<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 June 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 Number)
of incorporation or organization)
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 June 30, 1997: Common Stock, $.01 par value
9,951,835 shares.
-1-
<PAGE>
<TABLE>
<CAPTION>
INDEX
PAGE
- ------------------------------------------------------------------------------------------------------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Statement Regarding Financial Information 3
Balance Sheets June 30, 1997 (unaudited) and March 31, 1997
(audited) F-1
Statements of Operations (unaudited) for the Three Months
ended June 30, 1997, and June 30, 1996 F-2
Statements of Cash Flows (unaudited) for the Three Months
ended June 30, 1997, and June 30, 1996 F-3
Condensed Notes to Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 5
PART II OTHER INFORMATION 8
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 9
</TABLE>
-2-
<PAGE>
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.
-3-
<PAGE>
APPLIED DATA COMMUNICATIONS, INC.
BALANCE SHEETS - JUNE 30, 1997 and March 31, 1997
-------------------------------------------------
ASSETS
------
June 30 March 31,
1997 1997
------------------------
(Unaudited) (Audited)
CURRENT ASSETS
Cash $69,236 $9,113
Accounts receivable 69,053 79,498
Inventory 2,186 8,375
Prepaid expenses 37,060 4,625
------------------------
Total current assets 177,535 101,611
EQUIPMENT 20,861 27,839
Net of accumulated amortization
of $83,914 and $73,936 at
June 30, 1997 and March 31, 1997
OTHER ASSETS
Other 29,000 0
------------------------
TOTAL ASSETS $227,396 $129,450
------------------------
------------------------
LIABILITIES AND STOCKHOLDERS EQUITY
-----------------------------------
June 30 March 31,
1997 1997
------------------------
(Unaudited) (Audited)
CURRENT LIABILITIES
Accounts payable $407,356 $482,044
Accrued expenses 1,527,232 1,451,903
Bank debt 349,485 442,803
Notes Payable 3,139,435 2,712,485
------------------------
Total current liabilities 5,423,508 5,089,235
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT:
Preferred stock, Series A, $.01 par value,
Authorized 500,000 shares
Issued and outstanding, 104,890 and 80,790
shares at June 30, 1997 and March 31, 1997 1,049 808
Preferred stock, Series B, $.01 par value,
Authorized 200,000 shares
Issued and outstanding, 15,370 and 15,370
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 68,404
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 9,951,835 shares at
at June 30, 1997 and March 31, 1997
Additional paid-in capital, preferred stock 2,059,563 1,939,304
Additional paid-in capital, common stock 9,839,797 9,839,797
Accumulated deficit (17,196,877) (16,840,050)
------------------------
(5,196,112) (4,959,785)
TOTAL LIABILITIES AND EQUITY $227,396 $129,450
------------------------
------------------------
The accompanying notes are an integral part of these statements.
F-1
<PAGE>
APPLIED DATA COMMUNICATIONS, INC.
STATEMENT OF OPERATIONS
-----------------------
FOR THE THREE MONTHS ENDED JUNE 30, 1997
----------------------------------------
AND JUNE 30, 1996
-----------------
(Unaudited)
1997 1996
------------------------
REVENUES 122,827 104,614
COSTS AND EXPENSES
Cost of sales 87,904 98,289
Selling, general and administrative
expenses 290,272 186,113
-----------------------
378,176 284,402
OTHER INCOME
Interest (income)/expense, net 101,478 60,101
-----------------------
101,478 60,101
INCOME (LOSS) BEFORE PROVISION
(BENEFIT) FOR INCOME TAXES (356,827) (239,889)
PROVISION (BENEFIT) FOR INCOME TAXES 0 0
NET INCOME (LOSS) ($356,827) ($239,889)
------------------------
------------------------
EARNINGS (LOSS) PER COMMON SHARE ($0.04) ($0.03)
------------------------
------------------------
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 9.951,835 8,161,341
------------------------
------------------------
The accompanying notes are an integrel part of these financial statements.
F-2
<PAGE>
APPLIED DATA COMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED JUNE 30, 1997 AND JUNE 30, 1996
----------------------------------------------------------
1997 1996
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES;
Net Loss ($356,827) ($239,889)
Adjustments to reconcile net loss to net
cash used for operating activities
Depreciation and amortization 6,978 7,917
Compensation for services rendered 0 0
Changes in assets and liabilities
(Increase)/decrease in accounts receivable 10,445 33,210
(Increase)/decrease in inventories 6,189 28,184
(Increase)/decrease in prepaid expenses (61,435) (13,000)
Increase/(decrease) in accounts payable (74,688) (33,591)
Increase/(decrease) in accrued expenses 75,329 103,499
----------------------
Net cash used for operating activities (394,009) (113,670)
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 426,950 (6,083)
Borrowing/(repayment) of bank loans (93,318) 88,240
Net proceeds from issuance of common stock 0 37,500
Net proceeds from issuance of preferred stock 120,500 0
----------------------
Net cash provided by financing activities 454,132 119,657
----------------------
INCREASE/(DECREASE) IN CASH AND EQUIVALENTS 60,123 4,619
CASH AND EQUIVALENTS, beginning of period 9,113 2,974
----------------------
CASH AND EQUIVALENTS, end of period $69,236 $7,593
----------------------
----------------------
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES
Supplemental Disclosures
Cash paid during periods for interest $47,597 $6,101
The accompanying notes are an integral part of these statements
F-3
<PAGE>
Applied Data Communications, Inc.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 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 $120,500 during the three months ended June 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 to be used 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 changtes will not be
realized until the third quarter of fiscal 1997, at the earliest.
