SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to _________________ to _________________
Commission File Number 0-10329
AW COMPUTER SYSTEMS, INC.
(Name of Small Business Issuer in its Charter)
New Jersey 22-1991981
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
9000A Commerce Parkway, Mt. Laurel, New Jersey 08054
(Address of principal executive offices) (Zip Code)
609-234-3939
Issuer's telephone number, including area code
Securities registered pursuant to Section 12(b) of the Exchange Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Class A Common Shares, par value $.01 per share
(Title of Class)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past twelve 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 ninety days. Yes X
No ____
Check if disclosure of delinquent filers pursuant to Item 405 of Regulation S-B
is not contained in this form, and no disclosure will be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ X ]
Check whether the issuer has filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes No N/A X
Issuer's revenues for its most recent fiscal year: $1,151,256
As of April 9, 1998, the aggregate market value (based on the average closing
bid and asked quotations) of the 5,379,733 Class A Common Shares held by
non-affiliates of the Company was approximately $215,000 and a total of
6,670,567 Class A Common Shares of the Company were issued and outstanding.
Documents Incorporated by Reference:
See Item 13 - Exhibits, Financial Statements and Reports on Form 8-K.
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PART I
Item 1. Business.
On March 10, 1998 AW Computer Systems, Inc., a New Jersey corporation, (the
"Company" or "AW") announced that it was discontinuing operations. The company's
efforts to obtain long term financing have not been successful nor has the
Company been able to increase the sales of its products. There can be no
assurance that the Company will be able to resume its' operations. See Item 6 -
Management Discussion and Analysis of Financial Condition and Results of
Operations.
Since its inception in 1973, AW has provided retailers with custom-designed,
high-performance, computer-based systems to upgrade their Point-of-Sale ("POS")
operations. AW has developed two new products to provide additional
functionality to POS systems. These products are the Checker Productivity
Analyzer ("CPA") and the Wizard of POS ("Wizard"). Historically, AW's products
integrate a wide variety of POS terminals into the current store's computer
systems offered by the three largest POS system manufacturers in the United
States. AW had established relationships with the IBM Corporation ("IBM"), NCR
Corporation ("NCR"), and Fujitsu-ICL Systems, Inc. ("FJ-ICL") to provide
interfaces with their new POS systems, known as the 4690 Store System for IBM,
UNITY for NCR, ISS400 for FJ-ICL, and existing popular cash registers. The
ability of the Company's personnel to produce de novo interface hardware and
software, customized to retailers' requirements, is a critical factor in
successful operations.
The Company's target market includes nation-wide chains of retail stores and
supermarkets. Because of the large size of these customers relative to the
Company, many of the Company's contracts for sale of its proprietary hardware
and licensing of its proprietary software comprise a significant portion of the
Company's revenues in any given year. For example, in 1997, revenue from three
customers accounted for 82% of total revenue (see Notes to Financial
Statements).
Products.
AW has developed two products to provide additional functionality to
POS systems. They are the Checker Productivity Analyzer ("CPA") and the Wizard
of POS ("Wizard") Family of Products, specifically the Tutor, Eureka and
Scrolling Receipt and Merchandiser.
The CPA Project was developed under contract and completed on December
31, 1997 with a large supermarket chain. That contract did not include any
guaranteed minimum purchase. The Company has received an order to install eleven
(11) CPA systems for that supermarket chain. Notwithstanding the successful
installation of two systems, the Company's customer cancelled their purchase
order with AW on March 9, 1998 and on the same date advised the Company that it
was unwilling to enter into a second order that was necessary in order for the
Company to raise additional capital. At that time, the Company determined to
discontinue its' operations.
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The CPA system protects supermarkets against losses due to theft and
inaccuracies at the checkout counter. It is real-time security system that
interfaces with the POS system "listening to" register transactions as they are
transmitted over the register loop. Scanned or keyed information is used to
obtain product descriptions that are known to the system and stored in memory.
The system consists of cameras strategically mounted above the checkout counters
and AW's proprietary software. Visual images of products and shopping carts are
captured by cameras at the checkstand and converted to a form that enables
comparison with the known product and cart descriptions. When the system
determines there is a mismatch between camera data and database representations
of the product or cart descriptions, an "event" is declared. An event is the
recognition by the CPA system of the occurrence at a checkout station or lane
that deviates from the established norm. (The CPA system differs from that of
normal security systems in the fact that it records abnormal actions events
only; most security systems record everything, prompting the store manager to
view hours of video tape in the hope of finding evidence of fraud). An event is
usually reported by an "alert", which is defined as a signal to prompt the
checker to check the non-empty cart, print a message on the register journal
printer, write a description of the event to the CPA Controller Log and save
video as specified, and/or to lock the register until a manager override is
performed. Alerts are specified by the store manager in any combination for any
detected event or no alerts need be specified (e.g. while a cashier is
training).
Currently, CPA's supermarket database typically contains 55,000 items.
The full storage requirement is approximately 350-600 megabytes. The database is
dynamic, always "learning" new images as presented to the system.
The Company has received a purchase order to install eleven (11) CPA
systems for a supermarket chain. Notwithstanding the successful installation of
two systems, the Company's customer cancelled their purchase order with AW on
March 9, 1998 and on the same date advised the Company that it was unwilling to
enter into a second order that was required in order for the Company to raise
additional capital. At that time the Company determined to discontinue
operations.
The AW Wizard of POS Family of Products ("Wizard"), specifically the
Tutor, Eureka, and Scrolling Receipt and Merchandiser bring the familiarity of
Microsoft's graphical Windows environment to the retail POS operation. Unlike
existing graphical POS systems that demand total replacement of a retailers
hardware and software, the Wizard adds graphical capability to existing
environments.
The AW Wizard Tutor is an easy-to-use, hands-on cashier guidance
system. It actually tutors new sales associates while they assist customers at
the checkout line. The Tutor presents consistent on-line help screens to sales
associates. Service is improved by reducing cashier calls for supervisor
assistance. The Tutor is an interactive tool that is available 24 hours a day, 7
days per week. It is a handy, immediate reference to remind recent hires of the
POS operation. Leading retail chains are experiencing a quick six to nine month
return with the Tutor.
The Tutor addresses the cost and effectiveness of making the sales
associates productive quickly. The Tutor guides new cashiers on keying sequences
and store policy in an easy to understand, concise approach. The system is
designed and developed for the popular IBM 4683/4684 and 4693/4694 POS
terminals.
The Tutor provides cashiers with a user-friendly graphical interface to
the POS terminal. The Tutor operates on MS-Windows 3.1, MS Windows 95, or IBM
OS/2 platforms, and passively monitors all POS terminal peripheral activity such
as scanning, keyboard entry, and displays. The Tutor software then provides
graphical help on a video graphics adaptor ("VGA") display panel. This display
shows a keyboard with valid keys highlighted and a text area provides
instructions to the operator. The Tutor allows new cashiers to become self
proficient in the POS operation and eliminates the prolonged expense of a
high-cost, experienced person in the traditional buddy system method.
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The AW Wizard Eureka is an electronic produce flip chart which displays
digital images of the fruits and vegetables at the store. Using a touch screen,
the cashier can quickly identify the correct fruit or vegetable, its PLU code,
and optionally have the code entered automatically. Eureka reduces delays at the
cash register and improves customer service by eliminating cumbersome flip
charts and time consuming searches. Also shrinkage is reduced from errors made
in misidentifying fancy imported fruits and vegetables as less expensive items.
Eureka's versatile interface provides fast access to product
information, regardless of the cashier's level of knowledge or experience.
Produce can be identified by group ("top sellers"), by category index ("citrus
fruits" or "leafy vegetables"), by word index, by interactive description
("orange, oval-shaped, size of tennis ball, with thorns") or by simply browsing
through the digital images. Eureka can display a blow-up of the digital
photograph and its PLU, give a brief description of that item, and optionally
insert the PLU code into the IBM 4683/4693 POS terminal. Eureka will also be
developed for applications with mass merchandisers.
AW's Scrolling Receipts & Merchandiser application provides timely and
readable information to customers concerning their purchases at the time of
check-out. An electronic scrolling receipt is displayed at the register to
customers on the AW Wizard screen while merchandising messages of the retailer
are simultaneously presented on the same display. This Wizard application also
enables you to use PC-compatible thermal printers with your front-end POS system
to print clean customer receipts. The Company also presently derives additional
revenue from contract programming to provide system enhancements and maintenance
agreements covering all of AW's POS systems.
The Company's historical main product, known as AWare, enables the use
of existing popular, but older, cash registers with the POS systems manufactured
by IBM, NCR, and FJ-ICL. If AWare is used, a retail chain can upgrade its POS
system while postponing the replacement of cash registers, a major cost of
upgrading to current on-line POS operations, and mix older and newer models and
different makes of cash registers. AW has developed AWare for use in supermarket
chains, mass merchandising stores, and department stores.
AW has developed a family of programmable microprocessor adapter boards
for the IBM, the NCR, and the FJ-ICL computers that serve as cash register
controller units. They allow various NCR, Datachecker, and older IBM cash
registers to operate effectively with IBM's 4680 Store Controller, the NCR, and
the FJ-ICL POS systems (the "Major Store Systems").
Customers and Markets.
On March 10, 1998 AW Computer Systems, Inc., a New Jersey corporation,
(the "Company" or "AW") announced that it was discontinuing operations. The
company's efforts to obtain long term financing have not been successful nor has
the Company been able to increase the sales of its products. There can be no
assurance that the Company will be able to resume its' operations. See Item 6
Management Discussion and Analysis of Financial Condition and Results of
Operations.
The Company marketed the Checker Productivity Analyzer to the
supermarket grocery industry. The Company had installed the system in a pilot
store and received an order for eleven (11) additional systems at a major
supermarket grocery chain. Two of the eleven (11) systems were installed prior
to the Company being advised of the customer's cancellation of the purchase
order for the eleven stores.
The Company offered its Wizard of POS to three segments of the
retailer market: 1) large general merchandise retailers, 2) large discount
retail operators, and 3) supermarket grocery stores. In general, the Company's
POS systems are attractive to any retailer with a large number of stores or a
large number of checkout counters.
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The Company's business historically centered on a small number of large
clients in any given year. See Note 5 of Notes to Financial Statements for
information concerning the most recent two years. In 1997, revenues included a
concentration of 82% attributed to three customers. The Company has derived
substantially all of its revenues from North America during the last two years.
Customer Backlog.
At April 9, 1998, the total amount of the Company's firm orders for
delivery within one year for systems, maintenance services, hardware, and
software was $0, compared to a total of approximately $570,000 at March 25,
1997.
Competition.
