As filed with the Securities and Exchange Commission on ____, 1998.
Registration No._________
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
APPLIED COMPUTER TECHNOLOGY, INC.
(Name of small business issuer in its charter)
Colorado 5734 84-1164570
(State or other jurisdiction (Primary Standard (I.R.S.Employer
of incorporation or Industrial Identification No.)
organization) Classification Code)
2573 Midpoint Drive
Fort Collins, Colorado 80525
Telephone: 970/490-1849
(Address and telephone number of principal executive offices)
Wiley E. Prentice, Jr.
2573 Midpoint Drive
Fort Collins, Colorado 80525
Telephone: 970/490-1849
(Name, address and telephone number of agent for service)
2573 Midpoint Drive
Fort Collins, Colorado 80525
(Address of Principal Place of Business or
Intended Principal Place of Business)
Copies to:
William T. Hart, Esq.
Hart & Trinen
1624 Washington Street
Denver, Colorado 80203
Telephone: 303/839-0061
Approximate date of commencement of proposed sale to public:
As soon as practicable after the Registration Statement becomes effective
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
<PAGE>
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------
Proposed Proposed
Title of Each Class Amount Maximum Offer- Maximum Aggre- Amount of
of Securities to be to be ing Price Per gate Offering Registra-
Registered Registered Unit (1) Price (1) tion Fee
- -------------------------------------------------------------------------------
Common Stock (2) 360,000 $2.50 $900,000 $266
- -------------------------------------------------------------------------------
Total 360,000 $900,000 $266
- -------------------------------------------------------------------------------
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c).
(2) Shares are offered by the Selling Shareholder. Pursuant to Rule 416,
includes such indeterminate number of additional securities as may be required
for issuance on conversion of the Series A Preferred Stock and as a result of
any adjustment in the number of securities issuable on such conversion by reason
of the anti-dilution provisions of the Series A Preferred Stock.
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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APPLIED COMPUTER TECHNOLOGY, INC.
Cross Reference Sheet between Items of Form SB-2
and Prospectus
Item in Form SB-2 Location in Prospectus
----------------- ------------------------
1. Front of Registration Statement and
Outside Front Cover of Prospectus Facing Page; Outside Front Cover
Page
2. Inside Front and Outside Back
Cover Pages of Prospectus Inside Front Cover Page; Outside
Back Cover Page
3. Summary Information and Risk Factors Prospectus Summary; Risk Factors
4. Use of Proceeds Prospectus Summary
5. Determination of Offering Price Selling Shareholder
6. Dilution Comparative Share Data
7. Selling Security Holders Selling Shareholder.
8. Plan of Distribution Selling Shareholder
9. Legal Proceedings Not Applicable
10. Directors, Executive Officers,
Promoters and Control Persons Management
11. Security Ownership of Certain
Beneficial Owners and Management Principal Shareholders
12. Description of Securities Description of Securities
13. Interest of Named Experts and Counsel Legal Matters; Experts
14. Disclosure of Commission Position
on Indemnification for Securities
Act Liabilities Management-Limitation of Liability
and Indemnification
15. Organization Within Last Five Years Business; Certain Transactions
16. Description of Business Prospectus Summary; Business
17. Management's Discussion and Analysis
or Plan of Operation Management's Discussion and Analysis
of Financial Condition and Results
of Operations.
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Item in Form SB-2 Location in Prospectus
----------------- ------------------------
18. Description of Property Business
19. Certain Relationships and Related
Transactions Certain Transactions.
20. Market For Common Stock and
Related Shareholder Matters Market Information
21. Executive Compensation Management - Executive Compensation.
22. Financial Statements Financial Statements.
23. Changes In and Disagreements With
Accountants on Accounting and
Financial Disclosure Experts.
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APPLIED COMPUTER TECHNOLOGY, INC.
Common Stock
This Prospectus relates to the sale of shares of the Common Stock of
Applied Computer Technology, Inc. (the "Company") by the holder of the Company's
Series A Preferred Stock (the "Preferred Stock") if and when the holder of the
Preferred Stock elects to convert the Preferred Stock into shares of the
Company's Common Stock. The holder of the Preferred Stock may resell the shares
it receives upon conversion from time to time in the public market. The holder
of the Preferred Stock, to the extent it coverts the Preferred Stock into shares
of Common Stock and receives shares of the Company's Common Stock, is referred
to in this Prospectus as the "Selling Shareholder".
The Selling Shareholder has advised the Company that it will offer the
shares through broker/dealers at market prices with customary commissions being
paid by the Selling Shareholder. The costs of registering the shares offered by
the Selling Shareholder are being paid by the Company. The Selling Shareholder
will pay all other costs of the sale of the shares offered by this prospectus.
The Company will not receive any proceeds from the sale of the shares by the
Selling Shareholder.
The Common Stock and Warrants are listed on the Nasdaq SmallCap Market
under the trading symbols ACTI and ACTIW, respectively, and on the Pacific Stock
Exchange under the symbols ABZ and ABZW, respectively.
On February , 1998 the closing prices of the Company's Common Stock
and Warrants on the NASDAQ System were $____and $____, respectively. See
"Market Information".
These Securities involve a high degree of risk and immediate
substantial dilution. See "Risk Factors" and "Dilution".
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is_________, 1998
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Applied Computer Technology and the stylized handprint logo are
registered trademarks and service marks of Applied Computer Technology, Inc.
This prospectus also contains trademarks and service marks of other companies.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of l934 and in accordance therewith is required to file
reports, proxy statements and other information with the Securities and Exchange
Commission (the "Commission"). Copies of any such reports, proxy statements and
other information filed by the Company can be inspected and copied at the public
reference facility maintained by the Commission at Room 1024, 450 Fifth Street,
N.W., Washington, D.C. and at the Commission's Regional offices in New York (7
World Trade Center, Suite 1300, New York, New York 10048) and Chicago
(Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511). Certain information concerning the Company is also
available at the Internet Web Site maintained by the Securities and Exchange
Commission at www.sec.gov. The Company's securities are listed on the Pacific
Stock Exchange and copies of the reports, proxy statements and other information
filed with the Commission can be inspected at such exchange. Copies of such
material can be obtained from the Public Reference Section of the Commission at
its office in Washington, D.C. 20549 at prescribed rates. The Company has filed
with the Commission a Registration Statement on Form SB-2 (together with all
amendments and exhibits thereto, the "Registration Statement") under the
Securities Act of 1933, as amended (the "Act"), with respect to the Securities
offered by this Prospectus. This Prospectus does not contain all of the
information set forth in the Registration Statement, certain parts of which are
omitted in accordance with the rules and regulations of the Commission. For
further information, reference is made to the Registration Statement.
The Company intends to furnish annual reports to shareholders
containing audited financial statements, quarterly reports and such other
periodic reports as it may determine to be appropriate or as may be required by
law.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and Financial Statements and Notes thereto appearing else where in
this Prospectus.
The Company
The Company markets, installs, services and supports microcomputer
systems ("PCs") and related peripheral products principally for use by busi
nesses and large institutional customers active in the corporate, government and
retail markets. The Company provides a broad range of microcomputer pro ducts
and services including hardware, software, system design, engineering,
consulting, maintenance and training. Management estimates that over 90% of the
Company's microcomputer sales are accounted for by customer PCs which are
assembled by the Company under its own brand name, with remaining microcomputer
sales accounted for by well-known national brands including Compaq, Apple and
IBM. The Company also markets and installs operating systems and application
software developed by Microsoft Corporation, Novell, Inc. and other software
developers.
The Company services its customer base, which is located primarily in
the States of Colorado and Wyoming, from its headquarters and six business
centers ("Business Centers") in central and northern Colorado. The Company's
current customers include Colorado State University, Ball Aerospace Corporation,
the University of Colorado, Metropolitan State College, University of Oklahoma,
the U.S. Military Academy, the U.S. Air Force Academy, and the U.S. Naval
Academy.
The Company sells custom configured systems and network installations,
which generally carry higher gross profit percentages than the sale of
previously assembled microcomputers. The Company also sells hardware, software
and services for custom configured microcomputer systems and networks as a
single "system" in order to differentiate itself from certain of its competitors
which strictly provide hardware or hardware and software. The Company's Business
Centers provide a variety of installation, training and support services which
the Company intends to expand both in its present Business Centers and through
the addition of two new Business Centers. The Company plans to continue to
implement its strategy of bundling hardware, software and services and to
continue its penetration into network sales and installations. The Company
assembles custom PCs, as opposed to selling nationally known microcomputer
brands, in order to realize higher gross profits associated with the sale of the
Company's own brand of microcomputers versus brands produced by well-known
manufacturers. See "Business".
The Company completed its initial public offering in October 1995. In
this offering, the Company sold 1,150,000 Units at a price of $3.60 per Unit.
Each Unit consisted of one share of Common Stock and one Warrant.
The Company was incorporated in Colorado in January l989. Its principle
executive offices are located at 2537 Midpoint Drive, Fort Collins, Colorado
80525, and its telephone number is (303) 490-l849. Unless the
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context otherwise requires, references in this Prospectus to the "Company" or
"Applied Computer Technology" refer to Applied Computer Technology, Inc.
The Offering
Securities offered ........ Shares of Common Stock are offered for public sale
by the holder of the Company's Series A Preferred
Stock if and when the holder of the Preferred
Stock elects to convert the Preferred Stock into
shares of the Company's Common Stock. See
"Selling Shareholder".
Common Stock outstanding... As of January 31, 1998, the Company had 3,188,662
shares of Common Stock issued and outstanding.
Assuming all shares of the Series A Preferred
Stock are converted into 360,000 shares of the
Company's Common Stock (assuming a conversion
price of $2.50 per share) there will be 3,548,662
shares of Common Stock issued and outstanding.
The number of outstanding shares before and after
this Offering does not give effect to shares
which may be issued upon the exercise and/or
conversion of options, warrants or other
convertible securitites previously issued by the
Company.
See "Comparative Share Data".
Trading symbols: Nasdaq Pacific Stock Exchange
------ ----------------------
Common Stock ACTI ABZ
Warrants ACTIW ABZW
Summary Financial Data
(in thousands, except per share data)
Years Ended Nine Months
December 31, Ended September 30,
Statements of Operations 1994 1995 1996 1996 1997
---- ---- ---- ---- ----
Data:
Sales and service revenues $11,734 $19,058 $20,239 $16,343 $22,339
Gross profit 1,746 2,902 3,155 3,196 1,284
Income (loss) from oper-
ations (119) 925 (1,289) 731 (2,393)
Net income (loss) (196) 535 (1,342) 453 (2,784)
Net income (loss) per share(1) (.06) (.24) (.44) (.14) (.91)
Weighted average shares
outstanding 2,097 2,124 3,042 3,339 3,059
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December 31, 1996 September 30, 1997
Balance Sheet Data: ----------------- ------------------
Current Assets $6,868 $6,910
Current Liabilities 5,627 8,448
Working capital 1,241 (1,538)
Total assets 8,873 9,315
Total liabilities 5,864 9,090
Shareholders' equity 3,009 225
(1) Computed on a pro forma basis for fiscal l994 to give effect to federal and
state income taxes. See "Selected Financial Data".
