>
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<S> <C> <C>
Page
Item 1. CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets (unaudited) as of June 30,
1998 and December 31, 1997 3
Consolidated Statements of Operations (unaudited) for
the three months ended June 30, 1998 and 1997 4
Consolidated Statements of Operations (unaudited) for
the six months ended June 30, 1998 and 1997 5
Consolidated Statement of Stockholders' Equity
(unaudited) for the six months ended June 30, 1998 6
Consolidated Statements of Cash Flows (unaudited) for the
six months ended June 30, 1998 and 1997 7
Notes to Consolidated Financial Statements (unaudited) -
June 30, 1998 8
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 9
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS 17
Item 2. CHANGES IN SECURITIES 17
Item 3. DEFAULTS UPON SENIOR SECURITIES 17
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS 17
Item 5. OTHER INFORMATION 17
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 17
Signatures 18
</TABLE>
<PAGE>
PART I - CONSOLIDATED FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
APPLIED INTELLIGENCE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
ASSETS June 30, December
1998 31, 1997
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<S> <C> <C>
Current assets:
Cash and cash equivalents $ 176,338 $ 80,769
Accounts receivable-trade, net of allowance
for doubtful accounts of $3,713 at June 30,
1998 and $1,724 December 31, 1997 1,723,342 1,337,322
Other receivables 47,413 44,893
Inventory 7,427 8,707
Current portion of deferred tax asset 44,502 44,502
Prepaid expenses 122,829 51,634
---------- ----------
Total current assets 2,121,851 1,567,827
Furniture, equipment & leasehold improvements, net 1,235,608 1,462,575
Software development costs, net 1,837,375 1,735,420
Deferred tax asset 996,488 1,004,938
Other assets 64,599 33,393
---------- ----------
Total assets $6,255,921 $5,804,153
========== ==========
LIABILITIES AND STOCKHOLDERS'EQUITY
Current liabilities:
Book overdraft $ - $ 23,619
Accounts payable and accrued liabilities 1,731,974 1,507,018
Deferred revenue 254,567 236,134
Current portion of capital lease obligation 98,194 132,422
---------- ----------
Total current liabilities 2,084,735 1,899,193
Capital lease obligations, net of current portion 6,419 44,194
Notes payable to shareholders 482,830 482,830
Long-term debt 753,196 490,000
---------- ----------
Total liabilities 3,327,180 2,916,217
Stockholders' equity:
Common stock, $.001 par value;
30,000,000 shares authorized; 2,740,990 and
2,729,509 shares issued and outstanding at
June 30, 1998 and December 31, 1997 2,741 2,730
Additional paid-in capital 4,525,995 4,498,988
Accumulated deficit (1,599,995) (1,613,782)
---------- ----------
Total stockholders' equity 2,928,741 2,887,936
---------- ----------
Total liabilities and stockholders' equity $6,255,921 $5,804,153
========== ==========
</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 June 30, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
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<S> <C> <C>
Revenues $3,047,299 $2,089,517
Expenses:
Direct cost of sales 604,046 502,550
Salaries and benefits 1,605,830 1,540,677
Selling, general and
administrative 587,652 666,991
Interest expense, net 64,538 24,537
Depreciation and amortization 253,735 216,210
---------- ----------
Total expenses 3,115,801 2,950,965
---------- ----------
Loss before income taxes (68,502) (861,448)
Benefit for income taxes (26,031) (262,350)
---------- ----------
Net loss $ (42,471) $ (599,098)
========== ==========
Weighted average shares
outstanding-Basic 2,732,629 2,726,949
========== ==========
Net loss per common share-Basic $ (0.02) $ (0.22)
========== ==========
Weighted average shares
outstanding-Dilutive 2,732,629 2,726,949
========== ==========
Net loss per common share-Dilutive $ (0.02) $ (0.22)
========== ==========
</TABLE>
[CAPTION]
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
APPLIED INTELLIGENCE GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Six Months Ended June 30, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
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<S> <C> <C>
Revenues $6,145,703 $3,925,936
Expenses:
Direct cost of sales 981,114 691,045
Salaries and benefits 3,393,260 2,915,294
Selling, general and
administrative 1,146,251 1,253,881
Interest expense, net 100,654 30,102
Depreciation and amortization 502,187 395,732
---------- ----------
Total expenses 6,123,466 5,286,054
