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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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: June 30, 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: 33-95782-D
Applied Computer Technology, Inc.
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
As of July 31, 1998 the Company had 4,800,102 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 June 30, 1998 and
December 31,1997 3
Statements of Operations for the Six Months Ended
June 30, 1998 and 1997 4
Statements of Cash Flows for the Six Months
Ended June 30, 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>
APPLIED COMPUTER TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
June 30, 1998 December 31,
1997
CURRENT ASSETS:
Cash and equivalents $1,000 $24,000
Receivables:
Trade, less allowance of $35,000 and $55,000 1,359,000 1,377,000
Other 30,000 99,000
Inventories 1,551,000 2,404,000
Prepaid and Other expenses 212,000 261,000
--------- ----------
Total Current Assets 3,153,000 4,165,000
PROPERTY AND EQUIPMENT, at cost, net 1,562,000 1,852,000
INTANGIBLE ASSETS, net 114,000 116,000
NOTES RECEIVABLE, related party 104,000 98,000
OTHER ASSETS 262,000 276,000
--------- ----------
TOTAL ASSETS $5,195,000 $6,507,000
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current portion of obligations
under capital leases $205,000 $172,000
Current maturities of long-term debt 956,000 1,108,000
Accounts payable 4,493,000 3,952,000
Accrued liabilities 433,000 491,000
Total Current Liabilities 6,087,000 5,723,000
LONG-TERM DEBT, less current maturities 28,000 42,000
OBLIGATIONS UNDER CAPITAL LEASES, less
current maturities 303,000 399,000
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 $946,000)" 900,000 900,000
Class B, convertible Preferred Shares, 1500 shares
authorized, 1500 shares converted to common
stock at May 31, 1998 0 1,326,000
Common stock, no par value; 25,000,000 shares authorized;
4,800,102 shares issued and outstanding at June 30, 1998
5,550,000 4,183,000
Accumulated deficit (7,673,000) (6,066,000)
----------- -----------
Total Stockholders'
Equity (1,223,000) 343,000
----------- -----------
TOTAL LIAB. AND STOCKHOLDERS' EQUITY(DEFICIT) $5,195,000 $6,507,000
=========== ==========
The accompanying notes are an integral part of this financial statement.
<PAGE>
<TABLE>
APPLIED COMPUTER TECHNOLOGY, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C> >
NET REVENUES $2,044,000 $3,633,000 $3,978,000 $8,431,000
TOTAL COST OF GOODS SOLD:
Cost of Materials & Overhead 1,694,000 3,323,000 3,285,000 7,261,000
Inventory Adjustment 8,000 681,000 3,000 681,000
Unabsorbed Services Cost 694,000 854,000 1,193,000
------------- ---------- -------- -----------
452,000
COST OF GOODS SOLD 2,154,000 4,698,000 4,142,000 9,135,000
--- --------- -- --------- ------------ ---------
GROSS PROFIT (LOSS) (110,000) (1,065,000) (164,000) (704,000)
-------------- ---------- ---------- ----------
OPERATING EXPENSES:
Marketing and selling 355,000 587,000 734,000 1,331,000
General and administrative 321,000 491,000 645,000 876,000
------- ------- ------- -------
TOTAL OPERATING EXPENSES 676,000 1,078,000 1,379,000 2,207,000
--------- --------- --------- ---------
LOSS FROM OPERATIONS (786,000) (2,143,000) (1,543,000) (2,911,000)
OTHER INCOME (EXPENSE):
Other income (expense) 12,000 1,000 17,000 23,000
Interest expense (35,000) (91,000) (82,000) (203,000)
----- -------- ---- -------- ----- -------------
LOSS BEFORE TAXES (809,000) (2,233,000) (1,608,000) (3,092,000)
Income tax expense
(benefit) - - - -
- - - -
NET LOSS (809,000) (2,233,000) (1,608,000) (3,092,000)
PREFERRED STOCK DIVIDENDS:
Accrued
- - (40,000) -
- ----------- -------- -
Inputed
- - (229,000) -
- ------ --------- -
Net Loss Applicable to ($809,000) ($2,233,000) ($1,877,000) ($3,092,000)
-------------- ----------- ------------ ------------
Common Stockholders
NET LOSS PER COMMON SHARE $ (.19) $ (.73) (.48) $ (1.01) $
============ ============ =========== ===========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 4,418,217 3,068,127 3,931,839 3,064,127
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
APPLIED COMPUTER TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30,
1998 1997
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ($1,607,000) $3,092,000)
Adjustments to reconcile net income
(loss) to net cash used in operating activities:
Depreciation and amortization 300,000 319,000
Increase (decrease) from changes in assets and liabilities:
Accounts Receivable 18,000 (45,000)
Inventories 853,000 108,000
Prepaid expenses and other current assets 148,000 91,000
Income tax refund - 148,000
Accounts payable 541,000 2,340,000
Accrued liabilities and other (57,000) 46,000
----------- ------
Net cash provided by operating activities 196,000 (85,000)
CASH FLOWS FROM INVESTING ACTIVITY
Property and equipment acquisitions (8,000) (745,000)
