SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1996
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File No. 0-26826
APPLIED COMPUTER TECHNOLOGY, INC.
(Name of Small Business Issuer in its charter)
Colorado 84-116457
(State of incorporation) (IRS Employer Identification No.)
2573 Midpoint Drive, Fort Collins, CO 80525
(Address of Principal Executive Office) Zip Code
Registrant's telephone number, including Area Code: (970) 490-1849
Securities registered pursuant to Section 12(b) of the Act
Title of Class Name of Exchange
Common Stock Pacific Stock Exchange
Warrants Pacific Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
Common Stock and Warrants
(Title of Class)
Check whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the past 12 months (or for such
shorter period that the Registrant was required to file such
reports) and (2) has been subject to such filing requirements
for the past 90 days.
Yes [X] No [ ]
Check if disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no
disclosure will be contained, to the best of the 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]
The Company's revenues for the most recent fiscal year were
$20,239,000.
The aggregate market value of the voting stock held by non-affiliates
(1,603,127 shares), based upon the average bid and asked prices of the
Company's Common Stock on April 24, 1997 was approximately $3,400,000.
As of April 25, 1997 the Company had 3,063,127 shares of common
stock issued and outstanding.
Documents Incorporated by Reference: None
Transitional Small Business Disclosure Format: Yes [ ] No [X]
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Item 1. DESCRIPTION OF BUSINESS
General
Applied Computer Technology, Inc. (the "Company") markets,
installs, services and supports microcomputer systems and related
peripheral products principally for use by business and large
institutional customers in the corporate, government and retail markets.
The Company provides a broad range of microcomputer products and
services including hardware, software, system design, consulting,
maintenance and training, as well as internet access and related services.
The Company assembles custom PCs and peripheral hardware under its own
brand name and markets well- known national brands including Compaq,
Apple and IBM. The Company also markets and installs operating systems
and applications software developed by Microsoft Coporation,
Novell, Inc. and other software developers. In March 1997 the
Company was notified that it was awarded contracts to supply
microcomputers to the United States Military Academy in West
Point, the Air Force Academy in Colorado Springs, Colorado,
and the United States Naval Academy in Annapolis, Maryland.
The amount of the contracts for these three Military Academies
is approximately $7,500,000. The Company's current customers
include Colorado State University, Ball Aerospace Corporation,
the University of Colorado, Metropolitan State College,
University of Oklahoma, U.S. Military Academy, the U.S. Air
Force Academy and the U.S. Naval Academy. Management
estimates the Company and its predecessors, which from 1986 to
1991 carried on the business now conducted by the Company,
have sold over 50,000 microcomputers.
The microcomputer products segment of the computer
industry was characterized in its early development by stand
alone personal computers with limited capabilities. Advances
in semiconductor technology were the driving force behind
significant upgrades in the capabilities of microcomputer
products, which in turn resulted in a wider range of software
applications which were suitable for use on microcomputers.
This expansion in microcomputer capabilities has been
accompanied by significant price reductions in microcomputers
and peripheral products as the cost of semiconductor chips has
fallen and manufacturing efficiencies have been realized.
The growth in the microcomputer industry is also the
result of local and wide area networks which permit a wide
distribution of applications software and databases throughout
a business or other organization, the use of a variety of
different hardware and software products from location to
location or even user to user, and the flexible addition or
deletion of software applications. In most cases, hardware
and software products produced by a variety of manufacturers
can be used interchangeably in PCs.
The Company's customers are increasingly turning to
networked microcomputer systems with prepackaged software for
their requirements. This trend allows the Company to provide
system-wide solutions, incorporating a variety of
microcomputer products and services, to its customers.
The microcomputer products segment of the computer
industry is highly competitive. A number of computer
resellers which compete with the Company with respect to some
or all of the products or services offered by it have
experienced downturns in operating results due in part, in the
Company's opinion, to excessive competition. Because of an
industry trend toward decreasing prices for microcomputer
products and peripherals, the Company has adopted a "just in time"
inventory management system. The Company believes that by
selling various microcomputer products, peripherals and
services as a single system, the Company is able to charge
higher prices and thereby earn higher gross profits than those
attributable to hardware sales alone.
Products and Services
The Company provides turnkey solutions designed to meet its
customers' information system requirements. Systems typically
include microcomputer and networking hardware, peripheral
equipment, operating system software, network system software
and application software. The Company also derives a portion
of its sales and service revenues from installation,
integration, consulting, upgrades, maintenance and training.
The Company believes that its customers have, and will
continue, to utilize computer networks to allow a wider
distribution of information and applications. The Company
offers network hardware and software to its customers,
providing support and maintenance for network systems, and
focusing certain of its marketing and sales resources on
developing customers with networking requirements.
Hardware. The Company's microcomputer systems are
customarily sold using components and peripherals provided by
the Company's suppliers. Hardware included in these systems
may include, among other items, personal computers and PC
workstations (including monitors, disk drives and memory),
peripherals including modems, printers and scanners, network
file servers, hard disks, tape drives, power supplies,
printers, high speed modems, network interface cards and
cabling. The Company assembles its microcomputer systems
using products from a number of manufacturers. In addition to
branded computer products, the Company purchases components
from a number of suppliers from which the Company assembles
microcomputers which bear the Company's brand name and logo.
The Company believes that its customers have accepted
assembled microcomputers using the Company's brand name, as
opposed to national brands, due to the increasingly common
performance characteristics of most microcomputers. The
Company intends to continue to provide custom-assembled
microcomputers to its customers, both as a means of servicing
each customer's particular automation requirements as well as
achieving significantly higher margins than those associated
with mass produced national brand microcomputers.
Because the Company is frequently able to source
microcomputers or components from different suppliers, the
Company has generally not experienced delays in obtaining
hardware to satisfy customer orders. Although the Company
believes microcomputers and components are available from a
number of alternative suppliers, any significant interruption
in delivery of such items could have a material adverse effect
on the Company's operations.
Software. The Company purchases complete software
programs, including operating systems, application software
and networking software, from a variety of vendors. The vast
majority of operating systems installed by the Company operate
through the DOS/Windows environment. The Company has
also installed Novell, UNIX and NT Network operating systems.
Operating systems installed by the Company typically allow
customers to migrate to different hardware and software
technologies and to upgrade to new releases of application
software. The Company has established reseller and support
agreements with two leading software development firms. The
agreement with one software development firm contains minimum
royalty obligations payable by the Company through 1998
which, if not met, entitle the software development firm to
increase prices charged to the Company for software.
Services. The Company offers a full complement of
services which are designed to meet the Company's goals of
providing the turnkey solution to the customers' information
requirements. The services offered by the Company include
implementation, consulting, training, system integration and
support, internet access and service, maintenance and
customer service.
Customers are offered a variety of consulting services to
assist in effectively implementing and deploying the
information solution developed by the Company. Services
offered include a variety of site-specific technical and
consulting services to assist in all phases of installation,
as well as integration of hardware and software with the
customer's other automated systems and devices. Training
services provide the customers' personnel with a formalized
education program to ensure that their applications are
implemented and utilized in an efficient and cost-effective
manner. Customers are also offered a variety of software
installation, technical support and user training
services, both on-site and in the Company's Business Centers.
Customized education and training programs are also available
to meet a customer's specific need.
The Company's customer service program provides customers with
ongoing hardware and software maintenance and hotline telephone
support. Agreements which provide for upgrades maintain the
customers' hardware, software or documentation to the then
current standard release level supported by the Company. Where
contracted for separately, maintenance services are billed
monthly in advance and implementation and consulting services are
billed monthly as incurred.
Sales and Marketing
The Company's products and services are marketed and sold
principally on a direct basis by the Company's sales and
marketing personnel. As of March 31, 1997 the Company had 29
full-time employees engaged in sales and marketing activities,
including representatives serving the corporate, government and
retail markets and in-house sales associates. The sales
representatives are compensated using a combination of salary and
commissions.
The other principal means by which the Company markets its
products and services is through its Business Centers. Each
Business Center is designed as a showroom with key demonstration
models, but stocks relatively little inventory. Orders received
at the Company's Business Centers are transmitted to the
Company's headquarters, where products are ordered or assembled
for delivery to the Business Center. Although the Company has
adopted a "just in time" inventory management system, the Company
has been successful in delivering products ordered by its
Business Centers in an average of 10 to 14 days. If required,
the Company can have components or microcomputers delivered by
overnight delivery, at an additional charge to the customer, and
generally fill an order in three to five days.
The Company's customer base principally consists of
various corporate and government entities. During 1996,
approximately 65% of the Company's revenues were the result
of sales to government and educational institutions, 20% to
commercial accounts, and 15% to retail customers, although a
significant amount of these retail sales were to smaller
businesses. The Company's four largest customers during 1996
and their respective percentage of gross revenues were: U.S.
Air Force Academy - 16%; Ball Aerospace - 10%; U.S. Military
Academy - 15%; and Colorado State University - 7%. The
Company anticipates that its sales to the Departments of the
Army, Air Force, and Navy will each account for in excess of
10% of the Company's sales and service revenues in 1997.
Sales to the Company's government customers in particular
are characterized by a lengthy sales cycle which generally
extends for a period from six to 12 months. Purchases by
government entities are often characterized by bidding and
contracting procedures which may place significant demands on
the Company's administrative and sales personnel. Although
the Company's status as a non-exclusive approved vendor to
the State of Colorado has simplified some of the bidding
procedures to state-funded colleges and governmental
entities, there can be no assurance the Company will continue
to remain an approved vendor by the State of Colorado. See
"Risk Factors."
The Company's marketing efforts are designed to increase
awareness and demand for its products and services from its
customer base. The Company's marketing activities combine
media advertising in regional newspapers, direct mail
advertising, participation in four industry trade shows each
year, and sponsorship of local sporting events. The Company
also receives sales leads from its hardware and software
suppliers, customers and various firms active in the
microcomputer industry.
The Company offers installation, upgrades, maintenance,
training and technical support to its customers and estimates
that approximately 75% of its customers purchase one or more
of these services from the Company within one year of
purchase of hardware.
