<PAGE> 1
UNITED STATES
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 June 30, 1996
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 0-21352
APPLIED INNOVATION INC.
(Exact name of registrant as specified in its charter)
DELAWARE 31-1177192
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification no.)
5800 INNOVATION DRIVE, DUBLIN, OHIO 43016
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (614)-798-2000
Indicate by check mark whether the registrant (1) has filed all reports required
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, 1996 there were 15,734,512 shares of common stock outstanding.
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APPLIED INNOVATION INC.
Table of Contents
<TABLE>
<CAPTION>
Page
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<S> <C>
Facing Page 1
Table of Contents 2
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Balance Sheets
June 30, 1996 and December 31, 1995 3
Statements of Income
Three and six months ended June 30, 1996 and 1995 4
Statements of Cash Flows
Six months ended June 30, 1996 and 1995 5
Note to Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7 - 8
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders 9
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 11 - Statement Regarding Computation
of Earnings Per Share 10
(b) Exhibit 27 - Financial Data Schedule
(c) Reports on Form 8-K - None
Signatures 11
</TABLE>
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APPLIED INNOVATION INC.
Balance Sheets
June 30, 1996 and December 31, 1995
<TABLE>
<CAPTION>
Assets
1996 1995
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 8,800,580 9,176,287
Accounts receivable, net of allowance
of $100,000 in 1996 and $100,000 1995 7,966,711 6,572,326
Inventory 4,722,818 4,060,939
Prepaid expenses 95,844 228,688
Deferred income taxes 449,596 553,445
------------ ------------
Total current assets 22,035,549 20,591,685
Property and equipment, net 10,330,820 9,872,777
Other assets 100,645 67,265
------------ ------------
$ 32,467,014 30,531,727
============ ============
<CAPTION>
Liabilities and Stockholders' Equity
1996 1995
------------ ------------
<S> <C> <C>
Current liabilities:
Accounts payable $ 1,117,583 1,656,965
Accrued expenses 669,532 1,436,037
Deferred revenue 488,515 0
------------ ------------
Total current liabilities 2,275,630 3,093,002
------------ ------------
Other liabilities:
Deferred income taxes 125,715 123,795
------------ ------------
Stockholders' equity:
Common stock; $.01 par value; 30,000,000 shares
authorized; 15,734,512 shares issued and outstanding
in June, 1996; 15,683,264 shares issued and
outstanding in December, 1995 157,345 156,832
Additional paid-in capital 8,154,952 7,980,124
Deferred compensation (83,579) (142,669)
Retained earnings 21,836,951 19,320,643
------------ ------------
30,065,669 27,314,930
------------ ------------
$ 32,467,014 30,531,727
============ ============
</TABLE>
See accompanying note to financial statements
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APPLIED INNOVATION INC.
Statements of Income
Three and Six Months Ended June 30, 1996 and 1995
<TABLE>
<CAPTION>
Three months ended Six months ended
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Sales $11,427,503 10,751,074 20,340,370 18,983,073
Cost of Sales 5,338,255 3,874,001 8,505,232 6,756,977
----------- ----------- ----------- -----------
Gross profit 6,089,248 6,877,073 11,835,138 12,226,096
----------- ----------- ----------- -----------
Operating expenses:
Selling, general and administrative 2,437,728 2,062,316 4,589,983 4,049,048
Research and development 1,612,615 1,293,496 3,397,893 2,286,527
----------- ----------- ----------- -----------
4,050,343 3,355,812 7,987,876 6,335,575
----------- ----------- ----------- -----------
Income from operations 2,038,905 3,521,261 3,847,262 5,890,521
Other income 108,403 123,960 245,908 183,819
----------- ----------- ----------- -----------
Income before provision
for income taxes 2,147,308 3,645,221 4,093,170 6,074,340
Provision for income taxes 826,714 1,385,250 1,576,862 2,308,250
----------- ----------- ----------- -----------
Net income $ 1,320,594 2,259,971 2,516,308 3,766,090
=========== =========== =========== ===========
Net income per share $ 0.08 0.14 0.16 0.24
=========== =========== =========== ===========
</TABLE>
See accompanying note to financial statements
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<PAGE> 5
APPLIED INNOVATION INC.