RISK FACTORS
In evaluating the Company's business, prospective investors should
consider carefully the following risk factors in addition to the other
information presented in this Prospectus.
History of Losses, Variability in Quarterly Operating Results.
During the year ended December 30, 1996, and the nine months ending
September 30, 1997 the Company suffered losses of $1,342,000 and $2,784,000
respectively. The Company has suffered continuing losses during the quarter
ending December 31, 1997 and during January 1998. There can be no assurance
that the Company's operations will ever be profitable. The Company may
experience significant fluctuations in future operating results due to a number
of factors including, among others, the size and timing of customer orders,
delays in product enhancements and new product introductions by the Company's
suppliers, quality control difficulties, market acceptance of new products
introduced by the Company's suppliers, product returns, customer order deferrals
in anticipation of new products or enhancements, reduction in demand for
existing products as a result of new product introductions, and pricing trends
in the microcomputer and peripheral markets in which the Company is active.
The impact of any of these factors could cause operating results to decline
significantly from prior periods. The Company's business is also seasonal to a
certain extent. The Company's revenues in the first and second quarters are
typically lower than during the other two quarters of each year. Sales and
service revenues for each quarter depends substantially on orders received and
delivered in that quarter. The Company's operating expenses are based in part
on its estimate of future revenues and, accordingly, the Company may be unable
to adjust spending in a timely manner to compensate for a shortfall in revenues.
Any significant decrease in customer orders for any reason would have an
immediate adverse impact on the Company's operating results and its ability to
maintain profitability. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business."
Offering Proceeds, Need for Additional Capital
The Company will not receive any proceeds from the sale of the shares
by the Selling Shareholder. See "Selling Shareholder". Losses during 1996
and the nine months ended September 30, 1997 have caused liquidity problems
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for the Company. To fund its operations, 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.
Dependence on Hardware Sales
The Company's sales are derived from the corporate, government and
retail markets for microcomputer systems and peripherals. The Company's
customers in the corporate and government markets are generally large
institutions which purchase microcomputer systems and peripherals in significant
quantities. These customers in many cases will solicit bids from the Company and
its competitors and pricing is frequently one of the most significant factors
considered by the customers in their purchase decision. Gross profit percentages
generated from the sale of microcomputer systems and peripherals are customarily
less than the gross profit percentages generated by sales of network systems,
upgrades and maintenance, training, and system design and engineering. Because a
number of the Company's customers enter into contracts for the purchase of
hardware, networking, upgrades and maintenance, training, and system design and
engineering on a combined basis, the Company is unable to calculate precisely
the percentage of revenues attributable to each of these activities. Although
the Company plans to continue to expand its networking, maintenance, training
and system design and engineering activities, the Company will continue to be
substantially dependent on hardware sales of microcomputer systems and
peripherals to its customers in the corporate, government and retail markets.
There can be no assurance the Company will be successful in increasing its gross
profit percentages by deriving additional revenues from non-hardware sales. To
the extent the Company remains dependent on hardware sales, the Company will
continue to generate lower gross profit than that attributable to the other
activities in which the Company is engaged. See "Business."
Competition
Competition in the sale of microcomputers and peripherals is intense
and characterized by rapid technological advances, evolving industry standards
and technological obsolescence. A number of companies offer microcomputer
products and peripherals identical or similar to the Company's products. A
majority of the Company's existing competitors, as well as a number of potential
competitors, have larger technical and service staffs, more established and
larger marketing and sales organizations, and significantly greater financial
resources than the Company. A number of the Company's competitors carry
identical or similar products to those sold by the Company. Moreover, there are
no proprietary barriers to entry that would prevent the Company's competitors
from selling competing products in the Company's markets. The Company believes
that the principal competitive factors in the market for microcomputers and
peripherals include price, service and support, brand availability and market
presence. Although the Company believes that it competes favorably with respect
to certain of these factors in its markets, there can be no assurance the
Company will be successful in competing in its existing market or in new markets
the Company may enter. See "Business Competition."
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Dependence on Suppliers
The Company has no proprietary manufacturing operations and purchases
microcomputers and peripherals from a number of suppliers. In those instances
where the Company assembles microcomputers on an in-house basis, the Company
purchases manufactured components from third-party suppliers. The Company has no
supply contracts or agreements with its suppliers other than three pricing
agreements with a software supplier. These agreements do not grant the Company
any exclusive rights to software and do not assure the Company will receive
software as required. As such, the Company is vulnerable to limits in supply and
pricing and product changes by these suppliers. Although management believes
that such changes could be accommodated by the Company, they may necessitate
changes in the Company's design of its microcomputers or assembly methods, and
the Company could experience temporary delays or interruptions in supply while
such changes are incorporated. Further, the Company could also experience delays
or interruptions in supply in the event the Company is required to find a new
supplier for any of its commonly used components. Although the Company believes
there are a number of alternate suppliers for components and finished products
now purchased by it, there can be no assurance the Company could obtain
components or finished products from alternate suppliers in the event of
industry-wide price increases or component shortages. In addition, there can be
no assurance the Company's current suppliers will not alter their pricing in a
manner adverse to the Company. Although the Company uses a "just-in-time"
inventory management system for components and finished products (which
decreases prices of components, microcomputers and peripherals and to limit the
risk of inventory obsolescence), price increases in the component or finished
product markets in which the Company is active, or component or product
shortages, could cause the Company to be unable to fulfill its commitments to
customers or may adversely affect the Company's gross profit percentage. See
"Business."
Customer Concentration
The Company anticipates that a significant portion of its sales and service
revenues will be the result of sales to a limited number of customers, the
identity of which may vary from year to year. During the nine months ended
September 30, 1997, three customers accounted for 36.5% of the Company's sales.
To the extent the Company continues to depend upon a limited number of key
customers for a material percentage of its sales and service revenues and
accounts receivable, the loss of one or more of such significant customers could
materially adversely affect the Company's results of operations.
Dependence on Sales to Entities with Long Sales Cycles
During the nine months ended September 30, 1997 the Company derived
approximately 80% of its sales and service revenues from purchases by
educational and government entities. These entities include businesses,
colleges, municipalities, state or local quasi-governmental entities and state
and local governments. 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.
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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. Loss of this approval for
any reason could materially adversely impact the Company's sales to state-funded
universities and governmental entities. Once awarded, contracts with government
entities may also be subject to payment and/or funding delays. The ability of
state-funded entities to purchase the products offered by the Company will
depend on the financial condition and budgetary constraints of the particular
entity, as well as the continued availability of government funds.
Sales to the Company's government and quasi-government customers are
characterized by a lengthy sales cycle which typically extends for a period of
from six to 12 months. The sales cycle typically commences with the customer
preparing a request for proposal or bid quotation which is directed to the
Company and others. The sales cycle typically ends on placement of a purchase
order or execution of a contract. The length of the sales cycle is affected by
such factors as budgetary purchasing cycles, availability of funding from
federal, state and other sources, and the customer's assessment of its
automation requirements. Many of these factors are, and will continue to be,
outside of the Company's control. The Company's results of operations have been,
and will continue to be, impacted by the length of sales cycle to the Company's
educational and government customers. See "Business."
Dependence on Key Personnel.
The Company's success depends to a significant extent on its executive
officers. The loss of any of these officers would have an adverse effect on the
Company, although the Company believes that the loss of Mr. Prentice's services
would be most significant. The Company maintains key-man life insurance policies
on the lives of Mr. Prentice and Ms. Koehler in the amounts of $1,000,000 and
$100,000, respectively. The proceeds of these life insurance policies are
currently pledged as collateral against the Company's bank line of credit.
Although the Company has employment agreements with Mr. Prentice and, and Ms.
Koehler, the agreements do not assure the Company the continued services of such
officers and Ms. Koehler is only obligated to devote 60% of her time to the
Company's business. The success of the Company is also dependent upon its
ability to attract and retain highly qualified service and technical personnel,
competition for whom is intense. There can be no assurance the Company will be
able to recruit and retain such personnel. See "Management - Directors and
Executive Officers."
Reliance on Financing Arrangements
In October 1997 the Company established an accounts receivable line of
credit with a bank under which the Company may borrow up to 85% of approved
sales. As of December 31, 1997 the Company has borrowed $900,000 against this
line of credit. The line of credit bears interest at the rate of 1.5% per month
and is repayable on demand. The Company is dependent on amounts available under
this line of credit to address its liquidity requirements. If for any reason
this line of credit were declared payable by the bank (such as an event of
default), the Company"s liquidity would be materially and
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adversely affected. There can be no assurance the Company could identify
alternate sources of financing in such event or, if identified, that the cost of
such financing would be acceptable to the Company.
Absence of 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 has entered into a license agreement with one of its largest
suppliers which provides the Company with certain limited rights of reproduction
and usage of trademarks and service marks owned by the supplier. With the
exception of these limited, non-exclusive rights of usage and the Company"s own
trademarks and service marks, the Company has no exclusive or non-exclusive
proprietary rights. See "Business - Proprietary Rights."
Control by Existing Shareholders
Following this offering (and assuming all shares of the Series A
Preferred Stock are converted into shares of common stock), the Company's
executive officers, directors and principal shareholders will, in the aggregate,
beneficially own approximately 41% of the Company's outstanding shares of Common
Stock. These shareholders, if acting together, would likely be able effectively
to control most matters requiring approval by the shareholders of the Company,
including the election of a majority of the directors. The voting power of these
shareholders under certain circumstances could have the effect of delaying or
preventing a change in control of the Company. See "Management" and "Principal
Shareholders".
Public Market Price Fluctuations
Although the Company's Common Stock and Warrants trade on the Nasdaq
SmallCap Market and the Pacific Stock Exchange, there can be no assurance that
an active trading market will continue or that the market price of such
securities will not decline. There can be no assurance that the Company will
maintain its Nasdaq and Pacific Stock Exchange listings for the Common Stock or
Warrants. Factors such as quarterly fluctuations in results of operations,
announcements of new products or product enhancements by the Company's
suppliers, market conditions specific to the microcomputer segment of the
computer industry or market conditions in general, may cause the market price of
the Company's securities to fluctuate, perhaps substantially. In addition, in
recent years the stock market has experienced significant price and volume
fluctuations. These fluctuations, which are often unrelated to the operating
performance of specific companies, have had a substantial effect on the market
price for many technology and small capitalization companies. Factors such as
those cited above, as well as other factors which may be unrelated to the
operating performance of the Company, may affect adversely the price of the
Company's securities. See "Market Information."
