<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1996 COMMISSION FILE NUMBER 0-26778
APPLIED MICROSYSTEMS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
WASHINGTON 91-1074996
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
5020 148TH AVENUE N.E. 98052
REDMOND, WASHINGTON (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(206) 882-2000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $.01 Per Share
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
The number of shares of the registrant's Common Stock outstanding as of
May 3, 1996, was 6,505,382.
This report including exhibits consists of 15 pages. The exhibit index
appears on page 14.
<PAGE> 2
APPLIED MICROSYSTEMS CORPORATION
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Statements of Operations for the three months ended March 31, 1996.................. 3
Consolidated Balance Sheets as of March 31, 1996................................................. 4
Consolidated Statements of Cash Flows for the three months ended March 31, 1996.................. 5
Notes to Consolidated Financial Statements....................................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............ 7
Part II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................................................. 12
Signatures....................................................................................... 13
Exhibit Index.................................................................................... 14
Exhibit 11....................................................................................... 15
</TABLE>
2
<PAGE> 3
APPLIED MICROSYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
---------------------------
1996 1995
------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNT)
(UNAUDITED)
<S> <C> <C>
Net sales .......................... $8,704 $7,227
Cost of sales ...................... 2,557 2,269
------- -------
Gross profit ....................... 6,147 4,958
Operating expenses:
Selling and marketing ......... 3,056 2,718
Research and development ...... 1,807 1,473
General and administrative .... 391 509
------- -------
Total operating expenses ........... 5,254 4,700
------- -------
Income from operations ............. 893 258
Interest income and other .......... 153 4
Interest expense ................... (14) (101)
------- -------
Income before income taxes ......... 1,032 161
Income taxes ....................... 330 75
======= =======
Net income ......................... $ 702 $ 86
======= =======
Net income per share ............... $ 0.10 $ 0.02
Shares used in per share calculation 7,083 5,471
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE> 4
APPLIED MICROSYSTEMS CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
-------- --------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ........................ $ 8,684 $12,771
Short Term Investments ........................... 3,936 --
Accounts receivable........................... ... 7,727 7,510
Inventories ...................................... 3,076 3,145
Prepaid and other current assets ................. 513 454
-------- -------
Total current assets ...................... 23,936 23,880
Property and equipment, net ........................... 2,295 2,212
Other assets .......................................... 718 754
-------- -------
Total assets .............................. $26,949 $26,846
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................. $ 2,875 $ 3,442
Accrued payroll .................................. 1,434 1,698
Other accrued expenses ........................... 1,124 1,083
Deferred revenue ................................. 2,098 1,834
Current portion of long-term obligations ......... 61 67
-------- --------
Total current liabilities ................. 7,592 8,124
Long-term obligations, less current portion ........... 55 68
Shareholders' equity:
Common stock, par value $.01
Authorized - 25,000,000 shares
Issued - 6,499,000 and 6,468,000 shares in
March 31, 1996 and December 31, 1995,
respectively .................................. 25,658 25,655
Cumulative translation adjustment ................ (213) (156)
Accumulated deficit .............................. (6,143) (6,845)
-------- --------
Total shareholders' equity ................ 19,302 18,654
-------- --------
Total liabilities and shareholders' equity $26,949 $26,846
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE> 5
APPLIED MICROSYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-----------------------------
1996 1995
-------- --------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES
Net income .............................................. $ 702 $ 86
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization .................... 281 310
Changes in operating assets and liabilities
(Increase) decrease in accounts receivable, net (217) 422
Decrease (increase) inventories ............... 69 (442)
(Increase) decrease prepaid expenses .......... (59) 34
Decrease in other assets ...................... 16 59
Increase (decrease) in deferred revenue ....... 264 (103)
(Decrease) increase in accounts payable and
accrued expenses ............................ (790) 568
-------- --------
Net cash provided by operating activities ............... 266 934
INVESTING ACTIVITIES
Purchase of short-term investments ...................... (3,936) --
Property and equipment additions ........................ (344) (161)
-------- --------
Net cash used in investing activities ................... (4,280) (161)
FINANCING ACTIVITIES
Stock options exercised ................................. 3 --
Proceeds from long-term obligations ..................... -- 462
Repayment of long-term obligations ...................... (19) (124)
Proceeds from notes payable to banks .................... -- 3,900
Repayment of notes payable to banks ..................... -- (5,361)
-------- --------
Net cash provided by (used in) financing activities ..... (16) (1,123)
Effects of foreign exchange rate changes on cash ........ (57) 447
-------- --------
Increase (decrease) in cash and cash equivalents ........ (4,087) 97
Cash and cash equivalents at beginning of period ........ 12,771 2,072
-------- --------
Cash and cash equivalents at end of period .............. $ 8,684 $ 2,169
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE> 6
APPLIED MICROSYSTEMS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. INTERIM CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements for the three month period
ended March 31, 1996 and the related footnote information are unaudited and have
been prepared on a basis substantially consistent with the 1995 audited
consolidated financial statements, and in the opinion of management include all
adjustments (consisting of only normal recurring adjustments) necessary for fair
presentation of the results of this interim period. These statements should be
read in conjunction with the consolidated financial statements and related notes
included in the Company's 1995 Annual Report to Shareholders. The results of
operations for the three month period ended March 31, 1996 are not necessarily
indicative of the results to be expected for the entire year.
