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FORM 10-K
U.S. Securities and Exchange Commission
Washington, D.C. 20549
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT UNDER 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.
(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)
Issuer's telephone number: 614-798-2000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.01 PAR VALUE PER SHARE
(Title of class)
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, and (2) has been subject to the filing requirements for
at least the past 90 days. YES X NO
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Aggregate market value of voting stock held by non-affiliates of the registrant,
9,172,575 shares, based on the $7.06 closing sale price on March 6, 1998, was
$64,758,380.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date: 15,790,832 shares of Common
Stock were outstanding at March 6, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to the Stockholders for the fiscal
year ended December 31, 1997, are incorporated by reference in Part II.
Part III - Proxy Statement for 1998 Annual Meeting of Stockholders, in part, as
indicated.
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This Annual Report on Form 10-K contains forward-looking statements
within the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended, and Section 27A of the Securities Act of 1933, as amended. The words
"anticipate," "believe," "expect," "estimate," and "project" and similar words
and expressions identify forward-looking statements which speak only as of the
date hereof. Investors are cautioned that such statements involve risks and
uncertainties that could cause actual results to differ materially from
historical or anticipated results due to many factors, including, but not
limited to, the factors discussed in "Business - Business Risks." The Company
undertakes no obligation to publicly update or revise any forward-looking
statements.
PART I
ITEM 1. BUSINESS.
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GENERAL
Applied Innovation Inc. (the "Company") develops, manufactures and
markets network mediation and network bridging products and associated services
to support the operation, maintenance, administration and provisioning of the
internal data network that is used by telecommunications service providers to
manage elements in their customer service network systems. The Company is also
developing products which will assist telecommunications service providers in
handling the rapidly increasing Internet traffic.
The Company's predecessor was incorporated in 1983 and engaged
primarily in development and preliminary testing activities until September
1984. In June 1986, the Company was formed as a Delaware corporation and the
Company's predecessor, an Ohio corporation, was merged into the Company solely
for the purpose of effecting a change in domicile. In 1995, the Company formed
its wholly owned subsidiary, Applied Innovation International Inc., a U.S.
Virgin Islands corporation, to act as a foreign sales corporation to market the
Company's products outside of the United States.
The Company's executive offices and manufacturing facilities are
located at 5800 Innovation Drive, Dublin, Ohio, 43016, telephone (614) 798-2000.
THE COMPANY'S MARKETS
The Company's Data Communications Network (DCN) Products provide the
data network used to support Operations Support Systems needed to monitor and
maintain thousands of pieces of electronic equipment, or Network Elements, used
by telecommunications service providers. Network Elements provide the switching,
connections and support products required to transmit voice and data calls
through one or more Central Offices. Telecommunications service providers
continually upgrade and expand the equipment needed to provide service to their
customers. As each piece of new equipment is installed, it is connected to the
Company's data monitoring network that is used to report alarms, gather
performance information, and to provide test access and equipment reprogramming
for establishing and
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maintaining customer service. The Company's customers can use the Operations
Support Systems to perform a variety of tasks that include: fault management,
configuration management, performance management, security and inventory
management.
The Company is seeking to expand distribution for its DCN Products
outside the United States. The Company has taken early steps to establish a
local presence in China, which is rapidly becoming the world's biggest market
for telecommunications equipment. The Company believes that countries currently
building a telecommunications infrastructure will require centralized network
management and the supporting data communications capability supplied by the DCN
Products.
Over the past year and a half the Company has focused on designing,
developing and building its Access Products, which are Central Office compliant
Internet access solutions designed to redirect data traffic from telephone
company Central Office locations. Customers who utilize the Company's Access
Products will be able to off-load Internet data traffic from congested voice
traffic lines onto a data network, relieving communications lines originally
designed to carry voice, not data. The Company's Access Products Group is solely
focused on development of telecommunications solutions for Internet and
Enterprise systems needs. The market for the Company's Access Products is
comprised of the same telecommunications service providers the Company currently
serves.
The Company estimates that the Regional Bell Operating Companies
(RBOCs) control approximately half of the estimated 20,000 telecommunications
Central Office locations in the United States. The remaining locations are
controlled by a few large firms like GTE, Sprint, AT&T, Worldcom, MCI and over
1,000 smaller independent firms. Because of their relative size, demand for
product, and importance, the Company has concentrated its DCN Products marketing
efforts on the larger telecommunications service providers. The Company has
historically received a large percentage of its annual net sales from RBOCs. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Each telecommunications service provider has a finite number of Central
Office facilities which limit their total capacity for the Company's products.
To the extent that the Company achieves significant penetration with the
Company's products of any single customer's Central Office facilities, it cannot
anticipate substantial additional sales of those existing products to the
customer. Future domestic sales growth to these customers will depend on the
development of new products and new releases of existing products. Sales growth
will be derived from additional sales to other RBOCs, long distance phone
companies and competitive access providers. See "Business - Business Risks -
Risks Associated with Customer Concentration; Dependence on Telecommunications
Industry."
PRODUCTS
DATA COMMUNICATIONS NETWORK (DCN) PRODUCTS
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The DCN Products, marketed as the AISwitch(TM) Series 180, connect
multiple generations of telecommunications network equipment to computers that
monitor, control and analyze field conditions. The AISwitch Series 180
incorporates the latest high speed microprocessor and programmable gate
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array technology to bridge the hardware and software gaps between old and new
equipment. All vintages of equipment can be integrated with support systems. The
AISwitch Series 180 provides productivity gains and cost savings at both the
customer's Central Office and Operations Centers.
Within a typical telecommunications service region, there may be as
many as 10,000 Network Elements to interface with a variety of equipment using
various communications protocols. Communications protocols are standards which
describe the way in which data is transmitted between computer systems.
Replacing existing equipment and updating it to conform to newer standards takes
place on extended schedules of up to twenty years, with successive introductions
of new technologies. For this reason, many of the Central Office and local site
locations utilize multiple generations of equipment from different vendors, each
with unique operating conditions. The Company's products offer one of the most
comprehensive solutions available for connecting these dissimilar
telecommunications elements.
An unique capability of the AISwitch Series 180 and the Company's
technical organization is the ability to engineer custom interfaces for
telecommunications equipment produced by a variety of different manufacturers
for telecommunications service providers. Each AISwitch Series 180 includes a
wide variety of functions and options that are configured to fit client needs.
The key to the AISwitch Series 180 integration capability is its
flexible microprocessor controlled digital switching and protocol processing
capabilities. The AISwitch Series 180 permits the use of industry-standard, open
architecture network building blocks to more easily connect different computers,
Network Elements and other intelligent Central Office equipment with one or more
network destinations. The Company transforms a complex multi-vendor environment
into an easily managed seamless network to increase the total efficiency of
Operations, Administration, Maintenance and Provisioning (OAM&P) systems.
Applied View(TM) is the Company's open standards management system.
Applied View provides industry standard Simple Network Management Protocol
(SNMP) management of the OAM&P network, which connects Network Elements with
Operations Support Systems. Because Applied View is based on Hewlett-Packard
Company's Open View (TM) ("HP Open View(TM)), the same system can also monitor
other data communications networks and systems. Applied View also provides a
platform for Telecommunications Management Network (TMN), and Element Management
Layer (EML). Applied View enables customers to make basic configuration changes
to every AISwitch in their network from a single location. Applied View also
provides centralized configuration backup and control, and automatically stores
status, alias, destination and alarm events in the HP Open View(TM) database.
The Company has licensed technology from Cisco Systems, Inc. ("Cisco")
which allows the Company to integrate a Cisco router into the AISwitch. Cisco's
routing technology is the most widely used and allows the AISwitch to work
smoothly with the routing technology already in use by most of the Company's
customers.
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ACCESS PRODUCTS
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The Company's Access Products are designed to meet rigid Central Office
standards, redirecting network congestion away from the overcrowded Central
Office switches onto a data network connected directly to Internet Service
Providers (ISPs). The Access Products will provide RBOCs, ISPs and Enterprise
networks with cost-effective, scaleable data traffic management and enable them
to deliver greater remote access reliability and capability to their end users.
The Company's AI 4800 is currently available, while the AI5800 is currently
expected to be released during the fourth quarter of 1998.
The AI 4800 is a Central Office-based product that diverts Internet
data traffic away from congested voice traffic lines. It provides a logical and
direct route to a data network by moving modems to the originating Central
Office. As a result, it provides low cost, dependable Internet access and moves
data traffic from traditional voice lines to either a Frame Relay or
Asynchronous Transfer Mode (ATM) Network. The AI 4800 also acts as an efficient
remote access concentrator, off-loading both analog and digital data from voice
networks. This same platform can be used to develop new offerings based on
advanced services such as integrated data, voice and video, along with higher
bandwidth technologies or high-speed wireless. It is anticipated that
significant gains can be realized by transporting Internet access traffic on
packet-switched versus circuit-switched networks.
The AI 5800 is a larger follow-on Access Product than the AI 4800 and
the typical system handles up to 624 modems per shelf, with up to 10 shelves per
typical 6,240 modem system. Like the AI 4800, the AI 5800 is scaleable and
expandable to fit customer needs. Further, the AI 5800 is upgradeable to handle
voice over Internet Protocol (IP). Designed to fit into an existing
infrastructure, the AI 5800 is configured with high port density to reduce the
product's footprint, thus saving space costs. It is also designed to be in
compliance with Bellcore's Network Equipment - Building Systems (NEBS), and is a
fully scaleable and expandable system, providing a robust data traffic solution.
MANUFACTURING AND OPERATIONS
The printed circuit boards of the Company's products are proprietary
designs of the Company. Printed circuit boards and power supplies used in each
of the Company's product families are manufactured by third parties on a
contract basis and standard electronic components are purchased from a variety
of vendors. The Company is not dependent upon any of these manufacturers for its
printed circuit boards or parts inventory as there are alternative sources
available. Schedules based on order backlog and favorable prices determine when
and from whom components are purchased. The Company utilizes an automated
inventory control system and a streamlined sales reporting and forecasting
system.
The printed circuit boards and components are sent to job shop assembly
firms to provide assembly and wave soldering services. Final assembly and
testing of the products is conducted in the Company's Dublin, Ohio production
facility. Although some physical and electrical inspection of the printed
circuit boards is performed at the off-site assembly houses, final quality
control is accomplished at the Company's facility.
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The Company has made significant investments to attain quality
assurance consistent with stringent industry standards. The Company utilizes
sophisticated testing facilities for its products that are designed to simulate
extreme temperature and natural disaster conditions in order to validate the
integrity of these products in unforeseen circumstances so that service
interruptions are avoided. The manufacturing and quality assurance programs that
the Company utilizes are designed to be in compliance with NEBS, Generic
Equipment Requirements and the International Standards Organization 9001 ("ISO
9001") guidelines.
SALES AND MARKETING
The Company's products and services are sold primarily through its own
sales force, except for an independent sales agent in Canada. The Company is
exploring alternative distribution channels to allow sales of the Company's
products to markets that are not easily accessible nor cost effective for its
own sales force. In addition to the Dublin, Ohio headquarters, the Company
maintains sales offices in Atlanta, Chicago, Dallas, Denver, New York, Raleigh
and San Francisco.
The Company's sales and marketing staff consists of a Senior Vice
President of Sales and Marketing, Regional Sales Managers, District Sales
Managers, Sales Engineers, Product Line Managers and an administrative staff.
Sales leads are currently generated primarily through target marketing to
telecommunications service providers, direct mail and trade shows. Sales leads
are followed up by personal contact from the Company's marketing staff. If
sufficient interest exists, an on-site visit may be scheduled for the purpose of
making a sales presentation or actual demonstration of the product.
The technical complexity of the Company's products and the relative
large size of customers creates a long sales cycle for the Company's products.
The technical nature of the products and Central Office environment also
mandates a very technical sales force. The Company's sales force receives an
incentive based compensation package where they are rewarded for increased
levels of sales.
The Company is seeking a strategic partner to leverage the expanded
development of its Access Products, which includes the AI 4800 and AI 5800. The
Company plans to initiate discussions with companies that have significant
telecommunications industry expertise with demonstrated sales and marketing
strengths.
RESEARCH AND DEVELOPMENT
The Company's research and development activity is coordinated with
product management to create product development teams which focus on customer
requirements. The DCN team focuses on enhancing the AISwitch for its operations
support role. The Access Products team focuses on creating products to help
telecommunications service providers handle the burgeoning data traffic caused
by the explosion of the Internet.
Enhancements to the AISwitch(TM) are focused on increasing its capacity
and adapting to the emerging Open Systems Interconnection (OSI) applications
being driven into Network Elements by worldwide standardization efforts. At the
same time, the AISwitch(TM) is being enhanced to accommodate
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older data communication standards in order to broaden its range of application.
The DCN Products team consists of 50 engineers.
The Access Products, represented by the AI 4800 and AI 5800, are
strategic new developments which will expand the Company's technology into Frame
Relay and ATM, emerging worldwide standards for carrying all types of
communications. The AI 5800 required an increased development capability which
was met by the establishment of the Research and Development Center in the
Raleigh, North Carolina area, where several world-class telecommunications and
data communication centers have attracted a pool of talented hardware and
software engineers. The Access Products team consists of 48 engineers.
The Company spent $12,897,072, $7,646,796, and $5,979,252 on
Company-sponsored research and development during the fiscal years ended
December 31, 1997, 1996, and 1995, respectively. Research and development
expenditures represented approximately 27.6%, 18.6%, and 16.6% of annual net
sales in fiscal 1997, 1996, and 1995, respectively. The Company continues to
expect to commit a substantial amount of resources and cash to its research and
development efforts during 1998. See "Business - Business Risks - New Products
and Rapid Technological Change; Need to Manage Product Transitions."
