<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarter Ended September 30, 1999
or
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from to
------- -------
Commission file number 0-25897
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---------------------------
ADVANCED SYSTEMS INTERNATIONAL, INC.
(Exact name of small business Issuer as specified in its charter)
NEVADA 13-3953047
(State of other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
25300 Telegraph Rd., Suite 455, Southfield, MI 48034
(Address of principal executive offices)
(248) 263-0000
(Issuer's telephone number)
-----------------------------
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No .
Shares of the Registrant's Common Stock, par value $.00l per share, outstanding
as of September 30, 1999: 11,700,579.
<PAGE> 2
ADVANCED SYSTEMS INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
The following unaudited consolidated financial statements have been prepared in
accordance with generally accepted principles for interim financial information
and with the instruction to Form 10QSB and Rule 10-01 of Regulation S-X.
Accordingly, they do not contain all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting solely of normal
recurring adjustments) considered necessary for a fair presentation of the
financial position, results of operations, stockholders' equity and cash flows
of the Company have been included. For further information, please refer to
the consolidated financial statements and footnotes thereto included in the
Company's Registration Statement on Form SB-2, filed November 19, 1999. The
results of operations for the nine month period ended September 30, 1999 are
not necessarily indicative of the results to be expected for the full year.
<TABLE>
<CAPTION>
As of Sept. 30, As of December 31,
1999 1998
---------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 65,773 $ 225,491
Accounts Receivable (Net of Allowance of $8,700 at Sept. 30 and Dec. 31.) 2,159,410 494,063
Inventory 31,836 23,642
Prepaid Expenses 86,266 9,169
---------------------------------------
TOTAL CURRENT ASSETS 2,343,285 752,365
PROPERTY & EQUIPMENT - AT COST
Computer Equipment 252,045 185,148
Office Equipment 80,901 68,126
Leasehold Improvements 53,153 27,477
---------------------------------------
386,099 280,751
Less Accumulated Depreciation and Amortization 148,917 83,139
---------------------------------------
TOTAL PROPERTY & EQUIPMENT 237,182 197,612
OTHER ASSETS
Deposits 32,836 62,292
Software Development Costs, less $56,700 and $0 accumulated amortization at Sept. 30,
1999, and December 31, 1998, respectively. 299,019 296,195
Organization Costs, less accumulated amortization of $27,228 and
$21,628 at Sept. 30, 1999 and December 31, 1998, respectively. 9,316 15,675
---------------------------------------
TOTAL ASSETS $ 2,921,638 $ 1,324,139
=======================================
LIABILITIES & CAPITAL
CURRENT LIABILITIES
Current Maturities of Long-Term Obligations $ 262,666 $ 328,013
Current Maturities of Long-Term Obligations To Related Parties 88,000 88,000
Customer Deposits 401,159 96,638
Accounts Payable 812,167 356,497
Accrued Liabilities
Payroll 197,481 235,615
Payroll Taxes 4,609 24,840
Interest 6,233 3,851
Other 318,191 -
---------------------------------------
526,514 264,306
TOTAL CURRENT LIABILITIES 2,090,506 1,133,454
LONG TERM OBLIGATIONS, LESS CURRENT MATURITIES 6,064 319,922
LONG TERM OBLIGATIONS TO RELATED PARTIES, LESS CURRENT MATURITIES 13,322 62,822
STOCKHOLDERS' DEFICIT
Preferred Stock - $.001 Par Value; authorized, 10,000,000
shares; none issued and outstanding - -
Common Stock - $.001 par value; authorized, 20,000,000
shares; 11,700,579 and 11,157,672 shares issued and outstanding
at September 30, 1999 and December 31, 1998, respectively. 11,701 11,158
Additional paid-in capital 5,657,120 5,356,775
Accumulated Deficit (4,857,075) (5,559,992)
---------------------------------------
TOTAL LIABILITIES & STOCKHOLDERS' DEFICIT $ 2,921,638 $ 1,324,139
=======================================
</TABLE>
<PAGE> 3
ADVANCED SYSTEMS INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY/(DEFICIT)
<TABLE>
<CAPTION>
Additional
Common Paid-In Accumulated
Stock Capital Deficit Total
------------ ----------------- ----------------- ---------------
<S> <C> <C> <C> <C>
