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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 March 31, 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
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 May 5, 1997 there were 15,790,832 shares of common stock outstanding.
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APPLIED INNOVATION INC.
Table of Contents
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Facing Page 1
Table of Contents 2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets
March 31, 1997 and December 31, 1996 3
Statements of Income
Three months ended March 31, 1997 and 1996 4
Statements of Cash Flows
Three months ended March 31, 1997 and 1996 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
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
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APPLIED INNOVATION INC.
Consolidated Balance Sheets
March 31, 1997 and December 31, 1996
ASSETS
<TABLE>
<CAPTION>
1997 1996
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<S> <C> <C>
Current assets:
Cash and cash equivalents $11,934,820 12,278,092
Accounts receivable, net of allowance
of $112,528 in 1997 and $112,528 in 1996 6,878,462 7,646,517
Income taxes 200,504 -
Inventory 3,418,917 3,005,921
Prepaid expenses 191,873 270,611
Deferred income taxes 1,272,520 1,366,025
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Total current assets 23,897,096 24,567,166
Property and equipment, net 11,883,673 10,977,642
Other assets 143,023 117,436
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$35,923,792 35,662,244
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
1997 1996
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Current liabilities:
Accounts payable $2,582,961 1,517,191
Accrued expenses 3,434,532 3,959,160
Deferred revenue 234,255 -
----------- ----------
Total current liabilities 6,251,748 5,476,351
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Other liabilities:
Deferred income taxes 244,035 244,035
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Stockholders' equity:
Common stock; $.01 par value; 30,000,000 shares
authorized; 15,772,832 shares issued and outstanding
in March, 1997; 15,764,632 shares issued and
outstanding in December, 1996 157,728 157,646
Additional paid-in capital 8,365,545 8,360,502
Deferred compensation (41,857) (51,501)
Retained earnings 20,946,593 21,475,211
----------- ----------
29,428,009 29,941,858
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$35,923,792 35,662,244
=========== ==========
</TABLE>
See accompanying note to financial statements
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APPLIED INNOVATION INC.
Consolidated Statements of Income
Three Months Ended March 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
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Sales $8,409,853 8,912,867
Cost of sales 3,638,958 3,166,977
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Gross profit 4,770,895 5,745,890
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Operating expenses:
Selling, general and administrative 2,616,796 2,152,256
Research and development 3,158,974 1,785,277
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5,775,770 3,937,533
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Income (loss) from operations (1,004,875) 1,808,357
Other income :
Interest income 163,644 137,505
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Income (loss) before provision
for income taxes (841,231) 1,945,862
Provision for income taxes (312,611) 750,148
---------- ---------
Net income (loss) ($528,620) 1,195,714
========== =========
Net income (loss) per share ($0.03) 0.08
========== =========
</TABLE>
See accompanying note to financial statements
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APPLIED INNOVATION INC.
Consolidated Statements of Cash Flows
Three Months Ended March 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
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<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ($528,620) 1,195,714
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation 476,505 272,239
Net book value of disposed assets 46,297 -
Provision for deferred income taxes 93,505 77,856
Provision for deferred compensation 9,644 11,776
Effects of change in operating assets and liabilities:
Accounts receivable 768,055 1,000,806
Inventory (412,996) (960,471)
Income taxes (200,504) -
Prepaid expenses 78,738 112,404
Other assets (25,587) (32,718)
Accounts payable 1,065,770 (294,444)
Accrued expenses (524,628) 225,199
Deferred revenue 234,255 488,515
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Net cash provided by operating activities 1,080,434 2,096,876
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Cash flows from investing activities:
Purchases of property and equipment (1,428,831) (476,167)
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Net cash used by investing activities (1,428,831) (476,167)
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Cash flows from financing activities:
Proceeds from issuance of common stock 5,125 28,374
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Net cash provided by financing activities 5,125 28,374
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Increase(decrease) in cash and cash equivalents (343,272) 1,649,083
Cash and cash equivalents - beginning of period 12,278,092 9,176,287
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Cash and cash equivalents - end of period $11,934,820 10,825,370
=========== ==========
</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 1996
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 FIRST QUARTER ENDED MARCH 31, 1997 VS. FIRST QUARTER ENDED MARCH
31, 1996
Revenue for the first quarter of 1997 was $8,409,853, a decrease of 5.6% from
revenue of $8,912,867 for the first quarter of 1996. The Company believes that
this decrease is primarily attributable to a delay in customer orders at the
beginning of the quarter due to warranty issues with the Company's products in
the latter months of 1996. The Company's concentration of sales to Regional
Bell Operating Companies (RBOC's) and inter-exchange carriers results in a
small number of customers who represent substantial portions of revenue. For
the first three months of 1997, sales to five companies comprised 71% of total
revenue. Each of these five customers contributed between 10% and 17% of total
revenue. The Company continues to sell to six of the seven RBOC's.