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CUSTOMER SERVICE AND WARRANTY
The Company offers its customers a variety of support services such as
program management, training, detail engineering, installation and test and
turn-up. Program managers interface between the Company and customers for
installation of new products and service and upgrades of existing products. The
program manager is also responsible for assuring that all possible circumstances
are anticipated prior to certifying the system for full operation. Following
installation, the program manager continues to monitor the customer's system to
ensure proper satisfaction.
The Company designs training programs to educate the customer's system
administration, operations and maintenance personnel to operate the system.
Classes are available, either on-site or at the Company's headquarters.
Additional training is also offered to the customer during system upgrades and
for new operations personnel.
The Company's field service department provides custom design and
installation services for telecommunications network equipment. The Company
believes that its field service department complements and enhances the sale of
its DCN Products.
The AI Switch(TM) carries a one year warranty with guaranteed overnight
factory replacement service for circuit boards or system modules in the event of
equipment failure. In addition, for an additional charge, on-site spares are
available for those customers who require immediate replacement. The Company
also provides a 24-hour Service Hotline for instant access to the Company's
field service and support departments. It also offers a toll-free 800 number.
Warranty expense represented approximately 3.6%, 10.2%, and 1.7% of
annual net sales in 1997, 1996, and 1995. Warranty expense increased in 1996
because of repair costs of units which the Company agreed to repair to avoid
future product difficulties and to demonstrate the Company's quality assurance
commitment to customers. See "Business - Business Risks - Risk of Product
Defects."
COMPETITION
There are numerous manufacturers of data communications equipment.
Manufacturers of these products frequently specialize their products for
specific applications and could enter the Company's target markets. Significant
competition exists from several well-established companies having resources
greatly superior to those of the Company as well as from relatively new but
aggressive companies.
Competition for the Company's DCN Products has traditionally come
primarily from suppliers of telecommunications switching and transmission
equipment. Lucent Technologies has a product line, Datakit, which competes
directly with the Company's products when selling into the telecommunications
industry. Competition also comes from other data communications suppliers, such
as Cisco Systems, Inc., Dantel, Bay Networks, and Harris Corporation's
Westronics division. In some cases, newer products or redesigned older products
from these suppliers compete with the Company's products.
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Competition for the Company's Access Products also comes from suppliers
of telecommunications equipment and data communications suppliers. Competitors
include, but are not limited to, companies such as Lucent Technologies, Cisco
Systems, Inc., and Northern Telecom. The Company is actively seeking a strategic
partner to help market the Access Products. See "Business Business Risks -
Competition."
PERSONNEL
As of February 27, 1998, the Company had 258 full-time and part-time
employees. The Company's employees are distributed among the following
departments: Sales and Marketing (26); Research and Development (104); Customer
Service (54); Manufacturing (46) and Operations (28). The Company anticipates
that it will continue to increase the number of its employees as it grows.
BUSINESS RISKS
The Company desires to take advantage of the "safe harbor" provisions
of the Private Securities Litigation Reform Act of 1995. In addition to the
other information in this report, readers should carefully consider that the
following important factors, among others, in some cases have affected, and in
the future could affect, the Company's actual results and could cause the
Company's actual consolidated results of operations for the year ended December
31, 1998, and beyond, to differ materially from those expressed in any
forward-looking statements made by, or on behalf of, the Company.
Risks Associated with Customer Concentration; Dependence on
Telecommunications Industry. A significant portion of the Company's revenues in
each fiscal quarter since inception has been derived from substantial orders
placed by large organizations, such as the RBOCs. As a result, the Company's net
sales often have been concentrated among a relatively small number of customers.
In fiscal 1997, 1996, and 1995, net sales from the Company's five, three and
four largest customers represented approximately 76%, 53%, and 67%,
respectively, of the Company's total net sales. The Company expects that it will
continue to be dependent upon a limited number of customers for a significant
portion of its revenues in future periods. None of the Company's customers are
contractually obligated to license or purchase additional products or services
from the Company. As a result of this customer concentration, the Company's
business, operating results and financial condition could be materially
adversely affected by the failure of anticipated orders to materialize and by
deferrals or cancellations of orders. In addition, there can be no assurance
that revenue from customers that have accounted for significant net sales in
past periods, individually or as a group, will continue, or if continued will
reach or exceed historical levels in any future period. Furthermore, such
customers are concentrated in the telecommunications industry. Accordingly, the
Company's future success depends upon the capital spending patterns of such
customers and the continued demand by such customers for the Company's products
and services. The Company's operating results may in the future be subject to
substantial period-to-period fluctuations as a consequence of such customer
concentration and factors affecting capital spending in the telecommunications
industry.
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Product Concentration. Revenue from the sale, service and support of
the Company's AISwitch family of products has accounted for substantially all of
the Company's net sales since inception. The Company believes that revenue from
the sale, service and support of DCN Products will continue to account for
substantially all of the Company's net sales in fiscal 1998. Therefore, the
Company's future operating results, particularly in the near term, are
significantly dependent upon the continued market acceptance of the AISwitch,
improvements to the AISwitch framework and new and enhanced development tools
and network operations support. There can be no assurance that the AISwitch will
continue to achieve market acceptance or that the Company will be successful in
developing, introducing or marketing improvements to the AISwitch framework or
new or enhanced development tools and applications. The life cycles of the DCN
Products, including development tools and applications, are difficult to
estimate due in large part to the recent emergence of many of the Company's
markets, the effect of future product enhancements and competition. A decline in
the demand for the DCN Products as a result of competition, technological change
or other factors would have a material adverse effect on the Company's business,
operating results and financial condition.
New Products, Research and Development, and Rapid Technological Change;
Need to Manage Product Transitions. The market for the Company's products is
characterized by rapidly changing technologies, evolving industry standards,
frequent new product introductions and rapid changes in customer requirements.
The introduction of products embodying new technologies and the emergence of new
industry standards and practices can render existing products obsolete and
unmarketable. As a result, the life cycles of the Company's products are
difficult to estimate. The Company's future success will depend on its ability
to enhance its existing products and to develop and introduce, on a timely and
cost-effective basis, new products and product features that keep pace with
technological developments and emerging industry standards and address the
increasingly sophisticated needs of its customers. The Company is attempting to
ensure future success by investing heavily in its research and development
effort. However, there can be no assurance that the Company will be successful
in developing and marketing new products or product features that respond to
technological change or evolving industry standards, that the Company will not
experience difficulties that could delay or prevent the successful development,
introduction and marketing of these new products and features, or that its new
products or product features will adequately meet the requirements of the
marketplace and achieve market acceptance. If the Company is unable, for
technological or other reasons, to develop and introduce enhancements of
existing products or new products in a timely manner, the Company's business,
operating results and financial condition will be materially adversely affected.
The introduction or announcement of products by the Company or one or
more of its competitors embodying new technologies, or changes in industry
standards or customer requirements, could render the Company's existing products
obsolete or unmarketable. The introduction of new or enhanced versions of its
products requires the Company to manage the transition from older products in
order to minimize disruption in customer ordering. There can be no assurance
that the introduction or announcement of new product offerings by the Company or
one or more of its competitors will not cause customers to defer purchasing
existing Company products. Such deferment of purchases could have a material
adverse effect on the Company's business, operating results and financial
condition.
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Competition. Most of the Company's current and potential competitors
have longer operating histories and significantly greater financial, technical,
sales, customer support, marketing and other resources, as well as greater name
recognition and a larger installed base of their products and technologies than
the Company. There can be no assurance that the Company's current or potential
competitors will not develop products comparable or superior to those developed
by the Company or adapt more quickly than the Company to new technologies,
evolving industry trends or changing customer requirements. There can be no
assurance that the Company will be able to compete successfully against current
and future competitors or that competitive pressures faced by the Company will
not have a material adverse effect on its business, operating results and
financial condition.
Dependence Upon Proprietary Technology; Risk of Third Party Claims of
Infringement. The Company's success and ability to compete is dependent in part
upon its proprietary software technology. The Company relies on a combination of
trade secret, copyright and trademark laws, nondisclosure and other contractual
agreements and technical measures to protect its proprietary rights. The Company
currently has no patents or patent applications pending. Despite the Company's
efforts to protect its proprietary rights, unauthorized parties may attempt to
copy aspects of the Company's products or to obtain and use information that the
Company regards as proprietary. There can be no assurance that the steps taken
by the Company to protect its proprietary technology will prevent
misappropriation of such technology, and such protections may not preclude
competitors from developing products with functionality or features similar to
the Company's products. In addition, effective copyright and trade secret
protection may be unavailable or limited in certain foreign countries. While the
Company believes that its products and trademarks do not infringe upon the
proprietary rights of third parties, there can be no assurance that the Company
will not receive future communications from third parties asserting that the
Company's products infringe, or may infringe, the proprietary rights of third
parties. The Company expects that software product developers will be
increasingly subject to infringement claims as a number of products and
competitors in the Company's industry segment grows and the functionality of
products in different industry segments overlap. Any such claims, with or
without merit, could be time-consuming, result in costly litigation and
diversion of technical and management personnel, cause product shipment delays
or require the Company to develop non-infringing technology or enter into
royalty or licensing agreements. Such royalty or licensing agreements, if
required, may not be available on terms acceptable to the Company or at all. In
the event of a successful claim of product infringement against the Company and
failure or inability of the Company to develop non-infringing technology or
license the infringed or similar technology, the Company's business, operating
results and financial condition could be materially adversely affected. The
Company relies on certain software that it licenses from third parties,
including software that is integrated with internally developed software and
used in the Company's products to perform key functions. There can be no
assurance that these third party software licenses will continue to be available
to the Company on commercially reasonable terms or at all. Although the Company
believes that alternative software is available from other third-party
suppliers, the loss of or inability to maintain any of these software licenses
or the inability of the third parties to timely and cost-effectively enhance
their products in response to changing customer needs, industry standards or
technological developments could result in delays or reductions in product
shipments by the Company until equivalent software could be developed internally
or identified, licensed and integrated, which would have a material adverse
effect on the Company's business, operating results and financial condition.
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Reliance on Suppliers. The Company purchases raw material and licenses
technology from a number of domestic and foreign sources. The Company believes
that currently there are acceptable alternatives to the suppliers of raw
material and technology used in its products, with the exception of network
routing products supplied by Cisco Systems, Inc. The Company currently purchases
network routing products and licenses technology regarding the same from Cisco
Systems, Inc. pursuant to a Technology Agreement. The term of the Technology
Agreement expires on December 31, 1999 and automatically renews for one year
periods, unless either party elects not to renew. Additionally, the Technology
Agreement may be terminated by either party for any reason upon six months
notice. The Company believes that its customers place a high value on the
incorporation of network routing products and technology from Cisco Systems,
Inc. into the Company's products. While the Company believes that it could
obtain similar quality network routing products and technology from other
vendors, the termination of the Technology Agreement could materially adversely
affect the acceptance of the Company's products, which could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Future Capital Needs; Uncertainty of Additional Financing. The Company
currently anticipates that its existing cash, cash equivalents, cash to be
generated from future operations, and funds which may be obtained from future
financing activities will provide sufficient capital to meet the business needs
of the Company. See "Management's Discussion and Analysis of Financial Condition
and the Results of Operations - Liquidity and Capital Resources." The Company
may need to raise additional funds through public or private debt or equity
financings in order to take advantage of unanticipated opportunities, including
more rapid expansion or acquisitions of complementary businesses or
technologies, or to develop new or enhanced services and related products or
otherwise respond to unanticipated competitive pressures. If additional funds
are raised through the issuance of equity securities, the percentage ownership
of the then current stockholders of the Company may be reduced and such equity
securities may have rights, preferences or privileges senior to those of the
holders of the Company's Common Stock. There can be no assurance that additional
financing will be available on terms favorable to the Company, or at all. If
adequate funds are not available or are not available on acceptable terms, the
Company may not be able to take advantage of unanticipated opportunities,
develop new or enhanced services and related products or otherwise respond to
unanticipated competitive pressures and the Company's business, operating
results and financial condition could be materially adversely affected.
Future Operating Results Uncertain. Although the Company has previously
experienced growth in revenues and net income, the Company expects that
historical growth rates are not sustainable and such growth rates should not be
considered indicative of future growth, if any. There can be no assurance that
the Company's revenues will grow or be sustained in future periods or that the
Company will be profitable in any future period.
Need for Strategic Partner for the Company's Access Products. Over the
past year and a half the Company has been designing, developing and building its
Access Products Group. Through December 31, 1997, the Company had spent
approximately $7.4 million developing this line of products primarily funded
through operating cash flow and cash reserves. The Company is currently seeking
a strategic partner to fully
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<PAGE> 13
develop this product opportunity, primarily for the sales and marketing of its
Access Products. The Company's failure to locate a strategic partner for the
Access Products Group could materially adversely affect the Company's ability to
market and sell these products, which could have a material adverse effect on
the Company's business, financial condition and results of operations.
Risk of Product Defects. Products as complex as those offered by the
Company may contain defects or failures when introduced or when new versions or
enhancements are released. The Company has in the past discovered defects in
certain of its products. Although the Company has remedied all known material
defects in its products, there can be no assurance that, despite testing by the
Company and its customers, errors will not be found in existing or new products
or releases, resulting in delay or loss of revenue, loss of market share or
failure to achieve market acceptance or substantial warranty expenses. Any such
occurrence could have a material adverse effect upon the Company's business,
operating results and financial condition.
Potential Fluctuations in Quarterly Results; Seasonality. The Company's
quarterly operating results have in the past and will in the future vary
significantly depending on factors such as the timing of significant orders and
shipments, capital spending patterns of the Company's customers, changes in
pricing policies by the Company or its competitors, the lengthy sales cycle of
the Company's products, increased competition, changes in operating expenses,
personnel changes, demand for the Company's products, the number, timing and
significance of new product and product enhancement announcements by the Company
and its competitors, the ability of the Company to develop, introduce and market
new and enhanced versions of its products on a timely basis, the mix of direct
and indirect sales and general economic factors, among others. A significant
portion of the Company's revenues have been, and will continue to be, derived
from substantial orders placed by large organizations, such as the RBOCs, and
the timing of such orders and their fulfillment has caused and will continue to
cause material fluctuations in the Company's operating results, particularly on
a quarterly basis. Due to the foregoing factors, quarterly net sales and
operating results have been and will continue to be difficult to forecast.
