<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 September 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 November 3, 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
September 30, 1997 (unaudited) and December 31, 1996 3
Condensed Consolidated Statements of Operations for the three and
nine months ended September 30, 1997 and 1996 (unaudited) 4
Condensed Consolidated Statement of Stockholders' Equity for the nine
months ended September 30, 1997 (unaudited) 5
Condensed Consolidated Statements of Cash Flows for the nine
months ended September 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
Item 3. Quantitative and Qualitative Disclosure About Market Risk 10
Part II. Other Information
- --------------------------
Items 1 - 5 11
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits 11
(b) Reports on Form 8-K - None
Signatures 12
</TABLE>
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APPLIED INNOVATION INC.
Condensed Consolidated Balance Sheets
Assets
------
<TABLE>
<CAPTION>
(unaudited)
September 30, December 31,
1997 1996
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<S> <C> <C>
Current assets:
Cash and cash equivalents $ 8,921,682 $12,278,092
Accounts receivable, net of allowance 7,414,503 7,646,517
Inventory 3,850,657 3,005,921
Prepaid income taxes 1,073,099 --
Prepaid expenses 132,154 270,611
Deferred income taxes 1,108,188 1,366,025
----------- -----------
Total current assets 22,500,283 24,567,166
Property, plant and equipment, net 12,634,400 10,977,642
Other assets 120,650 117,436
----------- -----------
$35,255,333 $35,662,244
=========== ===========
</TABLE>
Liabilities and Stockholders' Equity
------------------------------------
<TABLE>
<CAPTION>
1997 1996
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<S> <C> <C>
Current liabilities:
Accounts payable $ 2,177,516 $ 1,517,191
Accrued expenses 2,368,234 1,197,571
Accrued warranty expenses 2,179,872 2,761,589
----------- -----------
Total current liabilities 6,725,622 5,476,351
----------- -----------
Deferred income taxes 199,365 244,035
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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 (14,757) (51,501)
Retained earnings 19,780,137 21,475,211
----------- -----------
28,330,346 29,941,858
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$35,255,333 $35,662,244
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</TABLE>
See accompanying note to condensed consolidated financial statements.
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APPLIED INNOVATION INC.
Condensed Consolidated Statements of Operations (unaudited)
Three and Nine Months Ended September 30, 1997 and 1996
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
-------------------------------- -------------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Sales $10,527,166 $10,887,634 $31,170,692 $31,228,004
Cost of sales 4,868,312 5,509,168 14,020,868 14,014,399
----------- ----------- ----------- -----------
Gross profit 5,658,854 5,378,466 17,149,824 17,213,605
Operating expenses:
Selling, general and administrative 4,860,562 2,451,357 11,408,043 7,041,341
Research and development 3,022,363 1,920,638 8,860,087 5,318,531
----------- ----------- ----------- -----------
Income (loss) from operations (2,224,071) 1,006,471 (3,118,306) 4,853,733
Investment income 124,732 128,680 421,384 374,589
----------- ----------- ----------- -----------
Income (loss) before provision
for income taxes (2,099,339) 1,135,151 (2,696,922) 5,228,322
Provision for income taxes (780,000) 436,042 (1,001,848) 2,012,904
----------- ----------- ----------- -----------
Net income (loss) $(1,319,339) $ 699,109 $(1,695,074) $ 3,215,418
=========== =========== =========== ===========
Net income (loss) per share $(0.08) $0.04 $(0.11) $0.20
=========== =========== =========== ===========
</TABLE>
See accompanying note to condensed consolidated financial statements.
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APPLIED INNOVATION INC.
Condensed Consolidated Statement of Stockholders' Equity (unaudited)
Nine Months Ended September 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 -- -- -- 36,744 --
Net income (loss) for the period -- -- -- -- (1,695,074)
---------- -------- ---------- -------- -----------
Balance - September 30, 1997 15,790,832 $157,908 $8,407,058 $(14,757) $19,780,137
========== ======== ========== ======== ===========
</TABLE>
See accompanying note to condensed consolidated financial statements.
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APPLIED INNOVATION INC.