The Company is not aware of any product on the market that is similar
to CPA or the Wizard. However, there are numerous security companies and
software firms that are potential competitors and they may develop products that
are more efficient or less costly than the Company's products. These potential
competitors are large, well financed, established companies that have greater
resources for research and development, manufacturing and marketing than the
Company.
Marketing.
The Company marketed its products through its own personnel from its
offices in Mount Laurel, New Jersey to its customers and prospects. The Company
does not offer financing or leasing for its systems, nor is such a program
contemplated.
Suppliers.
Manufacture of the Company's hardware products principally involves
circuit design, selection, and the assembly of purchased electronic, electrical
and peripheral components (such as custom-made printed circuit boards,
custom-manufactured enclosures, custom-manufactured application specific
integrated circuits, standard integrated circuits, components and power
supplies). The Company also makes use of programmable array logic chips in order
to minimize physical size and to protect against reverse engineering by
competitors. Agreements exist with the Company's suppliers to restrict them from
selling to others any custom components supplied to the Company. Most of the
components of the Company's hardware products are commonly available,
industry-standard material.
From time-to-time, the electronics industry has experienced periodic
shortages in the supply of certain standard semiconductor devices. It is the
Company's policy to maintain alternate sources for all important components, as
well as to adjust inventories, in anticipation of delayed delivery times.
Currently, however, some components utilized in the Company's products are
available only from a single source.
Research and Development.
The Company operated in an industry that is subject to rapid
technological change. The Company's ability to compete depends upon, among other
things, its ability to offer its customers state-of-the-art computer systems.
The Company protected its investment in software through use of
unregistered copyrights and by reliance on trade secrecy laws. The Company's use
of custom application specific integrated circuits ("ASIC") and programmable
array logic chips ("PAL") presents technological barriers to unauthorized
copying of the Company's products. The Company requires all technical personnel
to sign nondisclosure agreements with respect to the Company's products. There
can be no assurance that others will not unauthorizedly copy the Company's
products despite these protective devices. The Company believes that the most
effective protection of its trade secrets is rapid development of improved
hardware and software which makes use of the latest technology.
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Employees.
On April 9, 1998, the Company employed 3 full-time persons: 3 in sales,
management, and administration; compared to the 30 full-time persons employed at
March 22, 1997 (7 in sales, management, and administration; 4 in hardware design
and production; and 19 in software development and production). None of the
Company's employees is represented by a labor union. As a result of the
Company's inability to obtain long term financing and to increase sales, the
Company was required to reduce its workforce from 30 to 3.
Item 2. Properties.
The Company leases its administrative offices and sales and programming
facilities (containing approximately 30,000 square feet of space) in Mount
Laurel, New Jersey. The Company pays approximately $27,000 per month, including
its share of taxes, insurance and other expenses customarily borne by a tenant
under a "net" lease, which has been extended to March 15, 1999. The Company does
not own, and leases no other, real property. The Company believes that its
facilities are satisfactorily maintained.
Item 3. Legal Proceedings.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
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PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters.
The following table shows the quarterly range of prices for the
Company's Class A Common Shares, as reported by the National Association of
Securities Dealers Automated Quotation system for the period January 1, 1996
through December 31, 1997. Prices shown represent actual trades.
High Low
First Quarter 1997 1 5/16 7/8
Second Quarter 1997 1 11/16 1/2
Third Quarter 1997 1 1/4 9/16
Fourth Quarter 1997 1 7/16 9/16
First Quarter 1996 4 1/2 9/16
Second Quarter 1996 3 13/16 2
Third Quarter 1996 3 1/8 1
Fourth Quarter 1996 1 5/16 1
The Company's Class A Common Shares are listed on the Over-the-Counter
("OTC") Electronic Bulletin Board since August 28, 1996 and on April 4, 1998 the
"bid price" was $.04 per share. Prior to that August 28, 1996, the shares were
listed on the NASDAQ National Market Systems.
Holders. On April 9, 1998, there were approximately 260 holders of Class A
Common Shares, including holders of record and participants in security position
listings.
Dividends. The Company has not paid any cash dividends on its Common
Shares. The Company's credit agreements, with its bank, prohibit the payment of
dividends.
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Results of Operations.
On March 10, 1998 AW Computer Systems, Inc., a New Jersey corporation,
(the "Company" or "AW") announced that it was discontinuing operations. The
company's efforts to obtain long term financing have not been successful nor has
the Company been able to increase the sales of its products. There can be no
assurance that the Company will be able to resume its' operations.
AW's ability to continue as a going concern is dependent on the receipt
of a significant capital investment and an order or orders for the Company's
Wizard of POS and/or the CPA system. During 1997, in order to raise funds for
the continued development of the CPA product and for the support of ongoing
operations, certain officers and directors of the Company and other individuals
purchased a total of 8,947 shares of Series A 10% Redeemable Preferred Stock and
Warrants for $894,700. The Company expects that its existing capital resources
may enable it to maintain operations beyond the first quarter of 1998.
Thereafter, the Company will need to raise substantial, additional capital to
resume operations. There can be no assurance that the Company will be able to
resume operation.
Most all customer system installations are contingent upon successful
test store or pilot implementations, therefore, the backlog of total revenues
from a customer project cannot be considered firm until the pilot has been
accepted by the customer. At April 9 1998, AW had a backlog of firm orders for
delivery within one year of $0 compared to $570,000 at March 25, 1997.
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The CPA Project was developed under contract with a large supermarket
chain, which does not include any guaranteed minimum purchase. The Company has
received an order for eleven (11) systems and they are currently being
installed. Notwithstanding the successful installation of two systems, the
Company's customer cancelled their purchase order with AW on March 9, 1998 and
on the same date advised the Company that it was unwilling to enter into a
second order that was required in order for the Company to raise additional
capital. At that time the Company determined to discontinue operations.
The CPA system protects supermarket against losses due to theft and
inaccuracies at the checkout counter. The system consists of cameras
strategically mounted above the checkout counters and AW's proprietary software.
The CPA system employs vision technology to interact visual images and relate
them to the transaction being processed at the cash register. The Wizard brings
the familiarity of Microsoft's graphical Windows environment to the retail POS
operation. Unlike existing graphical POS systems that demand total replacement
of a retailer's hardware and software, the Wizard adds graphical capability to
existing environments. The Eureka version is an electronic product flip chart
that displays digital images of the produce or products in a grocery or retail
store. The Scrolling Receipt and Merchandiser version provides a readable
detailed receipt to customers concerning their purchases at the time of
check-out.
The Company has lost money for the past three years and discontinued
operations on March 10, 1998. The Company has paid operating expenses during the
past years with funds raised from the sale of common stock, redeemable preferred
stock and borrowed funds. AW's ability to restart operations is dependent on the
successful completion of future financings and the ability to attract key
personnel.
Revenues.
1997.
In 1997 revenue increased $151,000 to $1,151,000 from $1,000,000 in
1996. The increase in sales was primarily the result of completing the CPA
contract. Software revenue, maintenance fees and contract programming also
contributed to the 1997 revenue and were approximately the same as 1996.
The CPA Development Contract incurred costs in excess of its
$1,700,000 contractual budget and the Company recognized a loss of $777,000 on
the contract in 1997. Under the terms of this contract with a well established
supermarket chain, ownership of the products will be transferred to the contract
partner while exclusive marketing rights remain with AW.
1996.
Revenues in 1996 declined $2,424,000 to $1,000,000. The decrease in
sales was primarily caused by the reduction in sales of AWare related equipment
and software because of technical obsolescence. Software revenues, maintenance
fees and contract programming also contributed to 1996 revenue and were
approximately the same as 1995.
The CPA Development Contract incurred costs in excess of its
$1,700,000 contractual budget and the Company recognized a loss of $1,104,000 on
the contract during 1996. The 1996 loss included a loss provision of $400,000
representing the estimated cost to complete the contract.
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Costs.
1997.
The Company incurred direct cost in excess of revenues primarily
from the costs related to the completion of the CPA contract. The Company
recognized a loss of $777,000 on the contract in 1997.
1996.
The Company incurred direct cost in excess of revenues primarily
from the costs related to the development contract for the CPA contract. The
Company recognized a loss of $1,104,000 on the contract in 1996 including a loss
provision of $400,000.
Expenses.
1997.
The Selling, General and Administrative expenses decreased
$933,000, or 29.4%, mainly because of a reduction in the number of employees,
reduced salaries for the remaining employees, and reduced occupancy expenses
from the sublet of excess office space.
1996.
Selling, General and Administrative expenses increased $206,000, or
6%, in 1996 as compared to 1995 due primarily to increased employee compensation
and related expenses.
Research and Development.
The data processing industry is characterized by rapid technological
advances. The Company spent $46,000 and $111,000 on development for 1997 and
1996, respectively.
Operating Results.
1997.
Costs incurred in excess of contract revenues for the CPA project
caused expenses to exceed revenue causing a negative gross profit of
approximately $534,000. After Selling, General and Administrative expenses,
Development expenses and Interest expenses, the loss before and after taxes was
approximately $3,001,000. The Company anticipates that losses will continue
until such time, if ever, that it can generate sufficient revenues from the sale
of products to cover operating costs.
1996.
Costs incurred in excess of contract revenues for the CPA project
caused expenses to exceed revenue causing a negative gross profit of
approximately $419,000. After Selling, General and Administrative expenses, the
loss before and after taxes was approximately $3,862,000.
Financial Position and Capital Resources.
On March 10, 1998 AW Computer Systems, Inc., a New Jersey corporation,
(the "Company" or "AW") announced that it was discontinuing operations. The
company's efforts to obtain long term financing have not been successful nor has
the Company been able to increase the sales of its products. At April 9, 1998
the Company has $29,000 in cash $2,000,000 in Liabilities and $100,000 in
Assets.
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In 1997, operations were funded by the sale of Preferred Stock and
Loans because cash flow generated from operations were not sufficient to sustain
the Company. AW's needs for cash arise principally from salaries, sales and
marketing expenses, research and development expenses and occupancy expenses.
During April and May of 1997, the Company raised $250,000 from the sale
of 2,500 shares of Series A 10% Redeemable Preferred Stock and two year Warrants
to purchase 500,000 Class A Common Shares for $.50 per share sold to a limited
number of qualified investors, including certain officers and directors of the
Company.
On June 28, 1997, the Company consummated an exchange with an investor
group, including certain officers and directors of the Company. The investor
group purchased the Company's Bank Debt and exchanged $474,900 of secured debt
and $22,000 of accrued interest for 3,822 shares of Series A 10% Redeemable
Preferred Stock, two year Warrants to purchase 764,400 Class A Common Shares for
$.50 per share and a $45,000 cash payment. The exchange resulted in a gain of
$69,700 and was recorded as Additional Paid-in Capital.