Revenues are also difficult to forecast because the Company's sales cycle, from
initial evaluation to product shipment, varies substantially from customer to
customer. For these and other reasons, the sales cycle associated with the
purchase of the Company's products is typically lengthy and subject to a number
of significant risks, including customers' budgetary constraints and internal
acceptance reviews, over which the Company has little or no control. The
Company's expense levels are based, in part, on its expectations as to future
revenue levels. If revenue levels are below expectations, operating results are
likely to be materially adversely affected. In particular, because only a small
portion of the Company's expenses varies with net sales, net income (loss) may
be disproportionately affected by a reduction in net sales. The Company's
business has experienced and is expected to continue to experience significant
seasonality, in part due to an increase in capital expenditures by customers in
certain quarters. Based upon all of the foregoing, the Company believes that
quarterly net sales and operating results are likely to vary significantly in
the future and that period-to-period comparisons of its results of operations
are not necessarily meaningful and should not be relied upon as indications of
future performance. Further, it is likely that in some future quarter, the
Company's net sales or operating results will be below the expectations of
public market analysts and investors. In such event, the price of the Company's
Common Stock could be materially adversely affected.
- 13 -
<PAGE> 14
Management of Growth. The Company has experienced a period of rapid
sales and customer growth and an expansion in the number of its employees, the
scope of its operating and financial systems and the geographic area of its
operations. This growth has resulted in new and increased responsibilities for
management personnel and has placed and continues to place a significant strain
upon the Company's management, operating and financial systems and resources.
Although the Company believes that there are currently no existing material
weaknesses, to accommodate recent growth and to compete effectively and manage
future growth, if any, the Company will be required to continue to implement and
improve operational, financial and management information systems, procedures
and controls on a timely basis and in such a manner as is necessary to
accommodate the increased number of transactions and customers and the increased
size of the Company's operations. Management of future growth, if any, will also
require that the Company continuously expand, train, motivate and manage its
work force. These demands will require the addition of new management personnel.
The Company's future success will depend to a significant extent on the ability
of its current and future executive officers to operate effectively, both
independently and as a group. There can be no assurance that the Company's
personnel, systems, procedures and controls will be adequate to support the
Company's existing and future operations. Any failure to implement and improve
the Company's operational, financial and management systems or to expand, train,
motivate or manage employees could have a material adverse effect on the
Company's business, operating results and financial condition.
Dependence on Key Personnel. The Company's success depends to a
significant degree upon the continuing contributions of its key management,
sales, professional services, customer support and product development
personnel. In particular, the Company would be materially adversely affected if
it were to lose the services of Gerard B. Moersdorf, Jr., Chief Executive
Officer, President, Treasurer and a director of the Company, who has provided
significant leadership and direction to the Company since its inception. The
Company has obtained key man life insurance on the life of Mr. Moersdorf in the
amount of $1,000,000 payable to the Company. The loss of key management or
technical personnel could adversely affect the Company. The Company believes
that its future success will depend in large part upon its ability to attract
and retain highly-skilled managerial, sales, professional services, customer
support and product development personnel. The Company has at times experienced
and continues to experience difficulty in recruiting qualified personnel.
Competition for qualified personnel is intense, and there can be no assurance
that the Company will be successful in attracting and retaining such personnel.
In addition, there are only a limited number of qualified professional services
and customer support engineers, and competition for such individuals is
especially intense. In addition, competitors have in the past and may in the
future attempt to recruit the Company's employees. Failure to attract and retain
key personnel could have a material adverse effect on the Company's business,
operating results and financial condition.
Limited Market; Volatility of Stock Price. Although the Company is
listed on the Nasdaq National Market, there can be no assurance that an active
or liquid trading market in the Common Stock will continue. The market price of
the shares of Common Stock is likely to be highly volatile and may be
significantly affected by factors such as actual or anticipated fluctuations in
the Company's operating results, announcements of technological innovations, new
products or new contracts by the Company or its competitors, developments with
respect to copyrights or proprietary rights, general market conditions and other
factors. In addition, the stock market has from time to time experienced
significant
- 14 -
<PAGE> 15
price and volume fluctuations that have particularly affected the market prices
for the common stocks of technology companies. These types of broad market
fluctuations may adversely affect the market price of the Company's Common
Stock. In the past, following periods of volatility in the market price of a
company's securities, securities class action litigation has often been
initiated against such company. Such litigation could result in substantial
costs and a diversion of management's attention and resources, which could have
a material adverse effect upon the Company's business, operating results and
financial condition.
Anti-Takeover Provisions; Certain Provisions of Delaware Law;
Certificate of Incorporation and By-Laws. Certain provisions of Delaware law,
the Company's Certificate of Incorporation and By-Laws could have the effect of
making it more difficult for a third party to acquire, or of discouraging a
third party from attempting to acquire, control of the Company. The Company's
By-Laws provide for the Board of Directors to be divided into three classes of
directors serving staggered three-year terms. Such classification of the Board
of Directors expands the time required to change the composition of a majority
of directors and may tend to discourage a proxy contest or other takeover bid
for the Company. Additionally, the directors, executive officers and existing
principal stockholders of the Company and their affiliates collectively own
approximately 43.1% of the outstanding the Company's Common Stock. Such
concentration of ownership may have the effect of delaying or preventing a
change in control of the Company.
Concentration of Stock Ownership. The present directors, executive
officers and principal stockholders of the Company and their affiliates
beneficially own approximately 43.1% of the outstanding shares of the Company's
Common Stock. In particular, Gerard B. Moersdorf, Jr. and his spouse own
approximately 41.5% of the outstanding shares of Common Stock. As a result,
these stockholders are able to exercise significant influence over matters
requiring stockholder approval, including the election of directors and approval
of significant corporate transactions. Such concentration of ownership may have
the effect of delaying or preventing a change in control of the Company.
ITEM 2. PROPERTIES.
-----------
The Company headquarters is a 115,000 square foot modern corporate
office and manufacturing facility in Dublin, Ohio. All of the Company's
manufacturing, administrative and research and development activities for the
DCN Products and a substantial portion of its marketing activities are conducted
at this location. The Company owns the building and the approximately 33 acres
of land on which it is situated.
The Company leases approximately 24,000 square feet of office space in
Morrisville, North Carolina, used primarily for research and development
activities for the Access Products. The lease for the Morrisville facility
commenced in February 1997 and has a five year term.
ITEM 3. LEGAL PROCEEDINGS.
------------------
Not applicable.
- 15 -
<PAGE> 16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
----------------------------------------------------
Not applicable.
- 16 -
<PAGE> 17
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
----------------------------------------------------------------------
Applied Innovation Inc. common stock has been traded in the
over-the-counter market since 1986. The common stock was traded on the NASDAQ
OTC Bulletin Board until May 18, 1993. From May 18, 1993 to November 26, 1993
the common stock was traded on the NASDAQ Small Cap Market. On November 29, 1993
the common stock began trading on the NASDAQ National Market. The following
table sets forth, for the periods indicated, the high and low bid prices for
Applied Innovation Inc. common stock. The prices shown represent quotations
between dealers, without adjustment for retail markups, markdowns or commissions
and may not represent actual transactions.
1997 1996
---- ----
High Low High Low
- ----------------------------------------------------------------------
Q1 $6.50 $4.38 $13 $8
- ----------------------------------------------------------------------
Q2 $6.38 $3.25 $14 $8.25
- ----------------------------------------------------------------------
Q3 $4.75 $3.75 $10.875 $7.875
- ----------------------------------------------------------------------
Q4 $8.13 $4.13 $10.125 $5.75
- ----------------------------------------------------------------------
At March 6, 1998, the Company had 801 stockholders of record.
The Company has not paid any cash dividends and presently anticipates
that all of its future earnings will be retained for development of its
business. The Company does not anticipate paying cash dividends on its Common
Stock in the foreseeable future. The payment of any future dividends would be at
the discretion of the Company's Board of Directors and would depend upon, among
other things, future earnings, operations, capital requirements, the general
financial condition of the Company and general business conditions. Although the
Company's ability to pay dividends is not currently restricted by any of its
financing agreements, the Company may be subject to such restrictions in the
future.
ITEM 6. SELECTED FINANCIAL DATA.
------------------------
The information required by this item is included under the caption
"Financial Highlights" in the Company's Annual Report to Stockholders and is
incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-----------------------------------------------------------------------
OF OPERATIONS.
--------------
The information required by this item is included under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the Company's Annual Report to Stockholders and is incorporated
herein by reference.
- 17 -
<PAGE> 18
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
-----------------------------------------------------------
None.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
--------------------------------------------
The information required by this item is included under the caption
"Consolidated Financial Statements" in the Company's Annual Report to
Stockholders and is incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURE.
---------------------
None.
- 18 -
<PAGE> 19
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
---------------------------------------------------
The information appearing under the caption "ELECTION OF DIRECTORS" on
pages 4 through 11 of the Company's Proxy Statement relating to the Company's
Annual Meeting of Stockholders to be held on April 23, 1998 (the "Proxy
Statement"), and the information appearing under the caption "SECTION 16(a)
BENEFICIAL OWNERSHIP REPORTING COMPLIANCE" on page 18 of the Proxy Statement is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
-----------------------
The information appearing in the Proxy Statement under the caption
"ELECTION OF DIRECTORS - Executive Compensation" on pages 7 and 11 of the Proxy
Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
---------------------------------------------------------------
The information appearing in the Proxy Statement under the caption
"OWNERSHIP OF COMMON STOCK BY PRINCIPAL STOCKHOLDERS" on page 2, and under the
caption "SECURITY OWNERSHIP OF MANAGEMENT" on page 3 of the Proxy Statement, is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
-----------------------------------------------
The information appearing in the Proxy Statement under the caption
"ELECTION OF DIRECTORS - Related Party Transactions" on page 10 is incorporated
herein by reference.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
--------------------------------------- ------------------------
(a)(1) The following documents are filed as part of this report:
Consolidated Balance Sheets as of December 31, 1997 and 1996
Consolidated Statements of Operations for the years ended December 31,
1997, 1996, and 1995
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1997, 1996, and 1995
Consolidated Statements of Cash Flows for the years ended December 31,
1997, 1996, and 1995
Notes to Consolidated Financial Statements
- 19 -
<PAGE> 20
(a)(2) No schedules are included because of the absence of the conditions
under which they are required or because the required information is
included in the financial statements or the notes thereto.
(a)(3) Exhibits: The following exhibits are filed as part of this report:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
PAGE
<S> <C>
3.1 Certificate of Incorporation of the Company..................................................(1)
3.2 By-laws of the Company, as amended............................................................(1)
10.1 Company's Amended and Restated 1986 Incentive Stock
Option Plan, including form of Stock Option Agreement........................................(1)*
10.2 Company's 1986 Amended and Restated Non-Statutory
Stock Option Plan, including form of Stock Option Agreement..................................(1)*
10.3 Form of Confidentiality, Assignment and Non-Competition
Agreement between the Company and employee officers..........................................(1)*
10.4 Technology Agreement, dated November 12, 1996, between
the Company and Cisco Systems, Inc............................................................(5)
10.5A Letter Agreement between the Company and William H. Largent
regarding employment.........................................................................(5)*
10.5B Employment Agreement between the Company and William H. Largent..............................(5)*
10.6 Letter Agreement between the Company and
John M. Spiegel re: employment...............................................................(1)*
10.7 Employment Agreement between the Company and
William J. Mrukowski.........................................................................(5)*
10.8 Form of Indemnification Agreement between the Company
and officers and directors...................................................................(2)*
10.9 Schedule of Indemnification Agreements.......................................................(2)*
10.10 Omitted
10.11 Omitted
</TABLE>
- 20 -
<PAGE> 21
<TABLE>
<S> <C>
10.12 Omitted
10.13 Company's 1996 Stock Option Plan.............................................................(4)*
11 Statement re: computation of earnings per share...............................................(5)
13 Portions of the Annual Report to Stockholders.................................................(5)
23.1 Consent of KPMG Peat Marwick LLP..............................................................(5)
24 Powers of Attorney............................................................................(5)
27 Financial Data Schedule.......................................................................(5)
</TABLE>
--------------------
(1) Previously filed with the same exhibit number with the
Company's Form 10-SB filed March 10, 1993 and incorporated
herein by reference.
(2) Previously filed with the same exhibit number with the
Company's Form 10-KSB filed March 31, 1994 and incorporated
herein by reference.
(3) Previously filed with the same exhibit number with the
Company's Form 10-K filed March 31, 1995 and incorporated
herein by reference.
(4) Previously filed with the same exhibit number with the
Company's Form 10-K filed March 31, 1996 and incorporated
herein by reference.
(5) Filed herewith.
* Management contract or compensatory plan or arrangement
required to be filed as an exhibit to this form.
(b) No reports on Form 8-K were filed in the fourth quarter of 1997.
(c) Exhibits - The exhibits to this report follow the signature page.
(d) Financial Statement Schedules - None.
- 21 -
<PAGE> 22
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: March 27, 1998 By: /s/ Gerard B. Moersdorf, Jr.
-------------------------------
Gerard B. Moersdorf, Jr., Chairman,
President and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Gerard B. Moersdorf, Jr. Chairman, President March 27, 1998
- ------------------------------ and Treasurer (Principal Executive
Gerard B. Moersdorf, Jr. Officer)
/s/ William H. Largent Senior Vice President of March 27, 1998
- ------------------------------ Operations and Chief Financial
William H. Largent Officer (Principal Financial
Officer)
/s/ John M. Spiegel Controller March 27, 1998
- ------------------------------ (Principal Accounting Officer)
John M. Spiegel
*James H. Blough
- ------------------------------
James H. Blough Director March 27, 1998
*Curtis A. Loveland
- ------------------------------
Curtis A. Loveland Director March 27, 1998
*Gerard B. Moersdorf, Sr.