Balance at January 1, 1997 $ 4,907 $ 1,569,974 $(2,174,825) $ (599,944)
Issuance of 2,980,000 shares of stock
in connection with reverse acquisition and
recapitalization (Note A) 2,980 997,020 - 1,000,000
Issuance of 250,000 Shares of Stock 250 299,750 - 300,000
Net Loss - - (1,895,492) (1,895,492)
------------ ----------------- ----------------- ---------------
Balance At December 31, 1997 8,137 2,866,744 (4,070,317) (1,195,436)
Issuance of 2,194,082 Shares of Stock 2,194 1,888,875 - 1,891,069
Conversion of Debentures and Interest to
899,840 shares of stock 900 674,000 - 674,900
Foreclosure on Loan Receivable -- stockholder
(72,917 shares) (73) (72,844) (72,917)
Net Loss - - (1,489,675) (1,489,675)
------------ ----------------- ----------------- ---------------
Balance At December 31, 1998 11,158 5,356,775 (5,559,992) (192,059)
Issuance of 542,907 shares of stock 543 300,345 - 300,888
Net Earnings - - 702,917 702,917
------------ ----------------- ----------------- ---------------
Balance at Sept. 30, 1999 (Unaudited) 11,701 5,657,120 (4,857,075) 811,746
</TABLE>
<PAGE> 4
ADVANCED SYSTEMS INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
Sept 30, 1999 Sept 30, 1998
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Earnings/(Loss) $ 702,917 $ (479,205)
Adjustments to Reconcile net gain to net cash used in operating activities
Depreciation and Amortization 128,837 49,464
Change in Assets & Liabilities
Increase in Accounts Receivable (1,654,772) (702,659)
Increase in Inventories (8,193) (24,352)
(Increase) Decrease in Deposits 29,456 (49,387)
(Increase) Decrease in Prepaid Expenses (77,097) 20,364
(Increase) Decrease in Software Development Costs (59,524) 760
Increase (Decrease) in Accounts Payable 455,672 (39,257)
Increase in Accrued Liabilities 266,802 214,938
Increase in Customer Deposits 304,521 169,385
----------- -----------
Net Cash Provided (Used) By Operating Activities 88,619 (839,949)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of Property and Equipment (115,923) (136,411)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from Issuance of Obligations 250,000 13,610
Repayment of Obligations (626,450) (12,978)
Proceeds from Issuance of Obligations to Related Parties 170,000 100,000
Proceeds from Issuance of Common Stock 293,536 1,086,172
Repayments of Related Party Obligations (219,500) (50,233)
----------- -----------
Net Cash Provided (Used) by Financing Activities (132,414) 1,136,571
----------- -----------
NET INCREASE (DECREASE) IN CASH (159,718) 160,211
CASH AT JANUARY 1 225,491 68,132
----------- -----------
CASH AT SEPT 30 $ 65,773 $ 228,343
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash Paid During the Period For Interest
</TABLE>
<PAGE> 5
ADVANCED SYSTEMS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Sept 30, Nine Months Ended Sept 30,
1999 1998 1999 1998
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales $ 2,132,808 $ 867,296 $ 6,097,443 $ 1,828,609
Cost of Sales 298,212 34,795 695,046 109,996
--------------------------------------------------------------------
Gross Profit 1,834,596 832,501 5,402,397 1,718,613
Operating Expenses
Sales & Marketing 598,431 303,898 1,536,827 635,345
Research & Development 333,754 124,451 754,765 228,885
General & Administrative ** 853,541 494,724 2,282,548 1,248,960
--------------------------------------------------------------------
Gain/(Loss) From Operations 48,870 (90,572) 828,257 (394,577)
Other Expense
Interest Expense 27,646 25,182 125,340 84,628
Net Earnings/(Loss) $ 21,224 $ (115,754) $ 702,917 (479,205)
====================================================================
Earnings/(Loss) Per Share - basic $ - $ (0.01) $ 0.06 $ (0.06)
====================================================================
Earnings/(Loss) Per Share - diluted $ - $ (0.01) $ 0.04 $ (0.06)
====================================================================
</TABLE>
** General and Administrative Costs Include Implementation/Customer Support
Costs
<PAGE> 6
MANAGEMENT'S DISCUSSION AND ANALYSIS AND RESULTS OF OPERATIONS
SUMMARY
The information in this section should be read together with the
consolidated, unaudited, interim financial statements that are included
elsewhere in this Form 10-QSB. Those interim financial statements include all
adjustments, which we have deemed necessary in order to make them not
misleading.