Statements of Cash Flows
Six Months Ended June 30, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,516,308 3,766,090
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation 615,049 294,807
Provision for deferred income taxes 105,770 55,664
Provision for deferred compensation 23,553 17,093
Effects of change in operating assets and liabilities:
Accounts receivable (1,394,385) 2,434,207
Inventory (661,879) 1,680,019
Prepaid expenses 132,844 (5,260)
Other assets (33,380) (51,750)
Accounts payable (539,382) 274,671
Accrued expenses (594,326) (297,139)
Deferred revenue 488,515 (3,151)
----------- -----------
Net cash provided by operating activities 658,687 8,165,251
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment (1,073,093) (1,293,702)
----------- -----------
Net cash used by investing activities (1,073,093) (1,293,702)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock 38,699 81,335
----------- -----------
Net cash provided by financing activities 38,699 81,335
----------- -----------
Increase(decrease) in cash and cash equivalents (375,707) 6,952,884
Cash and cash equivalents - beginning of period 9,176,287 3,127,306
----------- -----------
Cash and cash equivalents - end of period $ 8,800,580 10,080,190
=========== ===========
</TABLE>
See accompanying note to financial statements
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<PAGE> 6
APPLIED INNOVATION INC.
Note to Financial Statements
1. Accounting Policy:
The information included in the foregoing interim financial statements is
unaudited. Accordingly, the financial statements should be read in
conjunction with the financial statement disclosures contained in the 1995
Annual Report of Applied Innovation Inc. (the Company). In the opinion of
management, the accompanying financial statements reflect all adjustments
necessary (which are of a normal recurring nature) to fairly present the
financial position and results of operations and cash flows for the interim
periods presented, but are not necessarily indicative of the results of
operations for a full fiscal year.
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<PAGE> 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF THE SECOND QUARTER ENDED JUNE 30, 1996 VS. SECOND QUARTER ENDED JUNE
30, 1995
Revenue for the second quarter of 1996 increased 6.3% over the same period of
1995. Year-to-date revenue for 1996 is up 7.2% over 1995. This increase is
attributable to a higher number of units sold. Because of the Company's
concentration of sales to Regional Bell Operating Companies (RBOC's) and
inter-exchange carriers, a small number of customers have represented
substantial portions of revenue. For the first six months of 1996, sales to
three companies comprised 65% of total revenue. Each of the three customers
contributed between 15% and 31% of total revenue. The Company continues to sell
to six of the seven RBOC's.
Gross profit as a percentage of revenue was 53.3% for the second quarter of 1996
versus 64.0% for the same period in 1995. Year-to-date gross profit percentages
were 58.2% and 64.4% for 1996 and 1995, respectively. The reduction in gross
profit as a percentage of revenue in the current quarter and for the first six
months was due to a change in product mix, costs incurred to support and upgrade
certain installed products pending release of new products, and increased
product warranty expenses.
Research and development (R&D) expenses increased to $1,612,615 for the second
quarter of 1996 from $1,293,496 for the same period in 1995. R&D increased as a
percentage of revenue to 14.1% from 12.0%. Year-to-date R&D expenses were
$3,397,893 for 1996 and $2,286,527 for 1995. As a percentage of revenue, this
represents 16.7% for 1996 and 12.0% for 1995. The Company anticipates increased
R&D expenses in future quarters to support its existing product lines and to
develop an Internet access product for its telecommunication company customers.
Selling, general and administrative expenses increased to $2,437,728 in the
second quarter of 1996 from $2,062,316 in 1995. As a percentage of revenue, this
represents 21.3% in 1996 and 19.2% in 1995. Year-to-date selling, general and
administrative expenses represented 22.6% of revenue in 1996 and 21.3% in 1995.
To support continued growth, the Company expects additional increases in
personnel and related costs during 1996.
As a result of the above factors, income from operations decreased by 42.1% to
$2,038,905 in the second quarter of 1996 versus $3,521,261 in the second quarter
of 1995. Second quarter income from operations represents 17.8% and 32.8% of
revenue in 1996 and 1995, respectively. Year-to-date income from operations was
$3,847,262 for 1996 and $5,890,521 in 1995. Year-to-date income from operations
represents 18.9% and 31.0% of revenue in 1996 and 1995, respectively.
The Company's effective income tax rate was 38.5% for the current quarter versus
an effective rate of 38.0% for the same period in 1995.
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<PAGE> 8
LIQUIDITY AND CAPITAL RESOURCES
Net working capital was $19,759,919 at June 30, 1996 compared to $17,498,683 at
December 31, 1995. Current ratios on those dates were 9.7:1 and 6.7:1,
respectively. The Company had no long-term debt at June 30, 1996 or December 31,
1995.
Net capital expenditures were $1,073,093 for the first half of 1996. The Company
anticipates opening a satellite R&D facility in North Carolina later this year.
The new facility may require some initial capital expenditures to be fully
functional.
The Company has an unsecured revolving line of credit from a bank totaling
$5,000,000. Interest on the outstanding balance is payable monthly at the London
Interbank Offered Rate (LIBOR) plus 2 percent. Unpaid principal is due March 31,
1998. The Company is in compliance with all related loan covenants.
At June 30, 1996, the full $5,000,000 amount of the line was available.
The Company expects existing cash reserves, future operating profits, and
borrowing capabilities to be sufficient to meet future operating and capital
expenditures for the next 12 months.