- ------------------------------
Gerard B. Moersdorf, Sr. Director March 27, 1998
*Richard W. Oliver
- ------------------------------
Richard W. Oliver Director March 27, 1998
*Thomas W. Huseby
- ------------------------------
Thomas W. Huseby Director March 27, 1998
</TABLE>
- 22 -
<PAGE> 23
<TABLE>
<S> <C> <C>
*Alexander B. Trevor
- ------------------------------
Alexander B. Trevor Director March 27, 1998
</TABLE>
*By: /s/ Gerard B. Moersdorf, Jr.
-----------------------------
Gerard B. Moersdorf, Jr.
(Attorney-in-Fact)
- 23 -
<PAGE> 24
<TABLE>
<CAPTION>
Applied Innovation Inc.
Form 10-K Exhibit Index
EXHIBIT NO. DESCRIPTION
PAGE
<S> <C>
3.1 Certificate of Incorporation of the Company...................................................(1)
3.2 By-laws of the Company, as amended............................................................(1)
10.1 Company's Amended and Restated 1986 Incentive Stock
Option Plan, including form of Stock Option Agreement........................................(1)*
10.2 Company's 1986 Amended and Restated Non-Statutory
Stock Option Plan, including form of Stock Option Agreement..................................(1)*
10.3 Form of Confidentiality, Assignment and Non-Competition
Agreement between the Company and employee officers..........................................(1)*
10.4 Technology Agreement, dated November 12, 1996, between
the Company and Cisco Systems, Inc............................................................(5)
10.5A Letter Agreement between the Company and William H. Largent
regarding employment.........................................................................(5)*
10.5B Employment Agreement between the Company and William H. Largent..............................(5)*
10.6 Letter Agreement between the Company and
John M. Spiegel re: employment...............................................................(1)*
10.7 Employment Agreement between the Company and
William J. Mrukowski.........................................................................(5)*
10.8 Form of Indemnification Agreement between the Company
and officers and directors...................................................................(2)*
10.9 Schedule of Indemnification Agreements.......................................................(2)*
10.10 Omitted
10.11 Omitted
10.12 Omitted
10.13 Company's 1996 Stock Option Plan.............................................................(4)*
11 Statement re: computation of earnings per share...............................................(5)
13 Portions of the Annual Report to Stockholders.................................................(5)
23.1 Consent of KPMG Peat Marwick LLP..............................................................(5)
24 Powers of Attorney............................................................................(5)
27 Financial Data Schedule.......................................................................(5)
</TABLE>
--------------------
(1) Previously filed with the same exhibit number with the
Company's Form 10-SB filed March 10, 1993 and incorporated
herein by reference.
(2) Previously filed with the same exhibit number with the
Company's Form 10-KSB filed March 31, 1994 and incorporated
herein by reference.
(3) Previously filed with the same exhibit number with the
Company's Form 10-K filed March 31, 1995 and incorporated
herein by reference.
(4) Previously filed with the same exhibit number with the
Company's Form 10-K filed March 31, 1996 and incorporated
herein by reference.
(5) Filed herewith.
* Management contract or compensatory plan or arrangement
required to be filed as an exhibit to this form.
<PAGE> 1
Exhibit 10.4
TECHNOLOGY AGREEMENT
This Technology Agreement ("Agreement") is made and entered into on the 12th day
of November, 1996 ("Effective Date") by and between Cisco Systems Inc.
("Cisco"), a California corporation, located at 170 West Tasman Drive, San Jose,
California 95134, and Applied Innovation Inc. ("Licensee"), a corporation duly
incorporated under the laws of Delaware, having its executive offices at 5800
Innovation Drive, Dublin, Ohio 43016.
Recitals
WHEREAS, Licensee is engaged in the business of designing, manufacturing and
marketing various network management switches and products for use in the
telecommunications industry, including the AI180 Switch product line and the
195MPR and 195RTR Router product line,
WHEREAS, Licensee desires to incorporate Cisco's local and wide area network
routing capability integrated into its network management and router product
lines,
WHEREAS, Cisco has expertise in local and wide area network routing products and
is, subject to the terms and conditions of this Agreement, willing to provide
certain technology in the form of chips, schematics and software to Licensee,
and
WHEREAS, Licensee wants to design and build a router unit based on the Cisco
technology for integration into its network management and router product lines.
Agreement
NOW THEREFORE, in consideration of the mutual promises set forth below, the
parties agree as follows:
1.0 DEFINITIONS
1.1 Cisco ASICs means Cisco's proprietary integrated circuits, and
SIMMs which are required to manufacture the Integrated Product and which Cisco
will make available from the third party manufacturer.
1.2 Cisco Product means the Cisco 2524 Router product which is the base
to be adapted into Integrated Product.
1
<PAGE> 2
1.3 Confidential Information means the information of either party
("Disclosing Party") which is disclosed to the other party ("Receiving Party")
pursuant to this Agreement.
1.4 Design Documentation means all the schematics of the Cisco Product
and other technical information provided by Cisco to empower Licensee to develop
the Integrated Product.
1.5 Documentation means Cisco's "Customer Documentation" for the Cisco
Product and for the Software and Cisco's "Manufacturing Documentation" for the
Cisco Product. Customer Documentation includes the following user guide
available from Cisco Connection Online (CCO) or on the Cisco Enterprise CD ROM:
Hardware Installation and Maintenance
Router Preparation
Router Configuration
Router Troubleshooting
Manufacturing Documentation includes sample test plans, procedures and
other technical information provided by Cisco to Licensee, for Licensee's use to
validate the design of the Integrated Product and to test the Integrated
Product.
1.6 Integrated Product means the physical board developed by Licensee
based on the Design Documentation and the Modified Cisco Design Documentation
licensed to Licensee under this Agreement, and including the Software and Cisco
ASICs.
1.7 Licensee Product means Licensee's products described on Exhibit B
("Licensee Products") into which Licensee may integrate and distribute the
Integrated Product.
1.8 Modified Cisco Design means the logical and functional design
recorded on one or more media adapted by Licensee from the Design Documentation
supplied by Cisco and which is required to adapt the Cisco Product into the
Integrated Product.
1.9 New Release means a standard release of the Software which may
include bug fixes and new features for the Cisco Product and which is made
available to Licensee for the Integrated Product by Cisco from time to time.
1.10 Software means Cisco's standard internetworking operating system
software in object code form which is developed for the Cisco Product and which
will also be used in the Integrated Product and which will be updated from time
to time with the New Releases, and as determined by Cisco from time to time.
This Agreement does not include applications software which may be developed
from
2
<PAGE> 3
time to time by Cisco or marketed separately, unless the parties agree in
writing to amend this Agreement.
2.0 INTEGRATED PRODUCT DEVELOPMENT
2.1 Cisco's Obligations. Cisco will provide the Design, Customer and
Manufacturing Documentation to Licensee as set forth in Exhibit A ("Cisco
Deliverables and SOW"), according to the time schedules set forth therein. Cisco
will provide consulting engineering support to Licensee during Licensee's
development of the Integrated Product for the development, manufacturing and
test process creation for the Integrated Product. This consulting will be as
described, and in consideration of the non-recurring engineering fees shown, in
Exhibit C ("Fees and Charges"). Additional consulting may be provided by Cisco
at its then current time and materials rates.
2.2 Licensee's Obligations. Except as set forth above, Licensee will be
solely responsible for the development and integration of the Cisco Product into
the Integrated Product including modification of the Design Documentation, and
for the manufacture, support, testing and distribution of the Integrated Product
and Licensee Product. In consideration for the rights and licenses granted in
this Agreement, Licensee agrees that Cisco's Software and technology will be the
sole routing functionality in Licensee's Product, and that Licensee will not
market or incorporate additional, third party routing functionality for
installation into Licensee Products or for use with Licensee Products; provided,
however, it is agreed that Licensee may continue to sell its 195MPR and 195RTR
router products and any new releases thereof until final product test acceptance
of the Integrated Product has occurred. Licensee agrees to always represent
Cisco's products and technology in a professional manner in accordance with the
highest standards in the industry. In particular without limiting the generality
of the foregoing, Licensee agrees to accurately represent the features and
functionality of the Cisco technology in its discussions with third parties and
marketing materials.
2.3 Project Managers. Each party will appoint a single Project Manager
and notify the other party of the name of the Project Manager within five (5)
days of the Effective Date. The Project Managers will act as a liaison with the
other party with respect to the design and development of the Integrated
Product. In the event that either side appoints a new Project Manager, the party
will notify the other, in writing, within 5 business days.
2.4 Regulatory Compliance. Licensee will be responsible for obtaining
all required safety or emissions approvals and for required network compliance.
Cisco will provide support to Licensee at its then current time and materials
rates. Cisco agrees to provide Licensee with a bill of materials including all
UL approval numbers to assist Licensee in achieving compliance to regulations.
3
<PAGE> 4
2.5 Third Party Licenses. Cisco may from time to time become aware of
third party licenses required to access the technology and materials licensed
hereunder. Cisco will notify Licensee if and when Cisco becomes aware of any
third party licensing requirements. Cisco will use reasonable efforts to assist
Licensee in attaining such third party licenses. Cisco will not be responsible
for payment of royalties on the third party patents listed on Exhibit F ("Third
Party Licenses"). Cisco may add additional parties to Exhibit F upon ninety (90)
days prior written notice to Licensee.
2.6 Engineering Change Orders and Release Notes. In the event that
Cisco intends to make a significant engineering change order on Cisco's
equivalent stand-alone products, Cisco agrees to give Licensee notice of the
change as soon as Cisco notifies its technology partners of the impending
change. Cisco will provide release notes with the Software to notify Licensee of
changes to the Software.
3.0 OWNERSHIP AND LICENSE GRANTS
3.1 Cisco Product, Software, Documentation. Cisco will retain ownership
of all right, title and interest (including all intellectual property rights) in
the Cisco Product, Design Documentation, Software, Documentation and Modified
Cisco Design and Licensee hereby assigns any such rights it may have in the
Integrated Product and Modified Design to Cisco. Licensee will sign all
documents necessary to effect such assignment. Subject to Cisco's ownership set
forth in this Section, Licensee shall own all other right, title and interest in
the Licensee Product.
3.2 Right to Create, Manufacture and Distribute Integrated Product.
Subject to the terms and conditions of this Agreement, Cisco hereby grants
Licensee a non-exclusive, non-transferable, non-sublicensable license to (i) use
and modify the Design Documentation solely for purposes of creating the Modified
Cisco Design from which Licensee can build the Integrated Product, (ii)
manufacture the Integrated Product based on the Modified Cisco Design, (iii)
distribute, market and sublicense the Integrated Product worldwide, solely as
integrated into the Licensee Products, through multiple tiers of distribution,
and (iv) purchase Cisco ASICs from Cisco's suppliers so long as Licensee has the
right to manufacture the Integrated Product pursuant to this Agreement.
3.3 Software. Subject to the terms and conditions of this Agreement,
Cisco hereby grants Licensee a non-exclusive, non-transferable fee bearing
license to use and reproduce object code copies of the Software and New Releases
from master copies of the Software provided by Cisco and to distribute such
copies through multiple tiers of distribution to end users (i) solely as
integrated into Integrated Product, or (ii) in the case of New Releases
distributed to existing end users of the Software, solely to end users who own
an Integrated Product as an update for the Software version then in use. Cisco
will provide
4
<PAGE> 5
standard Software and New Releases to Licensee, and Licensee will have sole
responsibility for insuring that the Modified Cisco Design will still run the
standard Cisco Software and New Releases. Licensee may not sublicense the right
to reproduce object code copies of the Software. Licensee agrees to distribute a
software license which contains at a minimum the terms and conditions attached
as Exhibit D ("Minimum Terms and Conditions") with each copy of the Software and
with each New Release distributed to a customer. Licensee agrees to promptly
notify Cisco of any breach of the software license with respect to the Cisco
Software or New Releases, and further agrees that it will vigilantly pursue any
third parties in breach of the license (or at Cisco's request, assign the claim
to Cisco).
3.4 Documentation. Subject to the terms of this Agreement, Cisco grants
Licensee a royalty-free, non-exclusive, nontransferable, non- sublicensable
license to incorporate the Customer Documentation into the Licensee Product
documentation and to distribute and sublicense the resulting documentation to
customers along with the Licensee Product. Cisco grants Licensee a nonexclusive,
nontransferable license to use the Design and Manufacturing Documentation
internally solely for purposes of integrating the Integrated Product into the
Licensee Product.
3.5 Trademarks. Subject to the terms of this Agreement, Cisco hereby
grants Licensee a non-exclusive, nontransferable, non-sublicensable, royalty
free license to use Cisco's logo according to Cisco's policies then in place in
connection with the distribution and marketing of the Integrated Product.
Notwithstanding the foregoing, Licensee agrees that if Cisco implements a
branding program for its technology partners, Licensee will affix the Cisco (or
relevant) logo to the Licensee Products within a reasonable time frame. If Cisco
generally produces lists of Cisco lOS partners in marketing collateral, a home
page list, and the like, Cisco agrees to use reasonable efforts to include
Licensee in such lists.