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Income (loss) before income taxes 22,237 (1,360,118)
Provision (benefit) for income taxes 8,450 (451,845)
---------- ----------
Net income (loss) $ 13,787 $(908,273)
========== ==========
Weighted average shares
outstanding-Basic 2,731,083 2,726,947
========== ==========
Net income (loss) per common share-Basic $ 0.01 $ (0.33)
========== ==========
Weighted average shares
outstanding-Dilutive 2,789,518 2,726,947
========== ==========
Net income (loss) per common share-Dilutive $ 0.01 $ (0.33)
========== ==========
</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 Six Months Ended June 30, 1998
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<CAPTION>
Additional
Common Stock Paid-in Accumulated
Shares Amount Capital Deficit
--------- ------- ---------- -----------
<S> <C> <C> <C> <C>
Balance, December 31, 1997 2,729,509 $ 2,730 $4,498,988 $(1,613,782)
Exercise of stock options 4,380 4 6,064 -
Stock issued under Employee
Stock Purchase Plan 2,068 2 5,220 -
Stock issued under Employee
Stock Bonus Plan 5,033 5 15,723 -
Net income - - - 13,787
--------- ------- ---------- -----------
Balance, June 30, 1998 2,740,990 $2,741 $4,525,995 $(1,599,995)
========= ======= ========== ===========
</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 Six Months Ended June 30, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
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<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 13,787 $ (908,273)
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization 502,187 395,732
Deferred income tax provision (benefit) 8,450 (451,845)
Decrease (increase) in accounts receivable (386,020) 592,918
Decrease (increase) in other receivables (2,520) 58,445
Decrease in inventory 1,280 16,821
Increase in prepaid expenses (71,195) (79,366)
Increase in other assets (31,206) (47,321)
Increase in accounts payable and
accrued liabilities 224,956 66,639
Increase in deferred revenue 18,433 35,728
---------- -----------
Net cash provided by (used in)operating activities 278,152 (320,522)
Cash flows from investing activities:
Capital expenditures (30,679) (326,322)
Capitalized expenditures for software
development (346,496) (271,190)
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Net cash used in investing activities (377,175) (597,512)
Cash flows from financing activities:
Decrease in book overdraft (23,619) (255,617)
Proceeds from long-term debt 2,740,116 392,000
Proceeds from exercise of stock options,
stock bonus and stock purchase plans 27,018 1,581
Payments of capital lease obligations (72,003) (65,457)
Payments of shareholder loans - (20,000)
Payments on long-term debt (2,476,920) (125,000)
---------- -----------
Net cash provided by (used in)
financing activities 194,592 (72,493)
---------- -----------
Net increase (decrease) in cash 95,569 (990,527)
Cash and cash equivalents at beginning of
period 80,769 1,821,014
---------- -----------
Cash and cash equivalents at end of period $ 176,338 $ 830,487
========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
APPLIED INTELLIGENCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 1998
NOTE 1. DESCRIPTION OF BUSINESS
Applied Intelligence Group, Inc. (the "Company") provides
business solutions through technology to the retail industry.
The Company's viaLink services combine Electronic Commerce and
leading edge Internet-based applications to provide consumer
product manufacturers, distributors, and retailers the capability
of doing business electronically with all of their trading
partners. The subscription-based viaLink service allows supply
chain participants to electronically send and receive product
cost and promotional information in a format that is compatible
with any party's system, regardless of their technological
sophistication and at a fraction of the cost of traditional EDI.
The Company also provides a diversified range of management
consulting and systems integration services to the retail supply
chain. Through the Company's wholly-owned subsidiary, ijob,
Inc., the Company provides a human resource recruiting
application accessible through either the Internet or by
telephone. 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
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, 1998.
Operating results for the six month period ended June 30, 1998
are not necessarily indicative of the results that may be
expected for the full year ended December 31, 1998.