Shares Eligible for Future Sale
Sales of a substantial number of shares of the Company's Common Stock
in the public market following this offering could adversely affect the market
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price of the Company's Common Stock. As of January 31, 1998 the Company had
3,188,662 shares of Common Stock issued and outstanding. Substantially all of
such shares are available for sale in the public market. Upon the completion of
this offering (and assuming all shares of the Series A Preferred Stock are
converted into shares of common stock) the 360,000 shares offered by means of
this Prospectus will be freely tradeable. In November 1997, the Company sold
1,500 shares of its Series B Preferred Stock, plus 82,192 Common Stock Purchase
Warrants, to a foreign investor for $1,500,000. The number of shares issuable
upon the conversion of each Series B Preferred Share is determined by dividing
$l,000 by the lower of (i) $3.65, or (ii) 75% of the average closing bid price
of the Company's common stock on the five trading days preceeding the conversion
date.
No predictions can be made as to the effect, if any, that future sales
of shares issuable upon the conversion of the Series A or Series B Preferred
Stock, or the availability of shares for future sale, will have on the market
price of the Company's Common Stock or Warrants. Nevertheless, sales of
substantial amounts of Common Stock, or the perception that such sales may
occur, could have a material adverse effect on prevailing market prices of the
Common Stock and Warrants.
Stock Issuable Pursuant to Options and Warrants
At the date of this Prospectus, the Company has reserved 1,851,788
shares of Common Stock for issuance upon the exercise of outstanding options and
warrants, including the Warrants sold in the Company's 1995 public offering. The
exercise prices of the options and warrants presently outstanding range from
$2.00 per share to $4.93 per share. During the terms of these outstanding
options and warrants, the holders are given the opportunity to profit from a
rise in the market price of the Common Stock, and their exercise may dilute the
book value per share of Common Stock. The existence of the options and warrants
may affect adversely the terms on which the Company may obtain additional equity
financing. Moreover, the holders are likely to exercise their rights to acquire
Common Stock at a time when the Company would otherwise be able to obtain
capital on terms more favorable than could be obtained through the exercise of
such securities. See "Comparative Share Data".
Absence of Dividends
The Company does not anticipate paying any cash dividends on its Common
Stock in the foreseeable future. The Company intends to retain profits, if any,
to fund growth and expansion.
Issuance of Preferred Stock
The Company"s Articles of Incorporation authorize the Company"s Board
of Directors to issue up to 5,000,000 shares of Preferred Stock. The provisions
in the Company's Articles of Incorporation relating to the Preferred Stock would
allow the Company"s directors to issue Preferred Stock with multiple votes per
share and dividends rights which would have priority
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over any dividends paid with respect to the Company"s Common Stock. The issuance
of Preferred Stock with such rights may make the removal of management difficult
even if such removal would be considered beneficial to shareholders generally,
and will have the effect of limiting shareholder participation in certain
transactions such as mergers or tender offers if such transactions are not
favored by incumbent management.
COMPARATIVE SHARE DATA
As of December 31, 1997, the present shareholders of the Company owned
3,085,243 shares of Common Stock, which had an estimated net tangible book value
of approximately $0.18 per share. The following table illustrates the
comparative stock ownership of the present shareholders of the Company, as
compared to the investors in this Offering, assuming all shares offered are
sold.
Number of Note
Shares Reference
--------- ---------
Shares outstanding on December 31, 1998 3,188,662
Shares issued during January 1998 upon conversion
of shares of Series B Preferred Stock (98,419) and
exercise of options (5,000) 103,419
Shares outstanding as of January 31, 1998 (1) 3,188,662
Shares to be issued upon conversion of
Series A Preferred Stock, assuming
conversion price of $2.50 per share 360,000 A
-------
Shares outstanding (pro forma basis) (1) 3,548,662
=========
Net tangible book value per share as of December
31,1997 (2) $0.18
Equity ownership by present shareholders
after this offering 90%
Equity ownership by investors in this Offering 10%
(1) Amount excludes shares which may be issued upon the exercise and/or
conversion of options, warrants and other convertible securities previously
issued by the Company. See table below.
(2) In January 1998 the Company incurred additional losses. Futhermore, the net
tangible book value as of December 31, 1997 as presented above is based upon
preliminary year-end balances which may change as a result of further analysis
by the Company. Therefore, the net tangible book value of the Company's common
stock will most likely further decrease subsequent to year-end.
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<PAGE>
The purchasers of the securities offered by this Prospectus will suffer
an immediate dilution if the price paid for the securities offered is greater
than the net tangible book value of the Company's Common Stock.
"Net tangible book value" is the amount that results from subtracting
the total liabilities and intangible assets of the Company from its total
assets. "Dilution" is the difference between the public offering price and the
net tangible book value of the Company's shares of Common Stock immediately
after the Offering.
Other Shares Which May Be Issued:
The following table lists additional shares of the Company's Common
Stock which may be issued as the result of the exercise of outstanding options,
warrants or the conversion of other securities issued by the Company. If the
options and warrants described below are exercised, there will be further
dilution to investors in this offering.
Number of Note
Shares Reference
---------- ----------
Shares issuable upon conversion of
Series B Preferred Stock, assuming
conversion price of $2.00 675,000 B
Shares issuable upon exercise of
warrants held by holders of the
Company's Series B Preferred Stock 82,192 B
Shares issuable upon exercise of
warrants issued to Selling Agent,
or its assigns, in connection with
the sale of the Company's Series B
Preferred Stock 41,096 C
Shares issuable upon exercise of
warrants sold in Company's 1995
Public Offering 575,000 D
Shares issuable upon exercise of
warrants sold to Selling Agent/
Underwriter in connection with
Company's 1995 Private and
Public Offerings 150,000 E
Shares issuable upon exercise of
options and warrants granted to Company's
officers, directors, employees, and
consultants 328,500 F
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<PAGE>
A. In November 1997, the Company sold 900 shares of Series A Preferred
Stock to a supplier of the Company for $900,000. Payment for the shares was made
by the vendor cancelling $900,000 of payables owed by the Company to the vendor.
At the option of the holder of the Series A Preferred Shares, the Preferred
Shares may be converted into shares of the Company's common stock on the basis
of one share of Preferred Stock for shares of Common Stock equal in number to
the amount determined by dividing $1,000 by the Average Closing Price of the
Corporation's Common Stock over the five-day trading period ending on the day
prior to the conversion of the Preferred Stock. The conversion price however may
not be less than $1.00 per share or more than $3.00 per share. The shares of
common stock issuable upon the conversion of the Series A Preferred Shares are
being offered to the public by means of this prospectus. See "Selling
Shareholder".
B. On November 24, 1997, the Company sold 1,500 shares of its Series B
Preferred Stock, plus 82,192 Common Stock Purchase Warrants, to a foreign
investor for $1,500,000. The number of shares issuable upon the conversion of
each Series B Preferred Share is to be determined by dividing $l,000 by the
lower of (i) $3.65, or (ii) 75% of the average closing bid price of the
Company's common stock on the five trading days preceeding the conversion date.
Notwithstanding the above, no more than 150 Series B Preferred Shares may be
converted in any one calender week. Under certain conditions the Company may
redeem all or part of the Series B Preferred shares at a price of $1,150 per
share. Each Warrant allows the holder to purchase one share of the Company's
common stock for $4.02 at any time prior to November 21, 2000. The sale of the
Series B Preferred Stock and Warrants was made in reliance upon Regulation S of
the Securities and Exchange Commission. As of January 31, 1998 150 shares of the
Series B Preferred Stock had been converted into 98,419 shares of the Company's
Common Stock.
C. In connection with the Company's December 1997 sale of Series B
Preferred Shares and Warrants, the Sales Agent for such offering, received a
commission plus warrants to purchase 41,096 shares of the Company's Common Stock
(the "Sales Agent Warrants"). The Sales Agent Warrants are exercisable at a
price of 4.02 per share at any time prior to November 21, 2000.
D. Up to 575,000 shares of Common Stock are issuable upon the exercise
of Common Stock purchase warrants (the "Warrants") which were sold to the public
in the Company's October 1995 public offering as a Unit, with each Unit
consisting of one share of Common Stock and one Warrant. Two Warrants entitle
the holder to purchase, at any time prior to October 26, 1998, one share of the
Company's Common Stock at a price of $4.50 per share. See "Description of
Securities".
E. In June 1995, the Company issued to a Selling Agent, warrants to
purchase 40,000 shares of Common Stock, which are exercisable at $4.68 per
share, in partial consideration for the Selling Agent serving as the placement
agent for the Company's 1995 Private Offering. In connection with its October
1995 public offering, the Company, for nominal consideration, sold to the
Selling Agent (who was the underwriter the public offering) warrants to purchase
110,000 shares of Common Stock at $4.55 per share. The foregoing warrants expire
on October 25, 2000.
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<PAGE>
F. See "Management - Stock Option and Bonus Plans".
MARKET INFORMATION
As of January 31, 1998, there were approximately 500 beneficial holders
of the Company's Common Stock and Warrants. The Company's Common Stock and
Warrants are traded on the National Association of Securities Dealers Automatic
Quotation ("NASDAQ") System and the Pacific Stock Exchange. 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
03/31/96 $5.63 $5.00 $1.06 $0.69
06/30/96 $5.63 $3.88 $1.06 $0.56
09/30/96 $5.00 $4.25 $0.82 $0.82
12/31/96 $5.44 $3.50 $1.00 $0.38
03/31/97 $4.06 $2.62 $0.50 $0.25
06/30/97 $3.43 $1.75 $0.25 $0.12
09/30/97 $8.06 $1.50 $1.62 $0.06
12/31/97 $5.25 $2.25 $0.81 $0.37
(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 therefor
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.
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction
with the Financial Statements and related Notes thereto appearing elsewhere in
this Prospectus 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.
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<PAGE>
Years ended Nine months ended
December 31, September 30,
---------------- -----------------
1995 1996 1996 1997
-------- -------- -------- -----
Statements of Operations Data: (in thousands, except per share data)
Sales and service revenues $19,058 $20,239 $16,343 $22,339
Cost of goods sold 16,156 17,084 13,147 21,055
------- ------- ------- -------
Gross profit 2,902 3,155 3,196 1,284
Operating expenses 1,977 4,444 2,465 3,677
------- ------- ------- -------
Income (loss) from operations 925 (1,289) 31 (2,393)
Other income (expense), net (194) (228) (81) (391)
Income tax (expense) benefit (184) 175 (197) --
------- ------- ------- -------
Net income (loss) $ 546 $(1,342) $ 453 $(2,784)
======= ======= ======= =======
Net income (loss) per share $0.25 $(0.44) $0.14 $(0.91)
===== ======= ===== =======
Pro forma information(1):
Historical earnings (loss)
before income taxes $ 731 -- --
Pro forma income taxes (benefit) 196 -- --
-------
Pro forma net income (loss) $ 535 -- --
-------
Pro forma net income (loss) per share $0.24 -- --
-----
Shares used in computing earnings
(loss) per share 2,124 3,042 3,339 3,058
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.
