<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, 1997
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 August 12, 1997 there were 15,790,832 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
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Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
June 30, 1997 (unaudited) and December 31, 1996 3
Condensed Consolidated Statements of Operations for the three and six
months ended June 30, 1997 and 1996 (unaudited) 4
Condensed Consolidated Statement of Stockholders' Equity
for the six months ended June 30, 1997 (unaudited) 5
Condensed Consolidated Statements of Cash Flows for the
six months ended June 30, 1997 and 1996 (unaudited) 6
Note to Financial Statements (unaudited) 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8 - 10
Part II. Other Information
- --------------------------
Items 1 - 5 11
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits 12
(b) Reports on Form 8-K - None
Signatures 13
</TABLE>
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APPLIED INNOVATION INC.
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
Assets
------
(unaudited)
June 30, December 31,
1997 1996
----------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 8,639,728 $12,278,092
Accounts receivable, net of allowance 10,336,478 7,646,517
Income taxes 139,085 --
Inventory 3,524,846 3,005,921
Prepaid expenses 184,235 270,611
Deferred income taxes 1,283,186 1,366,025
----------- -----------
Total current assets 24,107,558 24,567,166
Property, plant and equipment, net 12,311,439 10,977,642
Other assets 132,773 117,436
----------- -----------
$36,551,770 $35,662,244
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
Liabilities and Stockholders' Equity
------------------------------------
1997 1996
----------- -----------
<S> <C> <C>
Current liabilities:
Accounts payable trade $ 2,977,200 $ 1,517,191
Accrued expenses 1,227,424 1,197,571
Accrued warranty expenses 2,528,564 2,761,589
----------- -----------
Total current liabilities 6,733,188 5,476,351
----------- -----------
Deferred income taxes 186,353 244,035
----------- -----------
Stockholders' equity:
Common stock; $.01 par value; 30,000,000 shares
authorized; 15,790,832 shares issued and outstanding
in 1997; 15,764,632 shares issued and
outstanding in 1996 157,908 157,646
Additional paid-in capital 8,407,058 8,360,502
Deferred compensation (32,213) (51,501)
Retained earnings 21,099,476 21,475,211
----------- -----------
29,632,229 29,941,858
----------- -----------
$36,551,770 $35,662,244
=========== ===========
</TABLE>
See accompanying note to condensed consolidated financial statements.
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APPLIED INNOVATION INC.
Condensed Consolidated Statements of Operations (Unaudited)
Three and Six Months Ended June 30, 1997 and 1996
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
--------------------------- ----------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Sales $12,233,673 $11,427,503 $20,643,526 $20,340,370
Cost of Sales 5,513,598 5,338,255 9,152,556 8,505,232
----------- ----------- ----------- -----------
Gross profit 6,720,075 6,089,248 11,490,970 11,835,138
Operating expenses:
Selling, general, and administrative 3,930,685 2,437,728 6,547,481 4,589,983
Research and development 2,678,750 1,612,615 5,837,724 3,397,893
----------- ----------- ----------- -----------
Income (loss) from operations 110,640 2,038,905 (894,235) 3,847,262
Investment income 133,008 108,403 296,652 245,908
----------- ----------- ----------- -----------
Income (loss) before provision
for income taxes 243,648 2,147,308 (597,583) 4,093,170
Provision for income taxes 90,763 826,714 (221,848) 1,576,862
----------- ----------- ----------- -----------
Net income (loss) $ 152,885 $ 1,320,594 $ (375,735) $ 2,516,308
=========== =========== =========== ===========
Net income (loss) per share $ 0.01 $ 0.08 $ (0.02) $ 0.16
=========== =========== =========== ===========
</TABLE>
See accompanying note to condensed consolidated financial statements.
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APPLIED INNOVATION INC.
Condensed Consolidated Statement of Stockholders' Equity
Six Months Ended June 30, 1997
<TABLE>
<CAPTION>
Common Stock
-----------------------
Number Additional
of Paid-in Deferred Retained
Shares Amount Capital Compensation Earnings
---------- -------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Balance January 1, 1997 15,764,632 $157,646 $8,360,502 $(51,501) $21,475,211
Stock options exercised 26,200 262 16,863 -- --
Tax benefit associated with
exercise of stock options -- -- 29,693 -- --
Amortization of deferred
compensation -- -- -- 19,288 --
Net income (loss) for the period -- -- -- -- (375,735)
---------- -------- ---------- -------- -----------
Balance - June 30, 1997 15,790,832 $157,908 $8,407,058 $(32,213) $21,099,476
========== ======== ========== ======== ===========
</TABLE>
See accompanying note to condensed consolidated financial statements.
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APPLIED INNOVATION INC.