The Company sells its computer systems at prices which
are comparable to competitor"s systems having similar
features. The Company sets its rates for service, repair and
training so as to be comparable with the rates charged by
competitors. The Company believes that its pricing policy
allows the Company to differentiate itself from competitors
on the basis of service.
Because the Company ships microcomputer products and
software shortly after receipt of an order, the Company
typically does not have a significant backlog of unfilled
orders, and revenues in any quarter are substantially
dependent on orders received and delivered in that quarter.
However, the Company from time to time experiences higher
than normal backlog depending on factors such as the
configuration of the microcomputer systems ordered, the size
of orders received and availability of hardware or software
from suppliers.
Business Centers
The Company believes that the Business
Centers establish customer recognition of the Company, its
products and services and provide the Company a venue
through which higher margin services can be provided to its
customer base. The Company also utilizes its Business
Centers as a sales and marketing tool to identify and
provide services to its corporate and government customers.
The following table provides information concerning the location
and services offered by the Company's Business Centers:
Current
Services Monthly Lease
Location Offered Rental(1) Termination
2573 Midpoint Dr. (2)(3) $10,650 01/00
Fort Collins, Colorado
One Tabor Center (3) $ 5,092 09/01
1200 17th St.
Denver, Colorado
1221 W. Elizabeth St. (3) $ 2,660 01/01
Fort Collins, Colorado
5975 N. Academy Blvd. (3) $2,312 08/97
Colorado Springs, Colorado
6501 E. Belleview Ave. (3) $12,895 12/01
Suites 110 and l20
Englewood, CO 80lll
1640 Range Street (3) $2,600 07/00
Boulder, Colorado
(1) Base rent plus common area and maintenance fees, excluding taxes.
(2) This facility includes the Company's Executive Offices, Computer
Assembly Facility and Service Center.
(3) Sales, technical service, repairs and training services.
The Company expects that its existing executive and assembly
facilities will be adequate for the Company's needs for the
foreseeable future. However, should the Company require
additional space for assembly of microcomputers for large
contracts, the Company believes additional facilities are
available near the Company's existing headquarters at a
cost comparable to that now paid.
Suppliers
The Company purchases microcomputers, software
and components used in the assembly of its own brand of
microcomputers from outside suppliers. The Company has no long term
agreements with its suppliers with respect to the
price or supply of components or peripherals purchased by the
Company.
The Company is an authorized reseller of network operating
software developed by Microsoft and Novell. The agreements with
Microsoft and Novell authorizes the Company to sell and support
Microsoft and Novell network operating software. These agreements
obligate Microsoft and Novell to provide the Company with sales
leads, technical support, introductory product releases, product
promotion literature and technical documentation and may be
terminated by either party without cause on 30 days notice.
Proprietary Rights
Neither the Company nor any of its directors, officers or
shareholders own any patents or patent rights respecting products
marketed by the Company. The Company holds license agreements with
one supplier which grant the Company a limited, nonexclusive license
to use the trademarks, service marks and logos of such supplier in
the promotion of the software provided by the supplier to the
Company. The Company has registered its Applied Computer Technology
name as a trademark
and service mark, and has registered the stylized handprint logo, as
a trademark and service marks with the United States Patent and
Trademark Office. The Company intends to maintain the integrity of
its service marks, trade names and trademarks against unauthorized
use and to protect against infringement and unfair competition where
circumstances warrant. The Company is not aware of any currently
infringing uses.
Competition
The microcomputer segment of the computer industry is
intensely competitive and is characterized by rapid technological
advances, evolving industry standards and technological
obsolescence. Many of the Company's current competitors have longer
operating histories and have greater financial, technical, sales,
marketing and other resources than the Company. In addition, there
are a number of large, wellcapitalized firms that could, should they
choose to do so, market microcomputer hardware, peripherals and
software in direct competition with the Company. The Company
believes that the principal competitive factors in the market for
microcomputer products include price, service and support, ease of
use and the ability to integrate with other technologies, brand
availability and market presence. The Company currently views
Compucom, Entex and Lewan Associates as its principal competition in
the microcomputer market in which the Company is active. The
Company also competes to a lesser extent with a number of value
added resellers, computer retailers, electronic specialty stores and
mail order distributors active in the microcomputer hardware or
software markets. There can be no assurance the Company will be
able to compete successfully against its competitors or that the
competitive pressures faced by the Company will not adversely affect
its financial performance.
Internet Services
In October 1996, the Company began offering internet access to
the Company's customers and the general public. As an Internet
Service Provider, the Company provides Internet access to persons
wishing to view and/or use information stored on the Internet.
Persons using the Company for Internet access have unlimited E-Mail
usage through the Internet. In addition, the Company offers World
Wide Web ("Web") sites (one or more pages of information on the
Internet) to businesses that want to advertise their products or
services on the Web. For an additional fee, the Company helps these
businesses create and design the pages for their Web site.
Customers can establish initial access to the Internet using the
Company's dial-up service and standard analog modems. Basic service
includes unlimited usage for non-commercial purposes and EMail.
Customers can obtain additional E-Mail names (so that
family members can receive E-mail addressed to them) without
incurring the full expense of an additional account. Each personal
account also includes, at no extra charge, 10Mb of storage
space for Web documents.
Until recently, use of the Internet was generally limited
to governmental, educational and commercial organizations
with a working knowledge of the UNIX operating system and
commands, and the primary use made of the Internet was the
communication of information via electronic mail. However,
there has been a rapid growth in the use and popularity of
the Internet in the past several years. According to
industry sources, users in more than 130 countries
throughout the world are connected to the Internet including
24 million users in North America, 17.6 million of whom use
the World Wide Web.
The dramatic growth in the number of Internet users is
attributable to a number of developments and factors. The
first was the introduction in 1992 of the World Wide Web
("Web"), a collection of computer linked, multimedia
databases which began to unlock the potential of the Internet
as a mass medium. The Web advanced the potential of the
Internet in several significant ways. First, it enables full
multimedia presentation (including text, graphics, video and
audio) over the Internet. Second, through the Web's system
of standardized information protocols and a communications
format called HyperText Transfer Protocol ("HTTP"), users can
gain access to information ("navigate") on the Web without
entering complex alphanumeric commands. Third, using
HyperText Markup language ("HTML"), document authors can link
text or images in one document to other documents anywhere
else on the Web. When a user selects or, if using a mouse,
clicks on the hypertext in one document (often displayed on
the screen as highlighted words or images) the linked
document is automatically accessed and displayed.
The Web is based on a system on which certain computers
("servers"), such as the Company's computers, store
information in files and respond to requests issued by remote
computers to view or download files, thus allowing multiple,
geographically dispersed users to view and use the
information stored on a single server. The user must use
software, known as a browser, that can read HTML documents
and follow their hypertext links to retrieve and display
linked documents from servers.
The Company believes that its primary source of Internet
related revenues will be fees from providing Internet access
and Web maintenance and design services for businesses.
Employees
The Company employed 87 persons as of March 31, 1997. Of
these, 18 were employed in administration, 15 in assembly and
shipping, 29 in sales and marketing and 25 in support,
services, training and technical support. The
Company's employees are not covered by any collective
bargaining agreements. The Company believes that its
employee relations are good.
Item 2. DESCRIPTION OF PROPERTY
See "Business Centers" in Item 1 of this report.
Item 3. LEGAL PROCEEDINGS
In November 1996 the Securities and Exchange Commission
(SEC) commenced a formal investigation of the Company. The
Company understands this investigation relates primarily to
the Company's capitilization of labor and related costs
associated with enhancements to the Company's internal
software systems, the development of software for the
Company's internet service, the development of the Company's
new marketing program and the opening of new business
centers. At December 31, 1996 the Company changed its
accounting policy concerning these costs and elected to
expense substantially all of the costs which had previously
been capitalized during 1996 in the areas mentined above. As
of April 30, l997, the SEC's investigation was continuing.
On April 23, 1997 Access/Ability, Inc., filed a lawsuit
against the Company seeking damages for the alleged breach by
the Company of an agreement whereby Access/Ability was
retained to assist the Company in its customer training
program. Access/Ability contends in its complaint that the
Company failed to provied three months notice when
terminating the agreement, did not act in good faith in terminating the
agreement and fraudulently deceived Access/Ability into
entering into the agreement with the Company. The Company
is of the opinion that the allegations of Access/Ability
are without merit.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
As of March 31, 1997, there were approximately 450
beneficial holders of the Company's Common Stock and Warrants.
The Company has not issued any shares of preferred stock. The
Company's Common Stock and Warrants are traded on the National
Association of Securities Dealers Automatic Quotation
("NASDAQ") System. Set forth below are the range of high and
low bid quotations for the periods indicated as reported by
NASDAQ. The market quotations reflect inter-dealer prices,
without retail mark-up, mark-down or commissions and may not
necessarily represent actual transactions.
Quarter Ending Common Stock Warrants
High Low High Low
12/31/95 (1) $4.50 $4.31 $0.88 $0.63
3/31/96 $5.63 $5.00 $1.06 $0.69
6/30/96 $5.63 $3.88 $1.06 $0.56
9/30/96 $5.00 $4.25 $0.82 $0.82
12/31/96 $5.44 $3.50 $l.00 $0.38
(1) The Company's Common Stock and Warrants began trading on
October 26, 1995.
Holders of Common Stock are entitled to receive such
dividends as may be declared by the Board of Directors out of
funds legally available for the payment of dividends and, in
the event of liquidation, to share pro rata in any
distribution of the Company's assets after payment of
liabilities. The Board of Directors is not obligated to
declare a dividend. The Company has not paid any dividends
and the Company does not have any current plans to pay any
dividends. Pursuant to the terms of a loan agreement with a
bank, the Company may not pay any dividends without the
consent of the bank. See Note 4 to the Company's December
31, 1996 financial statements.
Recent Sales of Unregistered Securities. During the
year ending December 31, 1996 the Company issued 23,127
shares of common stock to a former employee as the result of
the exercise of stock options held by the former employee.
The issuance of the shares was exempt from registration
pursuant to section 4(2) of the Securities Act of 1933 since
the issuance of the shares was not a transaction involving a
public offering. The shares issued as a result of the
exercise of the options were restricted securities as that
term is defined in Rule 144 of the Securities and Exchange
Commission.