The foregoing statements include forward-looking assumptions which involve risks
and uncertainties. The Company's actual experience may differ from that
projected above. Factors that might cause such a difference include, but are not
limited to, economic, competitive, and technological developments; other factors
discussed in the Company's prior filings with the Securities and Exchange
Commission; and future events that may have the effect of reducing the Company's
available cash balances and materially affect its operating results, such as
unexpected operating losses or capital expenditures.
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<PAGE> 9
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Stockholders on April 25, 1996 for the
purposes of electing Class III Directors of the Company, approving the Company's
1996 Officer and Manager Compensation Plan, approving the Company's 1996 Stock
Option Plan, and ratifying the selection of KPMG Peat Marwick LLP as the
Company's independent certified public accountants for the fiscal year ending
December 31, 1996.
All of management's nominees for directors as listed in the proxy statement were
elected with the following vote:
<TABLE>
<CAPTION>
Number of Shares
-------------------------------------
Nominees: FOR AGAINST ABSTAIN
<S> <C> <C> <C>
Gerard B. Moersdorf Jr. 14,360,287 0 55,406
Ledo A. Ross 14,360,857 0 54,836
</TABLE>
The Company's 1996 Officer and Manager Compensation Plan was approved by the
following vote:
<TABLE>
<CAPTION>
Number of Shares
----------------
<S> <C>
FOR 13,188,187
AGAINST 385,989
ABSTAIN 126,685
</TABLE>
The Company's 1996 Stock Option Plan was approved by the following vote:
<TABLE>
<CAPTION>
Number of Shares
----------------
<S> <C>
FOR 10,208,127
AGAINST 514,790
ABSTAIN 98,628
</TABLE>
The appointment of KPMG Peat Marwick LLP as the Company's independent certified
public accountants for the fiscal year ending December 31, 1996 was ratified by
the following vote:
<TABLE>
<CAPTION>
Number of Shares
----------------
<S> <C>
FOR 14,358,274
AGAINST 34,117
ABSTAIN 23,302
</TABLE>
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<PAGE> 10
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 11 - Statement Regarding Computation of Earnings Per Share:
APPLIED INNOVATION INC.
Exhibit 11
Statement Regarding Computation of Earnings
Per Share For the six months ended June
30, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
(Unaudited) (Unaudited)
----------- -----------
<S> <C> <C>
Weighted average number of common shares outstanding 15,734,512 15,641,864
Add net shares issuable pursuant to stock options plans less
shares assumed repurchased at the average market price 129,671 260,010
----------- -----------
Number of shares for computation of primary earnings
per share 15,864,183 15,901,874
Add net shares issuable pursuant to stock options plans less
shares assumed repurchased at period end market price 1,285 102,988
----------- -----------
Number of shares for computation of fully diluted earnings
per share 15,865,468 16,004,862
=========== ===========
Net income for primary and fully diluted earnings per share $ 2,516,308 $ 3,766,090
=========== ===========
Primary earnings per share $ .16 $ .24
=========== ===========
Fully diluted earnings per share $ .16 $ .24
=========== ===========
</TABLE>
(b) Exhibit 27 - Financial Data Schedule
(c) Reports on Form 8-K - None
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<PAGE> 11
SIGNATURES
In accordance with 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 INNOVATION INC.
(Registrant)
August 8, 1996 /s/ Gerard B. Moersdorf, Jr.
- - -------------- -----------------------------
Date Gerard B. Moersdorf, Jr.
Chairman of the Board, President,
Chief Executive Officer, and Treasurer
(Principal Executive/Financial Officer)
August 8, 1996 /s/ John M. Spiegel
- - -------------- --------------------------
Date John M. Spiegel
Comptroller
(Principal Accounting Officer)
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<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<CASH> 8,800,580
<SECURITIES> 0
<RECEIVABLES> 8,066,711
<ALLOWANCES> 100,000
<INVENTORY> 4,722,818
<CURRENT-ASSETS> 22,035,549
<PP&E> 11,972,191
<DEPRECIATION> 1,641,371
<TOTAL-ASSETS> 32,467,014
<CURRENT-LIABILITIES> 2,275,630
<BONDS> 0
0
0
<COMMON> 157,345
<OTHER-SE> 29,908,324
<TOTAL-LIABILITY-AND-EQUITY> 30,065,669
<SALES> 20,340,370
<TOTAL-REVENUES> 20,340,370
<CGS> 8,505,232
<TOTAL-COSTS> 8,505,232
<OTHER-EXPENSES> 7,987,876
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 4,093,170
<INCOME-TAX> 1,576,862
<INCOME-CONTINUING> 2,516,308
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,516,308
<EPS-PRIMARY> .16
<EPS-DILUTED> .16
</TABLE>