December 31, 1996 September 30, 1997
------------------ -------------------
(In Thousands)
Balance Sheet Data:
Current Assets $6,868 $6,910
Current Liabilities 5,627 8,448
Working capital 1,241 (1,538)
Total assets 8,873 9,315
Total liabilities 5,864 9,090
Shareholders' equity 3,009 225
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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.
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.
The Company has suffered significant losses during the year ended
December 31, 1996 and the nine months ended September 30, 1997. In April 1997,
Management began a focused program to return the Company to a state to
profitability. Management is disappointed by results for the nine months ended
September 30, 1997 but it is encourged by the results of the third quarter.
Management believes that its programs and initiatives are showing signs of
success and intends to continue corrective actions. As a means to regain margin
on products sold, the customer bid/product pricing process has come under
increased scrutiny as the Company refocuses its efforts to assure adequate
margin on current and future orders. Concurrently, the Company's product
offerings are being evaluated to develop a product mix which supports gross
margin goals. The Company continues to review and improve inventory methods.
Additionally, the Company has contracted for outside services to improve system
controls and accuracy of the inventory accounting. During the second quarter of
1997, the Company appointed a Chief Financial Officer to assist in implementing
these improvements. While the Company believes that these activites will improve
its overall margins, there can be no assurance that these efforts will
successfully regain margin on products sold.
Indirect service labor and overhead spending has been analyzed, and the
individual service groups have been tasked to improve billable hours for
services rendered and to improve their contribution to the Company's earnings.
Job positions in all areas of the Company have been evaluated, resulting in the
elimination of multiple positions and analysis on all positions continues. The
Company has curtailed its investments in the expansion of its training business,
reducing unabsorbed training expenses. Additional Selling General and
Administrative expense reductions have been indentified and implemented, and
results will continue to be reviewed in an effort to control organizational
spending and to improve organizational financial performance. Whereas management
believes that this analysis and these activities will facilitate a return to a
state of operational profitability, there can be no guarantees that the Company
will be successful in this endeavor.
Results of Operations
Nine Months Ended September 30, 1997
The Company's adjusted gross margin on sales dropped by 3.5% as the
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<PAGE>
result of an unexpected physical inventory adjustment of $746,000. The majority
of this adjustment appeared in the second quarter, at which time efforts ensued
to research and correct the situation. Management's efforts during the third
quarter have proven productive, and the inventory adjustment for third quarter
was sufficiently less than the second quarter adjustment. Nevertheless,
Management is disappointed that any adjustments are necessary, and efforts
continue to improve the inventory systems and procedures. There can, however, be
no assurance that these actions will prove successful.
Another contributer to the reduced gross profit margin was an increase
in cost of materials and overhead from 77.7% for the similar period in 1996 to
85.9%. Of this increase, approximately 70% is attributable to additional
overhead and warranty costs over the prior year period. Management believes that
the decline in margin is further attributable to a loss of focus on product
pricing compared to actual inventory cost and a reduction in the Company's
ability to purchase economically due to cash constraints. Management has
initiated programs to regain focus on product pricing and to improve its working
capital. There can, however, be no assurance that Management will be succesful
in improving the Company's margin.
Sale and Marketing expenses rose in line with increased sales.
Contributing to the net increase of $393,000 over the same period in 1996 were
increases in advertising, depreciation, and wage expenses. Sales and Marketing
expenses were 3.3% of third quarter sales as opposed to 15.7% of sales for the
six months ended June 30, 1997. General and administrative expenses also
decreased 0.5% as a percentage of sales, resulting in an overall increase to
$1,348,000 from the same period in 1996. Contributing to this net increase of
$276,000 were increases in legal, telephone, and depreciation and ammortization
costs. General and administrative expenses were 3.4% of sales third quarter as
opposed to 10.4% of sales for the six months ended June 30, 1997. Internet
access costs for the Company's internet subsidiary were $543,000 for this nine
month period versus $0 for the similiar period in 1996.
Unabsorbed costs for the Company's networking, training, and service
activities were approxiamately $1,112,000 for the nine months ended September
30, 1997 versus $485,000 from the same period in the prior year. Unabsorbed
third quarter costs were $264,000 as compared to an average of $424,000 per
quarter for the six months ended June 30, 1997. All three of these areas are
being evaluated by the Company on a continuing basis for improving contribution
and/or elimination of noncontributing costs.
WEBAccess, the Company's internet subsidiary, continues to operate at
below breakeven. The Company plans to focus resources to increase its subscriber
base to near breakeven by year-end. Unused capacity available for subscriber use
is approximately 60%. The Company intends to use its internet capabilities to
sell internet access and hosting services to Corporate, Government and end
users, but there can be no assurances that the Company will be successful in
taking WEBAccess to a state of operational profitablility.
Year Ended December 31, 1996
The Company recorded a net loss of ($1,342,000) in 1996 as compared
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<PAGE>
to a net profit of $535,000 in 1995. 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 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 1995, 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 1997.
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 1996. 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. 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 1997 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 Business Centers. These centers, originally
slated for August and October openings, did not open until November 1996 and
February 1997 respectively, and the sales expected from these centers in 1996
were not relized.
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 Acedemies for delivery of PC's to the United States Military
and Air Force Acadimies 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.
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<PAGE>
Sales and marketing expenses increased by $1,748,000 in 1996 as the
Company made significant investments in 1996 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 made appealing to the
Company's target market segment of professional services buyers and other high
margin products 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
contined through the first quarter of 1997.
General and administative 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 1996 to develop an Internet service
division in Ft. Collins, Boulder, Denver, and Colorado Springs. During 1996 the
Company also aquired 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 syatems 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 31, 1997, the Company had
approxiamately 1,500 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 freshman classes and (ii) the
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<PAGE>
Company's increased merketing of custom configured computer sustems 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 is 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.
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.
During the nine months ended September 30, 1997, the Company incurred a
loss of $2,784,000 and used cash of $693,000 for equipment purchases. Cash used
in operating activities was $574,000 which was primarily the result of the loss
from operations with substantial offsetting increases in inventories and
accounts payable. Due in part to the foregoing, the Company's working capital
decreased from $1,241,000 at December 31, 1996 to $(1,538,000) at September 30,
1997.
As a result of lower than anticipated sales, the Company incurred a
loss in the fourth quarter of 1997 and in January 1998. These losses have
continued to impact the Company's liquidity. The Company is continuing its
effort to raise additional working capital through the issuance of equity
securities. Continuing losses would cause significant liquidity problems and may
ultimately impact the Company's ability to continue future operations.
In October 1997, the Company refinanced its bank debt. The interest
rate on the new loan is 18%, which is higher than the interest rate of
approximately 14-15% on the Company's old line of credit. The Company intends to
review its financial needs in 1998 and restructure its bank debt in an effort to
obtain a lower interest rate. However, the Company's ability to
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<PAGE>
restructure its bank debt will be dependent upon the financial condition of the
Company and its operating performance.
The Company's principal sources of liquidity for operations are its
cash, and cash generated from the collection of receivables and the sale of
inventory. 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.
In November 1997, the Company sold 900 shares of Series A Preferred
Stock to a supplier of the Company for $900,000. Payment for the shares was made
by the vendor cancelling $900,000 of payables owed by the Company to the vendor.
Also in November 1997, the Company sold 1,500 shares of its Series B Preferred
Stock, plus 82,192 Common Stock Purchase Warrants, to a foreign investor for
$1,500,000. The number of shares issuable upon the conversion of each Series B
Preferred Share is to be determined by dividing $l,000 by the lower of (i)
$3.65, or (ii) 75% of the average closing bid price of the Company's common
stock on the five trading days preceeding the conversion date. Since the common
stock issuable upon the conversion of the Series B Preferred Stock may be issued
at a discount from the market price of the Company's common stock, the
Securities and Exchange Commission requires that the estimated discount
($500,000) be reflected in the Company's financial statements as a "preferred
stock dividend". Although this "preferred stock dividend" will not involve the
payment of cash, the amount of this "dividend" (i.e. $500,000) will increase the
Company's Loss Per Common Share.
See "Comparative Share Data" for further information concerning the
terms of the Company's Series A and Series B Preferred Stock.
Although the Company has reduced its overhead during 1997, 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 1998.
To improve the Company's liquidity, the Company is continuing its
efforts to increase sales, reduce its costs, improve gross profit margins and
raise additional capital. The Company's future is dependent upon its success in
these areas.
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.
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<PAGE>
DESCRIPTION OF BUSINESS
General
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 1997 the
Company 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 was 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
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<PAGE>
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.
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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 January
31, 1998 the Company had twelve 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
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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. 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
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factors such as the configuration of the microcomputer systems ordered, the size
of orders received and availability of hardware or software from suppliers.
As of January 31, 1998, the Company had a sales backlog of
approximately $292,000.
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
2601 Midpoint Dr. (4) $15,114 12/02
Fort Collins, Colorado
One Tabor Center (3) $ 5,092 09/01
1200 17th St.
Denver, 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.
(4) Manufacturing and storage facility used by the Company when manufacturing
requirements exceed the capacity of the Company's main computer assembly
facility.
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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, non-exclusive 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, well-capitalized 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
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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 E-Mail.
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.
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 61 persons as of January 31, 1998. Of these,
twelve were employed in administration, nine in assembly and shipping, twelve in
sales and marketing and twenty-eight 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.
MANAGEMENT
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. 34 President, Chief Executive Officer
and Director
Cynthia E. Koehler 33 Executive Vice President, Secretary
and Director
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Name Age Position
------ ----- ----------
Daniel T. Radford 46 Vice President of Finance - Chief
Financial Officer
J. Roger Moody 64 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.
Daniel T. Radford has been the Company's Vice President of Finance and
Chief Financial Officer since June 1997. From 1994 through 1997 Mr. Radford
served as chief financial officer of Brite-Line Industries, Inc., a manufacturer
of highway marking products. From 1992 to 1993 Mr. Radford was chief financial
officer of Waveframe Corporation, a digital sound recording equipment
manufacturer. Mr. Radford obtained a Master of Business Administration from
Chapman College, Syracuse, New York, in 1988, and a Bachelor of Science in
Business Administration from Syracuse University, Syracuse, New York. He earned
his CPA and CMA from the State of New York.
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
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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.
Executive Compensation
The following table sets forth the annual and long-term 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 December 31, 1997, the number of shares of the Company's restricted
common stock, owned by the officer 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 $2,396,250
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.
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<PAGE>
The Board of Directors has also authorized payment of reasonable travel or other
out-of-pocket expenses incurred by non-management 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. The agreement with Mr. Prentice
requires Mr. Prentice to devote his full business time to the Company. The
agreement with Ms. Koehler requires Ms. Koehler to devote 60% of her time to the
Company's business. Each employment agreement 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 and Bonus Plans
The Company has an Incentive Stock Option Plan, a Non-Qualified Stock
Option Plan and a Stock Bonus Plan. A summary description of these Plans
follows. In some cases these Plans are collectively referred to as the "Plans".
