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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________
FORM 10-QSB
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- EXCHANGE ACT OF 1934
For the Quarterly Period Ended: September 30, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission File Number: 33-95782-D
Applied Computer Technology, Inc.
(Exact name of registrant as specified in its charter)
Colorado 84-1164570
(State of incorporation) (I.R.S. Employer ID No.)
2573 Midpoint Drive
Fort Collins, Colorado 80525
(Address of principal executive offices)
(970) 490-1849
(Registrant's telephone number)
Indicate by check mark whether the Registrant (1) has filed all reports 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___
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of the latest practicable date.
As of October 31, 1997 the registrant had 3,069,918 shares of Common Stock,
no par value, outstanding.
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<PAGE>
APPLIED COMPUTER TECHNOLOGY, INC.
FORM 10-QSB
INDEX
Page Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets as of September 30, 1997 and
December 31,1996..........................................3
Statements of Operations for the Three & Nine Months
Ended September 30, 1997 and 1996.........................4
Statements of Cash Flows for the Nine Months Ended
September 30, 1997 and 1996...............................5
Notes to the Financial Statements.........................6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations............7-10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.........................................11
Item 5. Other Information.........................................11
Item 6. Exhibits and Reports on Form 8-K..........................11
<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.
3
<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 3,062,127 3,328,443 3,058,865 3,339,109
=========== ========== ============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<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 280,000 156,000
receivable
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 $ 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.
5
<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 financial statements and
notes included in the Company's Annual Report on Form 10-KSB.
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.
6
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Results of Operations
Quarters ended September 30, 1997 and 1996
The Company reported net income of $308,000 on sales of $13,908,000 for the
quarter ended September 30, 1997. This compares to a net income of $378,000
on sales of $9,126,000 for the similar period in 1996. Revenues were up
$4,782,000 or 52.4% from the similar period in 1996, while the gross profit
dollars increased 3.7% from $1,592,000 to $1,651,000. The gross profit
margin percent declined from 17.4% to 11.9% for 3rd quarter 1997 versus the
same prior year period.
A contributor to the reduced Q3 gross profit margin was an increase in
cost of materials and overhead from 79.0% to 85.8% for the similar period in
1996. Of this increase, approximately 63.5% is attributable to additional
overhead and warranty costs over the prior year period. Approximately 15% of
this overhead increase was incurred in connection with the outsourcing of
certain of the Company's peak production runs in August. The Company
believes that it can accommodate future peaks much more economically inhouse
and has leased additional warehouse space to that end. 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 present cash constraints.
Management has initiated programs to regain focus on product pricing and to
improve its working capital (see below). There can, however, be no assurance
that Management will be successful in improving the Company's margin.
The Company's adjusted gross margin on sales dropped by 0.47% as the
result of an unexpected physical inventory adjustment of $65,000. This
adjustment is primarily the result of costing adjustments, and Management
does not believe that theft and/or shrinkage contributed significantly to
this adjustment. This adjustment is down considerably from the prior
quarter, however Management is still disappointed that any inventory
adjustments are necessary. Focused activities designed to further improve
the inventory systems and procedures to eliminate any future inventory
adjustments are underway, however there can be no assurance that these
actions will prove successful.
Unabsorbed costs for the Company's networking, training, and service
activities were approximately $264,000 for the 3rd quarter versus $365,000
from the same period in the prior year. All three of these areas are being
evaluated by the Company for improving contribution and/or elimination of
noncontributing costs. (See below for discussion)
Operating expenses for the period were as follows: Sales & Marketing
expenses decreased 23% to $455,000 from the same period in 1996.
Contributing to this net decrease of $136,000 were decreases in advertising
and wage expenses. General & administrative expenses increased 18% to
$471,000 from the same period in 1996. Contributing to this net increase of
$72,000 were increases in legal, telephone, and depreciation and
ammortization costs. Internet access costs for the company from its
investment in WEBAccess, the Company's internet subsidiary, were $206,000 for
7
<PAGE>
this quarter versus $0 for the similar period in 1996.
Nine months ended September 30, 1997 and 1996
The Company reported revenue of $22.3 million versus $16.3 million, a
37% increase over the comparable prior year period. Net income (loss) for
the nine months ended September 30, 1997 was a loss of $2,784,000 versus net
income of $453,000 for the comparable prior year period.
A contributor to the reduced gross profit margin was an increase in
cost of materials and overhead from 77.7% to 85.9% for the similar period in
1996. 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 present cash constraints.
Management has initiated programs to regain focus on product pricing and to
improve its working capital (see below). There can, however, be no assurance
that Management will be successful in improving the Company's margin.
The Company's adjusted gross margin on sales dropped by 3.5% as the
result of an unexpected physical inventory adjustment of $746,000. The
majority of this adjustment appeared in the 2nd quarter, at which time
efforts ensued to research and correct the situation. Management's efforts
during 3rd quarter have proven productive, and the adjustment for 3rd quarter
was significantly less than the adjustment 2nd quarter. 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.
Unabsorbed costs for the Company's networking, training, and service
activities were approximately $1,112,000 for the nine months ended September
30, 1997 versus $485,000 from the same period in the prior year. Unabsorbed
costs 3rd quarter 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. (See below for
discussion)
Operating expenses for the nine month period were as follows: Sales &
Marketing expenses were $1,786,000, a decrease of 0.5% as a percentage of
sales from the same period in 1996. Contributing to the net increase of
$393,000 over the same period in 1996 were increases in advertising,
depreciation, and wage expenses. Sales & Marketing expenses were 3.3% of
sales 3rd quarter as opposed to 15.7% of sales for the six months ended June
30, 1997. General & 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 & administrative expenses were 3.4% of sales 3rd quarter as opposed
to 10.4% of sales for the six months ended June 30, 1997. Internet access
costs for the company from its investment in WEBAccess, the Company's
internet subsidiary, were $543,000 for this nine month period versus $0 for
the similar period in 1996.