Advanced Systems International, Inc. (AdSys) has attained significant
growth, as well as profitability, for the nine-month period ended September 30,
1999. AdSys anticipates continued positive earnings for the remainder of 1999
resulting from installations at several Fortune 1000 companies, in industries
such as automotive supply, food processing, entertainment, furniture
manufacturing, paper processing and other manufacturing sectors.
We also are working with other partners to locate, attract, and serve
customers within our market niche - the Fortune 1000.
We believe the non-proprietary "Distributed Transaction Processing"
sector of the "middleware" industry is in its early stages and is currently
experiencing high growth. We are experiencing successful entrance in this
market, enhancing long-term growth potential by providing two separate but
compatible software products, ATServer and ATLink. ATServer is a registered
trademark of AdSys; we also claim common-law and pending trademark rights in
ATLink.
RESULTS OF OPERATIONS - RESULTS OF NINE MONTH PERIODS ENDED SEPTEMBER 30, 1999
AND SEPTEMBER 30, 1998
REVENUES
AdSys realized net earnings of $702,917 for the first nine months of
1999, as compared with a net loss of $479,205 for the nine month period
ended September 30, 1998. This difference is largely attributable to a
significant increase in sales to $6,097,443 in the first nine months of
1999, from $1,828,609 for the first nine months of 1998. The growth in
sales reflects our continued expansion of our ATServer customer list,
as well as further sales penetration at existing client sites. Revenue
for this period was derived primarily from sales of ATServer software,
hardware, and related implementation and maintenance, although we have
expanded in the implementation of our first ATLink client to a second
location in the third quarter of 1999, as well as retaining the
Company's second ATLink Customer.
OPERATING EXPENSES
Operating expenses increased dramatically in the first nine months of
1999, as compared with the nine-month period ended September 30, 1998.
This increase is primarily due to growth in number of employees and
increased sales, and is reflected in increases in compensation and
related benefits, which increased to $2,745,880 for the nine month
period ended September 30, 1999, from $1,221,497 for the nine month
period ended September 30, 1998. The Company also experienced an
increase in Cost of Goods Sold, primarily composed of costs of
reselling hardware, of $585,050 from $109,996 for the nine months ended
September 30, 1998 to $695,046 for the nine months ended September 30,
1999. Also, the Company has incurred greater travel expense, which
increased to $259,018 for the nine month period ended September 30,
1999, from $109,867 for the nine month period ended September 30, 1998.
AdSys also incurred increased legal and accounting expenses of $219,958
for the nine month period ended September 30, 1999, as compared with
$58,522 for the nine month period ended September 30, 1998, a
significant portion of which was preparation for the requirements of
being a public company subject to reporting requirements. As a result
of our expansion and occupation of new office space, premises-related
costs were $288,410 for the nine-month period ended September 30, 1999,
as compared with $85,383 for the nine month period ended September 30,
1998. Consulting costs, relating to development efforts, recruiting of
professionals, and implementation support, rose for the nine months
ended September 30, 1999 by $165,591, from
<PAGE> 7
$180,266 for the nine month period ended September 30, 1998 to $345,857
for the same period in 1999.
Sales and Marketing. Sales and marketing expenses increased to
$1,536,827 for the nine-month period ended September 30, 1999, from
$635,345 for the nine month period ended September 30, 1998. The
increase was primarily attributable to AdSys' hiring of additional
sales personnel, which increased sales and marketing expenses by
$281,923, and payment of larger commissions in connection with higher
sales revenue and more clients, which increased sales and marketing
expenses by $292,834. Costs of traveling increased to $135,349 for the
nine months ended September 30, 1999 from $21,467 for the nine months
ended September 30, 1998, an increase of $113,382.
Research and Development. Research and development expenses
increased to $754,765 for the nine-month period ended September 30,
1999, from $228,885 for the nine month period ended September 30, 1998.
The increase is chiefly attributable to an expansion of our development
team, whose work focuses on enhancing the ATServer, LABORVIEW.com, and
ATLink products, which accounted for an increase of $242,248 in
research and development expenses. AdSys also increased its usage of
outside consultants during the nine month period ended September 30,
1999, which resulted in an increase of $201,522 in research and
development expenses.
General and Administrative. General and administrative
expenses increased to $2,282,548 for the nine-month period ended
September 30, 1999, from $1,248,960 for the nine month period ended
September 30, 1998. This increase was primarily due to a greater number
of employees, which resulted in a $736,165 increase to general and
administrative expenses. The increase is also due to larger accounting
and legal expenses of $166,436 for the nine months ended September 30,
1999, a significant amount which was due to preparation for and
implementation of being a reporting public company.