Gross profit as a percentage of revenue was 56.7% for the first quarter of 1997
versus 64.5% for the same period in 1996. The reduction in gross profit as a
percentage of revenue in the current quarter 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
current quarter's gross profit margin of 56.7% represents the highest quarterly
gross profit expressed as a percentage of net sales since the first quarter of
1996. The Company anticipates that the gross margin percentage for 1997 will
be higher than for the full year of 1996.
Research and development (R&D) expenses increased 77% to $3,158,974 for the
first quarter of 1997 from $1,785,277 for the same period in 1996. R&D expenses
increased as a percentage of revenue to 37.6% for the first quarter of 1997
from 20.0% for the first quarter of 1996. The Company anticipates that R&D
expenses in the second quarter of 1997 will be higher than the first quarter.
R&D expenses in 1997 will continue to grow 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 $2,616,796 in
the first quarter of 1997 from $2,152,256 in 1996. As a percentage of revenue,
this represents 31.1% in 1997 and 24.1% in 1996. SG&A expenses increased
$464,540 over the same period last year and $406,360 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 Company anticipates that
SG&A expenses in the second quarter of 1997 will be generally consistent with
the first 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, the Company reported a loss from operations
of $1,004,875 in the first quarter of 1997 versus income from operations of
$1,808,357 for the first quarter of 1996. Income (loss) from operations
represents (11.9%) and 20.3% of revenue in 1997 and 1996, respectively.
The Company's effective income tax rate was 37.2% for the current quarter
versus an effective rate of 38.6% for the same period in 1996.
LIQUIDITY AND CAPITAL RESOURCES
Cash decreased by $343,272 during the first three months of 1997 to $11,934,820
at March 31, 1997. Operating activities provided $1,080,434 in cash. During the
same period in 1996, cash increased by $1,649,083 to $10,825,370 at March 31,
1996.
Net working capital was $17,645,348 at March 31, 1997 compared to $19,090,815
at December 31, 1996. Current ratios on those dates were 3.8:1 and 4.5:1,
respectively. The Company had no long-term debt at March 31, 1997 or December
31, 1996.
Net capital expenditures were $1,428,831 for the first quarter of 1997 and
$476,167 for the same period in 1996. The Company opened a satellite R&D
facility in North Carolina during the quarter. The new facility required
approximately $525,000 in initial capital expenditures for leasehold
improvements and office equipment and furnishings. During the quarter, the
Company also purchased approximately five acres of land adjacent to its
headquarters in Dublin, Ohio for $179,207.
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 March 31, 1997, the full $5,000,000 amount of the line was
available.
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The Company expects existing cash reserves, future operating profits, and
borrowing capabilities to be sufficient to meet operating and capital
expenditure requirements through 1997.
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),
R&D expenses (third paragraph), SG&A 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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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 three months ended March 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
(Unaudited) (Unaudited)
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<S> <C> <C>
Weighted average number of common
shares outstanding 15,772,832 15,707,264
Add net shares issuable pursuant to stock
option plans less shares assumed
repurchased at the average market price 104,276 143,923
Add shares issuable pursuant to officer and manager
compensation plans 0 4,248
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Number of shares for computation of
primary earnings per share 15,877,108 15,855,435
Add net shares issuable pursuant to stock
option plans less shares assumed
repurchased at period end market price 0 0
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Number of shares for computation of fully
diluted earnings per share 15,877,108 15,855,435
========== ==========
Net income (loss) for primary and fully diluted
earnings per share $ (528,620) $1,195,714
========== ==========
Primary earnings (loss) per share $(.03) $.08
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Fully diluted earnings (loss) per share $(.03) $.08
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</TABLE>
(b) Exhibit 27 - Financial Data Schedule
(c) Reports on Form 8-K - None
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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)
5/13/97 /s/ Gerard B. Moersdorf, Jr.
- ----------- ----------------------------
Date Gerard B. Moersdorf, Jr.
Chairman of the Board, President, Chief
Executive Officer, and Treasurer
(Principal Executive/Financial Officer)
5/13/97 /s/ John M. Spiegel
- ----------- ----------------------------
Date John M. Spiegel
Comptroller
(Principal Accounting Officer)
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<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 11,934,820
<SECURITIES> 0
<RECEIVABLES> 6,990,990
<ALLOWANCES> 112,528
<INVENTORY> 3,418,917
<CURRENT-ASSETS> 23,897,096
<PP&E> 14,798,110
<DEPRECIATION> 2,914,437
<TOTAL-ASSETS> 35,923,792
<CURRENT-LIABILITIES> 6,251,748
<BONDS> 0
0
0
<COMMON> 157,728
<OTHER-SE> 29,270,281
<TOTAL-LIABILITY-AND-EQUITY> 35,923,792
<SALES> 8,409,853
<TOTAL-REVENUES> 8,409,853
<CGS> 3,638,958
<TOTAL-COSTS> 3,638,958
<OTHER-EXPENSES> 5,775,770
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (841,231)
<INCOME-TAX> (312,611)
<INCOME-CONTINUING> (528,620)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (528,620)
<EPS-PRIMARY> (.03)
<EPS-DILUTED> (.03)
</TABLE>