NOTE 3. RECONCILIATION FOR BASIC AND DILUTIVE EARNINGS PER SHARE ("EPS")
<TABLE>
<CAPTION>
For the Six Months Ended 6/30/98
Income Shares Per Share
(Numerator) (Denominator) Amount
--------- ----------- ---------
<S> <C> <C> <C>
Basic EPS
Income available to common
shareholders $13,787 2,731,083 $0.01
=====
Effect of Dilutive Securities - 58,435
------- ---------
Dilutive EPS
Income available to common
shareholders plus assumed
conversions $13,787 2,789,518 $0.01
======= ========= =====
</TABLE>
<PAGE>
Options to purchase 462,500 shares of common stock at an average
exercise price of $4.75 per share were outstanding during the
first six months of 1998 but were not included in the computation
of diluted EPS because the options' exercise prices were greater
than the average market price of the common shares. The options,
which expire on November 30, 2001 and March 1, 2007 were still
outstanding at the end of the quarter ended June 30, 1998. In
addition, options to purchase 666,197 and 578,697 shares of
common stock at a weighted average price of $4.07 and $4.21 were
outstanding during the three month period ended June 30, 1998 and
during the three month and six month periods ended June 30, 1997,
respectively, but were not included in the computation of diluted
EPS because the effect of these outstanding options would be
antidilutive. These options expire June 12, 1999 through March
1, 2007.
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 Report constitute "forward-
looking statements" as defined in the Private Securities
Litigation Reform Act of 1995 ("Act"). Any
forward-looking statements are made by the Company in good faith,
pursuant to the safe-harbor provisions of the Act. As with any
future event, there can be no assurance that the events described
in forward-looking statements made in this Report will occur or
that the results of future events will not vary materially from
those described in the forward-looking statements. These forward-
looking statements reflect management's current views and
projections regarding economic conditions, industry environments
and Company performance. 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, sales performance, expense
levels, interest rates, changes in the Company's financial
condition, availability of capital sufficient to support the
Company's level of activity, delays in implementing further
enhancements to the Company's viaLink and ijob services, 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 Report, 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.
OVERVIEW
The Company is engaged in the business of selling computerized
information management systems and providing consulting and
network industry solutions services to retail companies and the
product suppliers of such retailers (i.e., manufacturers,
wholesalers and other distributors). The Company is currently
organized in two divisions. The Network Services Division offers
<PAGE>
subscription services through telecommunications (including
private networks and the World Wide Web of the Internet), which
include the Company's viaLink and ijob services, network-based
computer applications, and the production and operation of web
site hosting on the Company's computer systems. The Retail and
Store Systems Consulting Division provides management consulting,
computer system integration support services ("customer
support"), and markets software products and applications
("solutions"), including the Company's proprietary software
products, RETAIL SERVICES APPLICATION (RSA) and CHAINLINK, and
resells computer hardware and point-of-sale systems ("hardware
and product sales").
RESULTS OF OPERATIONS
REVENUES. Revenues increased $957,782 (46 percent) from
$2,089,517 for the quarter ended June 30, 1997 to revenues of
$3,047,299 for the quarter ended June 30, 1998. Revenues
increased $2,219,767 (57 percent) from $3,925,936 for the first
six months of 1997 to revenues of $6,145,703 for the first six
months of 1998. All categories of the Company's revenues
increased other than commissions. No commissions were earned on
referrals of certain hardware sales during the first six months
1998, as all hardware sales were made directly by the Company
rather than on a referral basis and directly through the vendor
to the customer.
Hardware and Product Sales. Hardware and product sales increased
$133,464 (25 percent) from sales of $544,524 in the second
quarter of 1997 to $677,988 in the second quarter of 1998.
Hardware and product sales increased $297,225 (38 percent) from
sales of $776,013 for the six months ended June 30, 1997 to
$1,073,238 for the same period in 1998. The increases for both
the quarter and the six month period were the result of two large
equipment sales totaling approximately $255,000 of which one was
made in the first quarter and one was made in the second quarter
of 1998. These sales were attributable to referrals from a large
retail software company, with whom the Company has an informal
agreement to serve as a preferred supplier of hardware to its
customers.
