SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended: March 31, 1998
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: 0-26826
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 ___ No_X__
As of June 12, 1998 the Company had 4,800,102 shares of Common Stock, no
par value, issued and outstanding.
<PAGE>
APPLIED COMPUTER TECHNOLOGY, INC.
FORM 10-QSB
INDEX
Page Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets as of March 31, 1998 and
December 31,1997......................................3
Statements of Operations for the Three Months Ended
March 31, 1998 and 1997...............................4
Statements of Cash Flows for the Three Months
Ended March 31, 1998 and 1997....... ................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 6 Exhibits and Reports on Form 8-K................11
<PAGE>
Consolidated Balance Sheets
ASSETS
March 31, December 31,
1998 1997
(unaudited)
CURRENT ASSETS:
Cash $6,000 $24,000
Receivables:
Trade, less allowance for
doubtful accounts of $55,000 1,021,000 1,377,000
Other 66,000 99,000
Inventories 1,835,000 2,404,000
Prepaid and Other expenses 329,000 261,000
--------- ---------
Total Current Assets 3,257,000 4,165,000
PROPERTY AND EQUIPMENT, at cost, net 1,717,000 1,852,000
INTANGIBLE ASSETS, net 113,000 116,000
NOTES RECEIVABLE, related party 100,000 98,000
OTHER ASSETS 275,000 276,000
--------- ---------
TOTAL ASSETS $5,462,000 $6,507,000
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of obligations
under capital leases $196,000 $172,000
Current maturiries of long-term debt 910,000 1,108,000
Accounts payable 4,008,000 3,952,000
Accrued liabilities 407,000 491,000
--------- ---------
Total Current Liabilities 5,521,000 5,723,000
LONG-TERM DEBT, less current maturities 37,000 42,000
OBLIGATIONS UNDER CAPITAL LEASES, less
current maturties 349,000 399,000
COMMITMENTS AND
STOCKHOLDERS' EQUITY
Preferred stock - no par value;
5,000,000 shares authorized; Series A
Preferred Shares, 1,000 shares authorized;
900 shares issued and (liquidation preference
$919,000) 900,000 900,000
Class B, convertible Preferred Shares,
1500 shares authorized,
1500 shares issued and outstanding
(liquidation preference $1,509,000) 1,326,000 1,326,000
Common stock, no par value; 25,000,000
shares authorized; 3,085,243 shares
issued and outstanding at December 31, 1997
and 3,930,288 outstanding at March 31, 1998 4,193,000 4,183,000
Accumulated deficit (6,864,000) (6,066,000)
------------ -----------
Total Stockholders' Equity (205,000) 343,000
----------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $5,462,000 $6,507,000
========== ==========
The accompanying notes are an integral part of this financial statement.
<PAGE>
Consolidated Statements of Operations
Three months ended March 31,
1998 1997
(unaudited) (unaudited)
Net Revenues $1,934,000 $4,798,000
Cost of goods sold 1,988,000 4,437,000
---------- ----------
Gross Profit (Loss) (54,000) 361,000
Operating Expenses:
Marketing and selling 379,000 744,000
General and administrative 323,000 386,000
---------- ----------
Total Operating Expenses 702,000 1,130,000
LOSS FROM OPERATIONS (756,000) (769,000)
OTHER INCOME (EXPENSE):
Other (expense) income 5,000 22,000
Interest expense (47,000) (112,000)
----------- -----------
Net other income (expense) (42,000) (90,000)
LOSS BEFORE INCOME TAXES ($798,000) ($859,000)
Income tax expense (benefit) - -
-------- -----------
NET LOSS (798,000) (859,000)
PREFERRED STOCK DIVIDENDS:
Accrued (40,000) -
Inputed (229,000) -
Net loss applicable to common ---------- -----------
stockholders $(1,067,000) $(859,000)
=========== ===========
NET LOSS PER COMMON SHARE (0.27) (0.28)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 3,930,288 3,065,127
The accompanying notes are an integral part of this financial statement.