Incentive Stock Option Plan. The Incentive Stock Option Plan authorizes
the issuance of up to 600,000 shares of the Company's Common Stock to persons
that exercise options granted pursuant to the Plan. Only Company employees may
be granted options pursuant to the Incentive Stock Option Plan.
To be classified as incentive stock options under the Internal Revenue
Code, options granted pursuant to the Plans must be exercised prior to the
following dates:
(a) The expiration of three months after the date on which an option
holder's employment by the Company is terminated (except if such termination is
due to the death or permanent and total disability);
(b) The expiration of 12 months after the date on which an option
holder's employment by the Company is terminated, if such termination is due to
the Employee's permanent and total disability;
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(c) In the event of an option holder's death while in the employ of the
Company, his executors or administrators may exercise, within three months
following the date of his death, the option as to any of the shares not
previously exercised;
The total fair market value of the shares of Common Stock (determined
at the time of the grant of the option) for which any employee may be granted
options which are first exercisable in any calendar year may not exceed
$100,000.
Options may not be exercised until one year following the date of
grant. Options granted to an employee then owning more than 10% of the Common
Stock of the Company may not be exercisable by its terms after five years from
the date of grant. Any other option granted pursuant to the Plan may not be
exercisable by its terms after ten years from the date of grant.
The purchase price per share of Common Stock purchasable under an
option is determined by the Committee but cannot be less than the fair market
value of the Common Stock on the date of the grant of the option (or 110% of the
fair market value in the case of a person owning more than 10% of the Company's
outstanding shares).
Non-Qualified Stock Option Plan. The Non-Qualified Stock Option Plan
collectively authorizes the issuance of up to 600,000 shares of the Company's
Common Stock to persons that exercise options granted pursuant to the Plans. The
Company's employees, directors, officers, consultants and advisors are eligible
to be granted options pursuant to the Plans, provided however that bona fide
services must be rendered by such consultants or advisors and such services must
not be in connection with the offer or sale of securities in a capital-raising
transaction. The option exercise price is determined by the Committee but cannot
be less than the market price of the Company's Common Stock on the date the
option is granted.
Stock Bonus Plan. Up to 200,000 shares of Common Stock may be granted
under the Stock Bonus Plan. Such shares may consist, in whole or in part, of
authorized but unissued shares, or treasury shares. Under the Stock Bonus Plan,
the Company's employees, directors, officers, consultants and advisors are
eligible to receive a grant of the Company's shares, provided however that bona
fide services must be rendered by consultants or advisors and such services must
not be in connection with the offer or sale of securities in a capital-raising
transaction.
Other Information Regarding the Plans. The Plans are administered by
the Company's Compensation Committee ("the Committee"), each member of which is
a director of the Company. The members of the Committee were selected by the
Company's Board of Directors and serve for a one-year tenure and until their
successors are elected. A member of the Committee may be removed at any time by
action of the Board of Directors. Any vacancies which may occur on the Committee
will be filled by the Board of Directors. The Committee is vested with the
authority to interpret the provisions of the Plans and supervise the
administration of the Plans. In addition, the Committee is empowered to select
those persons to whom shares or options are
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to be granted, to determine the number of shares subject to each grant of a
stock bonus or an option and to determine when, and upon what conditions, shares
or options granted under the Plans will vest or otherwise be subject to
forfeiture and cancellation.
In the discretion of the Committee, any option granted pursuant to the
Plans may include installment exercise terms such that the option becomes fully
exercisable in a series of cumulating portions. The Committee may also
accelerate the date upon which any option (or any part of any options) is first
exercisable. Any shares issued pursuant to the Stock Bonus Plan and any options
granted pursuant to the Incentive Stock Option Plan or the Non-Qualified Stock
Option Plan will be forfeited if the "vesting" schedule established by the
Committee administering the Plan at the time of the grant is not met. For this
purpose, vesting means the period during which the employee must remain an
employee of the Company or the period of time a non-employee must provide
services to the Company. At the time an employee ceases working for the Company
(or at the time a non-employee ceases to perform services for the Company), any
shares or options not fully vested will be forfeited and cancelled. At the
discretion of the Committee payment for the shares of Common Stock underlying
options may be paid through the delivery of shares of the Company's Common Stock
having an aggregate fair market value equal to the option price, provided such
shares have been owned by the option holder for at least one year prior to such
exercise. A combination of cash and shares of Common Stock may also be permitted
at the discretion of the Committee.
Options are generally non-transferable except upon death of the option
holder. Shares issued pursuant to the Stock Bonus Plan will generally not be
transferable until the person receiving the shares satisfies the vesting
requirements imposed by the Committee when the shares were issued.
The Board of Directors of the Company may at any time, and from time to
time, amend, terminate, or suspend one or more of the Plans in any manner they
deem appropriate, provided that such amendment, termination or suspension will
not adversely affect rights or obligations with respect to shares or options
previously granted. The Board of Directors may not, without shareholder
approval: make any amendment which would materially modify the eligibility
requirements for the Plans; increase or decrease the total number of shares of
Common Stock which may be issued pursuant to the Plans except in the case of a
reclassification of the Company's capital stock or a consolidation or merger of
the Company; reduce the minimum option price per share; extend the period for
granting options; or materially increase in any other way the benefits accruing
to employees who are eligible to participate in the Plans.
Summary. The following sets forth certain information, as of January
31, 1998, concerning the stock options and stock bonuses granted by the Company.
Each option represents the right to purchase one share of the Company's Common
Stock.
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Total Shares Shares Remaining
Shares Reserved for Issued Options/
Reserved Outstanding as Stock Bonus Shares
Name of Plan Under Plan Options Bonus Under Plan
- ------------ ---------- ------------ -------- ------------
Incentive Stock
Option Plan 600,000 328,500 -- 232,784
Non-Qualified Stock
Option Plan 600,000 -- -- 600,000
Stock Bonus Plan 200,000 N/A -- 200,000
Limitation of Liability and Indemnification
The Company's Articles of Incorporation provide no director shall have
liability to the Company or its shareholders for monetary damages for breach of
fiduciary duty as a director. This provision does not eliminate or limit
liability for breach of duty of loyalty, acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law or acts
specified by the Colorado Business Corporation Act. The Colorado Business
Corporation Act provides that a corporation may limit the liability of a
director for damages to the corporation or its shareholders resulting from
conduct of the director other than (i) acts or omissions which the director knew
or believed were clearly in conflict with the best interests of the Company,
(ii) unlawful payment of dividends and certain other distributions, or (iii) for
any transaction from which the director derived an improper, personal benefit.
The Company's Articles of Incorporation also provide that no officer or director
shall be personally liable for any injury arising out of an employee's tort
unless such officer or director (i) was personally involved in the situation or
(ii) committed a criminal offense.
The Company's Articles of Incorporation provide that the Company may
indemnify its officers and directors, to the fullest extent permitted by law. In
general, the Colorado Business Corporation Act permits a corporation to
indemnify its officers and directors provided they have acted in good faith and
with the reasonable belief that their conduct was in the Company's best
interests. The Company believes such indemnification is sufficiently broad to
permit indemnification under certain circumstances for liabilities arising under
the Securities Act of 1933, as amended (the "Act"). At present, there is no
pending litigation or proceeding involving any director, officer, employee or
agent of the Company where indemnification will be required or permitted. The
Company is not aware of any threatened litigation or proceeding which may result
in a claim for such indemnification.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Company pursuant
to the foregoing provisions, or otherwise, the Company has been advised that in
the opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
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CERTAIN TRANSACTIONS
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.
During 1996 and 1997, the Company collectively loaned approximately
$98,000 to Mr. Prentice and to Ms. Koehler. These advances are unsecured,
non-interest bearing, and are due on demand.
The Company has not sought or received any independent determination as
to the fairness and reasonableness of the terms of the transactions discussed
above. There is an inherent conflict of interest in transactions involving the
Company and its officers, directors and/or affiliates due to the
-39-
<PAGE>
inability of such officers, directors and affiliates to provide the Company with
independent judgment with respect to such transactions. The Company has adopted
a policy that future transactions between the Company and its officers,
directors and 5% or more shareholders are subject to approval by a majority of
the directors of the Company. Although any such future transactions will only be
approved if, in the opinion of the disinterested directors, such transactions
will be on terms no less favorable than could be obtained from unaffiliated
parties, the Company will nevertheless be adversely affected by transactions
which ultimately are not favorable to the Company.
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of the date of this Prospectus, 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 prior to offering Percentage owned
Name and Address Number Percent after offering(3)
- ---------------- --------- ------- -----------------
Wiley E. Prentice, Jr. 1,060,000 (1) 33% 30%
2573 Midpoint Drive
Fort Collins, CO 80525
Cynthia E. Koehler 355,000 (1) 11% 10%
2573 Midpoint Drive
Fort Collins, CO 80525
Daniel T. Radford -- -- --
2573 Midpoint Drive
Fort Collins, CO 80525
J. Roger Moody 47,500 (2) 1.5% 41.3%
7319 East Black Rock Road
Scottsdale, AZ 85255
All directors and officers
as a group (four persons) 1,462,500 (2) 46% 41.3%
* 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.
-40-
<PAGE>
(2) Includes options which currently allow for the purchase of 7,500 shares of
the Company's Common Stock.
(3) Assumes all shares of the Series A Preferred Stock are converted into
360,000 shares of the Company's common stock. Excludes shares issuable upon
exercise or conversion of warrants, options or other convertible securities
issued by the Company. See "Comparative Share Data".
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.
SELLING SHAREHOLDER
In November 1997 the Company sold 900 shares of Series A Preferred
Stock to a supplier of the Company for $900,000. Payment for the shares was made
by the vendor cancelling $900,000 of payables owed by the Company to the vendor.
At the holder's option, the Preferred Shares are convertible from time to time,
in whole or in part, into shares of the Company's Common Stock upon certain
terms. See "Comparative Share Data". The shares issuable upon the conversion of
the Series D Preferred Shares are being offered to the public by means of this
Prospectus.
The holder of the Preferred Shares, to the extent it converts the
Preferred Shares into shares of Common Stock, is referred to in this Prospectus
as the "Selling Shareholder". The Company will not receive any proceeds from the
sale of the shares by the Selling Shareholder.
-41-
<PAGE>
Shares
Which
May Be
Acquired
Upon Con- Share
version of Shares to Owner-
Shares Series A be Sold ship
Selling Presently Preferred in this After
Shareholder Owned Shares (1) Offering (2) Offering
- ---------------- ------- ---------- ------------ --------
Televideo Systems, -- 360,000 360,000 --
Inc.
(1) Represents shares issuable upon the conversion of the Series A Preferred
Stock assuming conversion price of $2.50 per share. The actual number of shares
to be issued upon the conversion of the Series A Preferred Shares will depend
upon the price of the Company's Common Stock at the time of conversion. See
"Comparative Share Data".