In December of 1997, the Company raised $262,500 from the sale of 2,625
shares of Series A 10% Redeemable Preferred Stock and two year Warrants to
purchase 787,500 Class A Common Shares for $.40 per share sold to a limited
number of qualified investors, including certain officers and directors of the
Company.
During 1997, working capital decreased $1,164,000 to $(1,487,000) as
compared to $(323,000) at December 31, 1996. Current assets decreased $970,000
due to decreases in cash, cost and estimated earnings in excess of billings on
uncompleted contracts, inventory, and prepared assets of $803,000, $200,000,
$47,000, and $10,000, respectively, offset by an increase in accounts receivable
of $100,000. Current liabilities increased $194,000 due to an increase in notes
payable of $773,000, customer deposits $100,000 and accrued compensation of
$193,000 offset by decrease of $475,000 in the line of credit, $408,000 in
accrued contract costs, $62,000 in accrued liabilities and $16,000 in other
liabilities.
Cash and cash equivalents necessary to operate at the Company's current
capacity beyond the first quarter of 1998 will be dependent on the successful
completion of financing to provide working capital.
The results of operations in 1997 have affected the Company's debt to
equity relationship as can be seen in the following table:
1997 1996 1995 1994
---- ---- ---- ----
Total liabilities $ 1,936,823 $1,776,965 $1,807,797 $1,809,775
Total Shareholders' equity
(deficit) $(1,248,044)$ 817,732 $2,086,456 $4,074,047
Total liabilities divided by
shareholders' equity N/A 2.17 0.87 0.44
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Liquidity.
The Company requires significant working capital in order to be able to
restart operations in 1998. Such resumption of operations will be dependent on
the Company securing external financing and on the successful sale of either the
CPA Product or the Wizard Product.
In order to raise funds for the continued development of the CPA
product and for the support of ongoing operations, certain officers and
directors of the Company and other individuals purchased a total of 8,947 shares
of Series A 10% Redeemable Preferred Stock and warrants for $894,700 during
1997. Dividends are payable in cash or in additional shares of Series A 10%
Redeemable Preferred Stock, at the discretion of the Board of Directors. All
dividends paid during 1997 were paid with shares of Preferred Stock except
fractional shares, which were paid in cash.
During April and May of 1997, the Company raised $250,000 from the sale
of 2,500 shares of Series A 10% Redeemable Preferred Stock and two year Warrants
to purchase 500,000 Class A Common Shares for $.50 per share.
On June 28, 1997, the Company consummated an exchange with an investor
group, including certain officers and directors of the Company. The investor
group purchased the Company's Bank Debt and exchanged $474,900 of secured debt
and $22,000 of accrued interest for 3,822 shares of Series A 10% Redeemable
Preferred Stock, two year Warrants to 764,400 Class A Common Shares for $.50 per
share and a $45,000 cash payment. The exchange resulted in a gain of $69,700 and
was recorded as Additional Paid-in Capital.
In December 1997, the Company raised $262,500 from the sale of 2,625
shares of Series A 10% Redeemable Preferred Stock and two year Warrants to
purchase 787,500 Class A Common Shares for $.40 per share sold to a limited
number of qualified investors, including certain officers and directors of the
Company.
On September 20, 1996, the Company consummated the private placement of
$1,678,023 Class A Common Shares to a limited number of qualified investors,
including certain officers and directors of the Company. The price per share was
$1.00, or an aggregate consideration of 1,678,023. The funds were used for
working capital for the development of new products and to support on-going
operations.
On March 8, 1996, the Company, in a private cash transaction, sold
250,000 Class A Common Shares for $2.00 per share to Winn-Dixie Stores, Inc. As
additional consideration for the purchase of the shares by Winn-Dixie Stores,
Inc., the Company modified the exercise price of the warrants held by
Winn-Dixie, pursuant to a Warrant Agreement dated October 28, 1993, which was
entered into in consideration of the Company receiving exclusive marketing
rights to the CPA product, from the previously amended price of $3.062 to $2.00
per share. By operation of anti-dilution provisions of the warrants, the number
of shares into which Winn-Dixie could convert the warrants automatically and
without additional consideration increased from 200,000 to 236,773 on May 15,
1995, as a result of the private placement to certain officers and directors
noted above.
In October 1996, the Company negotiated a one year extension of the
Line of Credit until December 31, 1997. In consideration for the one year
extension, the Company issued to Fleet Bank a Warrant expiring August 31, 1998
to purchase 50,000 Class A Common Shares at $1.25 per share.
During 1996, the Company maintained a $550,000 Line of Credit with
interest at the Bank's prime rate (8.25% at December 31, 1996) plus 1%. In
October 1996, the credit facility was increased by $20,368 with an interest rate
of prime plus 2% to fund the requirements of a Letter of Credit presented to the
Bank. The Line of Credit had an outstanding balance of $570,368 on December 31,
1996.
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In order to raise funds for the development of new products and for the
support of on-going operations, on May 15, 1995 certain officers and directors
of the Company and other individuals purchased a total of 394,000 units, each
consisting of one share of the Company's Class A Common Stock and one warrant to
purchase an additional share of Class A Common Stock at an exercise price of
$2.00 per share. The warrants are exercisable for five years from the date of
grant. The purchase price was $0.55 per unit. The total proceeds to the Company,
net of expenses, were $206,000. The securities sold are not registered for
public sale under the Securities Act of 1933 or any state securities law and the
purchasers acquired no registration rights with respect thereto.
Stock Options and Warrants.
The Company adopted Statement of Financial Accounting Standards No.
123, Accounting for Stock-Based Compensation beginning in 1996.
Item 7. Financial Statements.
Financial statements, together with the report of the Company's
independent accountants thereon, are presented under Item 13 of this report.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure. None
12
<PAGE>
PART III
EXECUTIVE COMPENSATION
Summary Compensation
The following table sets forth a summary of the aggregate compensation earned
for services rendered in all capacities to the Company during the years 1995
through 1997 by the Chief Executive Officer, and by each of the three other most
highly compensated executive officers earning over $100,000 in 1997 (the "Named
Officers").
SUMMARY COMPENSATION TABLE
Long-Term Compensation1
Awards Payouts
Other All
AnnualRestricted Long-Term Other
Name and Fiscal Compen- Stocks NumberofIncentiveCompen-
Principal Position Year Salary Bonus sation2 Awards Opitons Payoutssation3
Charles J. McMullin 1997 $140,0004 -- $ 6,560 -- $250,000 -- $2,060
Chairman and Chief 1996 $140,000 -- $ 7,073 -- 100,000 -- $2,060
Operating Officer 1995 $140,000 -- $ 7,750 -- 25,000 -- $2,152
Charles Welch 1997 $168,1505 -- $ 4,023 -- -- -- $1,146
President and Chief 1996 $168,150 -- $ 3,782 -- -- -- $3,831
Executive Officer 1995 $168,150 -- $15,400 -- 10,000 -- $3,105
Charles F. Trapp 1997 $120,0006 -- 5,304 -- 150,000 -- $3,000
Vice President, 1996 $ 41,153 -- $ 2,235 -- 60,000 -- $3,000
Finance
P. Michel Lutze 1997 $137,2307 -- -- -- -- -- --
Vice President 1996 $126,800 -- $ 3,759 -- -- -- --
1995 $126,800 -- $16,450 -- 12,500 -- --
(1) During three years, 1995 through 1997, no Named Officer received stock
appreciation rights, restricted stock awards or Long-Term Incentive Plan
payouts.
(2) Other Annual Compensation includes the following:
For Mr. McMullin: in 1997, $6,560 automobile benefit; in 1996, $7,073
automobile benefit; and in 1995, $7,750 automobile benefit.
For Mr. Welch: in 1997, $4,023 automobile benefit; in 1996, $3,782
automobile benefit; and in 1995, $6,150 gain on exercise of options and
$9,250 automobile benefit.
For Mr. Trapp: in 1997, $5,304 automobile benefit and in 1996, $2,235
automobile benefit.
For Mr. Lutze: in 1997, $0 automobile benefit; in 1996, $3,759 automobile
benefit; and in 1995, $8,200 gain on exercise of options and
$8,250 automobile benefit.
(3) All Other Compensation is comprised of life insurance premiums paid on
behalf of the respective individuals.
(4) Includes $45,000 of deferred salary.
(5) Includes $88,150 of deferred salary.
(6) Includes $20,000 of deferred salary.
(7) Includes $44,850 of deferred salary.
13
<PAGE>
STOCK OPTION GRANTS IN 1997
Name and Options Options GrantedExercise Expiration
Principal Position Granted To Employees Price Date
Charles J. McMullin 250,000 21.5% $ .65 April 6, 2002
Chairman and Chief
Operating Officer
Charles F. Trapp 150,000 12.9% $ .65 April 2, 2002
Vice President, Finance
Exercise of Stock Options and Aggregate Outstanding Stock Options at December
31, 1997 The following table sets forth information concerning stock options
which were exercised during 1997 by the Chief Executive Officer and the other
Named Officers and the amounts of their respective unexercised options as of
December 31, 1997.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTIONS
Number of
Shares Value of In-the-
Underlying Money
Unexercised Unexercised
Options at Options at
12/31/97 12/31/97
Name and Shares Acquired Exercisable/ Exercisable/
Principal Position on ExerciseValue Realized Unexercisable Unexercisable
Charles J. McMullin - 0 - - 0 - 435,000/0 --/--
Chairman and Chief
Operating Officer
Charles Welch - 0 - - 0 - 121,000/0 --/--
President and Chief
Executive Officer
Charles F. Trapp - 0 - - 0 - 210,000/0 --/--
Vice President, Finance
P. Michael Lutze
Senior Vice President - 0 - - 0 - 26,500/0 --/--
Bonus Plans
The Board of Directors adopted a bonus plan for Mr. Welch under which a varying
percentage of the Company's net profits in a particular year are paid as an
annual bonus if certain profit objectives established by the Board of Directors
for that year are achieved. Under the plan now in effect, Mr. Welch would
receive 2.5% of the first $99,999 of the Company's annual pre-tax profit, 3.75%
of the next $100,000 of the Company's annual pre-tax profit and 5% of the
Company's annual pre-tax profit in excess of $199,999. No bonus was paid under
this plan for 1997.
On April 25, 1997, the Company and Charles J. McMullin renewed an employment
agreement that provides for a term of employment of three years at an annual
salary of $140,000 and a cash bonus of 1.25% of the first $99,999 of the net
income of the Company before charges for officers' bonuses and income taxes
("EBOBAT"), 1.875% of the next $100,000 of EBOBAT and 2.5% of EBOBAT in excess
of $200,000. No bonus was paid under this plan for 1997.