Condensed Consolidated Statements of Cash Flows (unaudited)
<TABLE>
<CAPTION>
Nine months ended September 30,
-------------------------------
1997 1996
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<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $(1,695,074) $ 3,215,418
Adjustments to reconcile net income (loss) to net cash
provided by operating activities
Depreciation 1,581,057 953,799
Net book value of disposed assets 46,296 --
Loss on sale of assets 3,340 --
Provision for deferred income taxes 213,167 (36,153)
Provision for deferred compensation 36,744 39,592
Effects of change in operating assets and liabilities:
Accounts receivable 232,014 (486,756)
Inventory (844,736) 550,074
Prepaid income taxes (1,073,099) --
Prepaid expenses 138,457 148,206
Other assets (3,214) (72,005)
Accounts payable 660,325 236,731
Accrued expenses 588,946 511,734
Deferred revenue -- 442,300
----------- -----------
Net cash provided (used) by operating activities (115,777) 5,502,940
----------- -----------
Cash flows from investing activities:
Purchases of property, plant and equipment (3,296,951) (2,217,785)
Proceeds from sale of assets 9,500 --
----------- -----------
Net cash used by investing activities (3,287,451) (2,217,785)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock, including tax benefit 46,818 420,389
----------- -----------
Net cash provided by financing activities 46,818 420,389
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Increase (decrease) in cash and cash equivalents (3,356,410) 3,705,544
Cash and cash equivalents - beginning of period 12,278,092 9,176,287
----------- -----------
Cash and cash equivalents - end of period $ 8,921,682 $12,881,831
=========== ===========
</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
September 30, 1997, the condensed consolidated statements of operations for the
three and nine months ended September 30, 1997 and 1996, the condensed
consolidated statement of stockholders' equity for the nine months ended
September 30, 1997, and the condensed consolidated statements of cash flows for
the nine 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 September
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 THIRD QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 1997 VS. THIRD
QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 1996
Revenue for the third quarter of 1997 decreased 3% over the same period in 1996.
Year-to-date revenue for 1997 is even with 1996. 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 1997, sales to
four companies comprised 59% of total revenue. Each of the four customers
contributed between 14% and 16% of total revenue. The Company sells to all of
the seven RBOC's.
Gross profit as a percentage of revenue was 54% for the third quarter of 1997
versus 49% for the same period in 1996. Year-to-date gross profit percentages
were 55% for both 1997 and 1996. The gross profit percentage for the third
quarter of 1996 was adversely impacted by costs incurred to support and upgrade
certain installed products pending the release of new products, increased
product warranty expenses, 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 $4,860,562 in
the third quarter of 1997 from $2,451,357 in 1996. As a percentage of revenue,
this represents 46% in 1997 and 23% in 1996. Year-to-date SG&A was $11,408,043
for 1997 and $7,041,341 for 1996 and represented 37% of revenue in 1997 and 23%
in 1996. SG&A increased $4,366,702 for the nine months ended September 30, 1997
over the same period last year. Approximately $1,910,000 of the increase was
attributable to additional employment and recruiting expenses for administrative
personnel to support current operations and increased sales, marketing and
product management personnel to support planned growth. In the current quarter
there was a $740,000 expense for accounts receivable determined to be not
collectible and approximately $215,000 in severance costs. The balance of the
year to date increase was primarily attributable to increased commissions due on
the sale of products containing licensed technology of approximately $557,000
and other costs related to current operations.
Research and development (R&D) expenses increased 57% to $3,022,363 for the
third quarter of 1997 from $1,920,638 for the same period in 1996. R&D increased
as a percentage of revenue to 29% from 18%. Year-to-date R&D expenses were
$8,860,087 for 1997 and $5,318,531 for 1996. As a percentage of revenue, this
represents 28% for 1997 and 17% for 1996. R&D increased $3,541,556 for the nine
months ended September 30, 1997 over the same period last year. During 1997 the
Company has incurred approximately $4,000,000 in R&D expense to develop an
Internet access product for its telecommunication company customers. The Company
anticipates increased R&D expenses in future quarters to support its existing
product lines and the ongoing development of the Internet access product.