(2) Assumes all shares owned, or which may be acquired, by the Selling
Shareholder, are sold to the public by means of this Prospectus.
Manner of Sale. The shares of Common Stock owned, or which may be
acquired, by the Selling Shareholder may be offered and sold by means of this
Prospectus from time to time as market conditions permit in the over-the-counter
market, or otherwise, at prices and terms then prevailing or at prices related
to the then-current market price, or in negotiated transactions. These shares
may be sold by one or more of the following methods, without limitation: (a) a
block trade in which a broker or dealer so engaged will attempt to sell the
shares as agent but may position and resell a portion of the block as principal
to facilitate the transaction; (b) purchases by a broker or dealer as principal
and resale by such broker or dealer for its account pursuant to this Prospectus;
(c) ordinary brokerage transactions and transactions in which the borker
solicits purchasers; and (d) face-to-face transactions between sellers and
purchasers without a broker/dealer. In effecting sales, brokers or dealers
engaged by the Selling Shareholder may arrange for other brokers or dealers to
participate. Such brokers or dealers may receive commissions or discounts from
the Selling Shareholder in amounts to be negotiated.
The Selling Shareholder and any broker/dealers who act in connection
with the sale of the Shares hereunder may be deemed to be "underwriters" within
the meaning of ss.2(11) of the Securities Acts of 1933, and any commissions
received by them and profit on any resale of the Shares as principal might be
deemed to be underwriting discounts and commissions under the Securities Act.
The Company has agreed to indemnify the Selling Shareholder and any securities
broker/dealers who may be deemed to be underwriters against certain liabilities,
including liabilities under the Securities Act as underwriters or otherwise.
The Company has advised the Selling Shareholder that it and any
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<PAGE>
securities broker/dealers or others who may be deemed to be statutory
underwriters will be subject to the Prospectus delivery requirements under the
Securities Act of 1933. The Company has also advised the Selling Shareholder
that in the event of a "distribution" of the shares owned by the Selling
Shareholder, such Selling Shareholder, any "affiliated purchasers", and any
broker/dealer or other person who participates in such distribution may be
subject to Rule 102 under the Securities Exchange Act of 1934 ("1934 Act") until
their participation in that distribution is completed. A "distribution" is
defined in Rule 102 as an offering of securities "that is distinguished from
ordinary trading transactions by the magnitude of the offering and the presence
of special selling efforts and selling methods". The Company has also advised
the Selling Shareholder that Rule 102 under the 1934 Act prohibits any
"stabilizing bid" or "stabilizing purchase" for the purpose of pegging, fixing
or stabilizing the price of the Common Stock in connection with this offering.
Rule 101 makes it unlawful for any person who is participating in a distribution
to bid for or purchase stock of the same class as is the subject of the
distribution.
DESCRIPTION OF SECURITIES
The authorized capital stock of the Company consists of 25,000,000
shares of Common Stock, no par value per share, and 5,000,000 shares of
Preferred Stock, no par value per share.
Common Stock
The holders of Common Stock are entitled to one vote for each share
held of record on all matters submitted to a vote of shareholders. The Company's
Articles of Incorporation deny cumulative voting rights in the election of
directors. Accordingly, holders of a majority of the shares of Common Stock
entitled to vote in any election of directors may elect all of the directors
standing for election. Subject to preferences that may be applicable to any
outstanding Preferred Stock, holders of Common Stock are entitled to receive
ratably such dividends as may be declared by the Board of Directors out of funds
legally available therefor. See "Dividend Policy." In the event of a
liquidation, dissolution or winding up of the Company, holders of Common Stock
are entitled to share ratably in the assets remaining after payment of
liabilities and the liquidation preference of any outstanding Preferred Stock.
Holders of Common Stock have no preemptive, conversion or redemption rights. All
of the outstanding shares of Common Stock are, and the shares to be sold in this
offering when issued and paid for will be, fully paid and non-assessable.
Preferred Stock
The Board of Directors has the authority, without further shareholder
approval, to issue up to 5,000,000 shares of Preferred Stock from time to time
in one or more series, to establish the number of shares to be included in each
such series, and to fix the designation, powers, preferences and rights of the
shares of each such series and the qualifications, limitations or restrictions
thereof. The issuance of Preferred Stock may have the effect of delaying or
preventing a change in control of the Company. The issuance of
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<PAGE>
Preferred Stock could decrease the amount of earnings and assets available for
distribution to the holders of Common Stock, if any, or could adversely affect
the rights and powers, including voting rights, of the holders of the Common
Stock. In certain circumstances, such issuances could have the effect of
decreasing the market price of the Common Stock.
See "Comparative Share Data" for information concerning the Company's
Series A and Series B Preferred Stock.
Warrants
Up to 575,000 shares of Common Stock are issuable upon the exercise of
Common Stock purchase warrants (the "Warrants") which were sold to the public in
the Company's October 1995 public offering. Every two Warrants will entitle the
holder to purchase one share of Common Stock at an exercise price of $4.50 per
share at any time prior to October 26, 1998, subject to the Company's redemption
rights described below. The Warrants will be issued pursuant to the terms of a
Warrant Agreement between the Company and American Securities Transfer, Inc.
(the "Warrant Agent").
The Warrant exercise price and the number of shares of Common Stock
purchasable upon exercise of the Warrants are subject to adjustment in the event
of, among other events, a stock dividend on, or a subdivision, recapitalization
or reorganization of, the Common Stock, the merger or consolidation of the
Company with or into another corporation or business entity or sales of Common
Stock at a price below the Common Stock market price or the Warrant exercise
price (excluding exercise of options issued under stock option plans).
The Company, in its discretion, may redeem outstanding Warrants, in
whole but not in part, upon not less than 30 days' notice, at a price of $.03
per Warrant, provided that the closing bid price of the Common Stock equals or
exceeds $5.60 for 20 consecutive trading days immediately prior to such notice.
The notice must be given within five business days of the conclusion of the 20
day trading period. In the event the Company exercises its right to redeem the
Warrants, the Warrants will be exercisable until the close of business on the
date fixed for redemption in such notice. If any Warrant called for redemption
is not exercised by such time, it will cease to be exercisable and the holder
thereof will be entitled only to the redemption price. Warrant holders should
presume that the Company will redeem the Warrants if the criteria for redemption
are met.
The Company must have on file a current registration statement with the
Securities and Exchange Commission pertaining to the Common Stock underlying the
Warrants in order for a holder to exercise the Warrants or in order for the
Warrants to be redeemed by the Company. The shares underlying the Warrants must
also be registered or qualified for sale under the securities laws of the state
in which the Warrant holder resides. The Company intends to use its best efforts
to keep the Registration Statement incorporating this Prospectus current, but
there can be no assurance that such Registration Statement (or any other
registration statement filed by the Company covering shares underlying the
Warrants) can be kept current. In the
-44-
<PAGE>
event the Registration Statement covering the underlying Common Stock is not
kept current, or if the Common Stock underlying the Warrants is not registered
or qualified for sale in the state in which a Warrant holder resides, the
Warrants may be deprived of any value.
Subject to the foregoing, the Warrants may be exercised by surrendering
properly endorsed certificates therefor to the Warrant Agent accompanied by
payment in full of the exercise price for each share of Common Stock as to which
the Warrants are being exercised and any applicable transfer or other taxes.
Payment of the exercise price of Warrants may be made by tendering cash, a
personal check or a cashier's check only.
The Company is not required to issue any fractional shares of Common
Stock upon the exercise of Warrants or upon the occurrence of adjustments
pursuant to anti-dilution provisions. The Company will pay to holders of
fractional interests an amount equal to the cash value of such fractional
interests based upon the then-current market price of a share of Common Stock.
The subsequent sale in the public market of shares of the Company's
Common Stock, including the shares offered by the Selling Shareholder, may
depress the price for the Company's Common Stock. See "Selling Shareholder."
Transfer Agent and Registrar
The transfer agent and registrar for the Company's Common Stock and
Warrants is American Securities Transfer, Inc., Denver, Colorado.
LEGAL MATTERS
The validity of the securities offered will be passed upon for the
Company by Hart & Trinen, Denver, Colorado.
EXPERTS
The financial statements of the Company at December 31, 1995, and for
the year ended December 31, 1995 appearing in this Prospectus and Registration
Statement, have been audited by Brock and Company, CPAs, P.C., independent
auditors, as set forth in their report thereon appearing elsewhere herein and in
the Registration Statement, and are included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.
The financial statements of the Company at December 31, 1996, and for
the year ended December 31, 1996 appearing in this Prospectus and Registration
Statement, have been audited by Hein + Associates LLP independent auditors, as
set forth in their report thereon appearing elsewhere herein and in the
Registra- tion Statement, and are included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.
-45-
<PAGE>
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
Balance Sheets as of September 30, 1997 and December 31, 1996
(unaudited).......................................................... F-17
Statements of Operations for the Three & Nine Months Ended September 30,
1997 and 1996 (unaudited)........................................... F-18
Statements of Cash Flows for the Nine Months Ended September 30, 1997 and
1996 (unaudited).................................................... F-19
Notes to the Financial Statements (unadudited)
................................................................ F-20
F - 1
<PAGE>
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
F - 2
<PAGE>
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
F - 3
<PAGE>
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; 4,139,000
3,063,127 shares issued and outstanding
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
<PAGE>
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
<PAGE>
APPLIED COMPUTER TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM JANUARY 1, 1995 THROUGH DECEMBER 31, 1996
<TABLE>
<CAPTION>
COMMON STOCK ACCUMULATED
------------
SHARES AMOUNT DEFICIT
------ ------ ----------
<S> <C> <C> <C>
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 400,000 388,000 --
warrants issued in private
placement offering, less offering
costs of $112,000
Conversion of Subchapter S retained -- 142,000 (142,000)
earnings to common stock
Common stock issued for cash 50,000 62,000 --
Common stock and common stock 1,150,000 3,313,000 --
warrants issued in a public
offering, less offering costs of
$827,000
Net income for the year ended 546,000
------------ ----------- ------------
December 31, 1995
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)
========= ========= ==========
</TABLE>
The accompanying notes are an integral part of this financial statement.
F - 6
<PAGE>
APPLIED COMPUTER TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
1996 1995
------ ------
<S> <C> <C>
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 $ 80,000 $ --
stock surrendered =========== ===========
Cash paid (received) for:
Interest $ 150,000 $ 268,000
=========== ==========
Income taxes $ (25,000) $ 319,000
=========== ==========
</TABLE>
The accompanying notes are an integral part of this financial statement.
F - 7
<PAGE>
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 $ 3,172,000 $ 1,339,000
software
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.
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
F - 8
<PAGE>
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.
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
F - 9
<PAGE>
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 further intends to improve
its relationship with its financial institution and while formal waivers of
the debt covenant violations have not yet been received, the Company does
believe such waivers will ultimately be approved and the notes will not be
called. 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 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-of-credit, 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 1/2% (10.75% at December 31, 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 not been received by the Company. The Company also has a
F - 10
<PAGE>
$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
============
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 $ (175,000) $ 185,000 $ 196,000
(benefit) ========== ========== =============
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.