======= =========
CASH FLOWS FROM FINANCING ACTIVITIES
Net long-term borrowings (110,000) 279,000
Net short-term borrowings (111,000) (157,000)
Obligations under capital leases - -
Net proceeds from the issuance
of common stock and warrants 40,000 -
Net cash used in financing
activities $(181,000) $ 122,000
========= =======
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS $ (7,000) $(708,000)
CASH AND CASH EQUIVALENTS,
at beginning of year 24,000 710,000
------- ---------
CASH AND CASH EQUIVALENTS,
at end of year 17,000 2,000
---------- -----
SUPPLEMENTAL CASH FLOW INFORMATION:
Non-cash items:
Purchase of equipment for notes
and capital leases - $ 777,000
-------------- ---------
Cash paid (received) for:
Interest $ 82,000 $ 203,000
========== =========
The accompanying notes are an integral part of this financial statement.
<PAGE>
APPLIED COMPUTER TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
Six months ended June 30, 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 by 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 common 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.
During the quarter ended June 30, 1998, 600 shares of Series B Preferred
Stock were converted to 869,814 shares of common stock. During the quarter ended
March 31, 1998, 900 shares of Series B Preferred Stock were converted to 810,045
shares of common stock. As of May 31, 1998 all Series B Preferred Stock had been
converted.
This report on Form 10-KSB includes "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). All statements other than statements of historical
facts included in this report, including, without limitation, statements under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" regarding the Company's financial position, business strategy, plans
and objectives of management of the Company for future operations are
forward-looking statements and the assumptions upon which such forward-looking
statements are based are believed to be reasonable. The Company can give no
assurance that such expectations and assumptions will prove to be correct.
Additionally, any statements contained in this report regarding forward-looking
statements are subject to various known and unknown risks, uncertainties and
contingencies, many of which are beyond the control of the Company and which may
cause actual results or expectations to differ materially from the anticipated
results or expectations. Factors that may affect such forward-looking statements
include, but are not limited to: the Company's ability to generate additional
capital to fund operating activities; risks inherent in production; competition;
government regulation; and other matters beyond the Company's control. All
written and oral forward-looking statements attributable to the Company or
persons acting on its behalf subsequent to the date of this report are expressly
qualified in their entirety by this disclosure.
The Company has begun to address possible remedial efforts in connection with
computer software that could be affected by the Year 2000 problem. The Year 2000
problem is the result of computer programs being written using two digits rather
than four to define the applicable year. Any programs that have time-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a major system failure or miscalculations. The
Company has been informed by the suppliers of substantially all of the Company's
software that all of those suppliers' software that is used by the Company is
Year 2000 compliant. After reasonable investigation, the Company has not yet
identified any Year 2000 problems but will continue to monitor the issue.
However, there can be no assurance that Year 2000 problems will not occur with
respect to the Company's computer systems. The Year 2000 problem may impact
other entities with which the Company transacts business and the Company cannot
predict the effect of the Year 2000 problem on such entities.
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Results of Operations
Comparison of Quarters ended June 30, 1998 and 1997
The Company reported a net loss of $809,000 for the quarter ended June 30,
1998 compared to a net loss of $2,233,000 for the similar period in 1997.
Revenues declined by $1,589,000 or approximately 44% to $2,044,000 from
$3,633,000 for the similar period in 1997. As was seen from quarter one 1998
sales volume remained soft but management expects quarter three sales volume to
rebound to prior year levels.
The Company generated a $350,000 or 17.13% gross profit on materials in
1998 as opposed to $310,000 or 8.53% in 1997. Although revenues were down from
the same period in 1997, margins have improved before sales volume absorptions
considerations. Gross margin dollars were, however, eroded by unabsorbed
production and service costs of $252,000 and internet access costs of $200,000.
These costs reflect an increase of $50,000 over quarter one 1998.
