<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-QSB
Quarterly
Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the period ended September 30, 1997 Commission file number 0-12705
APPLIED DATA COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 93-2828385
(State or other jurisdiction) (I. R. S. Employer Identification
of incorporation or organization) Number)
3324 SOUTH SUSAN ST, SANTA ANA, CALIFORNIA 92704
Address of principal executive offices (Zip Code)
Registrant's telephone number, including area code: 714-668-5200
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 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
Number of shares outstanding as of September 30, 1997: Common Stock, $.01 par
value 9,951,835 shares.
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INDEX
PAGE
- --------------------------------------------------------------------------------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Statement Regarding Financial Information 3
Balance Sheets September 30, 1997 (unaudited)
and March 31, 1997 (audited) 4
Statements of Operations (unaudited) for the Six Months
ended September 30, 1997, and September 30, 1996 5
Statements of Cash Flows (unaudited) for the Six Months
ended September 30, 1997, and September 30, 1996 6
Condensed Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
PART II OTHER INFORMATION 12
Item 1 Legal Proceedings
Item 2 Changes in Securities
Item 3 Defaults Upon Senior Securities
Item 4 Submission of Matters to a Vote of Security Holders
Item 5 Other Information
Item 6 Exhibits and Reports on Form 8-K
SIGNATURES 13
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APPLIED DATA COMMUNICATIONS, INC.
FORM 10-QSB
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The consolidated financial statements included herein have been prepared by
Applied Data Communications, Inc. ("ADC" or the "Company"), without audit,
pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information normally included in the consolidated
financial statements prepared in accordance with generally accepted
accounting principles has been omitted pursuant to such rules and
regulations. However, the Company believes that the disclosures are adequate
to make the information presented not misleading. It is suggested that the
financial statements be read in conjunction with the financial statements and
notes thereto included in the Company's annual report on Form 10-KSB for the
fiscal year ended March 31, 1997 as filed with the Securities and Exchange
Commission.
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<PAGE>
APPLIED DATA COMMUNICATIONS, INC.
STATEMENT OF OPERATIONS
---------------------------
FOR THE PERIODS ENDED SEPTEMBER 30, 1997
----------------------------------------
AND SEPTEMBER 30, 1996
----------------------
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
----------------------- -----------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUES $ 85,525 $ 76,390 $ 208,352 $ 181,004
COSTS AND EXPENSES
Costs of sales 62,762 60,565 150,666 158,854
Selling, general and administrative 213,922 152,628 504,194 338,741
----------------------------- ----------------------------
276,684 213,193 654,860 497,595
OTHER INCOME
Interest (income)/expense, net 77,787 67,932 179,265 128,033
----------------------------- ----------------------------
77,787 67,932 179,265 128,033
INCOME (LOSS) BEFORE PROVISION
(BENEFIT) FOR INCOME TAXES (268,946) (204,735) (625,773) (444,624)
PROVISION (BENEFIT) FOR INCOME TAXES 0 0
----------------------------- ----------------------------
NET INCOME (LOSS) ($268,946) ($204,735) ($625,773) ($444,624)
----------------------------- ----------------------------
----------------------------- ----------------------------
EARNINGS (LOSS) PER COMMON SHARE ($0.03) ($0.03) ($0.06) ($0.05)
----------------------------- ----------------------------
----------------------------- ----------------------------
WEIGHTED AVERAGE COMMON SHARES 9,951,835 8,161,300 9,951,835 8,161,300
OUTSTANDING ----------------------------- ----------------------------
----------------------------- ----------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
APPLIED DATA COMMUNICATIONS, INC.