F - 11
<PAGE>
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.
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 -- 2.0 2.8
tax benefit
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 - 12
<PAGE>
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.
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.
F - 13
<PAGE>
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 212,500 $2.32 -- $ --
year
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 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.
F - 14
<PAGE>
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
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 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.
F - 15
<PAGE>
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
F - 16
<PAGE>
APPLIED COMPUTER TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
------
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
---- ----
(unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and equivalents $ 5,000 $ 710,000
Receivables:
Trade, net of allowance of $30,000 3,397,000 1,700,000
Income taxes - 280,000
Loans to Officers 92,000 36,000
Other 95,000 433,000
Inventories 2,871,000 3,381,000
Prepaid and Other 450,000 328,000
------------ ----------
Total Current Assets $ 6,910,000 $6,868,000
NET PROPERTY AND EQUIPMENT, at cost 2,015,000 1,769,000
NET INTANGIBLE ASSETS, at cost 131,000 166,000
OTHER ASSETS
259,000 70,000
------- ------
TOTAL ASSETS $ 9,315,000 $ 8,873,000
============ ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Current portion of long-term debt $ 46,000 $ 571,000
Notes payable 2,640,000 1,959,000
Accounts payable 5,484,000 2,752,000
Accrued liabilities 278,000 345,000
------------ ----------
Total Current Liabilities $ 8,448,000 $ 5,627,000
LONG -TERM LIABILITIES 642,000 237,000
STOCKHOLDERS' EQUITY:
Preferred stock - no par value; 5,000,000 shares
authorized; no Shares issued
Common stock, no par value; 25,000,000 shares 4,139,000 4,139,000
authorized; 3,063,127 shares issued and outstanding
Accumulated deficit
(3,914,000) (1,130,000)
------------ ----------
Total stockholders' equity 225,000 3,009,000
------------ ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 9,315,000 8,873,000
============ =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F - 17
<PAGE>
APPLIED COMPUTER TECHNOLOGY, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET REVENUES $13,908,000 $9,126,000 $22,339,000 $16,343,000
TOTAL COST OF GOODS SOLD:
Cost of Materials & Overhead 11,928,000 7,206,000 19,189,000 12,699,000
Inventory Adjustment 65,000 (37,000) 746,000 (37,000)
Unabsorbed Services Cost
264,000 365,000 1,120,000 485,000
---------- --------- ---------- ----------
COST OF GOODS SOLD 12,257,000 7,534,000 21,055,000 13,147,000
---------- --------- ---------- ----------
GROSS PROFIT (LOSS) 1,651,000 1,592,000 1,284,000 3,196,000
---------- --------- ---------- ----------
OPERATING EXPENSES:
Marketing and selling 455,000 591,000 1,786,000 1,393,000
General and administrative 471,000 399,000 1,348,000 1,072,000
Internet access cost 206,000 -- 543,000 --
------- - ------- -
TOTAL OPERATING EXPENSES 1,132,000 990,000 3,677,000 2,465,000
---------- --------- ---------- ----------
INCOME (LOSS) FROM OPERATIONS 519,000 602,000 (2,393,000) 731,000
OTHER INCOME (EXPENSE):
Other income (expense) (68,000) 4,000 (45,000) 12,000
Interest expense (143,000) (68,000) (346,000) (93,000)
---------- --------- ---------- ----------
INCOME (LOSS)
BEFORE INCOME TAXES 308,000 538,000 (2,784,000) 650,000
Income tax expense (benefit) -- 160,000 -- 197,000
---------- --------- ---------- ----------
NET INCOME (LOSS) $ 308,000 $ 378,000 $(2,784,000) $ 453,000
========== ========= =========== ==========
NET INCOME (LOSS)
PER COMMON SHARE $ .10 .11 $( .91) .14
========== ========= =========== ==========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 3,063,127 3,328,443 3,058,865 3,339,109
========== ========= =========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F - 18
<PAGE>
APPLIED COMPUTER TECHNOLOGY, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------
1997 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(2,784,000) $ 453,000
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation and amortization 482,000 234,000
Loss on equipment disposal - 161,000
Changes in operating assets and liabilities:
Increase (decrease) Accounts receivable (1,697,000) (561,000)
Increase (decrease) Inventories 510,000 (1,145,000)
Increase (decrease) Prepaid expenses and other (29,000) (166,000)
current assets
Increase (decrease) Income tax refund receivable 280,000 156,000
Increase (decrease) Accounts payable 2,732,000 139,000
Increase (decrease) Customer deposits 0 (53,000)
Increase (decrease) Accrued liabilities and
other current liabilities (63,000) 180,000
-------- -------
Net cash used in operating activities (574,000) (601,000)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Property and equipment acquisitions
(693,000) (1,380,000)
CASH FLOWS FROM FINANCING ACTIVITIES --------- -----------
Principal payments on loans (15,000) (33,000)
New borrowings 192,000 864,000
Principal payments on capital leases (172,000) (19,000)
Proceeds from new lease obligations 557,000 75,000
Net cash provided by financing activities 562,000 887,000
------- -------
NET DECREASE IN CASH AND EQUIVALENTS (705,000) (1,094,000)
CASH AND EQUIVALENTS, at beginning of period $710,000 $1,277,000
-------- ----------
CASH AND EQUIVALENTS, at end of period 5,000 183,000
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Non-cash items:
Purchase of equipment for notes and capital
leases $857,000 175,000
========= =========
Cash paid (received ) for:
Interest $346,000 93,000
========= =========
Income taxes (280,000) (156,000)
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F - 19
<PAGE>
APPLIED COMPUTER TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
Financial Information - The Company's unaudited interim financial statements
have been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission applicable to Regulation S-B. Accordingly, certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted. These interim financial statements should be read in
conjunction with the Company's December 31, 1996 financial statements and notes
included elsewhere in this prospectus.
In the opinion of management, the interim financial statements reflect all
adjustments necessary for a fair presentation of the interim periods, such
adjustments being of a normal recurring nature. The results of operations for
the interim periods are not necessarily indicative of the results of operations
to be expected for the full year.
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 five business center / 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.
Property and Equipment - Property and equipment are stated at cost.
Revenue Recognition - The Company recognizes revenues from product and system
sales when title passes to the customer.
Warranty - The company provides a warranty to its customers and the related
costs are recorded at the time of sale.
Earnings Per Share Calculation - The quarter ended September 30, 1997 the common
stock equivalents were excluded from calculation since the Company's stock price
did not exceed the exercise price for a significant portion of the period.
F - 20
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
The Company's Articles of Incorporation, as amended, and Bylaws, as
amended, allow the Company to indemnify and hold harmless to the maximum extent
permissible by Colorado law any officer or director of the Company who is made a
party to any proceeding as a result of that person's service to the Company as
an officer or director.
Apart from rights afforded by the Company's Articles of Incorporation
and Bylaws, an officer or director may be indemnified against judgments,
penalties, fines, settlements and reasonable expenses actually incurred if the
officer or director conducted himself in good faith and either (i) reasonably
believed his conduct to be in the corporation's best interest, or (ii)
reasonably believed the conduct to be at least not opposed to the corporation's
best interest. In the case of a criminal proceeding, the officer or director
must have had no reasonable cause to believe the conduct was unlawful.
The Colorado Business Corporation Act also requires that a corporation
indemnify a director who is wholly successful, on the merits or otherwise, in
the defense of any proceeding to which the director was a party because of being
a director of the corporation, against reasonable expenses incurred by the
director in connection with the proceeding.
Indemnification may also be granted pursuant to the terms of agreements
which may be entered into in the future pursuant to a vote of shareholders or
directors. The statutory provisions cited above also grant the power to the
Company to purchase and maintain insurance which protects its officers and
directors against any liabilities incurred in connection with their services in
such positions, and such a policy may be obtained by the Company in the future.
Item 25. Other Expenses of Issuance and Distribution.
Item Amount
S.E.C. Registration Fee $ 266
N.A.S.D. Filing Fee 766
State Securities Laws Legal and Filing Fees 1,000
Printing 200
Legal Fees 25,000
Accounting Fees and Expenses 5,000
Transfer Agent's Fees 100
Miscellaneous Expenses 2,668
-----
Total $35,000
========
*All expenses, with the exception of the SEC and NASD filing fees, are
estimated.
<PAGE>
Item 26. Recent Sales of Unregistered Securities.
The following information sets forth all securities of the Company
which have been sold since the Company's inception and which securities were not
registered under the Securities Act of 1933, as amended.
Shares of Common Date of
Security Holder Stock Sold Sale Consideration
Wiley E. Prentice, Jr. 1,065,000 1/1/1991 An undivided 75% of the
assets of a partnership
known as Applied Computer
Technology subject to all
liabilities associated
with such assets.
Cynthia E. Koehler 355,000 1/1/1991 An undivided 25% of the
assets of a partnership
known as Applied Computer
Technology subject to all
liabilities associated
with such assets.
Robert Oliphant 20,000 2/1/1995 Services rendered, with a
value of $5,000.
Robert G. Holman 20,000 6/2/1995 $25,000
Hugh H. McCullough 20,000 6/2/1995 $25,000
James B. Jaqua 20,000 6/2/1995 $25,000
Elsa P. McCullough 20,000 6/2/1995 $25,000
Joel R. Sachs 10,000 6/2/1995 $25,000
Olesh Partners, Ltd. 20,000 6/2/1995 $25,000
Nutri Chem, Inc. Pension
& Profit Sharing Plan 20,000 6/2/1995 $25,000
Lee Roy Tautz 20,000 6/2/1995 $25,000
Joseph E. Phillips 5,000 6/2/1995 $ 6,250
D. H. Carlson 10,000 6/2/1995 $12,500
Alan Fleisher 20,000 6/2/1995 $25,000
William Bammell IRA 10,000 6/12/1995 $12,500
Dan R. Koehler 5,000 6/12/1995 $ 6,250
Paul D. Koehler 10,000 6/12/1995 $12,500
Suzanne Oliphant 20,000 6/12/1995 $25,000
Stephen D. Whitman 10,000 6/12/1995 $12,500
Ralph H. Baltran 10,000 6/12/1995 $12,500
Todd and Dawn Morgan 10,000 6/12/1995 $25,000
James R. Parker 5,000 6/12/1995 $ 6,250
D/Ann Campbell 5,000 6/12/1995 $ 6,250
Robert F. Cantor 10,000 6/12/1995 $12,500
Eileen Marie Koehler 5,000 6/12/1995 $ 6,250
David W. Whitman IRA 10,000 6/12/1995 $12,500
John and Darcie Osbourn 5,000 6/12/1995 $ 6,250
Alfred P. Davis 5,000 6/12/1995 $ 6,250
Marilyn M. Davis 5,000 6/12/1995 $ 6,250
<PAGE>
Thomas & Susan Hilb 10,000 6/12/1995 $12,500
Armond Azharian 10,000 6/12/1995 $12,500
Wiley Prentice, Sr. 50,000 6/23/1995 $62,500
J. Douglas Heiskell 10,000 6/23/1995 $12,500
David K. Hicks 10,000 6/12/1995 $12,500
J. Roger Moody 40,000 7/30/1995 $50,000
Michael D. DeWitt 10,000 7/30/1995 $12,500
The sales of the Company's Common Stock described above were exempt
transactions under Section 4(2) of the Act as transactions by an issuer not
involving a public offering. The shares of Common Stock sold subsequent to
February 1995 were also exempt in accordance with Rule 504 of the Securities and
Exchange Commission. All of the shares of Common Stock were issued for
investment purposes only and without a view to distribution. All of the persons
who acquired the foregoing securities were fully informed and advised about
matters concerning the Company, including its business, financial affairs and
other matters. The purchasers of the Company's Common Stock acquired the
securities for their own accounts. The certificates evidencing the securities
bear legends stating that they may not be offered, sold or transferred other
than pursuant to an effective registration statement under the Securities Act of
1933, or pursuant to an applicable exemption from registration. No underwriters
were involved with the sale of the shares of Common Stock and no commissions or
other forms of remuneration were paid to any person in connection with sales of
the Company's securities prior to March 1995. The Company paid a commission of
$50,000 to Schneider Securities, Inc. in connection with the sale of the
securities sold in June 1995. All of the shares of Common Stock sold by the
Company are "restricted" shares as defined in Rule 144 of the Rules and
Regulations of the Securities and Exchange Commission.
