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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 September 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
NOT APPLICABLE
(former name, former address and former fiscal year,
if changed since last report)
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 October 22, 1996 there were 15,764,632 shares of common stock outstanding.
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APPLIED INNOVATION INC.
Table of Contents
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Page
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Facing Page 1
Table of Contents 2
Part I. Financial Information
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Item 1. Financial Statements
Balance Sheets
September 30, 1996 and December 31, 1995 3
Statements of Income
Three and nine months ended September 30, 1996 and 1995 4
Statements of Cash Flows
Nine months ended September 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 - 9
Part II. Other Information
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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
September 30, 1996 and December 31, 1995
<TABLE>
<CAPTION>
Assets
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1996 1995
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<S> <C> <C>
Current assets:
Cash and cash equivalents $12,881,831 9,176,287
Accounts receivable, net of allowance
of $100,000 in 1996 and $100,000 1995 7,059,082 6,572,326
Inventory 3,510,865 4,060,939
Prepaid expenses 80,482 228,688
Deferred income taxes 587,571 553,445
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Total current assets 24,119,831 20,591,685
Property and equipment, net 11,136,762 9,872,777
Other assets 139,270 67,265
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$35,395,863 30,531,727
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Liabilities and Stockholders' Equity
------------------------------------
1996 1995
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Current liabilities:
Accounts payable $1,893,696 1,656,965
Accrued expenses 1,947,771 1,436,037
Deferred revenue 442,300 -
----------- ----------
Total current liabilities 4,283,767 3,093,002
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Other liabilities:
Deferred income taxes 121,767 123,795
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Stockholders' equity:
Common stock; $.01 par value; 30,000,000 shares authorized; 15,764,632 shares
issued and outstanding in September, 1996; 15,683,264 shares issued and
outstanding in December, 1995 157,646 156,832
Additional paid-in capital 8,364,162 7,980,124
Deferred compensation (67,540) (142,669)
Retained earnings 22,536,061 19,320,643
----------- ----------
Total stockholders' equity 30,990,329 27,314,930
----------- ----------
$35,395,863 30,531,727
=========== ==========
</TABLE>
See accompanying note to financial statements
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APPLIED INNOVATION INC.
Statements of Income
Three and Nine Months Ended September 30, 1996 and 1995
<TABLE>
<CAPTION>
Three months ended Nine months ended
1996 1995 1996 1995
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<S> <C> <C> <C> <C>
Sales $10,887,634 8,209,205 31,228,004 27,192,278
Cost of Sales 5,509,168 2,905,635 14,014,399 9,555,570
----------- --------- ---------- ----------
Gross profit 5,378,466 5,303,570 17,213,605 17,636,708
----------- --------- ---------- ----------
Operating expenses:
Selling, general and administrative 2,451,357 1,544,367 7,041,341 5,700,458
Research and development 1,920,638 1,664,626 5,318,531 3,951,153
----------- --------- ---------- ----------
4,371,995 3,208,993 12,359,872 9,651,611
----------- --------- ---------- ----------
Income from operations 1,006,471 2,094,577 4,853,733 7,985,097
Other income:
Interest income 128,680 121,352 374,589 305,173
----------- --------- ---------- ----------
Income before provision
for income taxes 1,135,151 2,215,929 5,228,322 8,290,270
Provision for income taxes 436,042 814,850 2,012,904 3,123,100
----------- --------- ---------- ----------
Net income $699,109 1,401,079 3,215,418 5,167,170
=========== ========= ========== ==========
Net income per share $0.04 0.09 0.20 0.32
=========== ========= ========== ==========
</TABLE>
See accompanying note to financial statements
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APPLIED INNOVATION INC.