<PAGE>
Consolidated Statements of Cash Flows
Three Months Ended March 31
1998 1997
(unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ($798,000) ($859,000)
Adjustments to reconcile net income
(loss) to net cash used in operating activities:
Depreciation and amortization 156,000 150,000
Increase (decrease) from changes in assets and
liabilities:
Accounts Receivable 356,000 (536,000)
Inventories 569,000 (99,000)
Prepaid expenses and other current assets (35,000) 117,000
Accounts payable and other current
liabilities 56,000 569,000
Customer deposits - 2,000
Accrued liabilities and other
current liabilities (84,000) (93,000)
---------- ----------
Net cash used in operating
activities 220,000 (749,000)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITY
Property and equipment acquisitions (18,000) (639,000)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net long-term borrowings (55,000) -
Net short-term borrowings (175,000) 316,000
Obligations under capital leases - 516,000
Net proceeds from the issuance
of common stock and common stock
warrants 10,000 -
--------- ---------
Net cash provided by financing
Activities (220,000) 832,000
========= =======
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (18,000) (556,000)
CASH AND CASH EQUIVALENTS,
at beginning of year 24,000 710,000
--------
CASH AND CASH EQUIVALENTS,
at end of year 6,000 154,000
======= ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Non-cash items:
Purchase of equipment for notes
and capital leases - 316,000
==== =======
Sale of equipment for notes - -
==== =======
Issuance of common stock under
option for common stock surrendered - -
==== =======
Cash paid (received) for:
Interest 47,000 112,000
====== =======
Income taxes - -
====== =======
The accompanying notes are an integral part of this financial statement.
<PAGE>
APPLIED COMPUTER TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
Three months ended March 31, 1998
NOTE 1 - CERTAIN FINANCIAL POLICIES
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.
Revenues from product and system sales are recognized when title to the
product or system passes to the customer.
Dividends and Net Loss per Common Share. Net loss per common share is
computed be dividing the net loss applicable to common stockholders (which
includes accrued but unpaid preferred dividends) by the weighted average number
of common shares outstanding during the year. All commmon stock equivalents
have been excluded from the computations because their effect would be
antidilutive.
The net loss applicable to common stockholders is determined by adding any
dividends enuring to the benefit of the preferred stockholders to the net loss.
The holder of Series A Preferred Stock is entitled to dividends at 12% per
annum payable quarterly.
The holders of the Series B Preferred Stock are entitled to dividends equal to
7% per annum payable quarterly. 7% dividends will be charged to the future
earnings applicable to common stockholders. In addition, the Series B Preferred
Stock becomes convertible into commmon stock beginning in January 1998 at a
conversion price equal to a 25% discount to the average trading price of the
common stock prior to conversion. The discount is accounted for as an additional
dividend on the Series B Preferred Stock which is recognized as a charge to
earnings applicable to common shareholders. Other terms of the Series B
Preferred Stock are more thoroughly discussed in Footnote 8 to the Company's
December 31, 1997 Financial Statements.
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Results of Operations
Comparison of Quarters ended March 31, 1998 and 1997
The Company reported a net loss of $798,000 for the quarter ended March
31, 1998 compared to a net loss of $859,000 for the similar period in 1997.
Revenues declined by $2,864,000 or approximately 59% to $1,934,000 from
$4,798,000 the similar period in 1997. Much of this decline is attributable to a
$1,676,000 order which was delivered to NASA during 1st quarter, 1997. Whereas
the Company did receive a comparable contract at NASA in 1998, this contract
will not be delivered until 2nd and 3rd quarters. Adjusting for the NASA
contract, sales were down 38.1% over the same period last year.
The Company generated a $343,000 or 17.74% gross profit on materials in 1998 as
opposed to $860,000 or 17.92% in 1997. Although revenues were down from the same
period in 1997, margins held relatively constant. Gross margin dollars were,
however, eroded by unabsorbed production and service costs of $220,000 and
internet access costs of $182,000.