LIQUIDITY AND CAPITAL RESOURCES
We have a line of credit with a commercial bank for borrowing against
our accounts receivable, to address liquidity needs pending customer payments.
The maximum currently available to us under this arrangement, in which we are
required to pay the bank a fee of two percent of each total invoice against
which we borrow is $1.8 million. As of November 1, 1999, we had drawn a balance
of approximately $1.4 million under this facility. We also borrowed $250,000
from the same bank on a one-year term loan, with interest accruing at 1.5% above
the bank's index rate (yielding a rate of 9.75% as at September 30, 1999). These
financing arrangements are terminable on 60 days written notice. Using proceeds
from these arrangements, we retired our previous outstanding debt of
approximately $570,000 with a prior lender.
During the second quarter of 1999, we also established an equipment
leasing relationship with Primex, a private lending company. As of June 30,
1999, we had leased equipment with an outstanding balance of $42,000 owing to
Primex.
In November 1999, we entered into commitments for a 90-day financing
arrangement to borrow a total of $500,000 from private investors, who will
receive a 5% fee and monthly interest payments of 12%, as well as warrants
to acquire a total of 150,000 shares of AdSys common stock at $1.00 per share.
These funds will be used for working capital, and the loan will be repaid
without penalty upon the consummation of our planned $3.0 million term loan, as
described below.
In November 1999, we also agreed to terms for a subordinated
secured financing arrangement with an institutional lender, under which we
anticipate borrowing $3.0 million for a three year term, with a fixed interest
rate of 11.5%. Interest payments will be made monthly, and the principal will
be due in a lump sum at the end of the term. We may prepay this loan without
penalty. The lender will also receive warrants to acquire a total of 1.5 million
shares of AdSys common stock, exercisable over a three year period, at exercise
prices ranging from $1.00 to $2.25 per share. Consummation of this loan is
subject to satisfaction of certain customary conditions such as lender due
<PAGE> 8
diligence. The proceeds of this loan will be used to repay the $500,000
short-term loan described above, and for working capital.
Although we believe that operations, together with the financing
described above, will yield sufficient liquidity, no assurance can be given that
additional sources of capital will not be required. The Company would consider
working with the equity markets based on an acceptable strike price and certain
business conditions. Circumstances in which we would consider raising additional
capital include a desire for a stronger capital base, investment in product
development, acquisitions of companies with synergistic value, resource
procurement based on a definable implementation schedule or backlog, and/or
office space expansion. The extent to which such additional financing is
available will affect the level to which AdSys pursues these discretionary
growth actions.
<PAGE> 9
PART II - OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27. Financial Data Schedule
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Advanced Systems International, Inc.
(the "Registrant")
Date: November 22, 1999 /s/ Robert C. DeMerell
------------------------------------
Robert C. DeMerell
Chief Financial Officer (Principal
Financial and Accounting Officer)
<PAGE> 10
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JUL-01-1999 JUL-01-1998
<PERIOD-END> SEP-30-1999 SEP-30-1998
<CASH> 65,773 228,343
<SECURITIES> 0 0
<RECEIVABLES> 2,168,110 1,258,720
<ALLOWANCES> 8,700 8,700
<INVENTORY> 31,836 38,723
<CURRENT-ASSETS> 2,343,285 1,531,818
<PP&E> 386,099 239,128
<DEPRECIATION> 148,917 63,993
<TOTAL-ASSETS> 2,921,638 1,798,719
<CURRENT-LIABILITIES> 2,090,506 1,336,928
<BONDS> 0 0
0 0
0 0
<COMMON> 11,701 9,250
<OTHER-SE> 788,344 (204,141)
<TOTAL-LIABILITY-AND-EQUITY> 2,921,638 1,798,719
<SALES> 2,132,808 867,296
<TOTAL-REVENUES> 2,132,808 867,296
<CGS> 298,212 34,795
<TOTAL-COSTS> 1,785,726 923,073
<OTHER-EXPENSES> 27,646 25,182
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 27,646 25,182
<INCOME-PRETAX> 21,224 (115,754)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 21,224 (115,754)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 21,224 (115,754)
<EPS-BASIC> 0 (0.01)
<EPS-DILUTED> 0 (0.01)
</TABLE>