Statements of Cash Flows
Nine Months Ended September 30, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
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<S> <C> <C>
Cash flows from operating activities:
Net income $3,215,418 5,167,170
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation 953,799 490,852
Loss (gain) on sale of assets - (364)
Provision for deferred income taxes (36,153) 55,454
Provision for deferred compensation 39,592 25,638
Effects of change in operating assets and liabilities:
Accounts receivable (486,756) 2,894,588
Inventory 550,074 1,605,637
Prepaid expenses 148,206 (36,786)
Accounts payable 236,731 212,546
Accrued expenses 707,394 (3,842)
Deferred revenue 442,300 (3,939)
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Net cash provided by operating activities 5,770,605 10,406,954
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Cash flows from investing activities:
Purchases of property and equipment (2,217,785) (3,789,145)
Increase in other assets (72,005) (52,775)
Proceeds from sale of assets - 673
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Net cash used by investing activities (2,289,790) (3,841,247)
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Cash flows from financing activities:
Proceeds from issuance of common stock 224,729 140,945
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Net cash provided by financing activities 224,729 140,945
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Increase in cash and cash equivalents 3,705,544 6,706,652
Cash and cash equivalents - beginning of period 9,176,287 3,127,306
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Cash and cash equivalents - end of period $12,881,831 9,833,958
=========== ==========
</TABLE>
See accompanying note to financial statements
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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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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF THE THIRD QUARTER ENDED SEPTEMBER 30, 1996 VS. THIRD QUARTER ENDED
SEPTEMBER 30, 1995
Revenue for the third quarter of 1996 was $10,887,634, an increase of 32.6%
over revenue of $8,209,205 for the third quarter of 1995. For the nine months
ended September 30, revenue for 1996 was up 14.8% 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 nine months of 1996, sales to
four companies comprised 70% of total revenue. Each of these four customers
contributed between 10% and 23% of total revenue. The Company continues to sell
to six of the seven RBOC's.
Gross profit as a percentage of revenue was 49.4% for the third quarter of 1996
versus 64.6% for the same period in 1995. Gross profit percentages were 55.1%
and 64.9% for the first nine months of 1996 and 1995, respectively. The
reduction in gross profit as a percentage of revenue in the current quarter and
for the first nine months was due to costs incurred to support and upgrade
certain installed products pending release of new products, increased product
warranty expenses, and selected price competition. The Company anticipates that
the gross margin percentage for the fourth quarter of 1996 will be consistent
with that experienced in the second and third quarters of this year due to
continuation of these factors.
Research and development (R&D) expenses increased to $1,920,638 for the third
quarter of 1996 from $1,664,626 for the same period in 1995. R&D expenses
decreased as a percentage of revenue to 17.6% for the third quarter of 1996
from 20.3% for the third quarter of 1995. For the nine months ended September
30, R&D expenses were $5,318,531 for 1996 and $3,951,153 for 1995. As a
percentage of revenue, this represents 17.0% for the first nine months of 1996
and 14.5% for the first nine months of 1995. The Company anticipates that R&D
expenses in the fourth quarter of 1996 will be will be approximately the same
as the third quarter. The Company anticipates that R&D expenses in 1997 will
grow at a rate consistent with the rate of increase during the first nine
months of 1996 to support its existing product lines and to develop an Internet
access product for its telecommunication company customers.
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Selling, general and administrative expenses (SG&A) increased to $2,451,357 in
the third quarter of 1996 from $1,544,367 in 1995. As a percentage of revenue,
this represents 22.5% in 1996 and 18.8% in 1995. For the nine months ended
September 30, SG&A expenses were $7,041,341 in 1996 compared to $5,700,458 in
1995, which represented 22.5% of revenue in 1996 and 21.0% in 1995. The
increased SG&A expenses are primarily attributable to additional administrative
personnel to support current operations, increased sales, marketing and product
management personnel to support planned growth, and completion of an addition
to the Company's Dublin, Ohio facility at the beginning of 1996. The Company
anticipates that SG&A expenses in the fourth quarter of 1996 will be generally
consistent with the third quarter. To support continued growth, the Company
expects additional increases in sales and general administrative personnel and
related costs during 1997 as a percentage of sales.
As a result of the above factors, income from operations decreased by 51.9% to
$1,006,471 in the third quarter of 1996 versus $2,094,577 for the third quarter
of 1995. For the nine months ended September 30, income from operations was
$4,853,733 for 1996 and $7,985,097 in 1995. Year to date income from operations
represents 15.5% and 29.4% of revenue in 1996 and 1995, respectively.
The Company's effective income tax rate was 38.4% for the current quarter
versus an effective rate of 36.8% for the same period in 1995. The Company's
year to date effective income tax rate for 1996 and 1995 was 38.5% and 37.7%,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
Cash increased by $3,705,544 during the first three quarters of 1996 to
$12,881,831 at September 30, 1996. Operating activities provided $5,770,605 in
cash. During the same period in 1995, cash increased by $6,706,652 to
$9,833,958 at September 30, 1995.