The Company experienced a slight positive inventory adjustment at the
quarterly inventory count. The Company experienced significant inventory write
downs during 1997, particularly during 2nd quarter. Management implemented
strict inventory procedures in mid 1997 and is encouraged by the accuracy of the
year end and 1st quarter counts.
1998 % 1997 %
Net Revenues $1,934,000 100.00 $4,798,000 100.00
Cost of Materials ($1,414,000) (73.11) ($3,685,000)(76.81)
Absorbed Overhead ($ 177,000)( 9.15) ($ 253,000)( 5.27)
--------------------- --------------------
Gross Profit $343,000 17.74 $ 860,000 17.92
Inventory Adjustments $ 5,000 .26 -0- -0-
Unabsorbed Costs ($ 220,000)( 11.38) ($ 342,000)( 7.13)
Internet Access Costs ($ 182,000)( 9.41) ($ 157,000)( 3.27)
Adjusted Gross Profit (Loss)($ 54,000)( 2.79) $ 361,000 7.52
Unabsorbed overhead costs as a percentage of sales were 11.38% versus 7.13% from
the prior year. Adjusted gross profit dollars after unabsorbed costs decreased
from approximately 7.52% or $361,000 in 1997 to (2.79)% or ($54,000) in 1998,
due largely to insufficient revenues to generate the necessary gross profit
dollars on sales to cover production related fixed expenses. The variances
between 1st quarter, 1997 and 1st quarter, 1998 adjusted gross profits are as
follows :
1st Qtr 1997 Adjusted Gross Profit $361,000 7.52%
Margin gain from reduced=20
net overhead spending $122,000 3.03%
Margin lost from competitive=20
market conditions ($ 52,000) (1.29%)
Margin lost on absorption from=20
decreased production ($280,000) (.95%)
Margin lost from in gross profit
potential on unrealized sales ($215,000) (5.34%)
Margin gain from inventory &=20
internet contribution $10,000 .24%
1st Qtr 1998 Adjusted Gross Profit ($ 54,000) (2.79%)
Whereas sales were soft during 1st quarter, 1998, Management is highly
encouraged by the decreased spending which occurred in 1998 as compared to the
similar period in 1997. Sales and Marketing expenses decreased 49.1% to $379,000
from $744,000 during 1st quarter, 1997, reflecting significant reductions in
wage expenses as well as advertising and marketing expenses. These decreases are
the results of expense reduction programs implemented by Management in mid 1997.
Additionally, General and Administrative expenses decreased 16.3% to $323,000 as
compared to $386,000 during the same period in 1997. These reductions were wage
related, as well, as the Company streamlined its Information Systems, Customer
Service, and Accounting and Finance operations as part of its cost reduction
programs. Management continues to decrease non contributory expenses including
expenses associated with the Company's Denver Tech Center facilities. The
Company successfully terminated its lease in one of its DTC based facilities and
is in the process of negotiation the assignment of the remaining lease.
The Company attributes the low 1st quarter sales to changing conditions in the
industry (see below) as well as to low seasonal buying by the State of Colorado
and a 6 - 12 month bid cycle which is typical in the Federal market. The
Company's Federal bid team was established in mid 1997 and has been actively
bidding on large volume contracts. With the State fiscal year end on June 30,
the Company anticipates increased volume during its 2nd quarter. Sales backlog
as of March 31 was $474,000. Sales backlog as of May 30, 1998 was approximately
$850,000 not including the 3 major contracts to NASA, the US Air Force Academy,
and the US Naval Academy.
Industry conditions have changed during the past several quarters with the
introduction of the sub $1,000 PC. Technological advancements have made it
possible to integrate more of a system's componentry directly onto the main
system board, bringing down the cost of the overall system unit. The Company has
responded to the sub $1,000 PC by discontinuing investments in market segments
with commodity based buying patterns, by developing a sub $1,000 PC to offer to
the appropriate clientele in its traditional markets, and by focusing its sales
efforts on customers with sophisticated technology needs who perceive value in
the expandability and performance of open architecture PCs.