14
<PAGE>
Since the organization of the Company in 1973, it has been the policy of the
Company to award an annual bonus to the Company's officers and employees. The
amount of the bonus awarded to an officer or employee in a particular year is
discretionary and has been dependent upon the officer's or employee's level of
performance during the year, his length of service with the Company, and the
Company's earnings during the year. No discretionary bonuses were paid in 1997.
Under the Company's current discretionary bonus arrangement, Messrs. McMullin
and Welch are not eligible for discretionary bonuses. The Company may award
discretionary bonuses for 1998 and subsequent years.
Employment Agreements
The Company has renewed an agreement with Mr. McMullin providing for his
employment in an executive capacity from April 25, 1997 through April 24, 2000
at an annual minimum base salary of $140,000. If the employment of Mr. McMullin
is terminated by the Company prior to the end of his employment term without
cause, the Company will continue to pay Mr. McMullin his salary until the end of
such term, his death, or his employment with another organization, at which time
the Company shall be only obligated to pay Mr. McMullin the difference between
his compensation from the new employer and his current compensation. During
1997, Mr. McMullin deferred receipt of $45,000 of salary.
The Company has entered into an agreement with Mr. Welch providing for his
employment in an executive capacity from October 1, 1995 through September 30,
1998, at an annual minimum base salary of $168,150. The agreement requires that
this minimum base salary be adjusted annually during the second and third years
of the contract to reflect the average percentage salary increase awarded other
senior and executive employees of the Company during the preceding twelve
months. If the employment of Mr. Welch is terminated by the Company prior to the
end of his employment term without cause, the Company will continue to pay Mr.
Welch his salary until the end of such term, or the date on which he begins
competing with, or begins working for an organization which competes with the
Company.
During 1997, Mr. Welch deferred receipt of $88,150 of salary.
The Company has entered into an agreement with Mr. Trapp providing for his
employment in an executive capacity from August 29, 1996 through August 28,
1999, at an annual minimum base salary of $120,000. The agreement requires that
this minimum base salary be adjusted annually during the second and third years
of the contract to reflect the average percentage salary increase awarded other
senior and executive employees of the Company during the preceding twelve
months. If the employment of Mr. Trapp is terminated by the Company prior to the
end of his employment term without cause, the Company will continue to pay Mr.
Trapp his salary until the end of such term, or the date on which he begins
competing with, or begins working for an organization which competes with the
Company.
During 1997, Mr. Trapp deferred receipt of $20,000 of salary.
The Company has entered into an agreement with Mr. Lutze providing for his
employment in an executive capacity from February 15, 1996 through February 14,
1999 at an annual minimum base salary of $126,800. If the employment of Mr.
Lutze is terminated by the Company prior to the end of his employment term
without cause, the Company will continue to pay Mr. Lutze his salary until the
end of such term, his death, or his employment with another organization, at
which time the Company shall be only obligated to pay Mr. Lutze the difference
between his compensation from the new employer and his current compensation.
During 1997, Mr. Lutze deferred receipt of $44,850 of salary. Mr. Lutze resigned
as Vice President December 1, 1997.
15
<PAGE>
PART IV
Item 13. Exhibits, Financial Statements and Reports on Form 8-K.
(a) The following documents are filed as a part of this report:
(1) Financial Statements:
A. Reports of Independent Accountants.
B. Consolidated Statements of Operations for the Two Years
Ended December 31, 1997.
C. Consolidated Statement of Assets and Liabilities in
Liquidation, December 31, l997.
D. Consolidated Statement of Changes in Net Assets
(Liabilities) Liquidation Basis for the period ended
December 31,1997.
E. Consolidated Statements of Shareholders' Equity (Deficit)
for the Two Years Ended December 31, 1997.
F. Consolidated Statements of Cash Flows for the Two Years
Ended December 31, 1997.
G. Notes to Consolidated Financial Statements.
(2) Exhibits:
3A The Company's Restated Certificate of Incorporation.
Exhibit 3A to the Company's Registration Statement No.
2-68939 is incorporated herein by reference.
3A-1 Amendment to the Company's Restated Certificate of
Incorporation dated June 30, 1987. Exhibit 3A-1 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1987 is incorporated herein by reference.
3B The Company's Amended and Restated By-Laws. Exhibit 3B
to the Company's Annual Report on Form 10-KSB for the
year ended December 31, 1994 is incorporated herein by
reference.
3C-1 The Company's Registration Statement on Form S-8.
Exhibit 3C-1 to the Company's Quarterly Report on Form
10-QSB for the quarter ended September 30, 1995 is
incorporated herein by reference.
4F Specimen Certificate for Class A Common Shares. Exhibit
4F to the Company's Annual Report on Form 10-KSB for the
year ended December 31, 1994 is incorporated herein by
reference.
10D-4 Supplemental Employment and Retirement Agreement dated
March 1, 1993 between Nicholas Ambrus and the Company .
Exhibit 10D-4 to the Company's Annual Report on Form
10-KSB for the year ended December 31, 1993 is
incorporated herein by reference.
10E Employment Agreement dated October 1, 1985 between
Charles Welch and the Company. Exhibit 28C to the
Company's Registration Statement No. 33-1898 is
incorporated herein by reference.
16
<PAGE>
10E-1 Amendment Number Two to the Employment Agreement between
the Company and Charles Welch dated August 31, 1995.
Exhibit 10E-1 on Form 10-KSB for the year ended December
31, 1995 is incorporated herein by reference.
10F Employment Agreement between the Company and Charles J.
McMullin dated April 25, 1994. Exhibit 10F to the
Company's Annual Report on Form 10-KSB for the year
ended December 31, 1994 is incorporated herein by
reference.
10G Employment Agreement between the Company and P. Michael
Lutze dated February 15, 1996. Exhibit 10E-1 on Form
10-KSB for the year ended December 31, 1995 is
incorporated herein by reference.
10H Lease between Linpro Industrial Limited and the Company
dated August 12, 1983. Exhibit 10H to the Company's
Annual Report on Form 10-K for the year ended December
31, 1983 is incorporated herein by reference.
10H-1 Amendment dated August 1, 1986 to the Lease between
Linpro Industrial Limited and the Company. Exhibit 10H-1
to the Company's Annual Report on Form 10-K for the year
ended December 31, 1986 is incorporated herein by
reference.
10H-2 Amendment dated December 2, 1986 to the Lease between
Linpro Industrial Limited and the Company. Exhibit 10H-2
to the Company's Annual Report on Form 10-K for the year
ended December 31, 1986 is incorporated herein by
reference.
10H-3 Sixth Amendment dated November 27, 1991 to Lease between
Linpro South Jersey, Inc. and the Company. Exhibit 10H-3
of the Company's Annual Report on Form 10-K for the year
ended December 31, 1991 is incorporated herein by
reference.
10H-4 Seventh Amendment dated June 7, 1992 to lease between
Linpro Greentree Business Centre Partnership and the
Company. Exhibit 10H-4 to the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1992 is
incorporated herein by reference.
10H-5 Eighth Amendment dated February 15, 1994 to lease
between Linpro Greentree Business Centre Partnership and
the Company. Exhibit 10H-5 to the Company's Annual
Report on Form 10-KSB for year ended December 31, 1994
is incorporated herein by reference.
10M-16 Addendum to the Referral Agreement between NCR
Corporation and the Company dated December 10, 1993.
Exhibit 10M-16 to the Company's Annual Report on Form
10-KSB for the year ended December 31, 1994 is
incorporated herein by reference.
10M-18 Solution Provider Agreement between Microsoft
Corporation and the Company dated August 1995. Exhibit
10E-1 on Form 10-KSB for the year ended December 31,
1995 is incorporated herein by reference.
10N-2 The Company's October 1992 Stock Option and Stock Grant
Plan (as amended). Exhibit 10N-2 of the Company's Annual
Report on Form 10-KSB for the year ended December 31,
1992 is incorporated herein by reference.
17
<PAGE>
10P-1 Addendum to Warrant Agreement between the Company and
Winn-Dixie Stores, Inc. dated March 8, 1996. Exhibit
10E-1 on Form 10-KSB for the year ended December 31,
1995 is incorporated herein by reference.
10V Agreement for the Procurement of Life Insurance dated
May 13, 1986 between the Company and Nicholas Ambrus.
Exhibit 10V to the Company's Annual Report on Form 10-K
for the year ended December 31, 1986 is incorporated
herein by reference.
10W Agreement for the Procurement of Life Insurance dated
May 13, 1986 between the Company and Charles Welch.
Exhibit 10W to the Company's Annual Report on Form 10-K
for the year ended December 31, 1986 is incorporated
herein by reference.
21 Subsidiaries of the Registrant.
27 Financial Data Schedules, electronically filed, as per
Regulation SB.
(b) No reports on Form 8-K were filed by the Company during
the last quarter of 1997.
18
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Shareholders and Board of Directors of
AW Computer Systems, Inc.
We have audited the accompanying consolidated statements of
operations, shareholders' equity (deficit), and cash flows of AW Computer
Systems, Inc. and its subsidiary for each of the two years in the period ended
December 31, 1997. In addition, we have audited the accompanying consolidated
statement of assets and liabilities in liquidation of AW Computer Systems, Inc.
and its subsidiary as of December 31, 1997. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall consolidated financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
As described in Note 1 to the financial statements, liquidation of
the Company appears imminent. Accordingly, the Company has changed its basis of
accounting as of December 31, 1997 from the going concern basis to the
liquidation basis.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated results of
operations, and changes in shareholders' equity (deficit), and cash flows of AW
Computer Systems, Inc. and its subsidiary for each of the two years in the
period ended December 31, 1997, and their consolidated net assets and
liabilities on a liquidation basis as of December 31, 1997, in conformity with
generally accepted accounting principles applied on the bases of accounting
described in the preceding paragraph.
/s/Moore Stephens, P.C.
MOORE STEPHENS, P.C.