3.6 Acknowledgment. Licensee acknowledges that Cisco may use any ideas,
concepts, modifications, and information relating to the Integrated Product in
the development of Cisco or third party products. Cisco acknowledges that
Licensee shall have exclusive (even as to Cisco) manufacturing rights to the
Integrated Product designed to specifically fit into Licensee's 130 or 180
series equipment shelf; provided, however, that nothing contained in this
Agreement will prevent Cisco from entering into similar agreements with third
parties or licensing the underlying technology to another party to fit in a
different equipment shelf. Also, nothing in this Agreement precludes Cisco from
developing and manufacturing the underlying technology in a Cisco form factor
for its own product line. Cisco will not make Licensee's design of the
Integrated Product available to any third party for purchase or resale. Licensee
agrees that its distribution agreements with its resellers and its other
agreements with OEMs, VARs, and other resellers will protect Cisco's technology
incorporated into the
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Integrated Product to the same extent as Licensee protects its own technology of
similar importance, but must in every event, at the minimum, prevent reverse
engineering of the Software, disclaim consequential damages, and prevent export
of the Software in violation of US export control laws. Licensee agrees not to
assert any patent owned by Licensee against Cisco, its subsidiaries, affiliates
and customers who have purchased products from Cisco, or authorized Cisco
channels, provided that (a) the Software made available to Licensee under this
Agreement contributed to the making of the patented invention, and (b) at least
one claim of such patent applies to the Software, or to hardware implementations
of the Licensed Software.
3.7 Grants Survive Termination. In the event of termination of this
Agreement, each end user's rights granted by Licensee pursuant to Article 3 of
this Agreement prior to termination will survive termination of this Agreement
(provided such end user is not in breach of its end user license agreement).
4.0 FEES AND ROYALTIES
4.1 Non-Recurring Engineering Costs (NRE's). Licensee shall pay the
NRE's for the Integrated Product upon delivery of the milestones as set forth in
Exhibit C. Cisco shall invoice Licensee for NRE's according to the time schedule
set forth in Exhibit C.
4.2 Software License Royalties. Licensee will be responsible for
payment of the Software license royalties set forth in Exhibit C within thirty
(30) days after the end of the calendar quarter in which the Integrated Product
is sold or distributed to a customer other than or on behalf of Cisco or any
Cisco wholly-owned subsidiary. Royalties are applicable to all Licensee Products
which contain the Integrated Product and which are shipped or used internally
during a quarter. Payment will be accompanied by a report, in a form acceptable
to Cisco, which shows the volume of shipments, the country of the end user site
and the total royalties owed to Cisco for Integrated Products distributed in
that quarter. Upon renewal of this Agreement, Cisco will negotiate in good faith
to adjust the royalties due hereunder based on prevailing Cisco IOS pricing.
4.3 Support Fees. In consideration for the support services set forth
in Exhibit E ("Support"), Licensee will pay to Cisco during the term of this
Agreement a support fee which is outlined in Exhibit E.
4.4 Taxes. Licensee warrants and represents that amounts paid pursuant
to this Agreement are not subject to sales and use tax. Licensee agrees to
provide Cisco with satisfactory documentation (including but not limited to
resale exemption or other certificates) supporting such status. If any sales,
use, service, withholding or other tax, or government levies must be paid under
the laws of any jurisdiction on payments to Cisco specified in this Agreement,
then Licensee will pay all such taxes including interest or
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penalties incurred and the amounts payable to Cisco under this Agreement will be
increased so that the amounts actually paid to Cisco will be no less than the
amounts Cisco would have received notwithstanding such tax or levy. Licensee
will provide Cisco, on a quarterly basis, with written documentation, including
but not limited to copies of receipts of any and all such taxes paid in
connection with respect to payments due under this Agreement.
4.5 Right of Audit. Licensee will keep and maintain a complete, clear,
accurate record of the number of Integrated Products shipped and copies of the
Software distributed for a period of three (3) years from the time of shipment.
Cisco will have the right to have an inspection and audit of all the relevant
books and records of Licensee conducted by a third party whose fee is paid by
Cisco. The audit will be conducted during regular business hours at Licensee's
relevant offices and in such a manner as not to interfere with normal business
activities. In no event shall audits be made hereunder more frequently than once
per year, unless a discrepancy is uncovered. If such inspections should disclose
any under-reporting, Licensee will promptly pay the amount, together with
interest thereon from the time such royalties should have been paid at a rate of
1% per month. Further, if the under reporting is greater than 5%, Licensee will
pay for the costs of the audit.
4.6 Payment Terms. Unless otherwise expressly provided in this
Agreement, all payments will be made by Licensee in United States dollars within
thirty (30) days of the end of the calendar quarter or from the receipt of an
invoice as is relevant.
5.0 DOCUMENTATION AND TRAINING
5.1 Customer Documentation. Cisco shall deliver Customer Documentation
with the Software or New Releases to which it applies, electronically in
FrameMaker files on Syquest 40M cartridges or as mutually agreed by the parties.
The FrameMaker level used will be Cisco's current level which will be FrameMaker
3.0.1 at the effective date. In addition, Licensee may opt to purchase the
Customer Documentation from Cisco in its unmodified form at Cisco's then-current
prices for Customer Documentation. Licensee agrees not to alter or remove the
Cisco legends relating to copyrights and trademarks from the modified Customer
Documentation.
5.2 Training. Cisco will provide free training for two Licensee team
members in a Router Software Configuration course prior to the completion of the
project, at times and locations as mutually agreed. Licensee will be solely
responsible for travel and living expenses of its employees.
6.0 SUPPORT
6.1 Support Services. Cisco shall provide the support services for the
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Software and New Releases as set forth in Exhibit E.
7.0 EXPORT CONTROLS. Licensee agrees at its sole cost and expense to comply with
all applicable export control laws, and restrictions and regulations, as they
exist from time to time, including those of the United States Department of
Commerce. Licensee agrees not to export any Cisco material provided to it under
this Agreement, including Confidential Information of Cisco, or any of the
direct products of the foregoing, in violation of any such laws or regulations,
or to Afghanistan, the People's Republic of China or any Group Q, S, W, Y or Z
country as specified in the US Export Administration Regulations (as specified
from time to time).
8.0 CONFIDENTIALITY, PROPRIETARY NOTICES AND LEGENDS
8.1 Confidential Information. Each party may receive Confidential
Information under the terms of this Agreement. The Receiving Party will at all
times during the term of this Agreement, and for five (5) years after the
termination of this Agreement hold such Confidential Information in trust and
not disclose to third parties the Confidential Information, except to approved
subcontractors that have agreed to be bound by the provisions of this Article.
The Receiving Party will protect the Confidential Information of the Disclosing
Party to the same extent as it protects its own information of similar type.
These obligations will not apply to information which: (i) was in possession of,
or was known by the Receiving Party prior to its receipt from the Disclosing
Party; (ii) is or becomes public knowledge without the fault of the Receiving
Party; (iii) is received by the Receiving Party without restriction in
disclosure, from a third party who disclosed the information not in violation of
any confidentiality restriction; (iv) is or becomes available on an unrestricted
basis to the Receiving Party from the Disclosing Party or someone acting under
its actual control; or (v) is disclosed by the Receiving Party pursuant to
statute, regulation, or the order of a court of competent jurisdiction, provided
the Receiving Party previously notifies the Disclosing Party to permit the
taking of appropriate protective measures.
8.2 Restricted Rights. Both parties will identify or mark any Software
and related Documentation provided pursuant to any agreement with the United
States Government or any contractor therefor, as follows: (i) For acquisition by
or on behalf of civilian agencies, as necessary to obtain protection
substantially equivalent to that afforded to restricted computer software and
related documentation developed at private expense and which is existing
computer software no part of which was developed with government funds and
provided with Restricted Rights in accordance with subparagraphs (a) through (d)
of the "Commercial Computer Software - Restricted Rights" clause at 48 C.F.R.
52.227-19 of the Federal Acquisition Regulations and its successors; or (ii) For
acquisition by or on behalf of units of the Department of Defense ("DoD") as
necessary to obtain protection substantially equivalent to that afforded to
commercial computer software and related documentation developed at private
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expense and provided with Restricted Rights as defined in DoD FAR
Supplement 48 C.F.R. 52.2277013(c)(1)(ii) and its successors.
8.3 Reverse Engineering. Except as may be specifically set forth in
this Agreement, Licensee specifically acknowledges that it has no rights to
receive any human readable, source code of the Software and New Releases and
Licensee will not reverse engineer, disassemble or otherwise decompile, or
attempt to discover any source code or underlying ideas or algorithms of the
Software or New Releases.
9.0 INDEMNITY.
9.1 Indemnification. Cisco agrees to defend and hold Licensee harmless
from all claims by third parties pertaining to the infringement of any patent or
copyright related to the Design Documentation, Documentation, Software, and
Cisco ASICs (collectively the "Cisco Materials") in the United States and
existing as of the Effective Date, provided that Licensee gives Cisco prompt
written notice of any such claim, and gives Cisco opportunity to assume full
control of the defense of any such claim, and provides Cisco with full
cooperation for the defense of same. If Cisco receives notice of an alleged
infringement of the Cisco Materials or if Licensee's use of the Cisco Materials
shall be prevented by permanent injunction, Cisco may, at its sole option and
expense, (i) procure for Licensee the right to continued use of the Cisco
Materials as provided hereunder, or (ii) modify the Cisco Materials such that
they are no longer infringing, or (iii) refund the amounts received by Cisco for
such Materials, less depreciation over a five year period and pay actual
expenses incurred in a legal proceeding as a result of past infringement. THE
RIGHTS GRANTED TO LICENSEE UNDER THIS PARAGRAPH SHALL BE LICENSEE'S SOLE AND
EXCLUSIVE REMEDY FOR ANY ALLEGED INFRINGEMENT OF ANY PATENT, COPYRIGHT,
TRADEMARK OR OTHER PROPRIETARY RIGHT. CISCO WILL HAVE NO LIABILITY TO LICENSEE
IF ANY ALLEGED PATENT OR COPYRIGHT INFRINGEMENT OR CLAIM THEREOF IS BASED UPON
THE MODIFICATIONS MADE BY LICENSEE TO THE INTEGRATED PRODUCT, USE OF THE
SOFTWARE OR IN CONNECTION WITH THE COMBINATION OF EQUIPMENT, DEVICES, OR
SOFTWARE NOT DELIVERED BY CISCO (IF SUCH INFRINGEMENT OR CLAIM COULD HAVE BEEN
AVOIDED BY THE USE OF THE SOFTWARE OR CISCO HARDWARE WITH OTHER EQUIPMENT,
DEVICES OR SOFTWARE) OR USE OF ANY CISCO PRODUCT OR SOFTWARE IN A MANNER FOR
WHICH IT WAS NOT INTENDED OR USE OF OTHER THAN THE MOST CURRENT RELEASE OF THE
SOFTWARE IF SUCH CLAIM COULD HAVE BEEN PREVENTED BY USE OF SUCH RELEASE.
9.2 Licensee will indemnify, defend and hold Cisco harmless for any
loss or damage arising out of Licensee's use or distribution of Licensee
Product, including, but not limited to any claims based on an end user or
reseller's reverse
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engineering, decompilation or disassembly of the Software or New Releases,
breach of Cisco intellectual property rights or any representations made by
Licensee or its resellers on Cisco's behalf.
10.0 LIMITATION OF LIABILITY. Except for Licensee's breach of its obligations of
confidentiality or breach of Cisco's intellectual property rights (including
without limitation the scope of the licenses granted herein),in no event will
either party be liable to the other party, its resellers or any end users for
any incidental, special or consequential damages, including without limitation,
loss of profits, loss of data and cost of procurement of substitute goods,
services or technology regardless of what form of action they may arise in and
regardless if such party has been advised of the possibility of such damages in
advance.
11.0 LIMITATION OF AMOUNT. Except for Licensee's breach of its obligations of
confidentiality or breach of Cisco's intellectual property rights (including
without limitation the scope of the licenses granted herein), in no event will
either party's liability under this Agreement exceed the greater of amounts
actually received by Cisco for NRE's in relation to the Integrated Product, or
the amount of revenue received by Cisco for the Integrated Product from
royalties for the one year period preceding the date of the event giving rise to
the liability. This limitation applies to all forms of action including
contract, tort, and other forms. All claims must be made in writing within one
year following occurrence. The amounts in this limitation apply to all causes of
action which arise and not singularly to each cause of action.
12.0 TERM AND TERMINATION
12.1 Term. The term of this Agreement is from the Effective Date to
December 31,1999, unless terminated earlier in accordance with the terms of this
Agreement. This Agreement will be automatically renewed for one (1) year terms
unless either party objects no later than six (6) months prior to the end of the
initial term or any renewal term thereof. In the event Cisco does not renew this
Agreement pursuant to this Section 12.1, Licensee shall have the right to fill
orders it has accepted prior to the effective date of termination so long as
delivery of such orders occurs within three (3) months following the termination
date.
12.2 Termination for Breach. Either party may terminate this Agreement
upon thirty (30) days prior written notice in the event of a material breach by
the other party which is not cured within such thirty (30) day period. Material
breach by Licensee will include but not be limited to (i) reverse engineering or
otherwise infringing Cisco's proprietary rights by Licensee, its resellers or
its end users, (ii) nonpayment of Software license royalties, (iii) distribution
of products without appropriate licenses, (iv) attempts to assign this
Agreement, or (v) failure to pay in accordance with the terms of this Agreement.
The parties agree that this
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Agreement may be terminated immediately upon written notice if the material
breach by the other party is not curable.
12.3 Termination for Convenience. Beginning one (1) year after first
commercial ship of the Integrated Product, either party may terminate this
Agreement upon six (6) months written notice for any reason. In the event Cisco
provides notice of termination for convenience in accordance with this Section
12.3, then for the remaining six (6) months of the Agreement Licensee shall no
longer be bound by the exclusive routing functionality restriction set forth in
Section 2.2. In the event Cisco terminates this Agreement for convenience under
this Section 12.3, Licensee shall have the right to fill orders it has accepted
prior to the effective date of termination so long as delivery of such orders
occurs within three (3) months following the termination date. Post- termination
fulfillment of orders arising out of opportunities responded to jointly by Cisco
and Licensee shall be filled by the parties pursuant to the express commitment
stated in such joint response or, if no express commitment was made, such
fulfillment shall be subject to the mutual written agreement of the parties.
If the parties fail to execute a Distributor Agreement for the Integrated
Product by January 31,1997, either party can terminate this agreement
immediately.