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
The following selected financial data should be read
in conjunction with the Financial Statements and related
Notes thereto appearing elsewhere in this Report and
"Management's Discussion and Analysis of Financial Condition
and Results of Operations." The selected financial data
provided below is not necessarily indicative of the future
results of operations or financial performance of the
Company.
Years Ended December 31,
1996 1995 1994
(in thousands, except per share data)
Statements of Operations Data:
Sales and service revenues $20,239 $19,058 $11,734
Cost of goods sold 17,084 16,156 9,989
Gross profit 3,l55 2,902 l,745
Operating expenses 4,444 1,977 1,864
Income (loss) from operations (1,289) 925 (119)
Other income (expense), net (228) (l94) (77)
Income tax (expense) benefit 175 (185) -
Net income (loss) $(l,342) $ 546 $ (196)
Net income (loss) per share $(0.44) $0.25 N/A
Pro forma information(1):
Historical earnings (loss)
before income taxes $731 $(196)
Pro forma income taxes (benefit) 196 (63)
Pro forma net income (loss) $535 $(132)
Pro forma net income (loss) per share $0.24 $(.06)
Shares used in computing earnings
(loss) per share 3,042 2,124 2,097
(1) From inception through June 2, 1995, the Company elected to
be treated for federal and state income tax purposes as an S
Corporation under Internal Revenue Code and comparable state
tax laws. As a result, the Company's earnings from that date
until June 2, 1995 had been taxed, with certain exceptions,
for federal and certain state income tax purposes directly to
the Company's shareholders rather than to the Company. Pro
forma information reflects a tax provision to allow
comparisons with corporations which are subject to federal and
state income taxes.
December 31,
1996 1995
(In Thousands)
Balance Sheet Data:
Working capital $l,24l $4,084
Total assets $8,873 $5,762
Total liabilities $5,864 $1,411
Shareholders' equity $3,009 $4,351
General
Revenues from product and system sales are recognized
when title to the product or system passes to the customer.
Revenues from maintenance agreements are recognized ratably
over the term of the maintenance agreement.
From inception through June 2, 1995, the Company elected to
be treated for federal and state income tax purposes as an S
Corporation under the Internal Revenue Code and comparable
state tax laws. As a result, the Company's earnings from that date
until June 2, 1995 had been taxed, with certain exceptions, for
federal and state income tax purposes directly to the Company's
shareholders rather than to the Company. Due to the Company's
status as an S Corporation, the Company's financial statements do
not contain a provision for income tax expense for operations prior
to June 2, 1995. The financial statements include pro forma
calculations which assume the Company was subject to normal
corporate tax rates during the periods presented. Income earned by
the Company after June 2, 1995 will be subject to normal corporate
income tax. See Note 5 of Notes to Financial Statements.
The Company may experience significant fluctuations
in quarterly operating results due to a number of factors including,
among others, the size and timing of customer orders.
Results of Operations
Year Ended December 31, 1996
The Company recorded a net loss of ($l,342,000) in l996 as
compared to a net profit of $535,000 in l995. Contributing to this
loss were less than expected revenues as well as several large one-
time start-up and development expenses including (i) costs
associated with the development of the Company's internet division;
(ii) costs associated with the opening of the Business Centers in
the Tabor Center and the Denver Tech Center; (iii) expenses incurred
in the redevelopment of the Company's image and the generation of
associated marketing materials and (iv) costs involved in the
development of the Company's internal information systems. Investment
in these areas continued through the first quarter of 1997 and the
Company expects to incur further losses during this quarter. Although
there can be no assurance that there will not be future expenses in
these areas, the Company believes that these start up and
development efforts were materially complete as of March 31, 1997.
Sales and service revenues, although greater than fiscal
l995, were less than expected, primarily as the result of the
long sales cycle traditionally experienced with sales to
corporate and institutional customers. These customers may
take many months to open accounts, however,
the Company believes the opportunity for continuing business
with customers of this profile is significant. Although
there can be no assurance that these customers will choose to
purchase products and services from the Company or that
continuing business opportunities will be realized, several
new customers, including NASA in Houston and the U.S. Naval
Academy in Annapolis, have placed orders for delivery in
l997.
The Company's expansion of its sales force did not
contribute as expected during the fourth quarter of 1996.
There were disappointing industry-wide sales for the PC
industry in the retail segment as well as the Company's
targeted SOHO (Small Office/Home Office) business in the
fourth quarter of l996. The Company attributes the slow
fourth quarter sales to anticipation of the Intel MMX
technology, which was not released until the first quarter of
1997. The Company believes that the introduction of the
Intel Pentium II in May of l997 will motivate buying by the
Company's traditional institutional market as well as the
Company's targeted corporate market in l997. Since the
Company did not meet its targets in the SOHO market and did
not direct sufficient resources into the corporate market,
during the first quarter of l997 the Company scaled down its
efforts in the SOHO market and redirected resources towards
the generation of corporate business.
In addition, the Company's expansion efforts in the
Denver marketplace were delayed due to construction and other
delays associated with the opening of its Tabor Center and
Denver Tech Center Business Centers. These centers,
originally slated for August and October openings, did not
open until November l996 and February l997 respectively, and
the sales expected from these centers in l996 were not
realized.
Notwithstanding the above, sales in the Company's
traditional markets continued to be strong. During March
1997, the Company was awarded annual contracts with the
United States Military, the United States Air Force, and the
United States Naval Academies for delivery of PC's to their incoming freshmen
classes. Although the Company delivered PC's to the United States
Military and Air Force Academies in 1995 and in 1996, 1997 is the first
year that the Company has been awarded this contract for the United
States Naval Academy. All three contracts are scheduled for delivery in
August 1997. Gross revenues for these contracts will be approximately
$7,500,000.
Sales and marketing expenses increased by $1,748,000 in
1996 as the Company made significant investments in l996 to upgrade its
corporate image and recruite and train new sales
staff. These investments included (i) opening two new Business Centers
in Denver; (ii) upscaling existing Business Centers in Boulder, Ft.
Collins, and Colorado Springs; (iii) recruiting and training staff; (iv)
developing an updated Company logo; and (v) designing, printing and
distributing Company marketing pieces and advertising. The upgrade of
the corporate image was designed to enable the Company to be more
appealing to the Company's target market segment of professional
services buyers and other high margin products and services. The new
sales personnel were hired to develop and produce marketing materials,
oversee the design and construction of the Company's Business Centers,
introduce the Company's products and services to new market segments,
service the Company's existing client base, and to otherwise expand the
Company's marketshare in Denver and other areas. Expenditures in these
areas continued through the first quarter of 1997.
General and administrative expenses increased by $226,000 largely
as the result of expenses incurred in designing and installing the
Company's internal communications and information systems. The funds
invested by the Company in this project included the installation of
enterprise-wide telephone and wide data network (WAN) systems. These
systems were installed to enable the Company to improve internal
communications, upgrade management information systems, improve customer
service and productivity and enable the Company to service an expanding
customer profile. Company personnel were used for much of the design,
development, and installation of these systems. Additional increases in
general and administrative expenses included investor relations and
compliance costs associated with the Company's status as a public
entity.
The Company spent $493,000 in l996 to develop an Internet service
division in Ft. Collins, Boulder, Denver, and Colorado Springs. During
1996 the Company also acquired two Internet Service Providers (ISP's) in
Ft. Collins and Colorado Springs. These funds were spent to (i) develop
a working business model to market internet services to the Company's
clientele; (ii) develop and configure internal systems to support an
internet user base, track and monitor the client database, and bill
customers for services; (iii) develop pricing models, promotional
literature, and establish a regional presence; and (iv) market the
Company's services to customers. The Internet service division was
formed to enable the Company to expand the services offered to its
customers and to position the Company to take advantage of the growing
demand for internet access and internet web site services. As of March
3l, l997, the Company had approximately l,500 customers using its
Internet services. Year Ended December 31, 1995
The Company reported net income of $535,000 during 1995 compared to
a loss of $132,000 during 1994. Sales and service revenues increased
from $11,734,000 in 1994 to $19,058,000 in 1995 primarily as a result of
(i) contracts with the Army and Air Force to supply PCs to the United
States Military and Air Force Academies for the 1995 freshmen classes and
(ii) the Company's increased marketing of custom configured computer systems
and network installations. The gross profit margin for 1995 increased to
15.2% from 14.9% in 1994 due to the better pricing available to the
Company with larger volumes of purchasing and the increased margin on
services.
Liquidity and Capital Resources
During the quarter ending December 31, 1995, the Company completed
a public offering whereby it sold 1,150,000 shares of common stock and
1,150,000 common stock purchase warrants. The net proceeds to the
Company from the 1995 offering, after payment of underwriting
commissions and other offering expenses, were approximately $3,313,000.
Through other private offerings of common stock which were completed
prior to the public offering, the Company raised an additional $449,000 in
1995. These offerings were the Company's primary source of cash flows
from financing activities in l995. In l996, the Company's primary
source of cash from financing activities was net borrowings under its
credit line of $1,959,000, which was almost fully extended at December
31, 1996, except for amounts available under a $2,500,000 special credit
line for financing receivables from major accounts.
In 1996, the Company incurred a loss of $1,342,000 and
used cash of $1,395,000 for equipment purchases, (In 1995, equipment
acquisitions amounted to $559,000.) Due in part to the foregoing, the
Company's working capital decreased from $4,084,000 at December 31, 1995
to $1,241,000 at December 31, 1996. Continuing losses would cause
significant liquidity problems and may ultimately impact the Company's
ability to continue future operations. While the Company expects to
incur additional losses in the first quarter of 1997, management
believes it still will have adequate liquidity to sustain future
operations.
At December 31, 1996, the Company was not in compliance
with certain financial reporting and other covenants in its loan
agreement with a lender, to which the Company owed $2,465,000 at
December 31, 1996. Subsequent to December 31, 1996 the Company received
formal waivers of the violations to the loan agreement and covenants.