Certified Public Accountants
Cranford, New Jersey
March 17, 1998
19
<PAGE>
AW COMPUTER SYSTEMS, INC. AND SUBSIDIARY
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
GOING CONCERN BASIS
- ------------------------------------------------------------------------------
<TABLE>
Years ended
December 31,
1 9 9 7 1 9 9 6
------- -------
<S> <C> <C>
Revenues $1,151,256 $ 1,000,319
Cost of Revenues 1,685,117 1,420,089
---------- -----------
Gross Loss (533,861) (419,770)
---------- -----------
Expenses:
Selling, General and Administrative 2,367,230 3,300,394
Development 45,681 111,028
Interest 76,633 69,536
---------- -----------
Total Expenses 2,489,544 3,480,958
---------- -----------
Other Income 22,542 38,865
---------- -----------
Loss Before Income Taxes (3,000,863) (3,861,863)
Income Tax Benefit -- --
---------- -----------
Net Loss $(3,000,863) $(3,861,863)
=========== ===========
Basic Loss Per Share Computation:
Net Loss $(3,000,863) $ 3,861,863)
Preferred Stock Dividend Requirements 42,916 --
---------- -----------
Net Loss Available to Common Stockholders $(3,043,779) $(3,861,863)
=========== ===========
Basic Loss Per Share $ (.46) $ (.71)
========== ===========
Average Common Shares Outstanding 6,670,567 5,458,978
========== ===========
The Accompanying Notes are an Integral Part of the Consolidated Financial Statements.
</TABLE>
20
<PAGE>
AW COMPUTER SYSTEMS, INC. AND SUBSIDIARY
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF ASSETS AND LIABILITIES IN LIQUIDATION AS OF DECEMBER
31, 1997.
- ------------------------------------------------------------------------------
<TABLE>
Assets:
<S> <C>
Cash and Cash Equivalents $ 106,938
Accounts Receivable, Less Allowance for Doubtful Accounts
of $51,465 178,826
Property and Equipment 40,000
Other Assets 23,861
-----------
Total Assets 349,625
Liabilities:
Note Payable - Related Party 773,750
Note Payable - Related Party 95,448
Customer Deposits 100,000
Accounts Payable 91,968
Accrued Liabilities 664,825
Accrued Compensation 370,798
Deferred Compensation Payable 173,578
Other Liabilities 25,556
-----------
Total Liabilities 2,295,923
Commitments and Contingencies --
Redeemable Preferred Stock 913,700
Net Liabilities - Liquidation Basis $(2,859,998)
===========
The Accompanying Notes are an Integral Part of the Consolidated Financial Statements.
</TABLE>
21
<PAGE>
AW COMPUTER SYSTEMS, INC. AND SUBSIDIARY
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
- ------------------------------------------------------------------------------
<TABLE>
Class A Common Stock
Number
of Shares Amount
<S> <C> <C> <C> <C>
Balance - December 31, 1995 4,467,544 $ 44,676
Issuance of Stock Grants 30,000 300
Exercise of Stock Options 212,500 2,125
Private Placement 1,928,023 19,280
Non Cash Compensation -- --
Common Stock Subscribed -- --
Compensation Expense -- --
Net Loss -- --
---------- -----------
Balance - December 31, 1996 6,638,067 66,381
Issuance of Stock 32,500 325
Exercise of Preferred Stock for Debt -- --
Non Cash Compensation -- --
Dividends on Redeemable Preferred
Stock - $10 Per Share -- --
Net Loss -- --
---------- -----------
Balance - December 31, 1997 6,670,567 $ 66,706
========== ===========
(Table Continues on Following Page)
The Accompanying Notes are an Integral Part of the Consolidated Financial Statements.
</TABLE>
22
<PAGE>
AW COMPUTER SYSTEMS, INC. AND SUBSIDIARY
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
- ------------------------------------------------------------------------------
<TABLE>
(Table Continued from Pervious Page)
Stock
Additional Retained Subscription Total
Paid-in Earnings Related Deferred Stockholders'
Capital (Deficit) Party Compensation Equity
Balance - December 31,
<S> <C> <C> <C> <C> <C>
1995 $1,895,992 $ 181,354 $ -- $ (35,566) $ 2,086,456
Issuance of Stock Grants 33,450 -- -- -- 33,750
Exercise of Stock Options 201,594 -- -- -- 203,719
Private Placement 2,189,166 -- -- -- 2,208,446
Non Cash Compensation 111,658 -- -- -- 111,658
Common Stock Subscribed -- -- (95,000) -- (95,000)
Compensation Expense -- -- -- 35,566 35,566
Net Loss -- (3,861,863) -- -- (3,861,863)
---------- ----------- --------- --------- -----------
Balance - December 31, 1996 4,431,860 (3,680,509) (95,000) -- 722,732
Issuance of Stock 33,915 -- -- -- 34,240
Exercise of Preferred Stock
for Debt 69,720 -- -- -- 69,720
Non Cash Compensation 32,500 -- -- -- 32,500
Dividend on Redeemable
Preferred Stock - $10
Per Share -- (20,073) -- -- (20,073)
Net Loss -- (3,000,863) -- -- (3,000,863)
---------- ----------- --------- --------- ----------
Balance - December 31, 1997 $4,567,995 $(6,701,445) $ (95,000)$ -- $(2,161,744)
========== =========== ========= ========= ===========
The Accompanying Notes are an Integral Part of the Consolidated Financial Statements.
</TABLE>
23
<PAGE>
AW COMPUTER SYSTEMS, INC. AND SUBSIDIARY
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
GOING CONCERN BASIS
- ------------------------------------------------------------------------------
<TABLE>
Years ended
December 31,
1 9 9 7 1 9 9 6
------- -------
Cash Flows from Operating Activities:
<S> <C> <C>
Net Income (Loss) $(3,000,863) $(3,861,863)
Adjustments to Reconcile Net Income (Loss) to Net Cash
Provided by (Used for) Operating Activities:
Depreciation and Amortization 229,879 299,958
Amortization of Unearned Compensation -- 35,566
Provision for Doubtful Accounts 11,498 (70,162)
Provisions for Inventory -- 57,366
Non Cash Compensation 32,500 145,408
Gain on Capital Disposition -- (4,127)
Computer Software Expensed 669,351 --
Adjustment to Liquidation Basis of Fixed Assets 228,836 --
Liquidation Basis Adjustments (698,254) --
Decrease (Increase) in:
Accounts Receivable (111,944) 596,740
Costs and Estimated Earnings on Uncompleted Contracts 200,015 258,222
Inventories 56,589 400,836
Income Taxes Receivable -- 280,445
Prepaid Expenses and Other Assets 40,301 50,281
Increase (Decrease) in:
Accounts Payable (55,227) (144,675)
Accrued Liabilities 445,454 134,856
Accrued Costs (408,406) 75,753
Customer Deposits 50,000 --
Other Current Liabilities (16,199) (9,302)
Accrued Compensation 193,436 105,378
Pension Costs 11,070 27,250
---------- -----------
Net Cash (Used in) Operating Activities (2,121,964) (1,622,070)
---------- -----------
Cash Flows in Investing Activities:
Capital Expenditures (5,663) (147,808)
Capital Disposals 18,527 9,592
Computer Software Capitalized -- (305,725)
---------- -----------
Net Cash Provided by (Used in) Investing Activities 12,864 (443,941)
---------- -----------
Cash Flows Financing Activities:
Borrowings (Payments):
Proceeds from Note Payable - Related Party 773,750 --
Line of Credit -- 20,368
Issuance of Preferred Stock 534,500 --
Payments on Long Term Debt (45,000) (225,000)
Lease Obligations -- (15,460)
Advances - Related Party Loans -- (55,000)
Issuance of Common Stock 34,240 2,412,164
Dividends Paid on Redeemable Preferred Stock (1,073) --
---------- -----------
Net Cash Provided by Financing Activities 1,296,417 2,137,072
---------- -----------
Increase (Decrease) in Cash and Cash equivalents (812,683) 71,061
Cash and Cash Equivalents - Beginning of Years 919,621 848,560
---------- -----------
Cash and Cash equivalents - End of Years $ 106,938 $ 919,621
========== ===========
The Accompanying Notes are an Integral Part of the Consolidated Financial Statements.
</TABLE>
24
<PAGE>
AW COMPUTER SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- ------------------------------------------------------------------------------
1. Basis of Presentation:
Description of Business:
Historically, AW Computer Systems, Inc. and its wholly-owned subsidiary
(the "Company") is in the business of developing and marketing
specialized computer-based POS systems consisting of proprietary
hardware and software. The Company derived revenues from selling the
hardware and installing the software for licensed use by clients.
Because of rapid technological advances in the computer systems upon
which the Company based its products and the changing needs of
customers, new software and hardware must constantly be developed in
order to deliver products that use the current industry standard
equipment. Substantially all of the Company's revenues come from the
retail sector of the economy and its customers are located throughout
the United States.
Going Concern and Liquidation Basis:
As a result of the Company's significant recurring net losses and its
inability to obtain debt or equity financing needed to continue
operations, the Company cannot be classified as a going concern. At
March 10, 1998, the Company decided to adopt liquidation basis
accounting. The accompanying consolidated statement of assets and
liabilities in liquidation as of December 31, 1997 have been prepared
using that basis.
It is not presently determinable whether the amounts realizable from the
disposition of the remaining assets or the amounts that creditors agree
to accept in any settlement of the obligation due them will differ
materially from the accompanying financial statements.
Adjustments of Estimated Values
The following assets have been reduced to liquidation values:
Historical Estimated
Basis Liquidation Value
Prepaids $ 25,552 $ 0
Inventories 9,766 0
Property and Equipment, net 268,836 40,000
--------- ----------
Total $ 304,154 $ 40,000
========= ==========
The Company estimates liquidation costs to approximate $434,100 and
these costs have been accrued for as of December 31, 1997.
2. Summary of Significant Accounting Policies:
Principals of Consolidation:
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary. All significant intercompany
transactions and balances have been eliminated.
25
<PAGE>
Accounting Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Revenue Recognition:
Revenue and costs are recognized on fixed-price contracts using the
percentage of completion method. The percentage of completion is based
upon the percentage of total cost of labor performed to the estimated
total labor costs to be incurred under the contract. This method is used
because management considers labor performed to be the best available
measure of progress on these contracts.
Contract costs include all direct labor, material and overhead costs.
Revisions to estimated costs and contract profitability are recognized
in the period the revisions are determined. Provisions for estimated
losses on contracts are recorded in the period such losses become
evident.
Revenue from the licensing of computer software is recognized when the
software is accepted by the customer.
Revenue under maintenance contracts is recognized ratably over the
life of the contract.
Cash and Cash Equivalents:
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments purchased with original maturities of
three months or less to be cash equivalents. The carrying amount
reported in the balance sheet approximates its fair value.
Property and Equipment:
The carrying amount of property and equipment was adjusted from a
historical basis to reflect the amount of cash expected from their
realization and settlement. When assets are sold, the related cost and
accumulated depreciation are removed from the accounts and any gain or
loss from such disposition is included in operations. Leasehold
improvements are capitalized and amortized over the term of the lease.
Computer Software:
Costs incurred subsequent to establishment of technological feasibility
to produce the finished product are capitalized. Maintenance and
upgrades are expensed as incurred.
