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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997 COMMISSION FILE NUMBER 0-26778
APPLIED MICROSYSTEMS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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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)
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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 2, 1997, was 6,769,714.
This report including exhibits consists of 14 pages. The exhibit index
appears on page 13.
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APPLIED MICROSYSTEMS CORPORATION
INDEX TO FORM 10-Q
PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Statements of Income for the three months ended
March 31, 1997 and 1996 . . . . . . . . . . . . . . . . . . . . 3
Consolidated Balance Sheets as of March 31, 1997 and
December 31, 1996 . . . . . . . . . . . . . . . . . . . . . . . . 4
Consolidated Statements of Cash Flows for the three months ended
March 31, 1997 and 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 . . . . . . . . . . . . . . . . 11
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . . . 13
Exhibit 11 . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
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APPLIED MICROSYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED MARCH 31
-------------------------------
1997 1996
---------------- ----------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNT)
(UNAUDITED)
Net sales.......................................... $8,902 8,704
Cost of sales....................................... 2,456 2,557
------ ------
Gross profit........................................ 6,446 6,147
Operating expenses:
Sales, general and administrative............... 4,359 3,447
Research and development........................ 2,186 1,807
------ ------
Total operating expenses........................... 6,545 5,254
------ ------
Income from operations............................. (99) 893
Interest income and other.......................... 164 153
Interest expense................................... (4) (14)
------ ------
Income before income taxes......................... 61 1,032
Income taxes....................................... 19 330
------ ------
Net income......................................... $42 $702
------ ------
------ ------
Net income per share............................... $0.01 $0.10
Shares used in per share calculation............... 7,101 7,083
The accompanying notes are an integral part of these consolidated financial
statements.
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APPLIED MICROSYSTEMS CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
MARCH 31, DECEMBER 31,
1997 1996
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(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents............. $7,626 $7,208
Short term investments................ 5,933 5,931
Accounts receivable................... 8,863 10,261
Inventories........................... 3,322 3,197
Prepaid and other current assets...... 1,039 1,020
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Total current assets............... 26,783 27,617
Property and equipment, net.............. 2,704 2,441
Other assets............................. 735 766
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Total assets....................... $30,222 $30,824
------- -------
------- -------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable...................... $3,060 $2,394
Accrued payroll....................... 1,383 1,839
Other accrued expenses................ 847 1,220
Deferred revenue...................... 2,532 2,696
Current portion of long-term
obligations.......................... 54 53
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Total current liabilities.......... 7,876 8,202
Long-term obligations, less current
portion................................ 5 15
Shareholders' equity:
Preferred stock, par value $.01
Authorized - 5,000,000 shares ---- ----
Common stock, par value $.01
Authorized - 25,000,000 shares
Issued - 6,725,000 and 6,634,000 shares at
March 31, 1997 and December 31, 1996,
respectively...................... 26,070 26,068
Cumulative translation adjustment..... (642) (332)
Accumulated deficit................... (3,087) (3,129)
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Total shareholders' equity......... 22,341 22,607
------- -------
Total liabilities and shareholders'
equity........................... $30,222 $30,824
------- -------
------- -------
The accompanying notes are an integral part of these consolidated financial
statements.
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APPLIED MICROSYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31,
1997 1996
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(IN THOUSANDS)
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................. $42 $702
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization............ 281 281
Changes in operating assets and liabilitie
Accounts receivable...................... 1,398 (217)
Inventories.............................. (125) 69
Prepaid expenses......................... (19) (59)
Other assets............................. 4 16
Deferred revenue......................... (164) 264
Accounts payable and accrued expenses.... (163) (790)
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Net cash provided by operating
activities .......................... 1,254 266
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of short-term investments....... (2) (3,936)
Property and equipment additions......... (517) (344)
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Net cash used in investing
activities........................... (519) (4,280)
CASH FLOWS FROM FINANCING ACTIVITIES:
Stock options exercised.................. 2 3
Repayment of long-term obligations....... (10) (19)
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Net cash used in financing
activities........................... (8) (16)
Effects of foreign exchange rate changes
on cash.................................... (309) (57)
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Increase (decrease) in cash and cash
equivalents................................ 418 (4,087)
Cash and cash equivalents at beginning
of period.................................. 7,208 12,771
------- ------
Cash and cash equivalents at end of
period..................................... $7,626 $8,684
------- ------
------- ------
SUPPLEMENTAL DISCLOSURES OF CASH PAID:
Interest................................. $4 $14
Income taxes............................. $281 $232
The accompanying notes are an integral part of these consolidated financial
statements.