Included in current liabilities at December 31, 1996,
and thereby reducing working capital, is approximately $413,000 owed to
this lender which, although scheduled to be paid after 1997, is payable
upon demand. Subsequent to year-end, the Company received a $1,000,000
lease line commitment, which is available for future capital
expenditures.
Cash used in operating activities was $1,285,000 in 1996 which was
primarily the result of the loss from operations with substantial
offsetting increases in inventories and accounts payable. In 1995, the
Company used $968,000 of cash in operations which was the result of
increases in accounts receivable and inventories and payment of accounts
payable.
The Company's principal sources of liquidity for operations are its
cash, cash generated from the collection of receivables and the sale of
inventory, as well as potential future profits. Cash generated from
these sources is expected to be sufficient to meet the Company's capital
requirements
during 1997. However, if cash from the collections of accounts
receivable, the sale of products, and any debt financing are
insufficient, or if working capital requirements are greater than
anticipated, the Company could be required to raise additional capital.
There can be no assurance the Company will be capable of
raising additional capital or that the terms upon which such
capital will be available to the Company will be acceptable.
Although subsequent to year-end, the Company reduced its
overhead, there can be no assurance that the Company can
generate profits and other actions may be required by
management. Management however, believes the actions taken to
reduce overhead and increase revenues will enable the Company
to continue operations through 1997. As of April 30, 1997,
the Company had a sales backlog of approximately $8,500,000,
and the Company continues to aggressively pursue additional
sales.
The Company's operations are seasonal to a certain
degree, with sales and service revenues generally higher in
the third and fourth quarters of each year as opposed to the
first two quarters. Management attributes this seasonality
to purchases made prior to commencement of the school year,
sales attributable to the Christmas holiday and budgetary
purchasing cycles of its corporate and government customers.
Item 7. FINANCIAL STATEMENTS
See the financial statements attached to this report.
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS, COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Directors and Executive Officers
The following table sets forth information as of the
date of this prospectus regarding the directors and executive
officers of the Company:
Name Age Position
Wiley E. Prentice, Jr. 33 President, Chief Executive Officer
and Director
Cynthia E. Koehler 32 Executive Vice President, Secretary
and Director
Stephanie Sissler 36 Vice President of Sales and
Marketing
Gary D. Goldfain 50 Vice President of
Operations
J. Roger Moody 63 Director
Officers are appointed by and serve at the discretion
of the Board of Directors. Each director holds office until
the next annual meeting of shareholders or until a successor
has been duly elected and qualified. All of the Company's
officers devote their full-time to the Company's business
and affairs.
Wiley E. Prentice, Jr. is the founder of the Company
and has been the President, Chief Executive Officer and a
director since the Company's inception. Mr. Prentice also
served as Treasurer from inception to February 1995. Mr.
Prentice's principal responsibilities now include strategic
planning, vendor relationships, and sales and marketing
activities. In 1986, Mr. Prentice formed Applied Computer
Technology, a Colorado sole proprietorship which until 1989
conducted the business now engaged in by the Company. In
1989, Mr. Prentice co-founded Applied Computer Technology, a
Colorado general partnership, which continued the business
of the sole
proprietorship until 1991, at which time the assets of the
partnership were acquired by the Company.
Cynthia E. Koehler has been Executive Vice President,
Secretary and a director of the Company since its inception.
Ms. Koehler's principal responsibilities include human
resources, corporate policy and practices and logistics. Ms.
Koehler also co-founded Applied Computer Technology, the
general partnership which from 1989 through 1991 conducted
the business now engaged in by the Company. Ms. Koehler
received her Bachelor of Science degree in computer science
from Colorado State University in 1987.
Stephanie Sissler has been the Company's Vice President
of Sales and Marketing since March 1996. From 1991 through
1996, Ms. Sissler held various positions at Intelligent
Electronics, including Vice President, Sales and Customer
Service; Vice President, Marketing; and Director, Strategic
Marketing. Prior to her association with Intelligent
Electronics, Ms. Sissler held positions with Entre', Novel
and Xerox. Ms. Sissler received her B.B.A. degree in
Management Information Systems from James Madison University
in 1981 and her M.S. degree in marketing from the University
of Colorado-Denver in 1994.
Gary D. Goldfain has been the Company's Vice President of
Operations since February 1997. Between 1986 and 1997 Mr
Goldfain held a variety of positions with Teledyne Water Pik,
including Manufacturing Manager (1988 to 1997) and Purchasing
Manager (1986 to 1988). Between 1982 and 1986 Mr. Goldfain
was the Purchasing Manager for Cobe Laboratories. Mr.
Goldfain received a Master of Business Administration degree
from University of Phoenix in 1984 and his Bachelor of
Science degree in Engineering Sciences from the US Air force
Academy in 1969.
J. Roger Moody has been a director of the Company since July
1995. Mr. Moody has been an independent business consultant since
1994 providing advice in the areas of marketing and operations to
development stage companies. From 1991 to 1994, Mr. Moody served
as president, chief executive officer and a director of Data Switch
Corp., a publicly traded manufacturer of computer products. From
1986 to 1991, Mr. Moody served as president, chief executive
officer and a director of Coordination Technology, Inc., Trumbull,
Connecticut, a software development and marketing company. From
1985 to 1986, he was president, chief executive officer and a
director of InfoCenter Software, Inc., New Paltz, New York, a
software development and marketing company. From 1983 to 1984, he
was president, chief executive officer and a director of U.S.
Satellite Systems, Inc., New York, New York, a satellite design and
production company. From 1981 to 1983, he was a vice president of
CBS and between 1974 to 1981, a vice president of AT&T. From 1959
to 1972, he held various sales and management
positions with IBM. Mr. Moody received his Bachelor of Science
degree in electrical engineering from Columbia University in 1958
and his Master of Business Administration degree from the
University of Michigan in 1959.
Michael D. DeWitt, who became a director of the Company
in July 1995, died of natural causes in April l997.
Item 10. EXECUTIVE COMPENSATION
The following table sets forth the annual and
longterm compensation for services in all capacities to the Company for
the three years ended December 31, 1996 of Wiley E. Prentice, Jr., the
President and Chief Executive Officer of the
Company (the "Named Officer"), and any other officers of the Company who
received annual salary and bonus exceeding $100,000 during such three-
year period.
Long-term
Name and Annual compensation compensation All other
Principal Position Year Salary Bonus awards
Compensation(1)
Wiley E. Prentice, Jr. 1996 $71,910 -0- -- $ --
President and Chief 1995 $44,263 -0- -- $ --
Executive Officer 1994 $36,994 -0- -- $ --
(1) Excludes personal use of a Company-furnished automobile
valued at less than $l,000 and car allowance of $l,800.
During the period covered by the above table, no shares of
restricted stock were issued as compensation for
services to the persons listed in the table. As of September
30, 1996, the number of shares of the Company's restricted
common stock, owned by the officers included in the table, and
the value of such shares at such date, based upon the market
price of the Company's common stock were:
Name Shares Value
Wiley E. Prentice, Jr. 1,065,000 $3,727,500
Dividends may be paid on shares of restricted stock owned
by the Company's officers and directors, although the Company
has no plans to pay dividends.
No employee of the Company receives any additional
compensation for his or her services as a director. Non
management directors receive a retainer of $500 per month plus
$1,000 per meeting attended. Additionally, each of the non
management directors received a grant of 10,000 options
exercisable at $2.00 per share which vest 25% on grant and 25%
following each year of service. The Company has also agreed
to grant each of the non-management directors options to
acquire 10,000 shares of the Company's Common Stock on the
first anniversary of service and options to acquire 10,000
shares of Common Stock on the second anniversary of service.
These options will be granted at market value and will vest at
the rate of 25% per year. The Board of Directors has also
authorized payment of reasonable travel or other out-of-pocket
expenses incurred by nonmanagement directors in attending
meetings of the Board of Directors.
The Company has no retirement, pension or profit sharing
program for the benefit of its directors, officers or other
employees, but the Board of Directors may recommend one or
more such programs for adoption in the future.
Employment Agreements. The Company has entered into
employment agreements with Mr. Prentice and Ms. Koehler. Each
agreement requires that the executive devote their full
business time to the Company, and may be terminated by the
Company for "cause" (as defined in the agreements). The
Company has also entered into agreements with Mr. Prentice and
Ms. Koehler which prohibit the executive from directly
competing with the Company for one year within a 50 mile
radius of Fort Collins, Colorado following termination of the
agreement. Pursuant to their employment agreements, Mr.
Prentice and Ms. Koehler receive annual salaries of $80,000
and $60,000, respectively, with scheduled minimum increases of
5% annually. Each of the officers may also receive such
bonuses or compensation as may be awarded by the Board of
Directors. The employment agreement with Mr. Prentice extends
through March 2000 and the employment agreement with Ms.
Koehler extends through March 1998, subject
to the right on the part of either the Company or the
executive to terminate the employment agreement at any time
upon 30 days written notice. Stock Option Plan
The Company's 1995 Incentive Stock Option Plan (the "Option
Plan") was adopted by the Board of Directors and approved by
the shareholders of the Company in March 1995. A total of
600,000 shares of Common Stock are reserved for issuance under
the Option Plan. The Option Plan provides for the granting of
incentive stock options ("Incentive Stock Options") within the
meaning of Section 422 of the Internal Revenue Code of 1986,
as amended (the "Code") and, if the options do not conform to
applicable Code provisions, nonqualified stock options. No
options may be granted under the Option Plan subsequent to
February 2005.
The Option Plan is administered by the Board of Directors
(or may be administrated by a committee of the Board of
Directors), which determines the terms and conditions of the
options granted under the Option Plan, including the exercise
price, number of shares subject to the option and the
exercisability thereof.
The exercise price of all Incentive Stock Options granted
under the Option Plan must be at least equal to the fair
market value of the Common Stock of the Company on the date of
grant. In the case of an optionee who owns stock possessing
more than ten percent of the total combined voting power of
all classes of stock of the Company, the exercise price of
Incentive Stock Options shall be not less than 110% of the
fair market value of the Common Stock on the date of grant.