During 1997, the Company expensed $669,351 of software costs previously
capitalized because the product failed to generate revenue since being
developed.
Capitalized software costs are amortized using the straight-line method
over the estimated economic life of the product. Amortization expense of
computer software costs was $0 in 1997 and 1996. Costs capitalized prior
to 1995 have been fully amortized as of 1995. The following is a table
as of December 31, 1997.
Computer Software $ 1,780,521
Accumulated Amortization (1,111,170)
Write Off (669,351)
----------
Computer Software, Net $ 0
==========
26
<PAGE>
Impairment:
Certain long-term assets of the Company are reviewed at least
annually as to whether their carrying value has become impaired,
pursuant to guidance established in Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
Management considers assets to be impaired if the carrying value
exceeds the future projected cash flows from related operations
(undiscounted and without interest charges). If impairment is deemed
to exist, the assets will be written down to fair value or projected
discounted cash flows from related operations. Management also
re-evaluates the periods of amortization to determine whether
subsequent events and circumstances warrant revised estimates of
useful lives.
Stock Options Issued to Employees:
The Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation," on January 1, 1996 for financial statement note
disclosure purposes and will continue to apply the intrinsic value
method of Accounting Principles Boards ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," for financial reporting
purposes.
Depreciation and Amortization:
Property and equipment is depreciated or amortized on the
straight-line method over the estimated useful lives of the assets
(ranging from five to seven years).
Income Taxes:
Income taxes are provided based upon the provisions of Statement of
Financial Accounting Standards No. 109 "Accounting for Income Taxes"
("SFAS 109"), which requires recognition of deferred tax liabilities
and assets for the expected future tax consequences of events that
have been included in the financial statements or tax returns. Under
this method, deferred tax liabilities and assets are determined based
on the difference between the financial statement and tax bases of
assets and liabilities using enacted tax rates in effect for the year
in which the differences are expected to reverse. A valuation
allowance is provided if it is more likely than not that some or all
of the deferred tax asset will not be realized.
Net Loss Per Class A Common Share:
The Financial Accounting Standards Board has issued Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share"; which is effective for financial statements issued for
periods ending after December 15, 1997. Accordingly, earnings per
share data in the financial statements for the year ended December
31, 1997, have been calculated in accordance with SFAS No. 128. SFAS
No. 128 did not have an effect on the loss per share calculations for
the year ended December 31, 1996.
SFAS No. 128 supersedes Accounting Principles Board Opinion No. 15,
"Earnings per Share," and replaces its primary earnings per share
with a new basic earnings per share representing the amount of
earnings for the period available to each share of common stock
outstanding during the reporting period.
27
<PAGE>
Net Loss Per Class A Common Stock [Continued]
SFAS No. 128 also requires a dual presentation of basic and diluted
earnings per share on the face of the statement of operations for all
companies with complex capital structures. Diluted earnings per share
reflects the amount of earnings for the period available to each
share of common stock outstanding during the reporting period, while
giving effect to all dilutive potential common shares that were
outstanding during the period, such as common shares that could
result from the potential exercise or conversion of securities into
common stock.
The computation of diluted earnings per share does not assume
conversion, exercise, or contingent issuance of securities that would
have an antidilutive effect on earnings per share (i.e., increasing
earnings per share or reducing loss per share). The dilutive effect
of outstanding options and warrants and their equivalents are
reflected in dilutive earnings per share by the application of the
treasury stock method which recognizes the use of proceeds that could
be obtained upon exercise of options and warrants in computing
diluted earnings per share. It assumes that any proceeds would be
used to purchase common stock at the average market price during the
period. Options and warrants will have a dilutive effect only when
the average market price of the common stock during the period
exceeds the exercise price of the options or warrants.
Advertising:
Advertising Costs which are immaterial are expensed as incurred.
Concentration of Credit Risk:
The Company sells primarily to customers in the retail industry
throughout the United States. The financial instruments, which
potentially subject the Company to a concentration of credit risk,
are cash and cash equivalents and accounts receivable. To reduce
credit risk, the Company performs a credit evaluation of its
customers' financial conditions and has generally short payment
terms. The Company does not require collateral on its accounts
receivable and its losses on accounts receivable have been within
management's expectations. The Company maintains its cash and cash
equivalents primarily in two financial institutions. At December 31,
1997, the Company had no credit risk related to cash and cash
equivalents.
28
<PAGE>
3. Statement of Cash Flows:
Supplemental disclosure of cash flow information:
Cash paid during the years for:
1997 1996
---- ----
Interest $ 55,043 $ 64,994
Taxes $ -- $ --
Supplemental disclosure of non-cash investing and financing activities:
1997 1996
---- ----
Issuance of stock grants $ -- $ 33,750
Issuance of common stock for
Notes receivable -- 95,000
Issuance of Preferred Stock in
Satisfaction of Line of Credit 429,920 --
Preferred Dividends Paid in Preferred
Stock 19,000 --
4. Contracts Requiring Development:
The fixed price contracts by which the Company recognizes revenues
frequently involve development of new software programs and/or hardware
components. The Company retains ownership of the products developed under
most of these contracts. Revenues and costs recognized under these
contracts have been:
1997 1996
---- ----
Contract revenues $ 192,000 $ 88,000
Cost of contract revenues $ 969,000 1,003,980
The Company has completed a contract to provide research and development to
one of its major customers pursuant to an Application System Prototype
Development Agreement (CPA Project). Through December 31, 1997, $1,770,000
and $4,470,000 have been recognized as revenues and cost under this
Agreement, respectively. The Project has exceeded its $1,700,000
contractual budget and the Company has recognized a loss of $2,770,000 of
which $1,020,000 and $1,353,000 have been recognized for the years ended
December 31, 1997 and 1996, respectively. Under this Agreement, the Company
retains sole marketing rights of the technology and is required to pay
royalties.
29
<PAGE>
5. Major Customers:
Information concerning major customers is as follows:
Revenues
Year ended Number of attributable to each
December 31, major customers major customer
1997 Three $461,000; $270,000; and $216,000
1996 Three $420,000; $320,000; and $130,000
6. Income Taxes:
The provision (benefit) for income taxes consists of the following:
1997 1996
---- ----
Current:
Federal $ -- $ --
State $ -- --
----------- -----------
-- --
Deferred -- --
----------- -----------
$ -- $ --
=========== ===========
Deferred tax assets (liabilities) comprised the following at December 31,
1997:
Excess book over tax basis of
property and equipment $ 39,042
Excess tax over book basis of
computer software (267,740)
Excess book basis over tax basis of
bad debt and inventory allowance 20,586
Write down of Net Assets 105,661
Excess book basis over tax basis of
non-qualified defined pension 69,431
Net operating loss carryforwards 2,718,000
Deferred Tax Asset 2,684,980
Valuation allowance for deferred
tax asset (2,684,980)
Net Deferred Tax Asset $ --
===========
The Company has a net operating loss ("NOL") carry forward for federal
tax purposes of $6,795,000 of which $801,000 expires in the year 2010 and
$3,724,000 expires in the year 2011 and $2,270,000 expires in the year
2012. The valuation allowance of $2,684,980 represents an increase of
$754,162 from the preceding year.
30
<PAGE>
Reconciliation of the federal statutory rate to the Company's effective
tax rate for the years ended December 31, 1997 and 1996 is as follows:
1997 1996
Federal statutory rate (34.0)% (34.0)%
State income tax rate, net of
federal income tax benefit (6.0) (6.0)
Deferred tax asset
valuation allowance 40.0 40.0
---------- -----------
Effective tax rate (0)% (0)%
7. Property and Equipment:
Property and equipment consists of the following at December 31, 1997:
Furniture and equipment $ 797,093
Automotive equipment 70,334
Leasehold improvements 353,627
Property under capital lease 59,321
1,280,375
Less: accumulated depreciation
and amortization 1,011,539
Write down of Net Assets 228,836
Net Property and Equipment $ 40,000
Depreciation expense was $229,879 and $299,958 for the years ended
December 31, 1997 and 1996, respectively.
8. Benefit Plans:
The Company has a 401(k) defined contribution retirement plan that covers
substantially all employees. Eligible employees may contribute up to 15%
of compensation with matching contributions at the Company's option. The
Plan does not require a matching contribution by the Company. The Company
did not make a contribution to the plan or incur any expenses in 1997 or
1996.
9. Debt:
The Company borrowed $750,000 at 9.5%, per annum, due September 20, 1997,
from its largest shareholder. The Note, including interest of $23,750,
was extended until March 19, 1998. (See Note 15).
31
<PAGE>
In June 1997, the Company exchanged 3,822 shares of Series A 10%
Redeemable Preferred Stock, two year Warrants to purchase 764,400 shares
of Class A Common Stock at $.50 per share and $45,000 in exchange for
cancellation of approximately $474,900 of secured debt under the Company
line of credit and $22,000 of accrued interest. The Company also extended
the Warrants to purchase 50,000 shares of stock at $1.25 per share issued
to the bank scheduled to expire August 31, 1998 until August 31, 2006.
The transaction resulted in a gain of $69,700 and was recorded as an
increase to Additional Paid-in Capital. The remaining balance of $95,448,
with interest, at the Bank's prime rate (8.5% at December 31, 1997) plus
one percent matured December 31, 1997.
The Company did not make the required payment on December 31, 1997 but
the debt holders have not made a demand for payment and the Company
continues to work to restructure the notes.
During 1996, the Company maintained a $550,000 Line of Credit with
interest at the Bank's prime rate (8.25% at December 31, 1996) plus one
percent. In October 1996, the credit facility was increased by $20,368
with an interest rate of prime plus two percent to fund the requirements
of a Letter of Credit presented to the Bank. The Line of Credit had an
outstanding balance of $570,368 on December 31, 1996.
In consideration for a one year extension from December 31, 1996 until
December 31, 1997, the Company issued to the Bank a Warrant expiring
August 31, 1998 to purchase 50,000 shares of stock at $1.25 per share.
The Company recorded $31,300 as Additional Paid-in Capital and Finance
Expenses in connection with the loan extension.
10. Leases:
The Company leases office facilities under a lease, as amended, which
expires in 1999. The Company has the option to extend the lease in one
year intervals for five years. The Company also leases office equipment
under operating leases which expire in 2001. The rental expense for the
operating lease totaled $275,536 and $267,518 for the years ended
December 31, 1997 and 1996, respectively. Contingent rentals are provided
on the Company's office facilities based on CPI increases of operating
expenses, as defined.