Solutions. Solutions revenues increased $122,221 (903 percent)
from revenues of $13,528 in the second quarter of 1997 to
$135,749 for the same period of 1998. Revenues for the first six
months of 1998 were $288,269, an increase of 232,637 (418
percent) from $55,632 for the same period of 1997. The increases
for the quarter and the six month period were principally due to
a sale of the Company's RSA software for approximately $155,000
in the first quarter of 1998 and the sale of additional RSA
software licenses to a current RSA user for $70,000 in the second
quarter of 1998.
Consulting and System Integration Fees. Consulting and System
Integration fees earned during the three months ended June 30,
1998 totaled $1,726,527 compared to $1,037,354 for the same
period in 1997, an increase of $689,173 (66 percent). Consulting
fees for the first six months of 1998 totaled $3,812,076 compared
to $2,277,922 for the same period in 1997, an increase of
$1,534,154 (67 percent). Beginning in the fourth quarter of 1997
the Company refocused its resources on the consulting and systems
integration area. In the first quarter of 1998 a Vice-President
of Sales and Marketing and an additional sales representative
were hired to focus primarily on sales in the consulting area.
The Company aggressively pursued new clients and projects and
assigned consulting personnel and programmers from internal
projects to consulting and systems integration projects. The
increase for both the quarter and the six month period were the
result of these efforts.
<PAGE>
Customer support. Customer support revenues increased $19,184
(11 percent) to $192,751 for the second quarter of 1998 from
revenues of $173,567 for the second quarter of 1997. Revenues
for the six months ended June 30, 1998 increased $72,673 (30
percent) to $318,009 from $245,336 for the six months ended June
30, 1997. The increases were due to additional customer support
contracts obtained throughout 1997 and in the first six months of
1998. The increase was also due to a rate increase upon renewal
of certain support contracts and higher levels of billings for
hours in excess of the standard contract levels.
Network services and applications. Revenues from the Company's
network services and network based computer applications were
$314,284 for the three months ended June 30, 1998 compared to
$248,408 for the same period in 1997, an increase of $65,876 (27
percent). Revenues for the six months ended June 30, 1998 were
$654,111 compared to $425,654 for the same period in 1997, an
increase of $228,457 (54 percent). The increases were
principally the result of an increase in ijob revenues
attributable to a major contract being in effect for a full six
months in 1998. Revenue for ijob increased $55,242 (34 percent)
from $161,258 for the second quarter of 1997 to $216,500 for the
second quarter of 1998, and increased $193,783 (83 percent) from
$233,258 for the first six months of 1997 to $427,041 for the
first six months of 1998. The remaining increases for both the
quarter and the six month period were attributable to an increase
in web site maintenance, hosting, and viaLink services. The
Company has and will continue to make significant expenditures
for investment and development of its network subscription
services in order to further develop a recurring base of
revenues.
Since the fourth quarter of 1997, a major customer of ijob has
provided approximately $70,000 in revenue per month. As of June
30, 1998, the Company made its final $70,000 billing in regard to
this contract for its ijob services, as this client did not renew
their contract. Minimal amounts of revenue will be earned from
this customer in the third quarter of 1998 and no revenues are
expected from this customer in the fourth quarter of 1998.
Although the Company has replaced a portion of the revenues lost
in connection with the major contract through new, but smaller
customers, and is currently negotiating with several major
customers for ijob services, the Company has not yet obtained
contracts to replace the lost revenues in connection with the
major customer, and there can be no assurance that these revenues
will be replaced in the near term.
As of August 6, 1998, ijob has closed its two satellite offices
in Oklahoma City as a result of the major contract that was not
renewed. Using the two satellite offices the employees of ijob
were running the application for the major customer as an
outsource function. They performed the recruiting, screening,
evaluation and tracking functions of the their job applicants.
As a result of the work done with this major client and further
market research ijob has shifted it focus from this type of
outsource service to a license arrangement whereby the customer
purchases the ijob application, the "ijob inSource Human Resource
Hiring Suite", and the customer performs these functions. As a
result of this shift ijob has moved from a universal database
application to a proprietary searchable database.
DIRECT COST OF SALES. Direct cost of sales, which consists of
hardware and certain software purchases for resale, and costs
associated with the Company's proprietary software products,
increased $101,496 (20 percent) to $604,046 in the second quarter
of 1998 from $502,550 in the second quarter of 1997. Direct cost
of sales for the first six months ended June 30, 1998 increased
$290,069 (42 percent) to $981,114 from $691,045 for the first six
months of 1997. The increase was attributable to increased
hardware and product sales and solutions revenues.