The exercise price of all nonqualified stock options granted
under the Option Plan shall be determined by the Board of
Directors. The term of all nonqualified options granted under
the Option Plan may not exceed ten years and the term of all
incentive options may not exceed five years. The Option Plan
may be amended or terminated by the Board of Directors, but no
such action may impair the rights of a participant under a
previously granted option.
The Option Plan provides the Board of Directors the
discretion to determine when options granted thereunder shall
become exercisable and the vesting period of such options.
As of March 31, 1997, 310,500 Incentive Stock Options
were outstanding with exercise prices ranging from $2.00 to
$5.63 per share and 40,000 Non-Qualified Stock Options were
outstanding.
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth certain information
regarding beneficial ownership of the Company's Common Stock
as of March 31, 1997, and as adjusted to reflect the sale by
the Company of the shares of Common Stock offered hereby, by
(i) each person who is known by the Company to own
beneficially more than 5% of the Company's outstanding Common
Stock, (ii) each of the Company's executive officers and
directors, and (iii) all executive officers and directors as a
group. Shares not outstanding but deemed beneficially owned
by virtue of the right of an individual to acquire them within
60 days are treated as outstanding only when determining the
amount and percentage of Common Stock owned by such
individual. Each person has sole voting and sole investment
power with respect to the shares shown except as noted.
Shares Beneficially Owned Number Percent
Wiley E. Prentice, Jr. 1,060,000 (1) 34.6%
2573 Midpoint Drive
Fort Collins, CO 80525
Cynthia E. Koehler 355,000 (1) 11.6%
2573 Midpoint Drive
Fort Collins, CO 80525
Stephanie Sissler 5,000 *
2573 Midpoint Drive
Fort Collins, CO 80525
Gary D. Goldfain -- *
2573 Midpoint Drive
Fort Collins, CO 80525
J. Roger Moody 47,500 (2) 1.5%
7319 East Black Rock Road
Scottsdale, AZ 85255
All directors and officers
as a group (five persons) 1,467,500 (2) 47.7%
* Less than one percent.
(1) Includes shares of Common Stock currently held in an
escrow account and subject to release on or before December
31, 2002. For further information regarding the terms of such
escrow, see the information set forth below.
(2) Includes options which currently allow for the purchase of
7,500 shares of the Company's Common Stock.
In September 1995, Mr. Prentice and Ms. Koehler
entered into an escrow agreement (the "Escrow Agreement")
with U.S. Escrow Services, Inc., Denver, Colorado, pursuant
to which 330,000 shares of Common Stock owned by Mr. Prentice
and 110,000 shares of Common Stock owned by Ms. Koehler were
deposited in an escrow account (the "Escrow Account"). The
Common Stock deposited in the Escrow Account is subject to
release as follows: (i) in the event the Company achieves
earnings per share equal to or exceeding $.23 in the fiscal
year ending December 31, 1995, Mr. Prentice and Ms. Koehler
will have released to them 150,000 shares and 50,000 shares,
respectively; (ii) in the event the Company achieves earnings
per share of $.30 in the fiscal year ending December 31,
1996, Mr. Prentice and Ms. Koehler will have released to them
255,000 shares and 85,000 shares, respectively; and (iii) in
the event the Company achieves the earnings per share
benchmarks in both 1995 and 1996, all of the shares in the
Escrow Account will be released to Mr. Prentice and Ms.
Koehler. In the event any of the foregoing benchmarks are not
reached by the Company for the specified period, the escrowed
shares of
Common Stock not subject to release will be returned by the
escrow agent to Mr. Prentice and Ms. Koehler on December 31,
2002. The determination of earnings per share will be made
in accordance with generally accepted accounting principles
(excluding outstanding options and warrants) and will be
based upon the audited financial statements of the Company
prepared by its certified public accountants.
The Company had earnings of $0.24 per share (on a
fully diluted basis) in 1995 and as a result, 150,000 of Mr.
Prentice's shares and 50,000 of Ms. Koehler's shares were
released from escrow.
In connection with a private placement of Common
Stock conducted in June 1995, the Company issued 400,000
shares of Common Stock for $500,000. In July 1995, the
Company sold an additional 50,000 shares of Common Stock to
Messrs. Moody and DeWitt on the same terms extended to
purchasers in the placement.
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In January 1990, Mr. Prentice and Ms. Koehler, both
of whom are officers, directors and principal shareholders of
the Company, formed Applied Computer Technology, a Colorado
general partnership (the "Partnership"), which was formed to
engage in the business now conducted by the Company and
formerly conducted by Mr. Prentice's sole proprietorship.
Although the Company was incorporated in January 1989, the
Company conducted no operations until December 31, 1990, at
which time the Company acquired the assets, and assumed
certain liabilities, of the Partnership. The Company issued
1,065,000 and 355,000 shares of Common Stock, respectively,
to Mr. Prentice and Ms. Koehler as consideration for the
acquisition of the assets of the Partnership.
Mr. Prentice and Ms. Koehler are the officers, directors
and sole shareholders of Managed Care Technologies, Inc., and
are the sole partners of Medical Information Systems
(collectively "MCTI"). MCTI was formerly engaged in the
development and marketing of software designed to assist
managed health care organizations in the analysis and control
of health care costs.
From time to time, the Company made advances to MCTI for
use by MCTI as working capital. In June 1995, the Company and
MCTI entered into a loan agreement (the "Loan Agreement")
which, commencing January 31, 1996, obligated MCTI to make
payments of principal and interest which was to increase from
$5,000 per month in the initial year of repayment, to $7,500
per month in the second year and $10,000 per month thereafter
until all amounts owed to the Company were paid. The Loan
Agreement provided that all amounts borrowed from the Company
would bear interest at the rate of 10% per annum. As
additional consideration for the advances received from the
Company, the Loan Agreement provided that MCTI would pay to the
Company a percentage of its future gross revenues. The
advances made by the Company to MCTI were not collateralized by
any assets of MCTI, but were personally guaranteed, jointly and
severally, by Mr. Prentice and Ms. Koehler. MCTI had a minimal
net worth and had incurred losses since its inception.
Although the amount owed by MCTI to the Company was a
legal obligation of MCTI, for financial statement purposes the
amounts advanced by the Company to MCTI prior to December 3l,
l995 have been shown as dividends, and not as a receivable from
MCTI. In 1995 the Company deducted the receivable from MCTI
for federal income tax purposes.
In December l995 the Company agreed to forgive the amounts
then owed to the Company by MCTI (approximately $22l,000,
including accrued interest) in return for the surrender by Mr.
Prentice of options to purchase l50,000 shares of the Company's
common stock at a price of $0.75 per share and the surrender by
Ms. Koehler of options to purchase 50,000 shares of the
Company's common stock at a price of $0.75 per share.
Between January 1, 1996 and December 3l, 1996, the Company
paid certain payroll and other expenses on behalf of MCTI.
As of December 3l, l996, these advances totaled approximately
$36,000 and are shown on the Company's balance sheet at
December 3l, l996 as receivables from related parties. These
advances are unsecured, non-interest bearing, and are due on
demand. Subsequent to December 31, 1996 MCTI paid the Company
$10,000, reducing this receivable to approximately $26,000.
Mr. Prentice and Ms. Koehler have personally guaranteed
the Company's repayment of amounts advanced under the
business loan agreement with Colorado National Bank. Neither
Mr. Prentice nor Ms. Koehler received any compensation from
the Company for providing such personal guarantees. Mr.
Prentice has also guaranteed certain of the Company's real
property leases, for which he received no compensation.
Item 13. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
The following is a complete list of Exhibits
filed as part of this Report and which are incorporated
herein.
Exhibit No.
Page 3.1.1 Articles of Incorporation of the Company as filed on
January 3, 1989 with the Secretary of State of the State of
Colorado. *
3.1.2 Articles of Amendment to Articles of Incorporation of
the Company as filed on May 19, 1995 with the
Secretary of State of the State of Colorado. *
3.1.3 Articles of Amendment to Articles of Incorporation of
the Company as filed on June 6, 1995 with the
Secretary of State of the State of Colorado. *
3.2.1 By-Laws of the Company, as amended. *
4.1 Form of specimen certificate for Common Stock of the
Company. **
4.2 Form of specimen certificate for Warrants of the
Company. *
4.5 Warrant Agreement between the Company and American
Securities Transfer, Inc. *
10.1.1 Employment Agreement, dated April 1, 1995, by and
between Wiley E. Prentice, Jr. and the Company. *
10.1.2 Employment Agreement, dated April 1, 1995, by and
between Cynthia E. Koehler and the Company. *
10.2 1995 Incentive Stock Option Plan.
10.3 Business Loan Agreement, dated June 16, 1994, by and
among Colorado National Bank, the Company and
certain Guarantors. *
10.4 Accounts Receivable Financing Agreement, dated June 16,
1994, by and between Republic Acceptance Corporation and
the Company. *
10.5 Mutual Subordination Agreement, dated June 16, 1994, by
and between Colorado National Bank and Republic
Acceptance Corporation
10.24 Share Escrow Agreement. **
27 Financial Data Schedule -
* Incorporated by reference to the same exhibit in the Company's
Registration Statement on Form SB-2 (Commission File No. 33-95782-
D).
Reports on Form 8-K
During the Quarter ending December 31, 1996 the following
8-K reports were filed:
Report dated November 5, l996 concerning the appointment of Grant
Thornton LLP as the Company's independent certified public accountants.
Report dated December 12, l996 concerning the resignation of Grant
Thornton LLP as the Company's independent certified public accountants.
INDEX TO FINANCIAL STATEMENTS
PAGE
Independent Auditors' Reports. . . . . . . . . . . . . . . . F-2
Consolidated Balance Sheet - December 31, 1996 . . . . . . . F-4
Consolidated Statements of Operations -
For the Years Ended December 31, 1996 and 1995. . . . . F-5
Consolidated Statement of Stockholders'
Equity - For the Period from January 1, 1995 through
December 31, 1996 . . . . . . . . . . . . . . . . . . . F-6
Consolidated Statements of Cash Flows - For the Years Ended
December 31, 1996 and 1995 . . . . . . . . . . . . . . . . . F-7
Notes to Consolidated Financial Statements . . . . . . . . . F-8
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Applied Computer Technology, Inc.