Net working capital was $19,836,064 at September 30, 1996 compared to
$17,498,683 at December 31, 1995. Current ratios on those dates were 5.6:1 and
6.7:1, respectively. The Company had no long-term debt at September 30, 1996 or
December 31, 1995.
Net capital expenditures were $2,217,785 for the first three quarters of 1996
and $3,789,145 for the same period in 1995. The Company anticipates opening a
satellite R&D facility in North Carolina later this year. The new facility may
require some initial capital expenditures before its fully functional. The new
facility is expected to be operational in the first quarter of 1997.
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The Company has an unsecured revolving line of credit available from a bank in
the amount of $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 September 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
expenditure requirements through 1997.
SAFE HARBOR STATEMENT UNDER THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The foregoing statements include forward-looking statements concerning future
gross margins, R&D expenses, SG&A expenses, capital expenditures, and capital
resources, all of which involve risks and uncertainties. The Company's actual
experience may differ materially from that projected above. Factors that might
cause the Company's present expectations to not materialize or to change
include, but are not limited to, changes in customer needs, demands and buying
patterns for telecommunication equipment; the timely development of new
products and product upgrades and the market's acceptance of such products;
technological changes affecting telecommunications equipment and software;
changes in product warranty experience; competitive pressures from companies
with substantially greater resources; the ability of the Company to hire
additional technical personnel for new product development; the Company's
ability to manage its planned new product development; and other factors
discussed in the Company's prior filings with the Securities and Exchange
Commission, including the Annual Report on Form 10-K for the year ended
December 31, 1995.
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 11 - Statement Regarding Computation of Earnings Per Share:
(b) Exhibit 27 - Financial Data Schedule
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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)
11/11/96 /s/ GERARD B. MOERSDORF, JR.
- ----------- ----------------------------
Date Gerard B. Moersdorf, Jr.
Chairman of the Board, President, Chief
Executive Officer, and Treasurer
(Principal Executive/Financial Officer)
11/11/96 /s/ JOHN M. SPIEGEL
- ----------- --------------------------
Date John M. Spiegel
Comptroller
(Principal Accounting Officer)
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APPLIED INNOVATION INC.
Exhibit 11
Statement Regarding Computation of Earnings Per Share
For the nine months ended September 30, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
(Unaudited) (Unaudited)
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<S> <C> <C>
Weighted average number of common
shares outstanding 15,764,632 15,666,264
Add net shares issuable pursuant to stock
option plans less shares assumed
repurchased at the average market price 101,089 284,919
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Number of shares for computation of
primary earnings per share 15,865,721 15,951,183
Add net shares issuable pursuant to stock
option plans less shares assumed
repurchased at period end market price 0 0
----------- ----------
Number of shares for computation of fully
diluted earnings per share 15,865,721 15,951,183
========== ==========
Net income for primary and fully diluted
earnings per share $3,215,418 $5,167,170
========== ==========
Primary earnings per share $.20 $.32
==== ====
Fully diluted earnings per share $.20 $.32
==== ====
(b) Exhibit 27 - Financial Data Schedule
(c) Reports on Form 8-K - None
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 12,881,831
<SECURITIES> 0
<RECEIVABLES> 7,159,082
<ALLOWANCES> 100,000
<INVENTORY> 3,510,865
<CURRENT-ASSETS> 24,119,831
<PP&E> 13,116,883
<DEPRECIATION> 1,980,121
<TOTAL-ASSETS> 35,395,863
<CURRENT-LIABILITIES> 4,283,767
<BONDS> 0
<COMMON> 157,646
0
0
<OTHER-SE> 30,832,683
<TOTAL-LIABILITY-AND-EQUITY> 35,395,863
<SALES> 31,228,004
<TOTAL-REVENUES> 31,228,004
<CGS> 14,014,399
<TOTAL-COSTS> 14,014,399
<OTHER-EXPENSES> 12,359,872
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 5,228,322
<INCOME-TAX> 2,012,904
<INCOME-CONTINUING> 3,215,418
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,215,418
<EPS-PRIMARY> .20
<EPS-DILUTED> .20
</TABLE>