BALANCE SHEETS
SEPTEMBER 30, 1997 AND MARCH 31, 1997
-------------------------------------
<TABLE>
<CAPTION>
ASSETS
------
September 30 March 31
1997 1997
---------------------------
(Unaudited) (Unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash $38,999 $9,113
Accounts receivable 60,384 79,498
Inventory 1,686 8,375
Prepaid expenses 35,559 4,625
--------------------------
Total current assets 136,628 101,611
EQUIPMENT 13,883 27,839
Net of accumulated amortization
of $90,892 and $76,936 at
September 30, 1997 and
March 31, 1997
OTHER ASSETS
Other 0 0
--------------------------
TOTAL ASSETS $150,511 $129,450
--------------------------
--------------------------
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS EQUITY
-----------------------------------
September 30 March 31
1997 1997
----------------------------
(Unaudited) (Unaudited)
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $381,410 $482,044
Accrued expenses 1,689,548 1,451,903
Bank debt 368,576 442,803
Notes Payable 3,116,035 2,712,485
---------------------------
Total current liabilities 5,555,569 5,089,235
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT:
Preferred stock, Series A, $.01 par value,
Authorized 500,000 shares
Issued and outstanding, 122,890 and 80,790
shares at June 30, 1997 and March 31, 1997 1,169 808
Preferred stock, Series B, $.01 par value,
Authorized 200,000 shares
Issued and outstanding, 15,370 and 0 shares
at June 30, 1997 and March 31, 1997 154 154
Preferred stock, Series C, $.01 par value,
Authorized 200,000 shares
Issued and outstanding, 68,404 and 0 shares
at June 30, 1997 and March 31, 1997 684 684
Common stock, $.01 par value-
Authorized 10,000,000 shares
Issued and outstanding-- 99,518 99,518
9,951,835 and 8,161,341 shares at
June 30, 1997 and March 31, 1997
Additional paid-in capital, preferred stock 2,119,443 1,939,304
Additional paid-in capital, common stock 9,839,797 9,839,797
Accumulated deficit (17,465,823) (16,840,050)
--------------------------
(5,405,058) (4,959,785)
TOTAL LIABILITIES AND EQUITY $150,511 $129,450
---------------------------
---------------------------
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
APPLIED DATA COMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1996
------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss (625,773) (444,624)
Adjustments to reconcile net loss to net
cash used for operating activities
Depreciation and amortization 13,956 15,834
Stock issued for services rendered 0 0
Changes in assets and liabilities
(Increase)/decrease in accounts receivable 19,114 75,663
(Increase)/decrease in inventories 6,689 37,547
(Increase)/Decrease in prepaid expenses (30,934) (13,745)
Increase/(decrease) in accounts payable (100,634) (50,123)
Increase/(decrease) in accrued expenses 237,645 (174,903)
------------ ------------
Net cash used for operating activities (479,937) (554,351)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment 0 (1,368)
------------ ------------
Net cash used in investing activities 0 (1,368)
CASH FLOWS FROM FINANCING ACTIVITIES
Increase/(decrease) in long term debt, notes payable 403,550 (2,569,494)
Borrowing/(repayment) of bank loans (74,227) 164,081
Net proceeds from issuance of common stock 0 2,947,521
Net proceeds from issuance of preferred stock 180,500 17,275
------------ ------------
Net cash provided by financing activities 509,823 559,383
------------ ------------
INCREASE/(DECREASE) IN CASH AND EQUIVALENTS 29,886 3,664
CASH AND EQUIVALENTS, beginning of period 9,113 2,974
------------ ------------
CASH AND EQUIVALENTS, end of period 38,999 6,638
------------ ------------
------------ ------------
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES
Supplemental Disclosures
Cash paid during the period for interest $71,505 $20,033
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
Applied Data Communications, Inc.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(UNAUDITED)
1. MANAGEMENT OPINION
In the opinion of management, the financial statements reflect all
adjustments (which include only normal recurring adjustments) necessary to
present fairly the financial position and results of operations as of and for
the periods presented.
2. ACCOUNTING POLICIES
The Company's accounting policies are as stated in its annual report on Form
10-KSB, dated March 31, 1997.
3. PREFERRED STOCK SALE
In October 1996, the Company initiated a private placement offering of
preferred stock, "Series A", as disclosed in its annual report on Form
10-KSB, for the year ended March 31, 1997. The Company is continuing this
offering currently, and received $180,500 during the six months ended
September 30, 1997.
4. GOING CONCERN
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. The Company has reported significant losses
for the last several years and revenues from existing products do not provide
sufficient cash to cover current operating needs. The Company has
increasingly relied on related party borrowings to meet obligations and all
of these borrowings are past due.
The Company has been engaged in continuous efforts to formulate a
restructuring plan. Management is in the process of adding CD-ROM
manufacturing and duplication services to its product line. Additionally,
the Company is taking measures to increase revenues of its existing products
and services. Management is (i) attempting to raise additional funds through
a private placement of the Company's Series A preferred stock, and additional
borrowings will be used, in part, to purchase new machinery used in the
CD-ROM process and (ii) continuing to institute operational changes intended
to lower operating costs and limit corporate overhead. The impact of these
measures and changes will not be realized until the third quarter of fiscal
1997, at the earliest.
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APPLIED DATA COMMUNICATIONS, INC.
SEPTEMBER 30, 1997
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1996.
REVENUES
Revenues for the three months ended September 30, 1997 were $85,525, up
$9,135 (11.9%) from $76,390 reported in the comparable period of 1996. These
volume levels reflect continued evolution of the software duplication
industry toward distribution on CD-ROM (vs distribution on diskette), lower
pricing for diskettes, and increasing competition among firms continuing to
provide software duplication only on diskette.