-4-
<PAGE>
APPLIED DATA COMMUNICATIONS, INC.
JUNE 30, 1997
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
THREE MONTHS ENDED JUNE 30, 1997 AND JUNE 30, 1996.
REVENUES
Revenues for the three months ended June 30, 1997 were $122,827, up $18,213
(17.4%) from $104,614 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 quarter reflect primarily that for duplication on
diskette (59.8%) and fulfillment activity (16.4%), while those for the
comparable period for the prior year included duplication sales (64.7%) and
equipment sales (18.5%). Average revenue per invoice was $727.79 in the current
year compared to $537.63 in the prior year. Indicated revenue figures include
maintenance billings for prior year equipment sales of $22,279 in the current
year, vs $12,657 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 $87,904 or 71.6% of revenues. This compares to $98,289 in
the comparable period in the prior year, or 94.3% of revenues. The lower dollar
amount in the current year reflects 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 50% of such sales in each year.
OPERATING EXPENSES, INTEREST AND FINANCING EXPENSE
Operating expenses were $290,272 (236.3% of sales), a increase of $104,159
(56.0%) from the $186,113 (177.9% of sales) reported during the comparable
quarter in the prior fiscal year. Higher operating expenses in the current
period relate primarily to legal costs including those related to the Company's
current private placement.
-5-
<PAGE>
Financing expense in the current period was $101,478 compared with $60,101 for
the comparable period in the prior year. The increase of $41,377 (68.8%)
reflects the higher average borrowings for the Company's incresed accounts
receivable financing.
NET EARNINGS
The Company had a loss of $356,827 (290.5% of sales) for the quarter as compared
to a loss of $239,889 (229.3% of sales) for the same period last year. This
equates to losses of $.04 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 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 June 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 $394,009 compared with net
cash used of $113,670 in the prior year. The higher cash usage in operations
in the current year occurred due to a higher loss level and reduction in current
liabilities (excluding notes payable). 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 June
30, 1997 and June 30, 1996 were $69,236 and $7,593, and its net worth at
June 30, 1997 was a deficit of approximately $5.2 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 three months ended June 30, 1997, the Company realized cash proceeds
of $120,500 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
$933,000, 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 will have been reduced from approximately
$50,000 per month to below $20,000 per month by September 1997.
This funding also permitted the Company to have conducted an audit of its
financial records by a firm of outside accountants. Pursuant thereto, the
Company filed its annual report with the Securities and Exchange Commission on
Form 10-KSB, its first such report since the fiscal year
-6-
<PAGE>
ended March 31, 1989. This begins a process by which the Company anticipates it
will return to active trading of its common stock.
It has also initiated an exchange offer with creditors holding $1.9 million in
notes payable, to exchange such notes for equity securities of the Company. To
the extent this offer is accepted, the Company will further strengthen its
balance sheet and reduce interest expenses.
Regarding ADC's plans to begin manufacture of compact disks, subsequent to June
30, ADC relocated its offices to larger facilities in the Santa Ana (California)
"enterprise zone". This location will permit a significant reduction of state
income taxes at such time as the Company returns to profitability. ADC has also
obtained a written commitment for its long term equipment financing, and is
finalizing purchase prices and terms for purchase orders necessary for CD
manufacturing equipment. The Company is hopeful that such activities will be
concluded by September 30, 1997, including the delivery of such equipment and
commencement of CD manufacturing. ADC continues to believe that meaningful
business 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 late 1997.
-7-
<PAGE>
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
-8-
<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
-9-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 69,236
<SECURITIES> 0
<RECEIVABLES> 69,053
<ALLOWANCES> 0
<INVENTORY> 2,186
<CURRENT-ASSETS> 177,535
<PP&E> 104,775
<DEPRECIATION> 83,914
<TOTAL-ASSETS> 227,396
<CURRENT-LIABILITIES> 5,423,508
<BONDS> 0
0
2,061,450
<COMMON> 9,939,315
<OTHER-SE> (17,196,877)
<TOTAL-LIABILITY-AND-EQUITY> 227,396
<SALES> 122,827
<TOTAL-REVENUES> 122,827
<CGS> 87,904
<TOTAL-COSTS> 87,904
<OTHER-EXPENSES> 290,272
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 101,478
<INCOME-PRETAX> (356,287)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (356,287)
<EPS-PRIMARY> (.04)
<EPS-DILUTED> (.04)
</TABLE>