Condensed Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Six months ended June 30,
1997 1996
------------ -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (375,735) $ 2,516,308
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation 992,847 615,049
Net book value of disposed assets 46,297 --
Provision for deferred income taxes 25,157 105,770
Provision for deferred compensation 19,288 23,553
Effects of change in operating assets and liabilities:
Accounts receivable (2,689,961) (1,394,385)
Inventory (518,925) (661,879)
Income taxes (139,085) --
Prepaid expenses 86,376 132,844
Other assets (15,337) (33,380)
Accounts payable 1,460,009 (539,382)
Accrued expenses (173,479) (594,326)
Deferred revenue -- 488,515
----------- -----------
Net cash provided (used) by operating activities (1,282,548) 658,687
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment (2,372,941) (1,073,093)
----------- -----------
Net cash used by investing activities (2,372,941) (1,073,093)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock 17,125 38,699
----------- -----------
Net cash provided by financing activities 17,125 38,699
----------- -----------
Decrease in cash and cash equivalents (3,638,364) (375,707)
Cash and cash equivalents - beginning of period 12,278,092 9,176,287
----------- -----------
Cash and cash equivalents - end of period $ 8,639,728 $ 8,800,580
=========== ===========
</TABLE>
See accompanying note to condensed consolidated financial statements.
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APPLIED INNOVATION INC.
Note to Condensed Consolidated Financial Statements (Unaudited)
1. Basis of presentation - The condensed consolidated balance sheet as of June
30, 1997, the condensed consolidated statements of operations for the three and
six months ended June 30, 1997 and 1996, the condensed consolidated statement of
stockholders' equity for the six months ended June 30, 1997, and the condensed
consolidated statements of cash flows for the six month periods then ended have
been prepared by the Company, without audit. In the opinion of management, all
adjustments, which consist solely of normal recurring adjustments, necessary to
present fairly, in accordance with generally accepted accounting principles, the
financial position, results of operations and changes in cash flows for all
periods presented have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. These condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's December 31, 1996 annual
report on Form 10-K. The results of operations for the period ended June 30,
1997 are not necessarily indicative of the results for the full year.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF THE SECOND QUARTER AND SIX MONTHS ENDED JUNE 30, 1997 VS. SECOND
QUARTER AND SIX MONTHS ENDED JUNE 30, 1996
Revenue for the second quarter of 1997 increased 7% over the same period of
1996. Year-to-date revenue for 1997 is up 1% over 1996. These increases are
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 1997, sales to four
companies comprised 62% of total revenue. Each of the four customers contributed
between 14% and 18% of total revenue. The Company sells to all of the seven
RBOC's.
Gross profit as a percentage of revenue was 55% for the second quarter of 1997
versus 53% for the same period in 1996. Gross profit for the second quarter
benefited from the initial shipment of product which integrates the Cisco router
technology into the Company's AI 180 product offering. Year-to-date gross
profit percentages were 56% and 58% for 1997 and 1996, respectively. The
reduction in gross profit as a percentage of revenue for the first six months
was due to a change in product mix, costs incurred to support and upgrade
certain installed products, and selected price competition. The Company
anticipates that the gross margin percentage for 1997 will be higher than for
the full year of 1996.
Selling, general and administrative expenses (SG&A) increased to $3,930,685 in
the second quarter of 1997 from $2,437,728 in 1996. As a percentage of revenue,
this represents 32% in 1997 and 21% in 1996. Year-to-date SG&A was $6,547,481
for 1997 and $4,589,983 for 1996 and represented 32% of revenue in 1997 and 23%
in 1996. SG&A increased $1,957,498 for the six months ended June 30, 1997 over
the same period last year and approximately $1,150,000 of the increase was
attributable to additional employment expenses for administrative personnel to
support current operations and increased sales, marketing and product management
personnel to support planned growth. The balance of the increase was primarily
attributable to increased commissions due on the sale of products containing
Cisco router technology, increased product management and marketing consulting
fees, and increased sales and marketing activities. To support continued growth,
the Company expects additional increases in sales and general administrative
personnel and related costs during 1997.
Research and development (R&D) expenses increased 66% to $2,678,750 for the
second quarter of 1997 from $1,612,615 for the same period in 1996. R&D
increased as a percentage of revenue to 22% from 14%. Year-to-date R&D expenses
were $5,837,724 for 1997 and $3,397,893 for 1996. As a percentage of revenue,
this represents 28% for 1997 and 17% for 1996. R&D increased $2,439,831 for the
six months ended June 30, 1997 over the same period last year and approximately
$1,100,000 of the increase was attributable to additional employment expenses
for engineering personnel to develop new product lines. The balance of the
increase was due primarily to the purchase of technology, the opening of the
Company's new R&D facility in North Carolina, and the purchase of test equipment
for the Company's internet access product under development. 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.
-8-
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As a result of the above factors, income from operations decreased to $110,640
in the second quarter of 1997 from $2,038,905 in the second quarter of 1996.
Second quarter income from operations represents 1% and 18% of revenue in 1997
and 1996, respectively. Year-to-date results of operations was a loss of
$894,235 for 1997 versus income of $3,847,262 in 1996. Year-to-date income
(loss) from operations represents (4%) and 19% of revenue in 1997 and 1996,
respectively.
The Company's effective income tax rate was 37% for the current quarter versus
an effective rate of 39% for the same period in 1996.