At December 31, 1997, annual future minimum lease payments under
operating leases and the present value of minimum lease payments are as
follows:
Minimum Lease Payment Operating Lease
1998 $ 276,241
1999 62,431
2000 5,868
2001 5,868
-----------
Total minimum lease payments $ 350,408
In accordance with the preparation of financial statements on the
liquidation basis, the Company has included $303,000 in accrued
liabilities at December 31, 1997 representing the minimum future lease
payments relating to the Company's commitment under the non-cancellable
office facilities lease.
32
<PAGE>
11. Commitments and Contingencies:
The Company has entered into an Amended Employment and Retirement
Agreement effective July 1, 1996 with its former Chairman under which he
is retained as a consultant to the Company at a cost of $4,675 per month
until December 1, 1998. Effective January 1, 1999, the Company will pay a
retirement benefit of $4,675 per month until December 1, 2003. The total
present value as of December 31, 1997 for the non-qualified, retirement
benefit was $173,578; total expense was $11,070 and $27,250 in 1997 and
1996, respectively.
On April 1, 1997, the Company ceased making payments under the Agreement
while it researches the validity of the Agreement. Since the Company
ceased making payment, it has recorded an expense of $42,075 and included
that amount in Accrued Liabilities. Additionally, in accordance with the
preparation of financial statements on the liquidation basis, the Company
has included $56,100 in accrued liabilities at December 31,1997,
representing the future payments relating to the Company's commitment
under the consulting agreement.
The Company has historically satisfied claims for its products under
warranty. It is not possible to determine the future cost, if any, for
future costs under warranty.
12. Stockholders Equity [Deficit]:
On November 1, 1996, the shareholders approved an amendment to the
Company's Restated Certificate of Incorporation to provide for an increase
in the authorization of Class A Common Shares, $.01 par value, from
10,000,000 to 25,000,000 shares.
In order to raise funds for the continued development of the CPA product
and for the support of ongoing operations, on September 20, 1996 certain
officers and directors of the Company and other individuals purchased a
total of 1,678,023 shares of the Company's Class A Common Stock at $1.00
per share. The total proceeds to the Company were $1,678,023.
On May 8, 1996, the Company, in a private cash transaction, received
$500,000 from the sale of 250,000 Class A Common Shares.
13. Redeemable Preferred Stock:
On November 1, 1996, the shareholders approved an amendment to the
Company's Restated Certificate of Incorporation to provide for the
creation of a new class of 5,000,000 shares of Preferred Stock.
During 1997, in order to raise funds for the continued development of the
CPA product and for the support of ongoing operations, certain officers
and directors of the Company and other individuals purchased a total of
8,947 shares of Series A 10% Redeemable Preferred Stock with a stated
value of $100 per share, and Warrants for $894,700. Dividends are payable
in cash or in additional shares of Series A 10% Redeemable Preferred
Stock, at the discretion of the Board of Directors. Dividends paid during
1997 were paid with 190 shares of Series A 10% Redeemable Preferred Stock
with a stated value of $19,000 except fractional shares, which were paid
in cash. The Preferred Stock is mandatorily redeemable by the Company one
year from the date of issuance.
During April and May of 1997, the Company raised $250,000 from the sale of
2,500 shares of Series A 10% Redeemable Preferred Stock and two year
Warrants to purchase 500,000 Class A Common Shares for $.50 per share.
33
<PAGE>
On June 28, 1997, the Company consummated an exchange with an investor
group, including certain officers and directors of the Company. The
investor group purchased the Company's Bank Debt and exchanged $474,900 of
secured debt and $23,000 of accrued interest for 3,822 shares of Series A
10% Redeemable Preferred Stock, two year Warrants to purchase 764,400
Class A Common Shares for $.50 per share and a $45,000 cash payment. The
exchange resulted in a gain of $69,700 and was recorded as Additional
Paid-in Capital.
In December, 1997, the Company raised $262,500 from the sale of 2,625
shares of Series A 10% Redeemable Preferred Stock and two year Warrants to
purchase 787,500 Class A Common Shares for $.40 per share sold to a
limited number of qualified investors, including certain officers and
directors of the Company.
14. Stock Options and Warrants:
The Company has various incentive plans. Under these plans, incentive
stock options, non-qualified stock options and stock grants may be issued
to officers and key employees. Incentive stock options are exercisable at
a price equal to the fair market value of the shares at the date of grant.
Non-qualified stock options will be exercisable at a price, not less than
$0.50 per share, determined by the Board of Directors. All options are
exercisable for no longer than ten years from the date of the grant. The
plans also provide for grants of stock subject to at least six months
deferred vesting. The options generally vest or become fully exercisable
over periods ranging from one to four years.
Stock option and warrant transactions for the years ended December 31,
1997 and 1996 are as follows:
<TABLE>
Weighted Non- Weighted
Weighted Average Qualified Weighted Average
Incentive Average Remaining Options Average Remaining
Stock Exercise Contractual and Exercise Contractual
Options Price Life Warrants Price Life
Balance, December 31,
<S> <C> <C> <C> <C> <C> <C>
1995 335,200 $1.07 3.1 years 761,873 $1.92 4.0 years
Granted 277,500 $1.03 4.2 years 287,500 $1.04 4.5 years
Expired (59,250) $1.05 -- -- -- --
Exercised (212,500) $1.10 -- -- -- --
Balance, December 31,
1996 340,950 $1.02 3.7 years 1,049,373 $1.68 3.6 years
Granted 1,070,000 $ .68 5 years 2,601,900 $ .50 2.7 Years
Expired -- -- -- -- -- --
Exercised -- -- -- -- -- --
Shares exercisable
December 31, 1997 1,410,950 $ .76 3.9 years 3,651,273 $ .84 2.7 years
</TABLE>
The Company applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations
in accounting for stock options issued to employees and directors.
In 1997 and 1996, the Company recorded $32,500 and $31,300, respectively,
in expense with respect to options granted to non-employees.
34
<PAGE>
Had compensation cost for the Company's stock options issued to employees
and directors been determined based upon the fair value at the grant date
for stock options issued under these plans pursuant to the methodology
prescribed under Statement of Financial Accounting Standards ("SFAS") No.
123, Accounting for Stock-Based Compensation, the Company's net loss and
loss per share would have been increased, on a pro forma basis, by
$153,436, or $.02 per share for the year ended December 31, 1997 and
$258,083 or $.04 per share for December 31, 1996. Pro forma amounts were
calculated using the Black-Scholes option-pricing model with the following
assumptions:
December 31,
1997 1996
Risk-free interest rate 6.18% 6.198%
Expected life 2 years 2 years
Expected volatility 99.84% 97.2 %
Expected dividends N/A N/A
The weighted average exercise price and fair value of options is as
follows at December 31:
Weighted Average Weighted Average
Exercise Price Fair Value
1997 1996 1997 1996
Options Whose Price:
Exceeds Market - $1.25 - $.63
Equals Market $ .65 $1.06 $ .36 $.57
Is Less Than Market - $1.07 - $.64
The following table summarizes information about incentive stock options
outstanding at December 31, 1997:
Weighted
Average Weighted
Range of Remaining Average
Exercise Price Shares Contractual Life Exercise Price
$.65 - $.75 1,020,000 4.28 $.66
$1.00 - $1.25 387,450 3.54 $1.00
$3.00- $3.25 3,500 3.30 $3.25
The following table summarizes information about non-qualified stock
options and warrants outstanding at December 31, 1997:
Weighted
Average Weighted
Range of Remaining Average
Exercise Price Shares Contractual Life Exercise Price
$.40 - $.50 2,051,900 4.67 $.46
$.50-$.75 550,000 4.25 $.65
$1.00-$1.25 287,500 3.7 $1.04
$1.75-$2.00 761,873 2.3 $1.92
35
<PAGE>
Net loss and net loss per share as reported, and on a pro forma basis as if
compensation cost had been determined on the basis of fair value pursuant to
SFAS No. 123, is as follows:
December 31,
1997 1996
Net Loss
As reported $(3,043,779) $(3,861,863)
Pro forma $(3,197,215) $(4,119,946)
Loss per share
As reported $(.46) $(.71)
Pro forma $(.48) $(.75)
15. Related Party Transactions:
In March 1997, the Company borrowed $750,000 due September 1997 from its
principal shareholder with an interest rate of prime rate (8.5%) plus one
percent (1%). Upon maturity, the interest of $23,750 and the principal
were extended until March 19, 1998. The Company is in discussions to
extend the note.
During April and May of 1997, the Company raised $250,000 from the sale of
2,500 shares of Series A 10% Redeemable Preferred Stock and two year
Warrants to purchase 500,000 Class A Common Shares for a $.50 per share.
Officers and directors purchased 1,900 shares of Preferred Stock and
380,000 Warrants.
On June 28, 1997, the Company consummated an exchange with an investor
group, including certain officers and directors of the Company. The
investor group purchased the Company's Bank Debt and exchanged $474,900 of
secured debt and $22,000 of accrued interest for 3,822 shares of Series A
10% Redeemable Preferred Stock, two year Warrants to 764,400 Class A
Common Shares for $.50 per share and a $45,000 cash payment. The exchange
resulted in a gain of $69,700 and was recorded as Additional Paid-in
Capital. Officers and directors exchanged $283,900 of Bank Debt and
accrued interest for 2,184 shares of Preferred Stock and 436,800 Warrants.
Officers and directors are currently due $49,995 of the remaining secured
debt of $95,448. The note matured December 31, 1997 and bears interest at
prime rate (8.5%) plus one percent (1%). The secured note holders have not
made a demand for payment and the Company continues to negotiate to
restructure the notes.
In December 1997, the Company raised $262,500 from the sale of 2,625
shares of Series A 10% Redeemable Preferred Stock and two year Warrants to
purchase 787,500 Class A Common Shares for $.40 per share sold to a
limited number of qualified investors, including certain officers and
directors of the Company. Officers and directors purchased 1,275 shares of
Preferred Stock and 382,500 Warrants.
In order to raise funds for the continued development of the CPA product
and for the support of ongoing operations, on September 20, 1996 certain
officers and directors of the Company and other individuals purchased a
total of 1,678,023 shares of the Company's Class A Common Stock at $1.00
per share. The total proceeds to the Company were $1,678,023.
At December 31, 1997 and 1996, the Company has three notes receivable from
officers of the Company totaling $95,000 which are included as a reduction
of capital in the stockholders' equity section of the Balance Sheet. The
notes are for $20,000, $35,000 and $40,000, are non-recourse to the
borrower and are secured by 20,000, 35,000 and 40,000 shares of AW
Computer Systems, Inc. Class A Common Stock, respectively. The notes have
an interest rate of 6.1% and mature October 1, 1999.