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<PAGE> 9
As a result of the above factors, there was a loss from operations of $2,224,071
in the third quarter of 1997 compared to an income from operations of $1,006,471
in the third quarter of 1996. Third quarter income (loss) from operations
represents (21%) and 9% of revenue in 1997 and 1996, respectively. Year-to-date
results of operations was a loss of $3,118,306 for 1997 versus an income of
$4,853,733 in 1996. Year-to-date income (loss) from operations represents (10%)
and 16% 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 38% for the same period in 1996.
LIQUIDITY AND CAPITAL RESOURCES
Cash decreased by $3,356,410 during the first nine months of 1997 to $8,921,682
at September 30, 1997. Operating activities used $115,777 in cash. During the
same period in 1996, cash increased by $3,705,544 to $12,881,831 at September
30, 1996.
Net working capital was $15,774,661 at September 30, 1997 compared to
$19,090,815 at December 31, 1996. Current ratios on those dates were 3.3:1 and
4.5:1, respectively. The Company had no long-term debt at September 30, 1997 or
December 31, 1996.
Net capital expenditures were $3,296,951 for the first nine months of 1997 and
$2,217,785 for the same period in 1996. The Company opened an R&D facility in
North Carolina in 1997. The Company has incurred approximately $2,678,000 in
capital expenditures toward the development of the Company's Internet access
product. These capital expenditures include leasehold improvements, office
equipment and furnishings, test equipment, and computer and network equipment.
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. At September 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 profits (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.
Item 3. Quantitative and Qualitative Disclosure About Market Risk - inapplicable
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<PAGE> 11
Part II. Other Information
- ---------------------------
Items 1 - 5. Inapplicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
APPLIED INNOVATION INC.
Exhibit 11
Statement Regarding Computation of Earnings Per Share (unaudited)
For the nine months ended September 30, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Weighted average number of common shares outstanding 15,790,832 15,764,632
Add net shares issuable pursuant to stock options plans less
shares assumed repurchased at the average market price 24,436 101,089
----------- -----------
Number of shares for computation of primary earnings
per share 15,815,268 15,865,721
Add net shares issuable pursuant to stock options plans less
shares assumed repurchased at period end market price 0 0
----------- -----------
Number of shares for computation of fully diluted earnings
per share 15,815,268 15,865,721
=========== ===========
Net income (loss) for primary and fully diluted earnings per share $(1,695,074) $ 3,215,418
=========== ===========
Primary earnings (loss) per share $(.11) $.20
===== ====
Fully diluted earnings (loss) per share $(.11) $.20
===== ====
</TABLE>
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K - None
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<PAGE> 12
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)
November 11, 1997 /s/ Gerard B. Moersdorf, Jr.
- ----------------- -------------------------------------
Date Gerard B. Moersdorf, Jr.
Chairman of the Board, President,
Chief Executive Officer and Treasurer
(Principal Executive Officer)
November 11, 1997 /s/ William H. Largent
- ----------------- -------------------------------------
Date William H. Largent
Senior Vice President - Operations
and Chief Financial Officer
(Chief Financial Officer)
November 11, 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 8,921,682
<SECURITIES> 0
<RECEIVABLES> 7,525,145
<ALLOWANCES> 110,642
<INVENTORY> 3,850,657
<CURRENT-ASSETS> 22,500,283
<PP&E> 16,627,709
<DEPRECIATION> 3,993,309
<TOTAL-ASSETS> 35,255,333
<CURRENT-LIABILITIES> 6,725,622
<BONDS> 0
0
0
<COMMON> 157,908
<OTHER-SE> 28,172,438
<TOTAL-LIABILITY-AND-EQUITY> 35,255,333
<SALES> 31,170,693
<TOTAL-REVENUES> 31,170,693
<CGS> 14,020,868
<TOTAL-COSTS> 14,020,868
<OTHER-EXPENSES> 20,268,130
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,696,918)
<INCOME-TAX> (1,001,848)
<INCOME-CONTINUING> (1,695,070)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,695,070)
<EPS-PRIMARY> (.11)
<EPS-DILUTED> (.11)
</TABLE>