12.4 Post-Termination. In the event of termination, the following
events will occur: (i) except as specified in this Section 12.3 above and
Section 12.5 below, both parties will return or destroy the Confidential
Information of the other party; (ii) except for end user licenses, the rights
and licenses of the parties will immediately cease. Sections 3, 4,
8,10,11,12.3,13 and 14 will survive termination or expiration of this Agreement.
12.5 Post-Expiration Support. In the event that this Agreement expires
and is not renewed, Cisco will continue to provide critical bug fixes support
for the Software according to the terms of this Agreement and Exhibit E for the
fees set forth in Exhibit E, for five (5) years following expiration. The
parties agree that following expiration, non-renewal or termination for
convenience by Cisco of this Agreement, each party may retain only that
Confidential Information or proprietary information of the other party necessary
to provide post-termination support in accordance with the terms of this
Agreement.
13. AS-IS WARRANTY. All products, services and documentation are provided on an
as is basis without warranty of any kind by Cisco or its suppliers. Cisco
disclaims all implied warranties, including the implied warranties of non
infringement, merchantability and fitness for a particular purpose.
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14.0 GENERAL
14.1 Governing Law. This Agreement shall be governed in all respects by
the laws of the State of California, without regard to the conflicts of laws
provisions. The parties agree that the United Nations Convention on Contracts
for the International Sale of Goods (1980) is specifically excluded from
application to this Agreement.
14.2 Transfer Rights. Neither this Agreement nor any part thereof is
transferable or assignable by either party to any other party by operation of
law, merger, assignment or otherwise, without the non assigning party's prior
written consent, which consent will not be unreasonably withheld. This clause
shall not apply to the merger by either party with a company it has acquired
where the surviving entity is either Licensee or Cisco, respectively, unless the
acquired company is a competitor of the other party.
14.3 Notices. All notices or reports permitted or required under this
Agreement shall be in writing and shall be delivered by personal delivery,
telegram, telex, telecopier, facsimile transmission or by certified or
registered mail, return receipt requested, and shall be deemed given upon
personal delivery, five (5) days after deposit in the mail, or upon
acknowledgment of receipt of electronic transmission. Notices shall be sent to
the President of each company with the address as set forth in this agreement
or, as replaced over time.
14.4 No Agency. Nothing contained herein shall be construed as creating
any agency, partnership, or other form of joint enterprise between the parties.
The parties relationship will be that of independent contractors.
14.5 Force Majeure. Neither party shall be liable hereunder by reason
of any failure or delay in the performance of its obligations hereunder (except
for the payment of money) on account of strikes, shortages, riots, insurrection,
fires, flood, storm, explosions, acts of God, war, governmental action, labor
conditions, earthquakes, or any other cause which is beyond the reasonable
control of such party.
14.6 Waiver. The failure of either party to require performance by the
other party of any provision hereof shall not affect the full right to require
such performance at any time thereafter; nor shall the waiver by either party of
a breach of any provision hereof be taken or held to be a waiver of the
provision itself.
14.7 Severability. In the event that any provision of this Agreement
shall be unenforceable or invalid under any applicable law or be so held by
applicable court decision, such unenforceability or invalidity shall not render
this Agreement unenforceable or invalid as a whole, and, in such event, such
provision shall be
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changed and interpreted so as to best accomplish the objectives or such
unenforceable or invalid provision within the limits of applicable law or
applicable court decisions.
14.8 Confidentiality of Agreement. Neither party will disclose any
terms or the existence of this Agreement, except as required pursuant to this
Agreement, or pursuant to a mutually agreeable press release or as otherwise
required by law. Both parties agree to submit to the other party for approval
any advertising, press releases, sales promotions or other publicity relating to
this Agreement which references the other party prior to releasing such
publicity.
14.9 Entire Agreement. This Agreement and the Exhibits hereto
constitute the entire agreement between the parties with respect to the subject
matter hereof. This Agreement supersedes, and the terms of this Agreement
govern, any prior or collateral agreements with respect to the subject matter
hereof with the exception of any prior confidentiality agreements between the
parties. This Agreement may only be changed by mutual agreement of authorized
representatives of the parties in writing.
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14.10 Entry into Force. This Agreement will enter into force on the
Effective Date.
Cisco Systems, Inc. Applied Innovation Inc.
("C isco") ("Licensee")
Signature: /s/Jon Shantz Signature: /s/ Lawrence H Corbett
---------------------- -------------------------
By: Jon Shantz By: LAWRENCE H CORBETT
-------------------- ----------------------------
(Typed or Printed Name) (Typed or Printed Name)
Title: VP, Service Provider Market Title: SR. VP, MKTG & SLS
---------------------------- ------------------------
Date: 11-11-96 Date: NOV 12, 1996
------------------- -----------------
Address: 170 W. Tasman Dr. Address: 5800 INNOVATION DR
-------------------- ------------------------
San Jose, CA 95134 DUBLIN, OH 43016
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EXHIBIT A
CISCO DELIVERABLES AND SOW
HARDWARE RELATED DELIVERABLES FOR THE 2524 CARD
1. Complete schematic drawings.
2. Parts libraries for any special components (such as Cisco-specific custom
ASICs).
3. Mechanical drawings/circuit board layout.
4. A complete Parts List (with vendor contacts for Cisco-specific custom
components).
5. A netlist detailing the pin connections.
6. Circuit board layout instructions. (This includes identification of critical
signals, rules for separation and spacing of components).
7. Critical timing requirements (any controlled circuit traces), system reset
timing requirements, and power slew-rate requirements for startup.
8. Identification of components that are sensitive to ESD during operation, and
associated suppression circuitry.
9. Critical cooling requirements for any thermally stressed components.
10. A description of the interface required to perform a hardware reset.
11. Power requirements, including current requirements, voltages, and voltage
tolerances.
12. UL Flammability Ratings for all Cisco-specific custom parts.
13. Description of all current problems with the 2524 router.
14. Board level test procedures (for both development and production testing).
SOFTWARE RELATED DELIVERABLES FOR IOS ENTERPRISE FEATURE
SET:
1. The then current releases of all applicable feature sets.
2. Pre-release versions of all forthcoming applicable feature sets.
3. Test or diagnostic versions of the target IOS, to assist hardware testing.
4. Descriptions of all known problems in the IOS.
5. System level test procedures and diagnostic software.
DEVELOPMENT SUPPORT DELIVERABLES:
1. Telephone consulting for AI implementation differences (e.g. power up, IRB).
2. Telephone consulting for circuit board layout.
3. Formal Design Reviews (schematic and layout) at Cisco.
4. Training in the use of Cisco hardware diagnostics.
5. Telephone consulting for problem troubleshooting.
6. On-site (at AI) consulting for difficult problem troubleshooting (three
trips, 100 hours estimated)
7. Consulting in excess of 400 hours to be billed at Cisco consulting rates (see
Exhibit C).
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EXHIBIT A CONTINUED
CISCO DELIVERABLES AND SOW
STATEMENT OF WORK
I. AI2524 Product Overview
- AI2524 consists of a single router module that fits into AI's "AI180"
environment. AI is the owner of this product and the associated
development project as specified in Section 3.0 of this Agreement.
Cisco's role is to provide consulting to ensure the success of the
product. An outside contractor that has experience working with Cisco
C2500 router series may be brought in as contractor of AI to assist in
development or manufacturing.
II. H/W Design Tasks
- Cisco to transfer 2524 Router Design data-base to AI.
- Cisco to write up high level specification of module for hand-off to
AI.
- AI to add details to spec and turn it into Detail Design Spec.
- AI to make design changes to standard 2524 to reflect new spec.
- AI to perform PCB layout, Prototype built, Prototype Bring-up and
Sub-system Integration and Qualification with Cisco providing
consultation.
- AI to perform overall System Integration in the target chassis using
the Prototype units.
- AI to perform PCB layout, Engineering Models built, Engineering Models
Bring-up and Sub-system Integration and Qualification with Cisco
providing consultation.
- AI to perform overall System Integration in the target chassis using
the Engineering Models.
III. Mechanical/Power Development Tasks
- AI to design and develop the Front Panel of module.
- AI to design and develop (if any) external cable.
- AI to design and develop mechanical structure for interface modules.
- AI to test and qualify AI2524 mechanical/power systems to AI's
Environmental specifications (including, but not limiting to, NEBS
compliance).
IV. F/W Development Tasks
- Cisco to support hardware bring-up of Prototypes and Engineering
Models. Code and test any special low-level software if required.
V. S/W Development Tasks
- No software development task is planned. Any software feature that is
not already in the standard Cisco lOS will require a major development
effort. It implies a major hit to time to market
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VI. Agency Compliance Tasks
- AI to perform EMI and Immunity testing certification of complete
system as specified.
- AI to perform NET compliance testing of the Synchronous Serial port as
specified.
- AI to perform NEBS compliance testing of the complete system as
specified.
- Cisco will make compliance knowledgeable resources available to AI for
consultation.
VII. Design Verification Test Tasks
- AI to perform Electrical, Mechanical and Thermal Design Verification
Tests. AI to use "Electronic Design Validation Test Plan - Template"
as guideline in creating their own Test Plan and in executing the
design verification of AI2524.
- Cisco to perform Software Integration Qualification tests.
VIII. Release/Alpha Tests Tasks
- Joint effort between AI and Cisco.
IX. Beta Tests Tasks
- Al to execute.
X. Manufacturing Tasks
A. Materials (Kitting)
- Materials: AI
B. Order Fulfillment
- Order fulfillment of complete system will be managed by AI.
C. Manufacturing Test
- Cisco to provide manufacturing test software (binary) for Router
Design.
- AI to perform manufacturing of all items including, but not
limited to: ICT fixture development, ESS with full functional
testing.
D. Trademarks
- AI to affix Cisco Logo to faceplate in accordance with Cisco's
Trademark guidelines.
Xl. Performance
- Performance for the A12524 configuration shall be the same as
comparable Cisco router within +/- 10%.
XII. Documentation
- Cisco will provide AI with Router user documentation in FrameMaker or
other workable format.
XIII. Schedule
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- AI to create and update on a regular basis a System Level Schedule.
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EXHIBIT B
LICENSEE PRODUCT
The AISwitch Series 180 product line encompasses network mediation devices that
permit incompatible telco systems to interoperate over a variety of Wide Area
Networks.
The product line supports a wide range of mediation functions for Operations
Support (OS) systems, or vendor specific management systems and Network Elements
(NEs). Offering a wide range of interfaces and protocols, the AISwitch Series
180 is a highly reliable NEBS-compliant unit designed for central office and
other mission critical applications. The system features redundant CPU's and DC
power, allowing configurations without a single point of failure. Up to eight
"hot swap" interface modules can be installed in each AISwitch Series 180
shelf.
The list of available modules currently includes:
- AIl83-S 4-port async RS-232
- AI185 16-port RS-232
- AIl92 High-performance X.25 protocol module
- AI192E 4-port interface module for E2A (contact closure) alarm
collection
- AI193 LAN gateway for TCP/IP, OSI, TARP, ES-IS routing,
and CLNP
- AIl94 24-port 10BaseT Ethernet hub
- AIl95 Router module (to be replaced by the AI2524)
- AI196-16X 16-port X.25 Multiplexer Module
- AIl96B 16-port TBOS data collection module
- ASP-11 Application Support Processor (UNIX or DOS
applications)
- RDC180-P 48 volt power supply for central office power
- RAC180 AC power supply in 110 and 220 volt versions
- AIl98 Common Logic Controller Module
- AIl82-A Bus Repeater for interconnecting multiple shelves
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EXHIBIT C
FEES, ROYALTIES AND CHARGES
NRE's: $100,000 NRE payable as follows (see Exhibit A):
50% within 15 days of the signing of this Technology Agreement by
representatives of Cisco and Applied Innovation
25% following software deliveries, test procedures, and training but
not later than March 1, 1997
25% following final production test acceptance but not later
than May 1, 1997
See Exhibit A: Hours exceeding 400 to be billed at Cisco rate of $250 per hour
for consulting.
Royalty fees: $775 per unit sold by Licensee through December 31,1999 (see
Section 12.0). Fees for Support Services are covered in Exhibit E (Product
Support Addendum, Appendix A).
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EXHIBIT D
MINIMUM TERMS AND CONDITIONS
1. Each Licensee End User Agreement shall contain terms that are legally
sufficient to:
i. Authorize the End User to make one (1) copy of the Software for backup
purposes only; and
ii. Prohibit further copying and/or transfer of the Software; and
iii. Prohibit reverse assembly, reverse compilation, or other translation of
the Software or any portion thereof.
iv. Prohibit export of the Software in violation of United States and other
national laws.
2. Each such license agreement shall also include the following statements or
their equivalents:
i. "Software provided under this Agreement is copyrighted and licensed (not
sold). Licensee does not transfer title to the Software to End User"; and
ii. "Software provided under this Agreement may contain or be derived from
portions of materials provided by a third party under license to Licensee.
LICENSEE AND ITS SUPPLIERS DISCLAIM ALL WARRANTIES, EXPRESS OR IMPLIED WITH
RESPECT TO THE USE OF SUCH MATERIALS IN CONNECTION WITH PRODUCT(S), INCLUDING
(WITHOUT LIMITATION) ANY WARRANTIES OR MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE";
iii. in no event will Cisco or its suppliers be liable for consequential,
incidental or special damages.
iv. "The limitation of liabilities described in this section also apply to
any third-party supplier of materials supplied to licensee. The limitations
of liabilities of License and its third-party supplier are not cumulative.
Such third-party supplier is an intended beneficiary of this section."
v. a statement that the Software was developed at private expense and that if
licensed to the US government it is licensed only with restricted rights.
vi. a statement that Cisco is an intended third party beneficiary of the
Agreement.
21
<PAGE> 22
EXHIBIT E
PRODUCT SUPPORT ADDENDUM FOR EMBEDDED SOFTWARE APPLICATIONS
I . DEFINITIONS.