LIQUIDITY AND CAPITAL RESOURCES
Cash decreased by $3,638,364 during the first six months of 1997 to $8,639,728
at June 30, 1997. Operating activities used $1,282,548 in cash. During the same
period in 1996, cash decreased by $375,707 to $8,800,580 at June 30, 1996.
Net working capital was $17,374,370 at June 30, 1997 compared to $19,090,815 at
December 31, 1996. Current ratios on those dates were 3.6:1 and 4.5:1,
respectively. The Company had no long-term debt at June 30, 1997 or December 31,
1996.
Net capital expenditures were $2,372,941 for the first half of 1997 and
$1,073,093 for the same period in 1996. The Company opened an R&D facility in
North Carolina in 1997. The new facility required approximately $ 645,000 in
initial capital expenditures for leasehold improvements and office equipment and
furnishings. The balance of the capital expenditures were primarily for test
equipment for the Company's internet access product under development and the
purchase of additional computer and network equipment for use throughout the
Company.
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,
1997, 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 operating and capital
expenditure requirements for the next 12 months.
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SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The foregoing statements in this Management's Discussion and Analysis include
forward-looking statements concerning future gross margins (second paragraph),
SG&A expenses (third paragraph), R&D expenses (fourth paragraph), capital
expenditures (eleventh paragraph), and capital resources (eleventh paragraph),
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, 1996.
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<PAGE> 11
Part II. Other Information
- ---------------------------
Items 1 - 3. Inapplicable
Item 4. Submission of Matters to a Vote of Security Holders
(a) Applied Innovation Inc. held its annual meeting of stockholders on
April 24, 1997, for the purpose of electing two Class I directors and
ratifying the appointment of independent certified public accountants
for the fiscal year 1997.
(b) At the annual meeting of stockholders, all directors nominated were
elected.
(c) The table shows the voting tabulation for each matter voted upon at the
annual meeting of stockholders.
ACTION FOR WITHHELD
- ------ --- --------
Election of Class I Directors:
James H. Blough 13,580,265 199,339
Richard W. Oliver 13,588,172 191,432
ACTION FOR AGAINST WITHHELD
- ------ --- ------- --------
Ratification of KPMG Peat 13,659,869 81,040 38,695
Marwick LLP as independent
certified public accountants
for the fiscal year 1997:
Item 5. Inapplicable
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
APPLIED INNOVATION INC.
Exhibit 11
Statement Regarding Computation of Earnings Per Share
For the six months ended June 30, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
(Unaudited) (Unaudited)
----------- -----------
<S> <C> <C>
Weighted average number of common shares outstanding 15,772,832 15,734,512
Add net shares issuable pursuant to stock options plans less
shares assumed repurchased at the average market price 83,341 129,671
----------- -----------
Number of shares for computation of primary earnings
per share 15,856,173 15,864,183
Add net shares issuable pursuant to stock options plans less
shares assumed repurchased at period end market price 0 1,285
----------- -----------
Number of shares for computation of fully diluted earnings
per share 15,856,173 15,865,468
Net income (loss) for primary and fully diluted earnings per share $ (375,735) $ 2,516,308
=========== ===========
Primary earnings (loss) per share $(.02) $.16
===== ====
Fully diluted earnings (loss) per share $(.02) $.16
===== ====
</TABLE>
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K - None
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SIGNATURES
Pursuant to 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 13, 1997 /s/ Gerard B. Moersdorf, Jr.
- --------------- -------------------------------------
Date Gerard B. Moersdorf, Jr.
Chairman of the Board, President,
Chief Executive Officer and Treasurer
(Principal Executive Officer)
August 13, 1997 /s/ William H. Largent
- --------------- -------------------------------------
Date William H. Largent
Senior Vice President - Operations
and Chief Financial Officer
(Chief Financial Officer)
August 13, 1997 /s/ John M. Spiegel
- --------------- -------------------------------------
Date John M. Spiegel
Controller
(Principal Accounting Officer)
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<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000798399
<NAME> APPLIED INNOVATION INC.
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 8,639,728
<SECURITIES> 0
<RECEIVABLES> 10,452,641
<ALLOWANCES> 116,163
<INVENTORY> 3,524,846
<CURRENT-ASSETS> 24,107,558
<PP&E> 15,742,218
<DEPRECIATION> 3,430,779
<TOTAL-ASSETS> 36,551,770
<CURRENT-LIABILITIES> 6,733,188
<BONDS> 0
0
0
<COMMON> 157,908
<OTHER-SE> 29,474,321
<TOTAL-LIABILITY-AND-EQUITY> 29,632,229
<SALES> 20,643,526
<TOTAL-REVENUES> 20,643,526
<CGS> 9,152,556
<TOTAL-COSTS> 9,152,556
<OTHER-EXPENSES> 12,395,205
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (597,583)
<INCOME-TAX> (221,848)
<INCOME-CONTINUING> (375,735)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (375,735)
<EPS-PRIMARY> (.02)
<EPS-DILUTED> (.02)
</TABLE>