Fort Collins, Colorado
We have audited the accompanying consolidated balance
sheet of Applied Computer Technology, Inc. and subsidiaries as
of December 31, 1996, and the related consolidated statements
of operations, stockholders' equity, and cash flows for the
year then ended. These financial statements are the
responsibility of the Company's management. Our
responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally
accepted auditing standards. Those standards require that we
plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects,
the financial position of Applied Computer Technology, Inc.
and subsidiaries as of December 31, 1996, and the results of
their operations and their cash flows for the year then ended,
in conformity with generally accepted accounting principles.
Hein + Associates LLP
Denver, Colorado
April 11, 1997
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Applied Computer Technology, Inc.
Fort Collins, Colorado
We have audited the balance sheet (not
separately
included herein) of Applied Computer Technology, Inc. as
of
December 31, 1995, and the related statements of
operations,
stockholders' equity, and cash flows for the year then
ended. These financial statements are the responsibility
of the Corporations's management. Our responsibility is
to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with
generally
accepted auditing standards. Those standards require that
we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing
the accounting principles used and significant estimates
made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to
above present fairly, in all material respects, the
financial position of Applied Computer Technology,
Inc. as of December 31, 1995, and the results of its operations
and its cash flows for the year then ended, in conformity with generally
accepted accounting principles.
Brock and Company, P.C.
Fort Collins, Colorado
April 25, 1996
APPLIED COMPUTER TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1996
ASSETS
Current Assets:
Cash $710,000
Receivables:
Trade, less allowance for
doubtful accounts of $30,000 1,700,000
Income taxes 280,000
Related party 36,000
Other 433,000
Inventories 3,381,000
Prepaid expenses 205,000
Other 123,000
Total current assets 6,868,000
Property and Equipment, at cost, net 1,769,000
Intangible Assets, net 166,000
Other Assets 70,000
Total Assets $8,873,000
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $571,000
Note payable 1,959,000
Accounts payable 2,752,000
Accrued liabilities 345,000
Total current liabilities 5,627,000
Long-term Debt 237,000
Commitments and Contingencies (Notes 2 and 6)
Stockholders' Equity:
Preferred stock - no par value;
5,000,000 shares authorized; no
shares issued -
Common stock, no par value;
25,000,000 shares authorized;
3,063,127 shares issued and outstanding
4,139,000 Accumulated deficit (1,130,000)
Total stockholders' equity 3,009,000
Total Liabilities and Stockholders' Equity $8,873,000
The accompanying notes are an integral part of this financial
statement.
F-4
APPLIED COMPUTER TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31,
1996 1995
Net Revenues $20,239,000 $19,058,000
Cost of goods sold 17,084,000 16,156,000
Gross Profit 3,155,000 2,902,000
Operating Expenses:
Marketing and selling 2,410,000 662,000
General and administrative 1,541,000 1,315,000
Internet access cost 493,000 -
Total operating expenses 4,444,000 1,977,000
Income (Loss) from Operations (1,289,000) 925,000
Other Income (Expense):
Other (expense) income (53,000) 72,000
Interest expense (175,000) (266,000)
Net other income (expense) (228,000) (194,000)
Income (Loss) Before Income Taxes (1,517,000) 731,000
Income tax expense (benefit) (175,000) 185,000
Net Income (Loss) $(1,342,000) $546,000
Pro Forma Information:
Net income (loss) before
income taxes $ 731,000
Income tax expense (benefit) 196,000
Pro Forma Net Income (Loss) $ 535,000
Net Income (Loss) Per Common Share $(.44) $ .25
Pro Forma Net Income (Loss) Per Share $ .24
Weighted Average Common Shares
Outstanding 3,042,000 2,124,000
The accompanying notes are an integral part of this
financial statement.
F-5
APPLIED COMPUTER TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM JANUARY 1, 1995 THROUGH DECEMBER 31, 1996
Common Stock Accumulated
Shares Amount Deficit
Balances, January 1, 1995 1,420,000 $229,000 $(149,000)
Dividends - - (43,000)
Common stock issued for services 20,000 5,000 -
Common stock and common stock
warrants issued in private
placement offering, less offering
costs of $112,000 400,000 388,000 -
Conversion of Subchapter S retained
earnings to common stock - 142,000 (142,000)
Common stock issued for cash 50,000 62,000 -
Common stock and common stock
warrants issued in a public
offering, less offering costs
of $827,000 1,150,000 3,313,000 -
Net income for the year ended
December 31, 1995 - - 546,000
Balances, December 31, 1995 3,040,000 4,139,000 212,000
Exercise of options 40,000 80,000 80,000
Surrender of shares (16,873) (80,000) (80,000)
Net loss for the year ended
December 31, 1996 - - (1,342,000)
Balances, December 31, 1996 3,063,127 $4,139,000$(1,130,000)
The accompanying notes are an integral part of this financial
statement.
F-6
APPLIED COMPUTER TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended
December 31,
1996 1995
Cash Flows from Operating Activities:
Net income (loss) $(1,342,000) $546,000
Adjustments to reconcile net income
(loss) to net cash used in operating
activities:
Depreciation and amortization 274,000 148,000
Loss on disposal 68,000 -
Deferred taxes (22,000) 22,000
Other - 16,000
Increase (decrease) from changes in assets
and liabilities:
Accounts receivable (364,000) (973,000)
Inventories (1,809,000) (310,000)
Prepaid expenses and other
current assets (317,000) (94,000)
Income tax refund receivable (133,000) (156,000)
Accounts payable and other
current liabilities 2,270,000 (225,000)
Customer deposits (53,000) (8,000)
Accrued liabilities and other
current liabilities 143,000 66,000
Net cash used in operating activities (1,285,000) (968,000)
Cash Flows from Investing Activity -
Property and equipment acquisitions (1,395,000) (559,000)
Cash Flows from Financing Activities:
Bank overdraft - (590,000)
Net long-term borrowings (21,000) (87,000)
Net short-term borrowings 1,959,000 (241,000)
Obligations under capital leases 175,000 (1,000)
Dividend payments - (43,000)
Net proceeds from the issuance of
common stock and common stock warrants - 3,762,000
Net cash provided by financing activities 2,113,000 2,800,000
Net Increase (Decrease) in Cash and Cash
Equivalents (567,000) 1,273,000
Cash and Cash Equivalents, at beginning
of year 1,277,000 4,000
Cash and Cash Equivalents, at end of year $ 710,000 $1,277,000
Supplemental Cash Flow Information:
Non-cash items:
Purchase of equipment for notes and
capital leases $ 253,000 $ 55,000
Sale of equipment for notes $ - $ 16,000
Issuance of common stock under option
for common stock surrendered $ 80,000 $ -
Cash paid (received) for:
Interest $ 150,000 $ 268,000
Income taxes $ (25,000) $ 319,000
The accompanying notes are an integral part of this financial statement.
F-7
APPLIED COMPUTER TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies:
Nature of Operations - Applied Computer Technology, Inc. (the "Company")
principally assembles and distributes personal computers and related
products and services to customers throughout the United States.
Additionally, the Company has six retail and training locations within
Colorado. During 1996, the Company also expended substantial amounts in
establishing the infrastructure to become an Internet provider.
Principles of Consolidation - In 1996, the
Company established two wholly owned subsidiaries, ACT
Far East Limited and ACTNET, Inc. The financial statements
include the accounts of the Company and its subsidiaries. All
intercompany balances and transactions have been eliminated in
consolidation.
Use of Estimates - The preparation of the Company's
consolidated financial statements in conformity with
generally accepted accounting principles requires
management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and
disclosures 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.
Cash Equivalents - For purposes of the statement of cash
flows, the Company considers all highly liquid debt
investments purchased with an original maturity of three
months or less to be cash equivalents.
Inventories - Inventories consist principally of
component parts and are recorded at the lower of cost
(using the first-in, first-out (FIFO) method) or market.
Inventories, net of obsolescence reserve, consist of the
following at December 31:
1996 1995
Computer components, peripherals and software $3,172,000 $1,339,000
Work-in-process - 104,000
Completed computer systems 209,000 -
$3,381,000 $1,443,000
Property and Equipment - Property and equipment are stated at
cost. The Company capitalizes costs associated with major
improvements. These costs include payroll costs associated with
software developed for internal communication and information
systems and to provide Internet access to its customers (see
Note 3).
The Company provides for depreciation of equipment using the
straight-line method over the estimated useful lives of the
assets which are generally five years for computer and promotion
equipment and vehicles, and seven years for office equipment.
Leasehold improvements are amortized over the life of the
leases.
F-8
APPLIED COMPUTER TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred Start-up Costs - During 1996, the Company deferred
certain start-up costs associated with the opening of new stores
and implementing a related marketing plan as well as
establishing the infrastructure for providing Internet access
services. The Company policy was to amortize these costs over
twelve months. The Company has subsequently determined that
such amortization period should be the lesser of twelve months
or until its fiscal year-end. This has resulted in a fourth
quarter adjustment to expense $131,000 of net costs capitalized
as of the third quarter in excess of the revised policy.
Intangible Assets - These costs primarily represent the
acquisition in December 1996 from third parties of certain
customer bases. These customers are utilizing the Company's
Internet access services. The cost of these acquisitions will
be amortized over five years.
Impairment of Long-Lived Assets - In 1996, the Company adopted
Financial Accounting Standards Board Statement 121 (FAS 121),
"Impairment of Long-Lived Assets." In the event that facts
and circumstances indicate that the cost of assets or other assets may
be impaired, an evaluation of recoverability would be performed. If an
evaluation is required, the estimated future undiscounted cash flows
associated with the asset would be compared
to the asset's carrying amount to determine if a write-down to market
value
or discounted cash flow value is required. Adoption of FAS 121
had no effect on the December 31, 1996 financial statements.
Fair Value of Financial Instruments - The estimated fair values
for financial instruments are determined at discrete points in
time based on relevant market information. These estimates
involve uncertainties and cannot be determined with precision.
The carrying amounts of the Company's current assets and
liabilities are estimated to approximate fair value.