Results for the current period reflect primarily that for duplication on
diskette (59.3%) and fulfillment activity (7.34%), while those for the
comparable period for the prior year included duplication sales (54.9%) and
service (maintenance) sales (23.8%). Average revenue per invoice was $566.39
in the current year compared to $596.80 in the prior year. Indicated revenue
figures include maintenance billings for prior year equipment sales of
$13,176 in the current year, vs $18,161 previously.
Management had anticipated the trend toward CD-ROM based distribution and
believes the competitive position of "diskette only" duplicators will
continue to erode. Conversely, it believes that a substantial market niche
is available for "independent" (non-captive) software duplicators whose
capabilities include CD-ROM, diskette/tape, and packaging/"fulfillment".
Consequently, ADC is expediting efforts, begun in 1995, to enter this field
and believes such expanded capability will generate opportunities for
expanded business in all its product/service lines of business. ADC is
completing negotiations with vendors and financing sources to acquire
necessary equipment for CD-ROM manufacture. It has also advised its
customers and prospects of such plans.
COST OF SALES
Cost of sales were $62,762 or 73.4% of revenues. This compares to $60,565 in
the comparable period in the prior year, or 79.3% of revenues. The lower
percentage amount in the current year reflects lower materials costs in the
current year, with proportionately more sales related to maintenance
contracts. Direct costs including labor, diskettes, labels and similar items,
plus depreciation, as a percent of non maintenance sales was 45% of such
sales vs 50% in the prior year.
OPERATING EXPENSES, INTEREST AND FINANCING EXPENSE
Operating expenses were $213,922 (250.1% of sales), a increase of $61,294
(40.2%) from the $152,628 (199.8% of sales) reported during the comparable
quarter in the prior fiscal year. Higher operating expenses in the current
period relate primarily to legal and audit costs including
8
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those related to the Company's current private placement and audit, outside
professional expenses and expenses.related to the Company's relocation.
Financing expense in the current period was $77,787 compared with $67,932 for
the comparable period in the prior year. The increase of $9,855 (14.5%)
reflects the higher average borrowings for the Company's accounts receivable
financing and that related to its bridge loan, obtained in May.
NET LOSS
The Company had a loss of $268,946 (314.5% of sales) for the period as
compared to a loss of $204,735 (268.0% of sales) for the same period last
year. This equates to losses of $.03 and $.03 per share respectively, for
the same periods. The higher loss (in both dollars and as a percent of sales)
in the current period occurred because higher product margins were more than
offset by higher administrative and financing costs. The loss per common
share includes the effect of an increase in the weighted average number of
shares of approximately 1.8 million, related to conversion of certain debts
to common stock in October of 1996.
SIX MONTHS ENDED SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1996.
REVENUES
Revenues for the six months ended September 30, 1997 were $208,352, up
$27,348 (15.1%) from $181,004 reported in the comparable period of 1996.
Results for the current quarter reflect primarily that for duplication on
diskette (57.0%) and fulfillment activity (12.0%), while those for the
comparable period for the prior year included duplication sales (60.6%) and
service (maintenance) sales (17.2%). Average revenue per invoice was $651.11
in the current year compared to $576.44 in the prior year. Indicated revenue
figures include maintenance billings for prior year equipment sales of
$35,811 in the current year, vs $30,817 previously.
COST OF SALES
Cost of sales were $150,666 or 72.3% of revenues. This compares to $158,854
in the comparable period in the prior year, or 87.8% of revenues. The lower
percentage amount in the current year reflects lower materials costs and
different product mix in the current year, with proportionately more sales
related to maintenance contracts. Direct costs including labor, diskettes,
labels and similar items, plus depreciation, as a percent of non maintenance
sales were 48% of such sales vs 50% in the prior year.
OPERATING EXPENSES, INTEREST AND FINANCING EXPENSE
Operating expenses were $504,194 (242.0% of sales), a increase of $165,453
(48.8%) from the $338,741 (214.8% of sales) reported during the comparable
quarter in the prior fiscal year. Higher operating expenses in the current
period relate primarily to legal costs and audit costs, including those
related to the Company's current private placement and audit, outside
professional expenses and expenses related to the Company's relocation.
Financing expense in the current period was $179,265 compared with $128,033
for the comparable period in the prior year. The increase of $48,732
(37.7%) reflects the higher average
9
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borrowings for the Company's accounts receivable financing and that related
to its bridge loan obtained in May.