Item 27. Exhibits.
The following is a complete list of Exhibits filed as part of this
Registration Statement and which are incorporated herein.
Exhibit No. Page
3.1.1 Articles of Incorporation. *
3.1.2 Amendment to Articles of Incorporation as filed on May 19,
1995 *
3.1.3 Amendment to Articles of Incorporation as filed on June 6,
1995 *
3.2.1 By-Laws. *
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. *
5 Opinion of Hart & Trinen regarding legality of the securities
covered by this Registration Statement.
<PAGE>
Exhibit No. Page
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, adopted March 1, 1995,
authorizing 600,000 shares of Common Stock for issuance
upon exercise of options issued pursuant to the Plan. *
10.7 Retail Lease, dated May 29, 1992, by and between Clarmont
Enterprises, Inc. and the Company. *
10.8 Retail Lease, dated August 13, 1990, by and between
University Hill Plaza Partnership, Ltd. and the Company. *
10.9 Lease Agreement, dated August 16, 1989, by and between
G.B. Ventures and the Company, as amended by Lease
Extension Agreement #1, dated September 15, 1994
and Lease Addendum No. 2, dated July 7, 1995. *
10.10 Shopping Center Lease, dated August 13, 1991, by and
between Colorado & Wesley Partners, Ltd. and the Company. *
10.11 Shopping Center Lease, dated July 16, 1993, by and between
Crow-Watson #8, a Texas limited partnership, and the Company. *
10.12 Shopping Center Lease, dated September 14, 1992, by and
between First Interstate Bank, N.A., as Trustee of Heron
North America Property Trust, and the Company. *
10.13 Lease, dated July 8, 1991, by and between Westside
Investment Company and the Company. *
10.14 Certificate of Registration of Trademark, dated July 5,
1994, from Patent and Trademark Office. *
10.15 Certificate of Registration of Trademark, dated April 19,
1994, from Patent and Trademark Office. *
10.16 Certificate of Registration of Service Mark, dated December
14, 1993 from Patent and Trademark Office. *
10.17 Certificate of Registration of Service Mark, dated July 5,
1994, from Patent and Trademark Office. *
10.18 Certificate of Registration of Service Mark, dated April 19,
1994, from Patent and Trademark Office. *
10.19 Certificate of Registration of Service Mark, dated December
14, 1993, from Patent and Trademark Office. *
10.24 Share Escrow Agreement. *
14 Not applicable.
15 Not applicable.
21 Not applicable.
23.1 Consent of Hart & Trinen. __
23.2 Consent of Hein + Associates LLP __
23.3 Consent of Brock and Company __
* Incorporated by reference to same exhibit filed with Company's Registration
Statement on Form SB-2 (Commission File #33-95782-D).
<PAGE>
Item 28. Undertakings.
(a) Rule 415 Offering.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the information set
forth in the Registration Statement; and
(iii) Include any additional material information on the plan of
distribution.
(2) For determining any liability under the Securities Act, each such
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
(b) Indemnification.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Act, and is therefore unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
<PAGE>
POWER OF ATTORNEY
The Registrant and each person whose signature appears below hereby
authorizes the agent for service named in this Registration Statement, with full
power to act alone, to file one or more amendments (including post-effective
amendments) to this Registration Statement, which amendments may make such
changes in this Registration Statement as such agent for service deems
appropriate, and the Registrant and each such person hereby appoints such agent
for service as attorney-in-fact, with full power to act alone, to execute in the
name and in behalf of the Registrant and any such person, individually and in
each capacity stated below, any such amendments to this Registration Statement.
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this Registration
Statement or Amendment to be signed on its behalf by the undersigned in Fort
Collins, Colorado on February 12, 1998.
APPLIED COMPUTER TECHNOLOGY, INC.
By:/s/ Wiley E. Prentice, Jr.
-----------------------------
Wiley E. Prentice, Jr., President and
Chief Executive Officer
By:/s/ Daniel Radford
------------------------------
Daniel Radford,
Principal Financial and Accounting Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement or Amendment was signed by the following persons in the
capacities and on the dates stated.
Signature Title Date
/s/ Wiley E. Prentice, Jr. President, Chief Executive February 12, 1998
- -------------------------
Wiley E. Prentice, Jr. Officer (Principal Executive
Officer) and Director
/s/ Cynthia E. Koehler Executive Vice President, February 12, 1998
- -------------------------
Cynthia E. Koehler Secretary and Director
- ------------------------- Director
J. Roger Moody
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2
Registration Statement
Under
THE SECURITIES ACT OF 1933
Applied Computer Technology, Inc.
EXHIBITS
<PAGE>
Exhibit No. Page
3.1.1 Articles of Incorporation. *
3.1.2 Amendment to Articles of Incorporation as filed on May 19,
1995. *
3.1.3 Amendment to Articles of Incorporation as filed on June 6,
1995. *
3.2.1 By-Laws. *
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. *
5 Opinion of Hart & Trinen regarding legality of the securities
covered by this Registration Statement.
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, adopted March 1, 1995,
authorizing 600,000 shares of Common Stock for issuance upon
exercise of options issued pursuant to the Plan. *
10.7 Retail Lease, dated May 29, 1992, by and between Clarmont
Enterprises, Inc. and the Company. *
10.8 Retail Lease, dated August 13, 1990, by and between
University Hill Plaza Partnership, Ltd. and the Company. *
10.9 Lease Agreement, dated August 16, 1989, by and between
G.B. Ventures and the Company, as amended by Lease
Extension Agreement #1, dated September 15, 1994
and Lease Addendum No. 2, dated July 7, 1995. *
10.10 Shopping Center Lease, dated August 13, 1991, by and
between Colorado & Wesley Partners, Ltd. and the Company. *
10.11 Shopping Center Lease, dated July 16, 1993, by and between
Crow-Watson #8, a Texas limited partnership, and the Company. *
10.12 Shopping Center Lease, dated September 14, 1992, by and
between First Interstate Bank, N.A., as Trustee of Heron
North America Property Trust, and the Company. *
10.13 Lease, dated July 8, 1991, by and between Westside
Investment Company and the Company. *
10.14 Certificate of Registration of Trademark, dated July 5,
1994, from Patent and Trademark Office. *
10.15 Certificate of Registration of Trademark, dated April 19,
1994, from Patent and Trademark Office. *
10.16 Certificate of Registration of Service Mark, dated December
14, 1993 from Patent and Trademark Office. *
10.17 Certificate of Registration of Service Mark, dated July 5,
1994, from Patent and Trademark Office. *
10.18 Certificate of Registration of Service Mark, dated April 19,
1994, from Patent and Trademark Office. *
10.19 Certificate of Registration of Service Mark, dated December
14, 1993, from Patent and Trademark Office. *
<PAGE>
Exhibit No. Page
10.24 Share Escrow Agreement. *
14 Not applicable.
15 Not applicable.
21 Not applicable.
23.1 Consent of Hart & Trinen. __
23.2 Consent of Hein + Associates LLP
23.3 Consent of Brock and Company. __
* Incorporated by reference to same exhibit filed with Company's Registration
Statement on Form SB-2 (Commission File #33-95782-D).
February 12, 1998
Applied Computer Technology, Inc.
2573 Midpoint Drive
Fort Collins, CO 80525
This letter will constitute an opinion upon the legality of the sale by a
certain Selling Shareholder of Applied Computer Technology, Inc., a Colorado
corporation ("the Company"), of up to 360,000 shares of Common Stock, all as
referred to in the Registration Statement on Form SB-2 filed by the Company with
the Securities and Exchange Commission.
We have examined the Articles of Incorporation, the Bylaws and the minutes of
the Board of Directors of the Company and the applicable laws of the State of
Colorado, and a copy of the Registration Statement. In our opinion, the Company
was authorized to issue the shares of stock mentioned above and such shares are
fully paid and non-assessable shares of the Company's Common Stock.
Very truly yours,
HART & TRINEN
William T. Hart
CONSENT OF ATTORNEYS
Reference is made to the Registration Statement of Applied Computer Technology,
Inc., whereby a certain Selling Shareholder proposes to sell up to 360,000
shares of the Company's Common Stock. Reference is also made to Exhibit 5
included in the Registration Statement relating to the validity of the
securities proposed to be sold.
We hereby consent to the use of our opinion concerning the validity of the
securities proposed to be issued and sold.
Very truly yours,
HART & TRINEN
William T. Hart
Denver, Colorado
February 12, 1998
INDEPENDENT AUDITOR'S CONSENT
We consent to the inclusion in this Registration Statement of Applied Computer
Technology, Inc. on Form SB-2 of our report dated April 11, 1997 on our audit of
the consolidated financial statements of Applied Computer Technology, Inc. as of
December 31, 1996, and for the year then ended. We also consent to the reference
to our firm under the caption "Experts."
/s/ Hein + Associates LLP
HEIN + ASSOCIATES LLP
Denver, Colorado
February 9, 1998
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS CONSENT
We consent to the use in the Registration Statement of Applied Computer
Technology, Inc. on Form SB-2 of our report dated April 25, 1996 relating to the
financial statements of Applied Computer Technology, Inc. as of December 31,
1995 and for the year then ended.
Brock and Company, CPA's, P.C.
Fort Collins, Colorado
February 12, 1998