A. "Customer" means Applied Innovation Inc.
B. "CCIE" means Cisco Certified Internetworking Engineer.
C. "CCO" means Cisco Connection Online, Cisco's online information web
server.
D. "Cisco Technical Support" means problem reproduction, isolation, and
resolution of Cisco Software licensed to Customer, including those
problems caused by equipment and computer network configurations.
E. "Customer Technical Support" means all necessary problem determination
and resolution services (problem isolation, resolution and product
defect determination; lab simulations and interoperability testing;
hardware trace analysis, on-site troubleshooting and remote
diagnostics; including a lab or internal network to troubleshoot
complex configuration and software problems) for Customer's end users
before requesting high-level technical support from Cisco.
F. "Hardware" means tangible Cisco Product containing Cisco Code.
G. "Level One Technical Support" means first call support on all customer
calls, broad internetworking and multi-vendor troubleshooting
expertise, router configuration and upgrade support, pre- and post-
sale information, ability to gather customer information if situation
requires.
H. "Level Two Technical Support" means specialist level technical support
for problem isolation, lab simulations and interoperability testing,
ability to capture and analyze network traces and remote diagnostic
capabilities if situation requires.
I. "Level Three Technical Support" means support provided in conjunction
with Cisco engineering to determine the cause and resolution of
problems encountered by end users of the Product.
J. "Major Release" means a release of Cisco Software that provides
additional Software features and/or functions. Major Releases are
designated by Cisco as a change in the ones digit of the Software
version number [(x).x.x].
K. "Product" means both Hardware and/or Software.
L. "Software" means the machine-readable object code software programs
licensed by Cisco.
II. CISCO RIGHTS AND OBLIGATIONS.
A. Cisco shall offer the following support alternatives to Customer.
Customer may evaluate each alternative for the first six (6) months
following the Effective Date of the Technology Agreement, and then
select an alternative to remain consistent for the next twelve (12)
month period.
1. Partner Support Account.
a) Cisco shall provide Level Three Technical Support via a
dedicated engineering team, from Cisco's San Jose,
California, Technical Assistance Center ("TAC"), via
telephone, fax or electronic mail, as appropriate, 9:00 a.m.
to 5:00 p.m., Pacific Time, Monday through Friday, excluding
Cisco-observed holidays. Access to other geographic TAC
locations by Customer Level Two Technical Support engineers
will be provided upon mutual agreement.
22
<PAGE> 23
b) Cisco will provide access to Level Three Technical Support
engineers, who will be available in Cisco's worldwide TACs
to receive calls and provide basic problem resolution
services to both Customer Level Two Technical Support
engineers, and Customer Level One Technical Support
engineers. Cisco and Customer will each identify their
respective engineers to the other.
c) Customer may place up to eighty (80) cases per year into
Cisco, through their dedicated engineering resource.
2. Virtual Supported Account.
a) Cisco will provide identified space in the TAC for use by
Customer Level Two Technical Support engineers approved by
Cisco. This space is used to facilitate working with Cisco
on Customer-related network problems and network design.
Cisco shall have the right at any time and for any reason
upon written Notice to withdraw its approval of any such
Customer engineer and/or terminate Customer's privilege to
use Cisco's office space. In the event of such withdrawal,
Customer shall have the right to terminate this Agreement
upon thirty (30) days written Notice.
b) Customer will designate two (2) engineers who will have
access to Cisco's San Jose TAC, subject to the following
limitations. Customer engineers will be badged as visitors,
and will have access only to those areas necessary to work
with Cisco on Customer networking planning and problem
resolution. All cases relating to Customer Product will be
received by Customer engineers prior to being escalated to
Cisco.
c) Cisco will provide access to Level Three Technical Support
engineers in Cisco's TAC and Fast Track Engineering team to
work with Customer's engineers as focal points to provide
basic problem resolution services to Customer Level Two
Technical Support engineers, and customer Level One
Technical Support engineers.
d) Cisco will provide facilities, resources and office space
for the customer engineer, twenty-four (24) hours a day,
seven (7) days a week.
e) There is no limit to the number of cases Customer may
receive at Cisco.
B. Additional Code Support.
1. Cisco will provide access to the Cisco Connection On-Line ("CCO")
system to Customer.
2. Cisco will develop a procedure for expedited communication of case
notes accompanying reports of Code Errors or Documentation Errors
encountered by Customer in providing its technical support. Customer
may log cases electronically in a manner consistent with other Cisco
customers.
3. CCO will be available to Customer-approved end users pursuant to the
process in Appendix C ("PICA").
4. Cisco will include specific and mutually agreed Customer information
on CCO.
5. Cisco will provide Level Three Technical Support to Customer, pursuant
to Appendix D. Cisco will supply the appropriate level of technical
resources based on problem priority and elapsed time to assist
Customer with problem resolution, and to insure adherence to Cisco's
Problem Prioritization and Escalation Guideline (Appendix B). Cisco
will designate
23
<PAGE> 24
a focal point at time of case creation by Customer, and will manage
problem escalation through to resolution.
6. Cisco will allow Customer system engineers to monitor, at Cisco's
site, telephone support requests received by Cisco.
7. Support each Major Release and Version Release for a period of
thirty-six (36) months from the first commercial shipment of that
release. Cisco, in meeting any support obligations, may require
Customer to upgrade to a supported release.
24
<PAGE> 25
III. CUSTOMER RIGHTS AND OBLIGATIONS
1. Customer shall provide appropriately qualified Technical Support
staff to support the Products.
2. Customer shall provide Level One and Level Two Technical Support
for the Product.
3. Customer will have Cisco CCIE-certified engineers as central
point of contact for all calls originated by Customer to Cisco
(whether on-site or remotely), and for all Priority 1 problems
escalated to Cisco. All Customer engineers on-site at Cisco will
be CCIE-certified.
4. Customer will escalate problems to Cisco pursuant to the Problem
Prioritization and Escalation Guideline (Appendix B), and, where
applicable, the Escalation Flowchart (Appendix D).
5. Customer may provide end use access to CCO, and will authorize
end user access through PICA before an end use uses CCO.
6. Customer will provide an appropriate quantity of production units
of Product to Cisco, for Cisco's use in providing Level Three
Technical Support to Customer.
7. Upon mutual agreement, Customer shall facilitate access to end
user Product such that problems may be diagnosed and corrected
remotely via the Internet or via modem access.
IV. JOINT RIGHTS AND OBLIGATIONS.
A. Customer will provide Cisco a warm telephone call transfer mechanism
for Customer service support calls intended for Customer but received
by Cisco. A warm call transfer is a call transferred directly to
Customer by Cisco without the end user hanging up the telephone and
redialing.
B. Cisco and Customer will complete the final version of the Escalation
Flowchart (Appendix D) within thirty (30) days of the Effective Date.
C. If Cisco is requested to perform on-site diagnostics and/or remedial
service, Customer shall reimburse Cisco for all travel expenses at
Cisco's published time and materials rates, unless the problem is
mutually determined to be a Cisco problem.
D. Customer will absorb all costs relating to Cisco travel to Customer's
site to support Code mutually determined to be a Customer problem.
Cisco will absorb all costs relating to Cisco travel to Customer's
site to support Code mutually determined to be a Cisco problem.
V. SERVICES NOT COVERED UNDER THIS AGREEMENT.
A. Any customization of, or labor to install, Software.
B. Support or replacement of Product that is altered, modified,
mishandled, destroyed or damaged by natural causes or damaged due to a
negligent or willful act or omission Customer other than as specified
in the applicable Cisco-supplied documentation.
C. Services to resolve software or hardware problems resulting from third
party products or causes beyond Cisco's control.
VI. CISCO SERVICE FEE; PAYMENT TERMS. Customer will pay the annual Support Fee
in Appendix A in semi-annual installments in advance.
VII. REVIEW MEETINGS. Cisco and Customer will meet, directly or via
teleconference, not less than twice per year to review the service
performance, processes and procedures under this Addendum.
VIII. PROJECT MANAGERS. Cisco and Customer will each designate a support project
manager to manage the obligations and responsibilities under this Addendum.
IX. INDEMNIFICATION. Customer shall indemnify, defend, and hold harmless Cisco
from and against all claims and actions, and all expenses incidental to
such claims or actions, based upon or arising out of damage to property or
injuries to persons or other acts caused or contributed to by Customer's
engineers while on-site at Cisco under this Addendum.
25
<PAGE> 26
APPENDIX A
SUPPORT FEE
Annual Partner Supported Account: $25,000 per year payable semi-annually.
Annual Virtual Supported Account: $ 50,000 per year per Customer engineer at
Cisco payable semi-annually
Cisco and Customer agrees that the Support Fee identified above will be reviewed
twice per annual period under this Addendum, and may be adjusted if, by mutual
agreement, the parties determine that the Support Fee is not representative of
the resources required under this Addendum.
26
<PAGE> 27
APPENDIX B
CISCO PROBLEM PRIORITIZATION AND ESCALATION GUIDELINE
To ensure that all problems are reported in a standard format, Cisco has
established the following problem priority definitions. These definitions will
assist Cisco in allocating the appropriate resources to resolve problems.
Customer must assign a priority to all problems submitted to Cisco.
PROBLEM PRIORITY DEFINITIONS:
Priority 1: An existing network is down or there is a critical impact to the
End User's business operation. Cisco, Customer, Customer's
reseller, and Customer will commit full-time resources to resolve
the situation.
Priority 2: Operation of an existing network is severely degraded, or
significant aspects of the End User's business operation are
being negatively impacted by unacceptable network performance.
Cisco, Customer, Customer's reseller, and Customer will commit
full-time resources during Standard Business Hours to resolve the
situation.
Priority 3: Operational performance of the network is impaired while most
business operations remain functional. Cisco, Customer,
Customer's reseller, and Customer are willing to commit resources
during Standard Business Hours to restore service to satisfactory
levels.
Priority 4: Information or assistance is required on Cisco product
capabilities, installation, or configuration. There is clearly
little or no impact to the End User's business operation. Cisco,
Customer, Customer's reseller, and Customer are willing to
provide resources during Standard Business Hours to provide
information or assistance as requested.
Cisco encourages Customer to reference this guide when Customer-initiated
escalation is required. If Customer does not feel that adequate forward
progress, or the quality of Cisco service is not satisfactory, Cisco encourages
Customer to escalate the problem ownership to the appropriate level of Cisco
management by asking for the TAC Duty Manager at:1-800-505-TECH (8324)
<TABLE>
<CAPTION>
CISCO ESCALATION GUIDELINE:
- ------------------------------------------------------------------------------------------------------
Elapsed Time Priority 1 Priority 2 Priority 3 Priority 4
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------
1 Hour Customer Engineering
Manager
- ------------------------------------------------------------------------------------------------------
4 Hours Technical Support Customer Engineering
Director Manager
- ------------------------------------------------------------------------------------------------------
24 Hours Vice President, Technical Support
Customer Advocacy Director
- ------------------------------------------------------------------------------------------------------
48 Hours President/CEO Vice President,
Customer Advocacy
- ------------------------------------------------------------------------------------------------------
72 Hours Customer Engineering
Manager
- ------------------------------------------------------------------------------------------------------
96 Hours President/CEO Technical Support Customer Engineering
Director Manager
- ------------------------------------------------------------------------------------------------------
</TABLE>
Note: Priority 1 problem escalation times are measured in calendar hours 24
hours per day, 7 days per week. Priority 2, 3, and 4 escalation times correspond
with Standard Business Hours. The Cisco Manager to which the problem is
escalated will take ownership of the problem and provide the Customer with
updates. Cisco recommends that Customer-initiated escalation begin at the
Technical Manager level and proceed upward using the escalation guideline shown
above for reference. This will allow those most closely associated with the
support resources to correct any service problems quickly.
27
<PAGE> 28
ESCALATION BY CUSTOMER TO CISCO:
Customer shall establish priorities with its resellers and End Users that are
consistent with Cisco's definitions above. Customer may report to Cisco cases
received and unresolved by Customer which exceed the following time frames:
Priority 1: Four (4) hours
Priority 2: Three (3) business days
Priority 3: Five (5) business days
Priority 4: Ten (10) business days
28
<PAGE> 29
APPENDIX C
CISCO CONNECTION ONLINE
Partner Initiated Customer Access
(PICA)
Customer Responsibility
Customer shall nominate two (2) employees to enable employee CCO access using
CCO menus and forms. The online menus and forms are available through both the
World Wide Web (WWW) and character based systems.
Customer shall forward the following information to Cisco, as soon as
practicable, for the nominated persons:
1. CCO user ID(s).
2. Internet email address (if established).
The Customer's employees will be responsible for:
1. Providing CCO access to Customer employees.
2. Assisting Cisco in verifying CCO users previously registered, whereby
Customer submitted CCO access requests.
PICA Process Overview
1. Cisco will assign a unique account number prefix to the nominated
person(s).
2. This prefix is the basis of the new account numbering scheme for
employees (i.e., FJLxxxx).
3. If the Customer wishes to entitle employee access to CCO, the nominated
person logs onto CCO and will see a special menu option under the Partners
topic area to entitle them.
4. This option is selected and three fields will appear. The first field is
an input field for the name of the employee, the second field is a
selectable list of countries and the third is a selectable field for
software download entitlement for this customer [yes/no].
5. When correctly entered, selected and executed, CCO will generate a
unique account number just for that employee, and display it on screen
(e.g.,FJL 1012).
6. Only one number per employee is normally permitted.
7. A unique user ID will be generated for each user that registers.
8. For security reasons, generic or group accounts are not permitted under
any circumstances.
9. For each registration performed, an email can be sent to the nominated
person automatically with the newly registered user's online entered
details.
10. Disabling end user CCO access will also be an online option.
CONFIDENTIALITY. Integrator acknowledges that, in the course of performing its
duties, Integrator or the end users to whom Integrator authorizes CCO access may
obtain information relating to the Products and to Cisco which is of a
confidential and proprietary nature ("Proprietary Information"). Such
Proprietary Information may include, but is not limited to, trade secrets, know
how, invention techniques, processes, programs, schematics, Software source
documents, data, financial information, and sales and marketing plans.