2. COMPUTATION OF EARNINGS PER SHARE
Net income per share is based on the weighted average number of
common and common equivalent shares outstanding during each period. Common
equivalent shares include the effect of all outstanding convertible preferred
stock and outstanding stock options and warrants. Common equivalent shares are
not included in the per share calculations where the effect of their inclusion
would be antidilutive, except that, in accordance with Securities and Exchange
Commission requirements, common and common equivalent shares issued during the
12-month period prior to its filing of the initial public offering have been
included in the calculation as if they were outstanding for all periods through
November 1995 (the closing of its initial public offering), using the treasury
stock method and the initial public offering price.
3. INVENTORIES
Inventories consist of:
<TABLE>
<CAPTION>
March 31, Dec. 31,
1996 1995
------------ ------------
(in thousands)
<S> <C> <C>
Finished goods $1,152 $1,275
Work in process 218 155
Purchased parts 1,706 1,715
------------ ------------
$3,076 $3,145
============ ============
</TABLE>
6
<PAGE> 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Conditions and Results of
Operations should be read in conjunction with the accompanying financial
statements for the periods specified and the associated notes. Further reference
should be made to the Company's 1995 Annual Report to Shareholders.
RESULTS OF OPERATIONS
The following table sets forth for the period indicated the percentage of total
revenue represented by each line item in the Company's condensed consolidated
statements of income and the percentage change from comparative prior period in
each line item:
<TABLE>
<CAPTION>
Percentage of Period-to-Period
Net Sales Percentage Change
----------------------------- --------------------
Three Months Ended Three Months Ended
March 31, March 31, 1996
1996 1995 Compared to 1995
---------- ---------- --------------------
<S> <C> <C> <C>
Net sales 100.0% 100.0% 20.4%
Cost of sales 29.4 31.4 12.7
------- -------
Gross profit 70.6 68.6 24.0
Operating expenses:
Selling and marketing 35.1 37.6 12.4
Research and development 20.8 20.4 22.7
General and administrative 4.5 7.0 (23.2)
------- -------
Total operating expenses 60.4 65.0 11.8
------- -------
Income from operations 10.2 3.6 246.1
Interest income and other 1.8 0.0 3,725.0
Interest expense (0.2) (1.4) (86.1)
------- -------
Income before income taxes 11.8 2.2 541.0
------- -------
Income taxes 3.8 1.0 340.0
------- -------
Net income 8.0% 1.2% 716.3%
======= =======
</TABLE>
7
<PAGE> 8
NET SALES
Net sales increased by 20.4% from $7.2 million for the quarter ended
March 31, 1995 to $8.7 million for the quarter ended March 31, 1996. This
increase was primarily attributable to sales of CodeTEST(TM) and NetROM(TM)
tools which were not available in the prior year period , and to increased unit
sales of CodeTAP(R). The increase was partially offset by a decline in average
selling prices due to an increased proportion of sales represented by
lower-priced tools and to a lesser extent was unfavorably impacted by currency
exchange rate fluctuations affecting international sales. The Company's net
sales are presently derived predominantly from sales of software design,
debugging and testing tools and to a lesser extent include product support
revenues, which represented 8.8% and 7.8% of net sales for the quarter ended
March 31, 1995 and 1996, respectively. The Company generally recognizes revenues
from product sales upon shipment, and recognizes product support revenues
ratably over the life of each maintenance contract, typically 12 months.