The Company experienced a slight negative ($8000) inventory adjustment at
the quarterly inventory count, this compared to the Company's significant
inventory write downs during 2nd quarter 1998. Management implemented strict
inventory procedures in mid 1997 and is encouraged by the accuracy of the
inventory for 1998.
1998 % 1997 %
Net Revenues $2,044,000 100.00 $3,633,000 100.00
Cost of Materials ($1,503,000) (73.53) ($3,111,000) (85.63)
Absorbed Overhead ($ 191,000) ( 9.34) ($ 212,000) (5.84)
------------- -------- ------------ --------
Gross Profit $350,000 17.13 $ 310,000 8.53
Inventory Adjustments $ 8,000 .39 ($ 681,000) ( 18.74)
Unabsorbed Costs ($ 252,000) ( 12.33) ($ 520,000) ( 14.31)
Internet Access Costs ($ 200,000) ( 9.78) ($ 174,000) ( 4.79)
------------- -------- ------------- --------
Adjusted Gross Profit
(Loss) ($ 110,000) ( 5.38) ($ 1,065,000) (29.31)
Unabsorbed overhead costs as a percentage of sales were 12.38% versus 14.31%
from the prior year. Adjusted gross profit dollars after unabsorbed costs
increased from approximately (29.31%) or ($1,065,000) in 1997 to (5.38)% or
($110,000) in 1998, due largely to insufficient revenues to generate the
necessary gross profit dollars on sales to cover production related fixed
expenses
Whereas sales were soft during 2nd 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 39.5% to $355,000
from $587,000 during 2nd quarter, reflecting significant reductions in wage
expenses as well as marketing expenses. These decreases are the results of
expense reduction programs implemented by Management in mid 1997. Additionally,
General and Administrative expenses decreased 29% to $321,000 as compared to
$491,000 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 both of its DTC based facilities.
<PAGE>
The Company attributes the low 2nd 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. The 4 major
contracts to NASA, the US Air Force Academy, the US Naval Academy, and the US
Army Academy orders approximate $10M in quarter three '98 revenues plus new
orders from our state business. The Company on July 6, 1998 was awarded a $8M
contract for computers form Colorado Springs School District 11 and it appears
approximately $2M wil ship in Q3 1998.
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.
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
22%, posting revenues of $86,000 as compared to $70,000 during the similar
period in 1997. Operating expenses increased 15% from to $200,000 as compared to
$174,000 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 $809,000 during 2nd quarter, 1998. Due in
part to the foregoing, the Company's working capital decreased by $700,000.
Continuing losses would cause significant liquidity problems and may ultimately
impact the Company's ability to continue future operations. The Company did
anticipate losses 2nd quarter, and Management believes that it has sufficient
liquidity to sustain future operations.
<PAGE>
The Company's current assets were at $3,153,000 on June 30, 1998 down from
$4,165,000 at December 31, 1997 as the Company has continued to decrease its
assets including inventory. The Company's current liabilities increased from
$5,723,000 on December 31, 1997 to $6,087,000 on June 30, 1998. The Company's
property and equipment increased by $8,000 during the six months ended June 30,
1998.
As of June 30, 1998, the Company's principal sources of liquidity were its
cash and accounts receivable of $1,359,000 and inventories of $1,551,000. The
Company continues to pursue opportunities to raise approximately $2M 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 June 30, 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.
/s/ Wiley E. Prentice Jr.
------------------------------------------
Wiley E. Prentice, Jr.
President, CEO, and Chairman of the Board of Directors
/s/ Dan Radford
---------------------------------------------
Dan Radford
Chief Financial Officer
Date: August 21, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<CURRENCY> 1.00
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1.00
<CASH> 1,000
<SECURITIES> 0
<RECEIVABLES> 1,528,000
<ALLOWANCES> 35,000
<INVENTORY> 1,551,000
<CURRENT-ASSETS> 3,153,000
<PP&E> 1,852,000
<DEPRECIATION> 300,000
<TOTAL-ASSETS> 5,195,000
<CURRENT-LIABILITIES> 6,087,000
<BONDS> 0
0
900,000
<COMMON> 5,500,000
<OTHER-SE> (7,673,000)
<TOTAL-LIABILITY-AND-EQUITY> 5,195,000
<SALES> 3,978,000
<TOTAL-REVENUES> 3,978,000
<CGS> 4,142,000
<TOTAL-COSTS> 1,362,000
<OTHER-EXPENSES> 269,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 82,000
<INCOME-PRETAX> (1,877,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,877,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,877,000)
<EPS-PRIMARY> (0.48)
<EPS-DILUTED> (0.48)
</TABLE>