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APPLIED MICROSYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The consolidated financial statements for the three month period ended
March 31, 1997 and 1996 and the related footnote information are unaudited
and have been prepared on a basis substantially consistent with the 1996
audited consolidated financial statements. In the opinion of management, the
financial statements 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
1996 Annual Report to Shareholders. The results of operations for the three
months ended March 31, 1997 and 1996 are not necessarily indicative of the
results to be expected for the entire year.
Certain prior year amounts have been reclassified to conform to the
current year presentation. Such reclassifications have no effect on
previously reported results of operations.
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 stock options and
warrants. Common equivalent shares are not included in the per share
calculations where the effect of their inclusion would be antidilutive using
the treasury stock method.
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings per Share, which is required to be adopted on
December 31, 1997. At that time, the Company will be required to change the
method currently used to compute earnings per share and to restate all prior
periods. Under the new requirements for calculating primary earnings per
share, the dilutive effect of stock options will be excluded. The impact is
expected to result in an increase in primary earnings per share for the first
quarter ended March 31, 1996 of $0.01, while the impact of Statement 128 on
the calculation of primary earnings per share for the first quarter ended
March 31, 1997 and fully diluted earnings per share for these quarters is not
expected to be material.
3. INVENTORIES
Inventories consist of:
MARCH 31, DECEMBER 31,
1997 1996
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(IN THOUSANDS)
Finished goods $1,532 $1,282
Work in process 79 168
Purchased parts 1,711 1,747
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$3,322 $3,197
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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 1996 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.
Percent of Period-to-Period
Net Sales Percentage Change
------------------ -------------------
Three Months Ended Three Months Ended
March 31, March 31, 1997
1997 1996 Compared to 1996
--------- ------- -------------------
Net sales............................. 100.0% 100.0% 2.3%
Cost of sales......................... 27.6 29.4 (3.9)
----- -----
Gross profit.......................... 72.4 70.6 4.9
Operating expenses:
Sales, general and administrative.. 49.0 39.6 26.5
Research and development........... 24.6 20.8 21.0
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Total operating expenses.............. 73.6 60.4 24.6
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Income from operations................ (1.2) 10.2 (111.1)
Interest income and other............. 1.8 1.8 7.2
Interest expense...................... ---- (0.2) -----
----- -----
Income before income taxes............ 0.6 11.8 (94.1)
Income taxes.......................... .1 3.8 (94.2)
----- ----- -----
Net income............................ 0.5% 8.0% (94.0%)
----- -----
----- -----
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NET SALES
Net sales increased by 2.3% to $8.9 million from $8.7 million for the
quarter ended March 31, 1997 and 1996, respectively. These increases were
primarily attributable to the growth in sales of low cost debug and
CodeTEST-TM- tools. The increases were partially offset by a decline in unit
sales of higher priced debug 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
product support revenues. Product support revenues increased by 60% from the
prior three month period, and represented approximately 12.2% and 7.8%,
respectively, of total sales in the quarters ended March 31, 1997 and 1996.
The increase relates to higher revenue levels in prior quarters that the
associated service contracts are sold against, but recognized ratably over
the life of each maintenance contract, typically 12 months. The Company
generally recognizes revenues from product sales upon shipment.
International sales expressed in U.S. dollars increased by 6.7% for the
quarter ended March 31, 1997 over the comparable period of 1996, to 49.8% of
net sales as compared to 47.8% of net sales in the first quarter of the prior
year. The growth rate for international sales as expressed in U.S. dollars is
attributable to increased unit sales, 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. Had the exchange rates remained the same as in the prior
comparable period, especially in Japan, sales would have increased an
additional five percentage points for the quarter ended March 31, 1997. 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. 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 to $6.5 million, or 72.4% of net
sales, from $6.1 million, or 70.6% of net sales, in the quarters ended March
31, 1997 and 1996, respectively. The increases in gross profit as a
percentage of net sales were primarily attributable to an increase in the
percentage of net sales of newer debug and CodeTEST products that have lower
material and labor costs, and to a lesser extent, favorable cost reductions
on certain hardware components. These savings were partially offset by
declines in sales revenue due to unfavorable currency exchange rate
fluctuations.