<PAGE>
SALARIES AND BENEFITS. Salaries, wages, taxes and related
benefits, and contract labor expenses totaled $1,605,830 for the
three months ended June 30, 1998 compared to $1,540,677 for the
same period in 1997, an increase of $65,153 (four percent). For
the six months ended June 30, 1998 these expenses increased
$477,966 (16 percent) to $3,393,260 from $2,915,294 for the six
months ended June 30, 1997.
During the first six months of 1998, the Company utilized
contract programmers for client engagements to a greater extent
than in the same period in 1997 to meet the skill demands and
workload of clients' projects. Contract labor expenses totaled
$188,886 during the three months ended June 30, 1998 compared to
a total of $158,890 during the three months ended June 30, 1997.
For the six months ended June 30, 1998 contract labor totaled
$535,550 compared to $280,666 for the six months ended June 30,
1997.
Direct payroll costs of salaries and wages increased one percent to
$1,414,103 for the three months ended June 30, 1998 from
$1,395,081 for the same three month period in 1997. Direct
payroll cost increased to $2,862,100 for the six months ended
June 30, 1998 from $2,605,347. This increase was in part
associated with the start-up of ijob, which was not fully staffed
until June 1997. During the six months ended June 30, 1997, the
Company had a total average of 124 full time employees, compared
to a total average of 123 for the Company during the six months
ended June 30, 1998
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general
and administrative expenses decreased $79,339 (12 percent) to
$587,652 for the three months ended June 30, 1998 from $666,991
for the three months ended June 30, 1997. For the six months
ended June 30, 1998 selling, general and administrative expenses
decreased $107,630 (nine percent) to $1,146,251 from $1,253,881
for the six months ended June 30, 1997.
Occupancy expenses, including rent expense, utilities, equipment
rentals and leases, increased $23,918 (24 percent) to $125,274
for the second quarter of 1998 from $101,356 for the same period
in 1997. Occupancy expenses for the first six months of 1998
increased $46,803 (23 percent) to $247,613 from $200,810 for the
same period in 1997. The increases for both the quarter and the
first six months were primarily due to increased expenses for an
equipment lease entered into in the third quarter of 1997. The
lease provided new equipment for staff growth and production and
development equipment for the continued development of viaLink.
As of August 6, 1998, ijob, Inc. has closed its two satellite
offices in Oklahoma City. Management does not anticipate
reopening these or other satellite offices. See "-Network
services and applications", above.
General insurance increased $15,644 (256 percent) from $6,118 for
the second quarter of 1997 to $21,762 for the same period in 1998
and increased $43,148 (554 percent) from $7,792 for the first six
months of 1997 to $50,940 for the same period in 1998. These
increases were primarily due to additional insurance coverage
obtained by the Company. Employee practice liability insurance
was obtained for ijob, Inc. beginning in the third quarter of
1997 due to the nature of the services of ijob, Inc. In
addition, directors and officers insurance was obtained for the
Company due to the addition of two independent members to the
Board of Directors who began serving in December 1997 and January
1998.
<PAGE>
Telecommunications expense increased $16,381 (29 percent) from
$57,069 for the three months ended June 30, 1998 to $73,450 in
the same period of 1998. For the six months ended June 30, 1998
these expenses increased $47,674 (47 percent) to $148,836 from
$101,162 for the same period in 1997. These increases were due
to the expansion of the Company's communication systems for
viaLink, ijob and web site hosting services and greater long
distance usage due to the increased marketing activities of the
Company.
Supplies and resources, which consists of office supplies,
miscellaneous hardware and software expenses, printing and copy
charges, memberships and subscriptions, decreased $42,083 (58
percent) from $72,000 for the second quarter of 1997 to $29,917
for the second quarter of 1998. These expenses decreased $91,652
(64 percent) from $142,837 for the six months ended June 30, 1997
to $51,185 for the six months ended June 30, 1998. In the first
and second quarter of 1997 approximately $19,000 of the supplies
and resources costs were associated with the start-up of ijob,
Inc., these non-recurring costs were not incurred during the
first and second quarter of 1998, which, contributed to the
overall decrease in supplies and resources. The remaining
decrease was the result of cost reduction and control measures
implemented by the Company.