NET LOSS
The Company had a loss of $625,773 (300.3% of sales) for the period as
compared to a loss of $444,624 (245.6% of sales) for the same period last
year. This equates to losses of $.06 and $.05 per share respectively, for
the same periods. The higher loss (in both dollars and as a percent of sales)
in the current period occurred because higher product margins were more than
offset by higher administrative and financing costs. The higher loss per
common share includes the effect of an increase in the weighted average
number of shares of approximately 1.8 million, related to conversion of
certain debts to common stock in October of 1996.
LIQUIDITY AND CAPITAL
During the period ended September 30, 1997, the Company continued to
experience a significant level of operating losses, relative to its
resources. Net cash used in operating activities in the current period was
$479,937 compared with net cash used of $554,351 in the prior year. The
lower cash usage in operations in the current period occurred because the
higher loss level in the current year was offset to a greater extent by
increased current liabilities, than occurred in the prior period. Operations
were funded through a combination of increased notes payable and additional
equity obtained through the Company's current private placement. The
Company's cash balances at September 30, 1997 and September 30, 1996 were
$38,999 and $6,638, and its net worth at September 30, 1997 was a deficit of
approximately $5.4 million.
The Company's ability to operate effectively during the past several years
has been constrained by the extremely low level of its financial resources,
by expenditures involving its planned transition to CD-ROM manufacture and by
an increasingly competitive market for diskette duplication. Management's
efforts to address this situation have focused on raising additional outside
funding, continuing to address past financial obligations consistent with
resource availability and implementing plans to begin compact disk ("CD")
manufacturing.
During the period ended September 30, 1997, the Company realized cash
proceeds of $175,500 from sale of its Series A preferred stock pursuant to
its current private placement offering. In addition, it obtained a
convertible "bridge loan" of approximately $400,000. These receipts bring
the total of funds raised from both the Series A preferred stock and the
bridge loan, to approximately $1.018 million, cumulatively. This increased
liquidity permitting the Company to repay a portion of its receivables
financing while continuing repayment of past due trade creditors and
restructuring of its balance sheet. ADC completed payment programs with
several of such vendors in May and June, and its monthly payments to such
trade creditors have been reduced to below $50,000 per month.
ADC has also obtained a written commitment for its long term equipment
financing, and has negotiated further reductions in equipment prices and
extended payment terms for purchase orders necessary for CD manufacturing
equipment. The Company is hopeful that such activities will be concluded by
December 31, 1997, including the delivery of such equipment and commencement
of CD manufacturing. ADC continues to believe that meaningful business
10
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opportunities are available in the CD market in view of the increasing
availability of CD/DVD readers and products, and future growth projected for
this market.
In the meantime, the Company's operating cash environment continues to
reflect a shortfall of revenues from existing products to cover its cash
needs, including costs related to repositioning the business to convert to
CD-ROM production. It will continue to minimize cash outflows and rely on
existing credit facilities until it achieves positive operating cash flows.
The Company is hopeful that this will begin in its fiscal fourth quarter.
11
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APPLIED DATA COMMUNICATIONS, INC.
FORM 10-QSB
PART II OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS.
The Company is party to some litigation with various of its creditors
regarding payment of past due financial obligations. The Company has
initiated negotiations with such creditors relative to arranging extended
payment schedules for such obligations on terms comparable with those
effected over the past year.
ITEM 2 CHANGES IN SECURITIES.
None
ITEM 3 DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5 OTHER INFORMATION.
None
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K.
None
12
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act the registrant has
duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
APPLIED DATA COMMUNICATIONS, INC.
(Registrant)
August 15, 1997 /s/ Barry K. Sugden, Jr
- --------------- -------------------
Date: Chief Financial Officer
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 38,999
<SECURITIES> 0
<RECEIVABLES> 60,384
<ALLOWANCES> 0
<INVENTORY> 1,686
<CURRENT-ASSETS> 136,628
<PP&E> 104,775
<DEPRECIATION> 90,892
<TOTAL-ASSETS> 150,511
<CURRENT-LIABILITIES> 5,555,569
<BONDS> 0
0
2,121,450
<COMMON> 9,939,315
<OTHER-SE> (17,465,823)
<TOTAL-LIABILITY-AND-EQUITY> 150,511
<SALES> 208,352
<TOTAL-REVENUES> 208,352
<CGS> 150,666
<TOTAL-COSTS> 150,666
<OTHER-EXPENSES> 504,194
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 179,265
<INCOME-PRETAX> (625,773)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (625,773)
<EPS-PRIMARY> (.06)
<EPS-DILUTED> (.06)
</TABLE>