Stock-Based Compensation - In 1996, the Company adopted
Statement of Financial Accounting Standards No. 123 (FAS 123),
"Accounting for Stock-Based Compensation." The Statement
defined a fair value based method of accounting for stock
options or similar equity instrument. FAS 123 allows an entity
to continue to measure compensation cost for employee stock
option plans using the intrinsic value based method of
accounting prescribed by Accounting Principles Board Opinion
(APB) No. 25, which was elected by the Company. Accordingly,
the Company must make certain pro forma disclosures as if the
fair value based method had been applied (see Note 7).
The adoption of FAS 123 had no effect on net loss.
Revenue Recognition - The Company recognizes revenues from
product and system sales when title passes to the customer.
Revenues from service agreements are recognized ratably over the
terms of the agreements. Revenues from performance contracts
are recognized on the completed contract method.
Warranty - The Company provides a warranty to its customers
and the related costs are recorded at the time of sale.
Future warranty costs are not considered significant to the
financial statements as most warranty work, if any, is
generally performed shortly after the sale.
Advertising - Advertising costs are charged to operations in
the year incurred. The Company incurred advertising
expenses of $435,000 and $178,000 in 1996 and 1995,
respectively.
F-9
APPLIED COMPUTER TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Income Taxes - During June 1995, the Company terminated its
election under Subchapter S of the Internal Revenue Code.
Pro forma net income and net income per common share have
been reflected in the financial statements assuming the
Company had been taxed under Subchapter C of the Internal
Revenue Code for Federal and state income tax purposes for
the full fiscal year in 1995.
Commencing in the second quarter of 1995, the Company
recognized deferred tax assets and liabilities
for future tax consequences attributable to differences
between the financial statement carrying amounts of existing
assets and liabilities and their respective tax basis.
Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
Net Income (Loss) Per Common Share - Pursuant to Securities and Exchange
Commission Staff Accounting Bulletins, common shares issued prior to the
Company's initial public offering, at prices less than the initial
public offering price, plus the number of common equivalent shares
issuable pursuant to stock options granted at prices less than the
initial public offering price, using the treasury stock
method, have been included in the number of shares used in the
calculation of net income per share in 1995 as if they were
outstanding for the entire period. Net loss per share for 1996
was calculated based upon the weighted average shares
outstanding. Common stock equivalents were not considered in 1996
as their effect was antidilutive.
Reclassification - Certain reclassifications have been made to
conform 1995 financial statements to the presentation in 1996.
The reclassifications had no effect on net income.
2. Liquidity and Losses Incurred in 1996 Operations:
In 1996, the Company incurred a loss of $1,342,000 and expects
to incur additional losses in the first quarter of 1997.
These losses have adversely impacted the Company's working
capital. Should losses continue, they would cause significant
liquidity problems and may ultimately impact the Company's
ability to continue future operations. Furthermore, as of
December 31, 1996, the Company was not in compliance with
certain reporting and other covenants of its debt agreement with
its financial institution.
Subsequent to year-end, the Company has taken action to
decrease its overhead and has been successful in bidding additional
contracts for future sales. In addition, as of December 31, 1996, the
Company has $1,241,000 of working capital and $3,009,000 of equity.
Also included in current liabilities, and thereby reducing working
capital is approximately $413,000 of debt which is scheduled to be paid
after 1997, but is recorded as a current liability due to the "payment
on demand" feature included in a new note payable
refinanced during 1996. The Company has received its formal waivers
of the debt covenant violations. In addition,
management believes that certain start-up costs associated with
opening new stores, developing a related marketing plan, and
establishing the infrastructure for Internet provider services incurred
in 1996
F-10
APPLIED COMPUTER TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
should result in increased related revenues in 1997.
However, there can be no assurance that these efforts will
ultimately enable the Company to return to profitability,
and other actions may be required by management. However,
management believes the actions taken to reduce overhead and
increase revenues will enable the Company to continue
operations through 1997.
3. Property and Equipment:
Property and equipment consist of the following at December 31:
1996 1995
Office and computer equipment $1,745,000 $1,025,000
Vehicles 156,000 109,000
Leasehold improvements 227,000 75,000
Other 151,000 29,000
2,279,000 1,238,000
Less accumulated depreciation
and amortization (510,000) (402,000)
$1,769,000 $ 836,000
Included in office and computer equipment is $189,000 and
$175,000 at December 31, 1996 and 1995 (net of related
amortization expense) of payroll costs related to software
development of internal information and communication systems
and to provide Internet access for the Company's customers.
In 1995, the Company capitalized direct and indirect costs
associated with computer software developed for internal use.
In December 1996, the American Institute of CPAs issued an
Exposure Draft (E.D.) of a proposed Statement of Position on
"Accounting for the Cost of Computer Software Developed or
Obtained for Internal Use." The Company has adopted the
guidelines set forth in the E.D. with regard to internal
capitalized software costs. As a result, the Company has
expensed (and, therefore, the Company's net loss was increased
by the same amount) in the fourth quarter of 1996 certain
indirect overhead costs of $339,000 (or (.11) per common
share) which the E.D. indicates, if formally adopted
as proposed, should not be capitalized. Pursuant to the
guidelines of the E.D., this policy was applied retroactively
to the beginning of the current fiscal year, and the prior
year's capitalized amount was not adjusted. These costs are
being amortized over five years.
4. Notes Payable:
Lines-of-Credit - The Company has a $2,500,000 regular line-
ofcredit, of which $2,465,000 was drawn upon as of December
31, 1996. Of this amount $506,000 is included in long-term
notes payable (even though it is also classified as current
due to a "due-on-demand" clause included in the notes) and
the balance of $1,959,000 is reflected as notes payable.
This balance carries interest at prime plus 2.5% (10.75% at
December 31,
F-11
APPLIED COMPUTER TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1996) and is collateralized by substantially all of the assets of the
Company and guaranteed by major shareholders of the Company. As of
December 31, 1996, the Company was
not in compliance with certain financial reporting and other covenants
under this note with the financial institution. Formal waivers have
been received by the Company. The
Company also has a $2,500,000 "Major-order account" line-of-credit,
for which there is no balance outstanding at December 31, 1996. This
is a special purpose line-of-credit.
The Company has the following long-term notes payable outstanding
at December 31, 1996:
Note payable to financial institution, bears interest at 9% and is due
in monthly installments of $11,000 through June 2001. The loan
agreement limits the distribution of dividends and contains various
covenants that pertain to reporting requirements, maximum property and
equipment acquisitions, and the organization
or participation in other business entities. The note is
collateralized by accounts receivable, inventory, and
equipment. The note is 82% guaranteed by the U.S. Small Business
Administration and is personally guaranteed by certain stockholders.
This note is classified as current as it is due on demand, however, the
Company does not expect this
note to be called before its scheduled maturity dates. $506,000
Notes payable to financial institutions bear interest at 9.14%
and are due in monthly installments totaling $1,000 through
January 2000. The notes are collateralized by certain
vehicles. 39,000
Other, primarily capitalized leases, collateralized by the
related leased equipment. 263,000
808,000
Less portion due within one year. (571,000)
$ 237,000
Future principal payments required under long-term notes
payable, considering the Small Business Administration loan
of $506,000 as current due to demand features, as of
December 31, 1996, are as follows:
Year
1997 $ 571,000
1998 68,000
1999 76,000
2000 83,000
2001 10,000
$ 808,000
F-12
APPLIED COMPUTER TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In February 1997, the Company entered into a $1,000,000 lease
line commitment with a financial institution for future
purchases of capital equipment.
5. Income Taxes:
Federal and state income tax expense (benefit) consists of
the following amounts at December 31:
Pro
Forma
1996 1995 1995
Current $(153,000) $ 163,000 $200,000
Deferred (22,000) 22,000 (4,000)
Income tax expense (benefit) $(175,000) $ 185,000 $196,000
Effective June 2, 1995, the Company terminated its election
under Subchapter S of the Internal Revenue Code.
Accordingly, the net deferred tax liability at that date of
$30,000 has been recorded through a charge to the deferred
tax provision.
The income tax effects of deferred tax assets (liabilities)
are comprised of the following at December 31, 1996:
1996
Future taxable amounts:
Depreciation $ (20,000)
Future deductible amounts:
Net operating loss carryforward 300,000
Reserve for obsolete inventory 30,000
Accrued liabilities and other 45,000
375,000
Net deferred tax asset 355,000
Valuation allowance (355,000)
Balance $ -
There was no valuation allowance in 1995. The Company has
an approximate net operating loss carryforward of $900,000
which expires for the fiscal year ending December 31, 2001.
F-13
APPLIED COMPUTER TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A reconciliation of statutory Federal income tax rates
and the effective income tax rates is as follows:
Pro Forma
1996 1995 1995
Statutory Federal income
tax rate (benefit) (34.0%) 34.0% 34.0%
State and local income
taxes, net of Federal
tax benefit - 2.0 2.8
Depreciation and amortization - 6.2 (0.1)
Charge-off of related party
receivable - (10.9) (10.9)
Effect of Subchapter S
election - (4.7) -
Reduction due to valuation
allowance 22.5 - -
Other - (1.4) 1.0
Effective income tax rate (11.5%) 25.2% 26.8%
6. Commitments and Contingencies:
SEC Investigation - In November 1996, the Securities and Exchange
Commission (SEC) commenced a formal investigation of the Company. The
Company understands this investigation relates primarily to the
Company's capitalization of labor and related costs associated with
enhancements to the Company's internal software systems, the development
of software for the Company's Internet Access service, the development
of the Company's new marketing program and the opening of new business
centers. As discussed
in Notes 1 and 3, the Company changed its accounting policy concerning
these costs and elected to expense substantially all of the costs
which had previously been capitalized during 1996 by the
Company in the areas mentioned above. The SEC's investigation is
continuing, however, the Company does not believe the investigation will
have a significant financial impact upon the Company's December 31,
1996 financial condition.
Operating Leases - The Company leases office, production,
warehouse, and retail facilities under various noncancellable
lease agreements which expire through September 2007. The
agreements generally provide for certain rent-free, or reduced rent
periods and escalating rents in future periods. The Company,
however, recognizes rent expense ratably over the terms of the leases.