Professional fees decreased $82,064 (52 percent) to $76,169 for
the three months ended June 30, 1998, compared to $158,233 for
the three months ended June 30, 1997. Professional fees
decreased $108,987 (38 percent) to $175,023 for the six months
ended June 30, 1998, compared to $284,010 for the six months
ended June 30, 1997. The decrease was primarily a result of the
decrease in professional services used by ijob, Inc. in the first
six months of 1998 compared to the first quarter of 1997, when
legal and consultant services of approximately $98,000 were used
to assist in the development and start-up of ijob, Inc.
NET INTEREST EXPENSE. Net interest expense increased $40,001
(163 percent) to $64,538 for the three months ended June 30, 1998
from $24,537 for the same period in 1997. Net interest expense
increased $70,552 (234 percent) to $100,654 for the six months
ended June 30, 1998 from $30,102 for the same period in 1997.
Proceeds of the Company's initial public offering in November
1996 were used to pay off the Company's total outstanding bank
debt at that time. There were no outstanding borrowings on the
bank line-of-credit at the end of the first quarter of 1997.
During the second, third, and fourth quarter of 1997, certain
borrowings were made under the Company's bank line-of-credit and
during the first quarter of 1998, the Company completed a new
credit facility with a commercial lender that replaced and
increased the working line-of-credit with the bank. As of June
30, 1998, the new credit facility had an outstanding balance of
$753,196. Average total outstanding debt, including shareholder
loans and capital leases, during the first six months of 1998 was
$1,283,000 compared to average total outstanding debt in the
first six months of 1997 of $816,000.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization
expense totaled $253,735 for the second quarter ended June 30,
1998 compared to $216,210 for the same quarter ended 1997, an
increase of $37,525 (17 percent). Depreciation and amortization
expense totaled $502,187 for the six months ended June 30, 1998
compared to $395,732 for the same period ended June 30, 1997, an
increase of $106,455 (27 percent). The increase was due
primarily to total capital asset expenditures made during 1997
totaling $332,987, and being depreciated during the first six
months of 1998. In 1998, the Company has reduced its capital
expenditures to only absolutely necessary items, and totaled
$30,679 for the six months ended June 30, 1998. Software
development costs capitalized throughout 1997 totaled $751,158,
and are being depreciated during the first six months of 1998.
During the six months ended June 30, 1998, the Company
capitalized $346,496 of software development costs. As of August
11, 1998, the Company has no major capital commitments, and will
continue to only make capital additions on a specific and
necessary basis.
<PAGE>
TAX PROVISION (BENEFIT). SFAS 109, "Accounting for Income
Taxes," requires, among other things, the separate recognition,
measured at currently enacted tax rates, of deferred tax assets
and deferred tax liabilities for the tax effect of temporary
differences between the financial reporting and tax reporting
bases of assets and liabilities, and net operating loss and tax
credit carryforwards for tax purposes. A valuation allowance
must be established for deferred tax assets if it is "more
likely than not" that all or a portion will not be realized.
The Company recorded a tax benefit of $26,031 related to the pre-
tax loss of $68,502 for the quarter ended June 30, 1998 and a tax
provision of $8,450 related to the pre-tax income of $22,237 for
the six months ended June 30, 1998. As of June 30, 1998 the
Company had a cumulative net deferred tax asset of $1,040,990.
Management believes it is more likely than not that net deferred
tax assets will be realized based upon expected future taxable
income and therefore a valuation allowance has not been provided.
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.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued a
Statement of Financial Accounting Standards No. 131, "Disclosure
about Segments of an Enterprise and Related Information", which
establishes standards for reporting information about operating
segments in annual and interim financial statements issued to the
shareholders. This Statement also establishes standards for
related disclosures about products and services, geographic
areas, and major customers. The Company plans to adopt this
Statement in the fourth quarter of 1998.