36
<PAGE>
16. Fair Value of Financial Instruments
In assessing the fair value of financial instruments at December 31, 1997,
the Company was required to make assumptions, which were based on
estimates of market conditions and risks existing at that time. For its
cash equivalents, and accounts receivable amount approximates fair value
because they have been written down to estimated liquidation basis. Based
on the financial condition of the Company, however, it is not practicable
to determine the fair value of the companies liabilities.
17. New Authoritative Accounting Pronouncements
The FASB has issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 is effective for the fiscal years beginning
after December 15, 1997. Earlier application is permitted.
Reclassification of the financial statements for the earlier periods
provided for comparative purposes is required. SFAS No. 130 will not
have an effect upon the Company's results of operations as it is an
income statement presentation accounting pronouncement only.
The FASB has issued SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information." SFAS No. 131 changes how operating
segments are reported in the annual financial statements and required the
reporting of selective information about operating segments in interim
financial reports issued to shareholders. SFAS No. 131 is effective for
periods beginning after December 15, 1997, and comparative information for
earlier years is to be restated. SFAS No. 131 need not be applied to
interim financial statements in the initial year of its application.
Management is in the process of evaluating the disclosure requirements.
SFAS No.131 will not have an effect on the Company's results of operations
as it is a disclosure accounting pronouncement only.
18. Loss Per Share:
The calculation of net loss per share attributable to common stockholders
for the year ended December 31, 1997 and 1996, includes the undeclared and
unpaid dividends on preferred stock of $22,843 and $-0- which represents
the quarterly dividends of $2.50 and $-0- per share, respectively.
Stock options and warrants outstanding at December 31, 1997 and 1996 to
purchase 5,062,223 and 1,390,323, respectively, shares of common stock
were not included in the computation of earnings per share assuming
dilution because the options and warrants would be anti-dilutive, however,
the options and warrants could be dilutive in the future.
19. Stockholders' Deficit Reconciliation
The following table reconciles stockholders' deficit at December 31,1997,
from the going concern basis to the liquidation basis
Stockholders' Deficit at December 31, 1997
(Going Concern - Basis) $(2,161,744)
Adjustment to Reflect Change to Liquidation Basis of
Accounting (Note 1) (264,154)
Estimated Cost to be Incurred During Period of Liquidation
(Note 1) (434,100)
Ending Net Liabilities - Liquidation Basis $(2,859,998)
===========
37
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
AW COMPUTER SYSTEMS, INC.
(Registrant)
By:/s/ Charles Welch
Charles Welch
Chief Executive Officer/President
By:/s/ Charles F. Trapp
Charles F. Trapp
Vice President, Finance
(Principal Financial Officer)
Dated:April 23, 1998
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
Signature Title Date
/s/ Charles McMullin Chairman/Chief Operating April 23, 1998
Charles McMullin Officer/Director
/s/ Charles Welch CEO/President/Director April 23, 1998
Charles Welch
38
<PAGE>
Supplemental Information to be furnished with Reports Filed Pursuant to Section
l5(d) of the Act by Registrants Which Have Not Registered Securities Pursuant to
Section l2 of the Act.
Not Applicable.
39
<PAGE>
EXHIBIT INDEX
- ------------------------------------------------------------------------------
PAGE NUMBERED IN SEQUENTIAL
NUMBERING SYSTEM AS
EXHIBIT DESCRIBED IN RULE 0-3(b)
INDEX DESCRIPTION OF INDEX WHERE EXHIBIT CAN BE FOUND
3A Amendment to the Company's Exhibit 3A-1 to the Company's Quarterly
Restated Certificate of Report on Form 10-Q for the quarter ended
Incorporation dated June 30, 1987 is incorporated herein by
June 30, 1987. reference at page 21.
3A-1 Amendment to the Company's Exhibit 3A-1 to the Company's Quarterly
Restated Certificate of Report on Form 10-Q for the quarter ended
Incorporation dated June 30, 1987 is incorporated herein by
June 30, 1987. reference at page 21.
3B The Company's Amended and Exhibit 3B to the Company's Annual Report
Restated By-Laws. on Form 10-KSB for the year ended
December 31, 1994 is incorporated
herein by reference at page 21.
3C-1 The Company's Registration Exhibit 3C-1 to the Company's Quarterly
Statement on Form S-8. Report on Form 10-QSB for the quarter
ended September 30, 1995 is incorporated
herein by reference at page 21.
4F Specimen Certificate for Exhibit 4F to the Company's Annual Report
Class A Common Shares. on Form 10-KSB for the year ended
December 31, 1994 is incorporated
herein by reference at page 22.
10D-4 Supplemental Employment Exhibit 10D-4 to the Company's Annual
and Retirement Agreement Report on Form 10-KSB for the year ended
dated March 1, 1993 between December 31, 1993 is incorporated
Nicholas Ambrus and the herein by reference at page 22.
Company.
10E Employment Agreement dated Exhibit 28C to the Company's Registration
October 1, 1986 between Statement No. 33-1898 is incorporated
Charles Welch and the herein by reference. Exhibit 10E to the
Company. Company's Annual Report on Form
10-K for the year ended December
31, 1990 is incorporated herein by
reference at page 22.
40
<PAGE>
EXHIBIT INDEX
- ------------------------------------------------------------------------------
PAGE NUMBERED IN SEQUENTIAL
NUMBERING SYSTEM AS
EXHIBIT DESCRIBED IN RULE 0-3(b)
INDEX DESCRIPTION OF INDEX WHERE EXHIBIT CAN BE FOUND
10E-1 Amendment Number Two to Exhibit 10P-1 to the Company's Annual
Employment Agreement between Report on Form 10-KSB for the year ended
the Company and Charles Welch. December 31, 1995 is incorporated
herein by reference at page 22.
10F Employment Agreement between Exhibit 10F to the Company's Annual
the Company and Charles J. Report on Form 10-KSB for the year ended
McMullin dated April 25, 1994. December 31, 1994 is incorporated herein
by reference at page 22.
10G Employment Agreement between Exhibit 10P-1 to the Company's Annual
Company and P. Michael Lutze Report on Form 10-KSB for the year ended
dated February 15, 1996. December 31, 1995 is incorporated
herein by reference at page 22.
10H Lease between Linpro Industrial Exhibit 10H to the Company's Annual
Limited and the Company dated Report on Form 10-K for the year ended
August 12, 1983. December 31, 1983 is incorporated herein
by reference at page 22.
10H-1 Amendment dated August 1,1986 Exhibit 10H-1 to the Company's Annual
to the Lease between Linpro Report on Form 10-K for the year ended
Industrial Limited and the December 31, 1986 is incorporated herein
Company. by reference at page 23.
10H-2 Amendment dated December 2,1986 Exhibit 10H-2 to the Company's Annual
to the Lease between Linpro Report on Form 10-K for the year ended
Industrial Limited and the December 31, 1986 is incorporated herein
Company by reference at page 23.
10H-3 Sixth Amendment dated November Exhibit 10H-3 to the Company's Annual
27, 1991 to Lease between Report on Form 10-K for the year ended
Linpro South Jersey, Inc. December 31, 1991 is incorporated herein
and the Company by reference at page 23.
10H-4 Seventh Amendment dated June 7, Exhibit 10H-4 to the Company's Annual
1992 to lease between Linpro Report on Form 10-KSB for the year ended
Greentree Business Centre December 31, 1987 is incorporated herein
Partnership and the Company. by reference at page 23.
41
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10H-5 Eighth Amendment dated February Exhibit 10H-5 to the Company's Annual
15, 1994 to lease between Linpro Report on Form 10-KSB for the year ended
Greentree Business Centre December 31, 1994 is incorporated herein
Partnership and the Company. by reference at page 23.
10M-16 Addendum to the Referral Exhibit 10M-16 to the Company's Annual
Agreement between NCR Report on Form 10-KSB for the year ended
Corporation and the Company December 31, 1994 is incorporated herein
dated December 10, 1993. by reference at page 23.
10M-18 Solution Provider Agreement Exhibit 10P-1 to the Company's Annual
between Microsoft Corporation Report on Form 10-KSB for the year ended
and the Company dated August December 31, 1995 is incorporated herein
1995. by reference at page 23.
10N-2 The Company's October 1992 Exhibit 10N-2 to the Company's Annual
Stock Option and Stock Grant Report on Form 10-KSB for the year ended
Plan (as amended). December 31, 1992 is incorporated herein
by reference at page 24.
10P-1 Addendum to Warrant Agreement Exhibit 10P-1 to the Company's Annual
between the Company and Winn- Report on Form 10-KSB for the year ended
Dixie Stores, Inc. dated December 31, 1995 is incorporated herein
March 8, 1996. by reference at page 24.
10V Agreement for the Procurement of Exhibit 10V to the Company's Annual
Life Insurance dated May 13, Report on Form 10-K for the year ended
1986 between the Company and December 31, 1986 is incorporated herein
Nicholas Ambrus. by reference at page 24.
10W Agreement for the Procurement of Exhibit 10W to the Company's Annual
Life Insurance dated May 13, Report on Form 10-K for the year ended
Nicholas between the Company December 31, 1986 is incorporated herein
and Charles Welch. by reference at page 24.
21 Subsidiaries of the Registrant. Page 55.
42
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27 Financial Data Schedules, CE
electronically filed, as per
Regulation SB.
No reports on Form 8-K were filed
by the Company during the last
quarter of 1997.
43
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
AW Computer Systems - Florida, Inc. Incorporated in the State of Florida
Conducts business under the name of AW Computer Systems - Florida, Inc.
44
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<ARTICLE> 5
<LEGEND>
This schedule contains summary financial data extracted from the consolidated
balance sheet and the consolidated statement of operations and is qualified in
its entirety by reference to such statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> year
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-END> Dec-31-1997
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<RECEIVABLES> 178,826
<ALLOWANCES> 51,465
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<CURRENT-ASSETS> 285,764
<PP&E> 40,000
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<TOTAL-ASSETS> 349,625
<CURRENT-LIABILITIES> 2,295,923
<BONDS> 0
0
913,700
<COMMON> 66,706
<OTHER-SE> (2,161,744)
<TOTAL-LIABILITY-AND-EQUITY> 1,114,585
<SALES> 0
<TOTAL-REVENUES> 1,151,256
<CGS> 1,685,117
<TOTAL-COSTS> 2,489,544
<OTHER-EXPENSES> (22,542)
<LOSS-PROVISION> 0
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<INCOME-PRETAX> (3,000,863)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,000,863)
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<EXTRAORDINARY> 42,916
<CHANGES> 0
<NET-INCOME> (3,043,779)
<EPS-PRIMARY> (0.46)
<EPS-DILUTED> (0.46)
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