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SALES, GENERAL AND ADMINISTRATIVE
Sales, general and administrative expenses were $4.4 million or 49.0% of
net sales, and $3.4 million, or 39.6% of net sales, for the quarter ended
March 31, 1997 and 1996, respectively. The dollar amount increase between
comparable periods was primarily attributable to increased
compensation-related expenses resulting principally from increased sales
force headcount, and to a lesser extent, increased sales commissions and
travel related expenses. The percentage increase between comparable periods
was primarily attributable to lower than anticipated revenues for the quarter
ending March 31, 1997. Sales are difficult to predict and the majority occur
late in the quarter, at which time budgets are already committed. Sales,
general and administrative expenses include salaries, bonuses, commissions,
benefits, depreciation, 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, general and
administrative organization.
Foreign exchange gains and losses are included in sales, general and
administrative expenses. In order to mitigate certain intercompany risks
associated with exchange rate fluctuations, the Company does hedge a portion
of its foreign exchange risk in Japan as it relates to the trade debt the
Company's Japanese subsidiary owes to the Company. 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.
RESEARCH AND DEVELOPMENT
Research and development expenses were $2.2 million, or 24.6% of net
sales, and $1.8 million, or 20.8% of net sales, for the quarters ended March
31, 1997 and 1996, respectively. The 21.0% increase in the dollar amount of
research and development expenses was primarily attributable to increased
compensation-related and proto-typing expenses and to a lesser extent, a
decrease in external development funding received from third parties. The
percentage increase between comparable periods was primarily attributable to
lower than anticipated revenues for the quarter ending March 31, 1997. Sales
are difficult to predict and the majority occur late in the quarter at which
time budgets are already committed. 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 as well as 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
OTHER
The Company's interest (net) and other income increased by $11,000
between the comparable three month periods due primarily to an increase in
cash and marketable securities generated from operations.
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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 to the Company of $13 million. Among other things, these proceeds
were used to purchase short-term investments and equipment, and pay off
certain debts. For the three months ended March 31, 1997 and 1996, the
Company generated $1.3 million and $266,000, respectively, of cash from
operations; and utilized $519,000 and $4.3 million, respectively, of cash for
purchases of short-term investments and equipment. As of March 31, 1997, the
Company had working capital of $19.0 million, including $13.6 million of
cash, cash equivalents and short-term investments
The Company believes that its existing working capital, together with
funds from operations and available revolving credit line, 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 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.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
Statements in this report concerning sales, costs, expenses, adequacy of
working capital and other matters 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, ability
of its suppliers to provide components and assemblies, uncertain 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, and other risks set forth in
the Company's filings with the Securities and Exchange Commission, including
its annual report for the year ended December 31, 1996 on Form 10-K. 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 be a key determinant of 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, at which time, budgeted expenses have already been committed which
could result in an even more immediate and adverse effect on the trading
price of the Company's common stock. 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.
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PART II. - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) The following exhibits are filed as part of this report.
11 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, 1997.
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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 8, 1997.
APPLIED MICROSYSTEMS CORPORATION
(Registrant)
By /s/ A. James Beach
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A. James Beach
VICE PRESIDENT, CHIEF FINANCIAL OFFICER,
SECRETARY AND TREASURER
(PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)
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EXHIBIT INDEX
Exhibit No. Description Page No.
11 Computation of Earnings Per Share. 14
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EXHIBIT 11
APPLIED MICROSYSTEMS CORPORATION
Computation of Earnings Per Share
(in thousands, except per share amounts)
THREE MONTHS ENDED MARCH 31,
1997 1996
--------- --------
Average shares outstanding 6,694 6,480
Net effect of dilutive stock warrants
and options based on the treasury stock
method using average market price 407 603
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Total 7,101 7,083
--------- --------
--------- --------
Net Income $42 $702
--------- --------
--------- --------
Per share amount $.01 $.10
--------- --------
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<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 7626
<SECURITIES> 5933
<RECEIVABLES> 8863
<ALLOWANCES> 0
<INVENTORY> 3322
<CURRENT-ASSETS> 26783
<PP&E> 2704
<DEPRECIATION> 0
<TOTAL-ASSETS> 30222
<CURRENT-LIABILITIES> 7876
<BONDS> 5
0
0
<COMMON> 26070
<OTHER-SE> (3729)
<TOTAL-LIABILITY-AND-EQUITY> 30222
<SALES> 8902
<TOTAL-REVENUES> 8902
<CGS> 2456
<TOTAL-COSTS> 6545
<OTHER-EXPENSES> (164)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4
<INCOME-PRETAX> 61
<INCOME-TAX> 19
<INCOME-CONTINUING> 42
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 42
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
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