Rent expense for the years ended December 31, 1996 and 1995 was
$253,000 and $172,000. Liabilities for rental expense recognized in
excess of payments required under the agreements were
$5,000 at December 31, 1996.
F-14
APPLIED COMPUTER TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 1996, future minimum lease payments
required under noncancellable operating leases are as
follows:
Year
1997 $392,000
1998 377,000
1999 396,000
2000 319,000
2001 273,000
Thereafter 110,000
$1,867,000
Retirement Plan - The Company has a defined contribution retirement
plan under Section 401(k) of the Internal Revenue Code. The plan
covers substantially all of the Company's employees and allows the
Company to make discretionary contributions. No contributions have
been made by the Company since the plan's inception.
7. Stockholders' Equity:
Recapitalization - Effective in January 1995, the Company's
stockholders approved an amendment to the Articles of Incorporation
authorizing 25,000,000 shares of common stock with no par value and
5,000,000 shares of preferred stock with no par value. Also during
January 1995, the Company's stockholders approved a 142 for 1 stock
split of its common stock. All references to common stock and per
share data have been restated to reflect the stock split.
Stock Issuances and Outstanding Warrants - During February 1995, the
Company issued 20,000 shares of its common stock for services which
were valued at $5,000.
During 1995, the Company completed a private offering of 400,000
shares of common stock. Warrants to purchase 40,000 shares of common
stock for $4.55 per share were issued to the
underwriter in connection with the offering. The Company also
completed a public offering of 1,150,000 units. Each
unit included one share of common stock and one redeemable
common stock purchase warrant. Two warrants entitle the
holder to purchase one share of common stock for $4.50.
Warrants to purchase 60,000 shares of common stock for $4.55
per share, and warrants to purchase 100,000 warrants
exercisable at $.14 per warrant were issued to the
underwriter in connection with the offering.
F-15
APPLIED COMPUTER TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of warrants outstanding at December 31, 1996 is as follows:
Number of Exercise Expiration
Issued For Shares Price Date
Private offering, underwriter 40,000 $ 4.55 October 2000
Public offering, unit holders 575,000 4.50 October 1998
Public offering, underwriter 60,000 4.55 October 2000
Public offering, underwriter 50,000 4.83 October 2000
Total shares reserved for warrants 725,000
Stock Option Plans - During March 1995, the Board of Directors
adopted the 1995 incentive Stock Option Plan (Plan). The Plan
authorizes the issuance of up to 600,000 shares of the
Company's common stock to employees. Options granted pursuant to the
plan are incentive stock options within the meaning of
the Internal Revenue Code. The exercise price of the options granted
under the plan is not less than the fair market value of the common
stock.
The options are granted for terms of five or ten years and
may be increased at such times as may be determined by the
Plan's administrator. Options are subject to certain
acceleration and termination provisions.
A summary of incentive stock option activity is as follows:
1996 1995
Weighted Weighted
Average Average
Number Exercise Number Exercise
of Shares Price of Shares Price
Outstanding, beginning of
year 212,500 $2.32 - $ -
Granted 249,000 5.04 463,500 1.47
Exercised (40,000) 2.00 - -
Canceled (71,000) 2.23 (251,000) .76
Expired - - - -
Outstanding, end of year 350,500 $4.54 212,500 2.32
During 1996, a former officer exercised 40,000 options. Pursuant to
the Plan, the former officer surrendered shares with a market value
equivalent to the exercise price.
For all options granted during 1996 and 1995, the weighted
average market price of the Company's common stock on the
F-16
APPLIED COMPUTER TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATMENTS
grant date was approximately equal to the weighted average
exercise price. At December 31, 1996, options for 250,800
shares were exercisable (at a weighted average exercise
price of $4.86) with 64,300 shares becoming exercisable in
1997 and the remaining 35,400 shares becoming exercisable
by December 31, 2000. The range of exercise prices is
$2.00 - $5.63 for all options outstanding at December 31,
1996. If not previously exercised, options outstanding at
December 31, 1996, will expire as follows:
Weighted
Average
Number Exercise
Year Ending December 31, of Shares Price
2000 20,000 $2.00
2001 20,000 4.62
2005 47,500 2.00
2006 34,000 3.50
2006 229,000 5.07
350,500
Directors of the Company have nonqualified options to purchase 20,000
shares of common stock for $2.00 per share granted in 1995 and options
to purchase 20,000 shares of common stock at $4.62 per share granted
in 1996. The options become exercisable
at 25% per year and expire in July 2000 and 2001, respectively. The
Company has agreed to grant each of the non-management directors
options to acquire 10,000 shares of common stock in 1997. The options
will be exercisable at the market value on the date of the
grant.
Pro Forma Stock-Based Compensation Disclosures - The Company
applies APB Opinion 25 and related interpretations in
accounting for stock options and warrants which are granted to
employees. Accordingly, no compensation cost has been
recognized for grants of options and warrants to employees
since the exercise prices were not less than the fair value of
the Company's common stock on the grant dates. Had
compensation cost been determined based on the fair value at
the grant dates for awards under those plans consistent with
the method of FAS 123, the Company's net income (loss) and net
income (loss) per share would have been reduced to the pro
forma amounts indicated below.
Year Ended December 31,
1996 1995
Net income (loss) applicable to common
stockholders:
As reported $(1,342,000) $546,000
Pro forma $(1,795,000) $521,000
Net income (loss) per common share:
As reported $ (.44) $ .25
Pro forma $ (.59) $ .25
F-17
APPLIED COMPUTER TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The fair value of each employee option and warrant granted in
1996 and 1995 was estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted
average assumptions:
Year Ended December 31,
1996 1995
Expected volatility 50.84% -
Risk-free interest rate 6.5% 6.5%
Expected dividends - -
Expected terms (in years) 5.0 5.0
8. Related Party Transactions:
Certain major stockholders and officers of the Company are
general partners of Medical Information Systems (MIS), a
related partnership, and also own all of the stock of Managed Care
Technologies, Inc. (MCTI). These entities developed and marketed
computer software for the managed health care industry, which
activities have significantly curtailed in recent years. Advances in
prior years made to the related entities have been deducted from
retained earnings similar to dividends. Advances in 1995 totaled
$3,000. Principal and interest receivable on the advances
principally made in prior years totaled $257,000 at December 31,
1995. This balance was deducted by the Company for income tax
purposes in fiscal 1995 and was not reflected as an asset for
financial reporting purposes as they were charged, as previously
indicated, as dividends to retained earnings. However, the Company
and the shareholders did execute a note, whereby this balance was to
be repaid in monthly installments of $5,000 commencing in 1996. The
Company's has agreed to forgive this note in consideration of certain
stock options surrendered by these shareholders, and the benefit the
Company received from expensing this note for tax purposes.
During fiscal 1996, the Company provided additional services totaling
$36,000 to MCTI, which were charged based upon direct costs incurred
by the Company on behalf of MCTI. As of
December 31, 1996, the Company has notes receivable of $36,000 from
its stockholders, which are collateralized by their common stock
ownership. Subsequent to year-end, $10,000 has been
received on these notes.
In 1995, the Company made $40,000 of distributions to
stockholders owning shares during the period the Company was
taxed under Subchapter S of the Internal Revenue Code. The
distribution allowed the stockholders to discharge income
tax liabilities associated with corporate earnings taxed to
the individual stockholders.
9. Concentration of Credit Risk and Major Customer:
Financial instruments which potentially subject the Company
to concentrations of credit risk consist principally of cash
and
F-18
APPLIED COMPUTER TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
temporary cash investments. At times, cash balances held at
financial institutions were in excess of FDIC insurance
limits. The Company places its temporary cash investments
with high-credit, quality financial institutions. The
Company believes no significant concentration of credit risk
exists with respect to these cash investments.
The Company sells its products and services primarily to
customers in the education, corporate, and governmental
markets. Credit is extended based on an evaluation of the
customer's financial condition and collateral is generally
not required. Credit losses have been minimal and such
losses have been within management's expectations.
Sales in excess of 10% or more of the Company's sales are
as follows:
1996 1995
A 15% 12%
B 10% 14%
C 16% 15%
Accounts receivable from these customers totaled $322,000 at
December 31, 1996.
10. Segment Information:
The Company's principal operations are in the assembly and
distribution of personal computers and Internet access industries.
The following is selected information for the fiscal year ended
December 31, 1996 about the Company's industry segments. Since
the Internet access segment of the Company was
not established until 1996, segment information is not
included for the fiscal year ended December 31, 1995.
Computer Internet
Year Ended December 31, 1996 Sales Access Consolidated
Revenue $20,228,000 $ 11,000 $20,239,000
Loss from operations (807,000) (482,000) (1,289,000)
Depreciation and amortization 257,000 17,000 274,000
Identifiable assets 8,420,000 453,000 8,873,000
Capital expenditures 1,171,000 224,000 1,395,000
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of
the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned, therunto
duly
authorized.
APPLIED COMPUTER TECHNOLOGY, INC.
By: /s/ Wiley E. Prentice, Jr.
Wiley E. Prentice, Jr., President and
Chief Executive Officer
By: /s/ Cynthia E. Koehler
Cynthia E. Koehler, Executive Vice
President and Secretary
By: /s/ S. Scott Goering
S. Scott Goering,
Principal Financial
Officer
By: /s/ S. Scott Goering
S. Scott Goering,
Principal Accounting
Officer
Date: April 29, 1997
In accordance with the requirements of the Securities Act
of 1934, this Report has been signed below by the following
persons on behalf of the Registrant and in the capacities and
on the dates indicated.
Signature Title Date
/s/ Wiley E. Prentice, Jr. President, Chief Executive April 29, 1997
Wiley E. Prentice, Jr. Officer and Director
/s/ Cynthia E. Koehler Executive Vice President, April 29, 1997
Cynthia E. Koehler Secretary and Director
/s/ K/ Roger Moody Director April 29, 1997
J. Roger Moody
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<NAME> APPLIED COMPUTER TECHNOLOGY, INC.
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
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