International sales, expressed in U.S. dollars increased by 21.5% for
the quarter ended March 31, 1996 over the comparable period of 1995, to 47.8% of
net sales as compared to 47.4% of net sales in the prior year. The growth rate
of international sales is attributable to increased unit sales, which is due
primarily to increased sales and marketing efforts. The Company's sales through
its foreign subsidiaries are generally denominated in local currencies, and as a
result, fluctuations in currency exchange rates can have a significant effect on
the Company's reported net sales. For example, the Company estimates that
unfavorable currency rate fluctuations affecting translation of sales from the
Company's foreign subsidiaries into U.S. dollars, especially in Japan, accounted
for a 4.5% reduction of the Company's year over year consolidated net sales
growth for the quarter ended March 31, 1996 based upon the change in the rate
from the comparable period of 1995. The Company is unable to predict currency
exchange rate fluctuations and anticipates that such fluctuations will continue
to affect its net sales to varying degrees in the future. In order to mitigate
certain risks associated with exchange rate fluctuations, the Company does hedge
a portion of its foreign exchange risk in Japan. Although the Company generally
plans to continue to engage in exchange rate hedging activities with respect to
certain exchange rate risks, there can be no assurance that it will do so or
that any such activities will successfully protect the Company against such
risks. The Company expects international sales, especially in Japan, to continue
to account for a significant percentage of its net sales.
GROSS PROFIT
The Company's gross profit increased from $5.0 million, or 68.6% of net
sales, for the quarter ended March 31, 1995 to $6.1 million, or 70.6% of net
sales, for the quarter ended March 31, 1996. The increase in gross profit as a
percentage of net sales was primarily attributable to an increase in the
percentage of net sales attributable to newer products (CodeICE(TM), CodeTAP,
NetROM and CodeTEST) that have lower material and labor costs, and to a lesser
extent, increased leverage of fixed and semi-variable manufacturing costs, and
to favorable cost reductions on certain hardware components. These savings were
partially offset by unfavorable currency exchange rate fluctuations. Due to a
variety of factors, the Company anticipates that the prices for its products
will decline over time.
8
<PAGE> 9
SALES AND MARKETING
Sales and marketing expenses were $2.7 million or 37.6% of net sales,
and $3.1 million, or 35.1% of net sales, for the quarter ended March 31, 1995
and 1996, respectively. The dollar amount increase between comparable periods
was primarily attributable to increased compensation-related expenses resulting
principally from increased sales and marketing headcount. Sales and marketing
expenses declined as a percentage of net sales due to the Company's ability to
leverage certain fixed selling expenses over an increased sales base. Sales and
marketing expenses include salaries, bonuses, commissions, benefits, travel and
entertainment, rent, telephone, supplies and promotional costs. The Company
expects its sales and marketing expenditures to continue to increase in the
future as it introduces and markets new products, and continues to expand its
sales organization.
RESEARCH AND DEVELOPMENT
Research and development expenses were $1.5 million, or 20.4% of net
sales, and $1.8 million, or 20.8% of net sales, for the quarter ended March 31,
1995 and 1996, respectively. The 22.7% increase in research and development
expenses between comparable periods was primarily attributable to increased
compensation-related expenses resulting principally from new product development
and other increases in engineering headcount. Aggregate amounts devoted to
product development, prior to offsetting such amounts with external development
funding from semiconductor manufacturers, increased from $1.7 million for the
quarter ended March 31, 1995 to $1.9 million for the quarter ended March 31,
1996. Although external product development funding has declined and is expected
to continue to decline, the Company intends to continue to make substantial
investments in product development, including development of software design,
debugging and test tools for additional embedded microprocessors and continued
advanced development in future directions. As a result, the Company anticipates
that net research and development expenses are likely to increase for the
foreseeable future.
GENERAL AND ADMINISTRATIVE
General and administrative expenses decreased from $509,000, or 7.0% of
net sales, to $391,000, or 4.5% of net sales, for the quarter ended March 31,
1995 and 1996, respectively. The dollar amount decrease between comparable
periods was primarily attributable to decreased trade secret and patent
enforcement litigation costs, partially offset by increased compensation-related
expenses, including recruiting and relocation costs. General and administrative
expenses may fluctuate as a percentage of net sales from period to period.
OTHER
The Company's interest(net) and other income increased by $236,000 between the
three month comparative periods due primarily to an increase in cash and
marketable securities from the initial public offering in November 1995 and
reduction in debt.
9
<PAGE> 10
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
Statements in this report concerning sales, costs, expenses, adequacy of working
capital which are not historical facts, constitute forward-looking statements
which are subject to a number of risks and uncertainties which might cause
actual results to differ materially from stated expectations. Such risks and
uncertainties include delays in shipments of the Company's new products,
declining product prices and margins, market acceptance of new products, growth
in the marketplace in which the Company operates, competitive product offerings,
unfavorable foreign currency fluctuations and adverse changes in general
economic conditions in any of the countries in which the Company does business.
The Company's performance may also be adversely affected by the ability of its
suppliers to provide components and assemblies. During the last twelve months,
the Company's competitors have continued to make a variety of product
announcements and offerings. The Company continues to release new versions of
its product lines and the successful acceptance of these products will play a
key role in future growth. The impact of any of these factors is difficult to
predict or forecast.