8
<PAGE>
Early 2nd quarter, Management began a focused program to return the
Company to a state of profitability. Management is disappointed by year to
date results but is encouraged by the results of 3rd quarter. Management
believes that its programs and initiatives are showing signs of success and
intends to vigorously continue these 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 system processes
including parts substitution, inventory transfers and service inventory
accounting. During the 2nd quarter, the Company appointed a Chief Financial
Officer to assist in implementing these improvements. While the Company
believes that these activities will improve the overall margins, there can be
no assurance that these efforts will successfully regain margin on products
sold.
Indirect service labor & 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 bottom
line. 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 SG&A expense reductions have been identified 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.
WEBAccess 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 profitability.
Liquidity and Capital Resources
The Company incurred a profit of $308,000 in the 3rd quarter of 1997
and improved its working capital deficit by $617,000. Current year net
losses have caused liquidity problems and may impact the Company's future
operations. The Company is pursuing additional cash strategies, which
include operational profitability, liquidation of certain Company assets, and
near term equity infusions. There can, however, be no assurance that the
Company will be successful in any of these strategies.
The Company's current assets were $6,910,000 on September 30, 1997 and
increased by $42,000 during the 9 months ended September 30, 1997. The
Company's current liabilities increased from $5,627,000 on December 31, 1996
to $8,448,000 on September 30, 1997 due largely to an increase in the
Company's accounts payable. The Company's net note payable balance increased
9
<PAGE>
approximately $175,000 as a result of less borrowing from the Company's line
of credit and the addition of a short term vendor note.
The Company's property and equipment increased by $693,000 for the nine
month period ended September 30, 1997. Depreciation and amortization expense
for the nine month period was $482,000 compared with $234,000 for the
comparable prior year period.
As of September 30, 1997, the Company's principal sources of liquidity
were its cash and accounts receivable of $3,402,000 and its inventories of
$2,871,000. The company's current assets are expected to be sufficient to
meet the Company's capital requirements during 1997 and into 1998. However,
if cash from the collections of accounts receivable, the sale of products,
and any debt financing are insufficient, 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.
The Company has recently been awarded several significant contract
opportunities and has begun pursuing capital to support the growth
anticipated by these contracts. As of November 4, the Company had raised
$900,000 through the sale of preferred stock (see below). The Company is
pursuing the sale of additional securities to raise working capital to
support these anticipated opportunities. There can, however, be no assurance
that the Company will be successful in obtaining additional investment
capital.
The Company continues to reduce its overhead and improve its margins.
There can, however, be no assurance that the Company will be successful in
generating profits, and Management may be required to take other actions.
Management, however, believes that the actions taken to reduce overhead and
improve profitability and that efforts to raise additional capital will
enable the Company to continue operations into 1998. As of September 30,
1997, the Company had a sales backlog of approximately $1,458,000, and the
Company continues to pursue additional sales for its 4th quarter.
The Company's working capital, while stretched, has thus far been
sufficient to meet the Company's 4th quarter production, inventory, and
supplier demands. This is due primarily to strong support from vendors, and
this support is expected to continue. There can, however, be no assurance
that this support will continue.
10
<PAGE>
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
With respect to legal proceedings involving the Company, reference is
made to Item 3 of the Company's Annual Report on form 10-KSB for the year
ending December 31, 1996.
Item 5. OTHER INFORMATION
On November 4, 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. The following condensed pro forma balance sheet of the Company as of
September 30, 1997 reflects this transaction :
September 30, 1997 September 30, 1997
Adjustments (1) (as adjusted)
________________ _______________ _________________
Total Assets $9,315,000 ---- $9,315,000
Total Liabilities $8,448,000 ($900,000) $7,548,000
Long Term Liabilities $ 642,000
Stockholder's Equity $ 225,000 $900,000 $1,125,000
Total Liabilities and
Stockholders' Equity $9,315,000 $9,315,000
(1) Reflects sale of Series A Preferred Stock for $900,000 and payment for
shares through cancellation of accounts payable.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) There are no exhibits filed as a part of this report.
(b) The Company did not file any reports on form 8-K during the
quarter ended September 30, 1997.
11
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
APPLIED COMPUTER TECHNOLOGY, INC.
By /s/ Wiley E. Prentice, Jr.
Wiley E. Prentice, Jr.
President, CEO, and Chairman of the Board of Directors
By /s/ Daniel T. Radford
Daniel T. Radford
Chief Financial Officer
Date: November 5, 1997
12
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000946244
<NAME> APPLIED COMPUTER TECHNOLOGY
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 5,000
<SECURITIES> 0
<RECEIVABLES> 3,614,000
<ALLOWANCES> 30,000
<INVENTORY> 2,871,000
<CURRENT-ASSETS> 6,910,000
<PP&E> 2,015,000
<DEPRECIATION> 482,000
<TOTAL-ASSETS> 9,315,000
<CURRENT-LIABILITIES> 8,448,000
<BONDS> 0
0
0
<COMMON> 4,139,000
<OTHER-SE> (3,914,000)
<TOTAL-LIABILITY-AND-EQUITY> 9,315,000
<SALES> 22,339,000
<TOTAL-REVENUES> 22,339,000
<CGS> 21,055,000
<TOTAL-COSTS> 3,677,000
<OTHER-EXPENSES> 45,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 346,000
<INCOME-PRETAX> (2,784,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,784,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,784,000)
<EPS-PRIMARY> (0.91)
<EPS-DILUTED> (0.91)
</TABLE>