Notwithstanding the above, bookings and future sales in the Company's
traditional markets continue to be strong. During May, 1998, the Company was
awarded annual contracts with the US Air Force Academy and the US Naval Academy
for delivery of PCs to their incoming freshmen classes in August. Gross revenues
for these contracts will be approximately $5 million. The Company is in the
final stages of the bid process on a $4 million contract to the US Military
Academy at West Point. This contract has traditionally been a $2.5 million
contract, which the Company has been awarded for the past 3 years. The Company
is optimistic that it will be selected as the successful vendor on this
contract, but there can be no guarantees that the Company will be awarded this
contract.
Management is encouraged by the renewal of these annual contracts because
they confirm the Company's competitiveness and success in the Company's
traditional markets. Additionally, large volume contracts of this nature enable
the Company to retain gross profits without the overhead absorption loss
associated with low volume quarters. The Company's Federal bid team and the
Company's State Contract team are actively pursuing additional contracts which
will allow the Company to fully utilize its manufacturing capabilities
throughout the year, thus eliminating the loss of gross profit dollars to
unabsorbed costs. Although the Company has multiple bids in various stages of
the bid process, there can be no assurance that the Company will be successful
in leveling out the seasonality of its business, and other expense reduction
measures may be required.
WEBAccess, the Company's Internet Services division increased its revenues
36.1%, posting revenues of $114,000 as compared to $83,758 during the similar
period in 1997. Operating expenses increased 16% from to $182,000 as compared to
$157,000 the prior year. The Company is contemplating the sale of this
subsidiary later this year. There can, however, be no assurance that the Company
will be successful in negotiating a favorable transaction.
Liquidity and Capital Resources
The Company incurred a loss of $798,000 during 1st quarter, 1998. Due in
part to the foregoing, the Company's working capital decreased by $706,000.
Continuing losses would cause significant liquidity problems and may ultimately
impact the Company's ability to continue future operations. The Company did
anticipate losses 1st quarter, and Management believes that it has sufficient
liquidity to sustain future operations.
The Company's current assets were at $3,257,000 on March 31, 1998 down
from $4,165,000 at December, 1997 as the Company has continued to decrease its
receivables and reduce its inventory. The Company's current liabilities
decreased from $5,723,000 on December 31, 1997 to $5,521,000 on March 31, 1998.
The Company's property and equipment increased by $18,000 during the three moths
ended March 31, 1998.
As of March 31, 1998, the Company's principal sources of liquidity were
its cash and accounts receivable of $1,027,000 and inventories of $1,835,000.
The Company is in negotiations to issue approximately $1M in preferred stock to
alleviate capital constraints. There can, however, be no assurance that 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.
<PAGE>
PART II. OTHER INFORMATION
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 March 31, 1998.
<PAGE>
SIGNATURES
Pursuant to the requirement of the Securities and 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/ Dan Radford
-------------------
Dan Radford
Chief Financial Officer
Date: June 12, 1998
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<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 6,000
<SECURITIES> 0
<RECEIVABLES> 1,142,000
<ALLOWANCES> 55,000
<INVENTORY> 1,835,000
<CURRENT-ASSETS> 3,257,000
<PP&E> 2,940,000
<DEPRECIATION> 1,223,000
<TOTAL-ASSETS> 5,462,000
<CURRENT-LIABILITIES> 5,521,000
<BONDS> 0
0
2,226,000
<COMMON> 4,193,000
<OTHER-SE> (6,864,000)
<TOTAL-LIABILITY-AND-EQUITY> 5,462,000
<SALES> 1,934,000
<TOTAL-REVENUES> 1,934,000
<CGS> 1,988,000
<TOTAL-COSTS> 697,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 47,000
<INCOME-PRETAX> (798,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (798,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<EPS-PRIMARY> (0.27)
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