The Company's future earnings and stock price may be subject to significant
volatility, particularly on a quarterly basis, due to a variety of factors,
including factors noted above. Any shortfall in revenue or earnings from levels
expected by securities analysts could have an immediate and significant adverse
effect on the trading price of the Company's common stock in any given period.
Additionally, the Company often does not learn of such shortfalls until late in
the fiscal quarter, or even after the quarter is over, which could result in an
even more immediate and adverse effect on the trading price of the Company's
common stock. Finally, the Company participates in a highly dynamic industry,
which often results in significant volatility of the company's common stock
price. Consequently, purchasing or holding of the Company's stock involves a
high degree of risk.
10
<PAGE> 11
LIQUIDITY AND CAPITAL RESOURCES
The Company requires capital principally for the financing of
inventory, capital equipment and accounts receivable, and for investment in
product development activities, new technologies and potential company or
product line acquisitions. The Company's net assets changed considerably as a
result of the initial public offering in November 1995 which resulted in net
proceeds of $13 million. Among other things, these proceeds were used to
purchase short-term investments and equipment, and has been used to pay off
certain debts. For the quarter ended March 31, 1995 and 1996, the Company
generated $934,000 and $266,000, respectively, of cash from operations; utilized
$161,000 and $4,280 million, respectively, of cash for purchases of short-term
investments and equipment; and utilized $1,123 million and $16,000,
respectively, of cash for net debt reduction. As of March 31, 1996, the Company
had working capital of $16.3 million, including $12.6 million of cash, cash
equivalents and short-term investments.
The Company believes that the net proceeds from the November, 1995
initial public offering, together with funds from operations and borrowings,
will provide the Company with sufficient funds to finance its operations for at
least the next 12 months. The Company's future capital requirements will,
however, depend on a number of factors, including costs associated with product
development efforts, the success of the commercial introduction of the Company's
new products and the potential acquisition of complementary businesses, products
or technologies. To the extent additional capital is required, the Company may
sell additional equity, debt or convertible securities, or obtain additional
credit facilities.
11
<PAGE> 12
Part II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
11. Weighted Shares Used in Computation of Earnings Per Share
(b) Report on Form 8-K
The registrant did not file any reports on Form 8-K during the quarter
ended March 31, 1996.
12
<PAGE> 13
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Redmond, State of Washington, on May 10, 1996.
APPLIED MICROSYSTEMS CORPORATION
(Registrant)
By /s/ A. James Beach
-------------------------------------------------
A. James Beach
Vice President, Chief Financial Officer,
Secretary and Treasurer
(Principal Financial and Accounting Officer)
13
<PAGE> 14
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description Page No.
<S> <C> <C>
11 Weighted Shares Used in Computation of Earnings Per Share 15
27 Financial Data Schedule
</TABLE>
14
<PAGE> 1
Exhibit 11
APPLIED MICROSYSTEMS CORPORATION
Computation of Earnings Per Share
(in thousands, except per share amount)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------
1996 1995
------ ------
<S> <C> <C>
Average shares outstanding 6,480 704
Net effect of dilutive stock warrants and options based on the
treasury stock method using average market price 603 289
Net effect of stock options issued during the 12 months prior
to the initial public offering at less than the offering price based on the
treasury stock method using $10.00 per share,
treated as outstanding for all periods presented 643
Dilutive effect of Convertible Preferred Stock 3,835
------ ------
Total 7,083 5,471
====== ======
Net income $ 702 $ 86
====== ======
Per share amount $ 0.10 $ 0.02
====== ======
</TABLE>
15
xxx
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 8,684
<SECURITIES> 3,936
<RECEIVABLES> 7,727
<ALLOWANCES> 0
<INVENTORY> 3,076
<CURRENT-ASSETS> 23,936
<PP&E> 2,295
<DEPRECIATION> 0
<TOTAL-ASSETS> 26,949
<CURRENT-LIABILITIES> 7,592
<BONDS> 55
0
0
<COMMON> 25,658
<OTHER-SE> (6,356)
<TOTAL-LIABILITY-AND-EQUITY> 26,949
<SALES> 8,704
<TOTAL-REVENUES> 8,704
<CGS> 2,557
<TOTAL-COSTS> 5,254
<OTHER-EXPENSES> (153)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14
<INCOME-PRETAX> 1,032
<INCOME-TAX> 330
<INCOME-CONTINUING> 702
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 702
<EPS-PRIMARY> .10
<EPS-DILUTED> .10
</TABLE>