READINESS FOR YEAR 2000 ISSUES
In 1997, the Company initiated a complete risk evaluation and
assessment study to determine the preparedness level of the
Company, customers, vendors, and other service providers for the
Year 2000 and the subsequent impact on the Company. The review
will be completed in 1998 and based upon the results of the
initial assessment, ongoing Year 2000 impact analysis and risk
assessment will continue as management deems appropriate. The
<PAGE>
Company expects to incur internal staff costs as well as
consulting and other expenses related to the risk evaluation and
assessment project. Although cost estimates for the project are
not yet available, based on its initial assessment, management
does not anticipate that the remaining costs associated with
assuring that its internal systems will be Year 2000 compliant
will be material to its business, operations or financial
condition.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1998 the Company had cash and cash equivalents of
$176,338, and working capital of $37,116, with a working capital
ratio of 1.02 to 1, as compared to a working capital deficit of
$331,366 as of December 31, 1997. During the first quarter of
1998, the Company completed a new credit facility with a
commercial lender that replaced and increased the Company's
former line-of-credit with a bank. Under the new credit facility
the Company may borrow up to $1,000,000; however, amounts
borrowed are limited to 75% of the Company's accounts receivable
as defined by the new facility. The facility is collateralized
by accounts receivable and all tangible assets of the Company and
is guaranteed by three principal officers of the Company. As of
June 30, 1998, the Company had borrowed $753,196 under the new
credit facility, bearing interest at 11.25%. In addition, during
the first quarter of 1998 the Company obtained a credit facility
including a $1,000,000 large sale financing option with IBM
Credit Corp., whereby the Company may finance directly with IBM
Credit Corp. large sales of hardware and software. As of June
30, 1998, there was $142,172 financed under the IBM Credit Corp.
arrangement, which was included in accounts payable.
As of August 11, 1998, the working capital line-of-credit has
been extended to July 15, 2000 from the original due date of July
1999 under essentially the same terms and conditions. As of
August 11, 1998, the Company had borrowed $649,100 under its
working capital line-of-credit and had an unused line-of-credit
of $350,000; however, under the terms of the borrowing base the
actual availability was $88,535.
During the six months ended June 30, 1998, net cash increased a
total of $95,569. Net cash provided by operating activities for
the first six months of 1998 was $278,152 compared to net cash
used in the first six months of 1997 of $320,522. This increase
in cash was due the improved operating income levels during the
six month periods ending June 30, 1998 compared to 1997. Income
of $13,787 for the six months ended June 30, 1998 was recorded
compared to a loss of $908,273 for the same period of 1997.
Accounts receivable increased a net $386,020 during the six
months ended June 30, 1998, from $1,337,332 at December 31, 1997,
to $1,723,342 at June 30, 1998, primarily due to increased
revenues for the period. Accounts payable and accrued
liabilities increased a net of $224,956 primarily due to
liabilities associated with the purchase of hardware for resale.
During the six months ended June 30, 1998, the Company expended
$30,679 for investing activities in various fixed assets and
$346,496 for software development costs of its proprietary
software products, compared to total expenditures of $326,322 and
$271,190, respectively, for the same items in the six months
ended June 30, 1997. As of August 11, 1998, the Company had no
material firm cash commitments for capital expenditures, nor does
the Company expect to incur any material cash commitments for
capital expenditures for the remainder of 1998, other than
capitalized internal staff costs for software development of RSA,
Chainlink, ijob and viaLink, and only as those resources are
available for internal development.
<PAGE>
During the three months ended June 30, 1998, financing activities
provided net cash of $194,592, which was mainly provided by net
borrowings under the new credit facility of $263,196. Payments on
the Company's capital lease obligations of $72,003 and a decrease
in the book overdraft of $23,619 offset the borrowings. During
the six months ended June 30, 1997 the Company used net cash of
$72,493 in financing activities.
The Company anticipates that its operations and strategies will
be funded through cash and cash equivalents, operating cash flows
generated from the Company's continued focus on its consulting
services engagements, the new line-of-credit facility of
$1,000,000, capital lease sources and the financing arrangement
with IBM Credit Corp. The Company believes that these sources of
funds will be sufficient to satisfy the Company's operating and
capital requirements for at least 12 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.
MANAGEMENT'S PLANS FOR IMPROVED OPERATIONS
The Company operated in 1997 without the services of its Vice
President of Sales and Marketing who left the Company in late
1996. In January 1998, Mr. Larry R. Davenport joined the Company
as Vice President of Sales and Marketing. With his extensive
experience, the Company expects to improve its sales effort in
1998. Two additional full time sales staff have also been added
during the first six months of 1998. Also the Company has
entered into an informal relationship with a large retail
software company, whereby the Company serves as a preferred
supplier of hardware to its customers and has obtained consulting
engagements to install the hardware and provide consulting
services to its customers. In addition, in the first quarter of
1998 the Company obtained a $1,000,000 credit facility to replace
its existing bank facility, which was to expire in July 1999.
Effective August 11, 1998, this credit facility was extended to
January 2000. Further, in support of the potential hardware
sales discussed above, the Company obtained a large sale
financing facility of $1,000,000 with IBM Credit Corp., whereby
the Company may finance directly with IBM Credit Corp. large
sales of hardware or software. There can be no assurance that
increased revenues and the return to profitability will continue
to result from the above events.
Continued improvements in revenue and operating results for the
remainder of 1998 are significantly dependent upon many factors,
including but not limited to successfully replacing completed
contracts with new consulting and systems integration services
engagements, completing current projects timely and within
budget, creating new sales for the Company's proprietary software
products (RSA and Chainlink), controlling costs and expenses,
continuing to have sources of capital at levels equal to the
current levels, and, continued investment, development and
implementation of the Company's network services product,
viaLink, in new and existing locations.
<PAGE>
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
Robert Barcum and Robert Baker were elected as Class II directors
to the Company's Board of Directors to hold office for a three
year term expiring in 2001 or until a successor is duly elected
and qualified. The other directors whose terms of office
continued after the meeting, are Russell Reinhardt, Lewis
Kilbourne, Ph.D., and Jimmy Wright. In connection with the
election of the directors, and other matter submitted to a vote
of security holders the vote was:
NOMINEE FOR AGAINST ABSTAINED NON-VOTES
Robert Barcum 2,509,204 4,500 6,900 208,944
Bob Baker 2,501,404 11,300 6,900 208,944
RATIFICATION OF THE APPOINTMENT OF PRICEWATERHOUSECOOPERS LLP
"FORMERLY COOPERS & LYBRAND L.L.P." AS AUDITORS FOR THE
FISCAL YEAR 1998
FOR AGAINST ABSTAINED NON-VOTES
2,509,948 3,000 7,656 208,944
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
None
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
APPLIED INTELLIGENCE GROUP, INC.
By: /s/ ROBERT L. BARCUM
Robert L. Barcum
Chairman of the Board
President and Chief Executive
Officer
August 11, 1998
By: /s/ JOHN M.DUCK
John M. Duck
Vice President and Chief
Financial Officer
August 11, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION FROM THE BALANCE SHEET
FOR JUNE 30, 1998 AND THE STATEMENT OF OPERATIONS FOR THE THREE MONTHS AND SIX
MONTHS ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-END> JUN-30-1998 JUN-30-1998
<CASH> 176,338 176,338
<SECURITIES> 0 0
<RECEIVABLES> 1,727,055 1,727,055
<ALLOWANCES> 3,713 3,713
<INVENTORY> 7,427 7,427
<CURRENT-ASSETS> 2,121,851 2,121,851
<PP&E> 3,256,638 3,256,638
<DEPRECIATION> 2,021,030 2,021,030
<TOTAL-ASSETS> 6,255,921 6,255,921
<CURRENT-LIABILITIES> 2,084,735 2,084,735
<BONDS> 0 0
0 0
0 0
<COMMON> 2,741 2,741
<OTHER-SE> 2,926,000 2,926,000
<TOTAL-LIABILITY-AND-EQUITY> 6,255,921 6,255,921
<SALES> 0 0
<TOTAL-REVENUES> 3,047,299 6,145,703
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 2,837,528 5,520,625
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 64,538 100,654
<INCOME-PRETAX> (68,502) 22,237
<INCOME-TAX> (26,031) 8,450
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (42,471) 13,787
<EPS-PRIMARY> (.02) .01
<EPS-DILUTED> (.02) .01
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