Integrator shall at all times keep in trust and confidence all such Proprietary
Information, and shall not use such Proprietary Information other than in the
course of its duties under the Agreement, nor shall Integrator disclose any
such Proprietary Information without Cisco's written consent. Integrator further
agrees to immediately return to Cisco all Proprietary Information (including
copies thereof) in Integrator's possession, custody, or control upon termination
of this Agreement at any time and for any reason. Integrator will indemnify
Cisco for unauthorized disclosures of Proprietary Information by Integrator or
its end user.
29
<PAGE> 30
APPENDIX D
ESCALATION FLOWCHART
CUSTOMER/CISCO WORLDWIDE CUSTOMER SUPPORT CASE ESCALATION PROCESS
30
<PAGE> 31
EXHIBIT F
THIRD PARTY LICENSES
It is expressly agreed and understood that the manufacture, use and sale of any
equipment which interfaces to a token ring network may violate United States
Reissue Patent No. 31,852 and related United States and foreign patents
(collectively the "Soderbloom Patents"). It is expressly agreed and understood
that Cisco will have no obligation or responsibility with respect to the
Soderbloom patents, and that Licensee will be solely responsible for obtaining
licenses to the Soderbloom Patents. Licensee will indemnify and defend Cisco
against any claim resulting from Licensee's failure to obtain such licenses.
It is expressly agreed and understood that the manufacture, use and sale of any
equipment which interfaces to a token ring network may violate one or more
patents held by Madge Networks, Inc. It is expressly agreed and understood that
Cisco will have no obligation or responsibility with respect to the Madge
patents, and that Licensee will be solely responsible for obtaining licenses to
the Madge patents. Licensee will indemnify and defend Cisco against any claim
resulting from Licensee's failure to obtain such licenses.
It is expressly agreed and understood that the manufacture, use and sale of any
equipment may violate United States Patent No. 5,077,732 and Patent No.
5,008,879 and related United States and foreign patents (collectively, the
"Datapoint Patents"). It is expressly agreed and understood that Cisco will have
no obligation or responsibility with respect to the Datapoint Patents, and that
Licensee will be solely responsible for obtaining licenses to the Datapoint
Patents. Licensee will indemnify and defend Cisco against any claim resulting
from Licensee's failure to obtain such licenses.
31
<PAGE> 1
Exhibit 10.5A
[APPLIED INNOVATION INC. LETTERHEAD]
March 24, 1997
PERSONAL & CONFIDENTIAL
Mr. William H. Largent
1249 Crooked Tree Court
Westerville, OH 43081
Dear Bill:
With this letter, we are pleased to offer you the position of Senior Vice
President, Operations and Chief Financial Officer with Applied Innovation Inc.
(Company). We are very excited about you joining the Company, and I look forward
to working with you to grow Applied to a substantial sized business for the
benefit of all of our employees and stockholders. I think you have the ability
to make a major and lasting contribution to Applied's future performance as a
senior officer.
As you know, Applied has grown substantially over the past 10 years, and we see
no reason why growth is not sustainable with the right team in place. We want
you to be a part of that team. We believe that your broad business experience in
industry, particularly at Liebert, will be very beneficial in helping Applied
build an even larger and more innovative business.
Let me now review the terms of our employment proposal.
1. EMPLOYMENT
----------
You will be employed by the Company commencing not later than May 15,
1997, although we hope that you can start earlier.
As Senior Vice President, Operations and Chief Financial Officer, you
will report directly to me as Chairman and President. You will be
responsible for directing the business administration, financial,
accounting, information systems, human resources, and manufacturing
activities of the Company.
<PAGE> 2
Mr. William H. Largent
March 24, 1997
Page -2-
We also see you as the senior business person working on teams with
other key officers and employees on many projects involving sales and
marketing initiatives, merger and acquisition opportunities, technology
transfers, and a variety of business initiatives.
2. COMPENSATION
------------
Your compensation will be at an annual base rate of $145,000, payable
in accordance with the normal payroll practices of the Company.
You will also be eligible for a cash bonus consistent with my plan for
1997, which is based on the Company attaining pre-tax, pre-bonus income
as follows:
PRE-TAX, PRE-BONUS INCOME % OF BASE SALARY
------------------------- ----------------
$2,750,000 to $3,437,499.99 40%
$3,437,500 to $4,124,999.99 50%
$4,125,000 or more 60%
Under our bonus program, the bonus is paid in cash by March 31, 1998,
provided you remain employed by the Company throughout 1997. Since you
would be employed in 1997 only about 8 months, your bonus will be
calculated as a percentage of your base salary actually earned in 1997,
so your bonus would effectively be pro rated for 1997 (e.g., if you
started April 1, 1997, your base for calendar 1997 would be 66.7% of
$145,000 or $96,666 and your bonus would be computed on that amount.)
The above "Pre-tax, Pre-bonus Income" schedule will be adjusted to
reflect variance from plan for the period of January 1 to April 30,
1997 (e.g., if plan for January to April was to earn $500,000 and
actual was $100,000 then the ranges would be as follows: $2,350,000 to
$3,037,499.99 - 40%; $3,037,500 to $3,724,999.99 - 50%; and $3,725,000
- 60%).
3. STOCK OPTIONS
-------------
On the date of your employment, the Company will grant to you an
incentive stock option to purchase 50,000 shares of common stock at an
exercise price equal to the closing price as quoted by NASDAQ on the
day before you commence employment. The option will be granted under
the Company's 1996 Stock Option Plan (copy enclosed), and the option
agreement will provide that the option will vest and become exercisable
as to 20% of the option shares on each anniversary of the date of your
employment with the Company, and that the option will terminate on the
sixth anniversary of the date of grant.
<PAGE> 3
Mr. William H. Largent
March 24, 1997
Page -3-
4. OTHER BENEFITS
--------------
You will also be entitled to participate in any employee benefit plans,
including vacation provisions, that the Company maintains during your
employment and which are made generally available to all other
management employees, in accordance with their terms as from time to
time amended. This includes a 401(k) and profit sharing plan, and paid
medical insurance. The Company has historically matched 25% of employee
contributions up to 6%. The Company has also made contributions to the
profit sharing plan in the past several years. The contribution for
1996 was $200,000, which is allocated among all employees based on base
salary. Employees are eligible for both plans upon employment. It is
agreed that during your first year of employment you will be entitled
to two weeks of vacation at any time during your first year. It is
agreed that the Company will pay any necessary COBRA payments on your
behalf due to any break in medical coverage for any reason, including
pre-existing conditions.
5. EXECUTIVE SEARCH FEE
--------------------
You represent that no personnel or executive search firm has been
involved in or facilitated your employment by the Company and that no
such fees are payable to any such firm for assisting you.
6. TERM
----
As with all of our employees and officers, your employment would be an
at-will employment and may be terminated by either the Company or
yourself at any time.
However, if the Company elects to terminate you without cause you will
be paid as severance pay your regular monthly base salary for up to six
(6) months after termination in accordance with the Company's normal
salary payment schedule, except that the severance pay will terminate
when you find another job and you will be paid an extra month severance
pay if you find another job within four months of your termination.
If the Company terminates you for cause, it may do so immediately and
without further obligation to you. For these purposes, "cause" will
mean an intentional failure to abide by directions or policies of the
Board of Directors or the President of the Company, an intentional
failure to perform your duties, any action that involves a
misappropriation of
<PAGE> 4
Mr. William H. Largent
March 24, 1997
Page -4-
Company assets, or any breach of this letter agreement or the
Assignment, Confidentiality and Non-Competition Agreement. You will
have the right to submit the Company's determination of "cause" to
arbitration in Columbus, Ohio before a single arbitrator under the
rules of the American Arbitration Association.
If you terminate your employment, you will continue working for the
Company during a 14-day notice period, but only if the Company so
desires to continue your employment and to compensate you during such
period.
7. FULL TIME EMPLOYMENT
--------------------
Your employment will be full time with the Company. You will not
participate in any other business activities, including consulting
activities, or serve as a director or officer of other business
enterprises, without the prior written consent of the President of the
Company. The Company acknowledges that you presently serve as a
director of Amerilink Corp., Maximation Incorporated, Metatec
Corporation, and BellePointe, Inc., and you may continue in these
outside director positions if you choose, so long as such time
commitments do not interfere with your responsibilities at the Company.
You will, of course, be permitted to hold totally passive business
investments and take part in community, civic, or charitable activities
that neither interfere with nor are inconsistent with your
responsibilities to the Company.
8. ASSIGNMENT, CONFIDENTIALITY AND NON-COMPETITION AGREEMENT
---------------------------------------------------------
In consideration of your employment, you will enter into an Assignment,
Confidentiality and Non-Competition Agreement with the Company on the
date of your employment (form enclosed), except that if the Company
terminates you without cause, you will be excused from the
non-competition restrictions of the agreement.
9. NO RESTRICTIONS ON EMPLOYMENT
-----------------------------
You represent and warrant that you are not a party to any agreement,
oral or written, or subject to any other legal restriction whatsoever
which would prevent you from performing your duties to the Company as
contemplated in this letter or which would expose the Company to a risk
of suit by reason of your employment by the Company.
<PAGE> 5
Mr. William H. Largent
March 24, 1997
Page -5-
I hope that this letter sets forth acceptable terms for you to join the Company.
To confirm acceptance of this offer, please sign the enclosed extra copy of this
letter and return it to me.
Those of us who have met you and talked with you believe that you will be a
significant asset to the Company. We also believe that Applied Innovation will
offer you the challenge and satisfaction of being an architect of our business
as it continues to grow.
Sincerely,
/s/ Gerard B. Moersdorf, Jr.
Gerard B. Moersdorf, Jr.
President
Enclosures:
1996 Stock Option Plan
Assignment , Confidentiality and Non-Competition Agreement
AGREED:
/s/ William H. Largent
- -----------------------------
WILLIAM H. LARGENT
April 24, 1997
- -----------------------------
DATE
<PAGE> 1
Exhibit 10.5B
APPLIED INNOVATIONS INC.
EMPLOYMENT AGREEMENT
--------------------
This Agreement is made this 5th day of May, 1997, by and between
William H. Largent and APPLIED INNOVATION INC., a Delaware corporation with its
principal office at 5800 Innovation Drive, Dublin, Ohio 43016, its affiliated,
subsidiaries, successors and assigns (the "Company").
WHEREAS
The company is engaged in the business of developing, manufacturing and
marketing data communications equipment, internet access devices, software and
services to telephone companies, interexchange telephone carriers, cable
television companies, and electric utilities, for alarm data communications,
network mediation and management, interoperability of networks, and network
switching and routing, and develops and uses valuable technical and
nontechnical trade secrets and other confidential information which it desires
to protect.
The Company invests considerable resources in recruiting, training and
developing employees to perform specialized services and fill individualized
customer needs in a highly competitive market. The Company has also invested
extensive resources in developing and retaining its major customers and its
contacts with key employees of its major customers.
You desire to be employed by the Company in a position of trust and
confidence in which you may receive or contribute to the confidential
information of the Company.
The Company desires to maximize your effectiveness and professional
growth by allowing you access to its trade secrets and confidential
information, but at the same time wishes to ensure that you exert your
full-time best efforts on behalf of the Company, except as provided herein, and
to ensure that the Company's trade secret and confidential information is
maintained in confidence and used only for the benefit of the Company and not
for the purpose of competition with the Company.
THEREFORE, the parties agree as follows:
1. CONSIDERATION. The Company shall employ you and provide you with
access to certain Confidential Information as defined in this Agreement and
other valuable consideration.
2. RESTRICTED EMPLOYMENT. While employed by the Company, you shall
devote your best efforts to the business of the Company and shall not engage in
any outside employment or consulting work without first securing the written
consent of the Company. The Company acknowledges that you presently serve as a
director of Amerilink Corp., Maximation incorporated, and BellePointe, Inc. and
you may continue in these outside director positions if you choose, so long as
such time commitments do not interfere with your responsibilities at the
Company. You will, of course be permitted to hold totally passive business
1
<PAGE> 2
investments and take part in community, civic, or charitable activities that
neither interfere with nor are inconsistent with your responsibilities to the
Company.
3. CONFIDENTIAL INFORMATION.
a. As used throughout this Agreement, the term "Confidential
Information" means any information you acquire during employment by the Company
(including information you conceive, discover or develop) which is not readily
available to the general public and which relates to the business, including
research and development projects, of the Company, its subsidiaries or its
affiliated companies.
b. Confidential Information includes without limitation,
information of a technical nature (such as secrets, inventions, discoveries,
product requirements, designs, software codes and manufacturing methods),
matters of a business nature (such as customer lists, the identities of
customer contacts, information about customer requirements and preferences, the
terms of the Company's contracts with its customers and suppliers, and the
Company's costs and prices), personnel information (such as the identities,
duties, customer contacts, and skills of the Company's employees) and other
financial information relating to the Company and its customers (including
credit terms, methods of conducting business, computer systems, computer
software, personnel data, and strategic marketing, sales or other business
plans). Confidential Information may or may not be patentable.
c. Confidential information does not include information which you
learned prior to employment with the Company from sources other than the
Company, information you develop after employment from sources other than the
Company's Confidential Information or information which is readily available to
persons with equivalent skills, training and experience in the same field or
fields of endeavor as you. You must presume that all information that is
disclosed or made accessible to you during employment by the Company is
Confidential Information if you have a reasonable basis to believe the
information in Confidential Information or if you have notice that the Company
treats the information as Confidential Information.
4. CONFIDENTIALITY.
a. Except in furtherance of the Company's business, you shall not
at any time, either during or for five years following employment with the
Company, make use of, or disclose to any other person or entity, any
Confidential Information unless (i) the specific information becomes public
from a source other than you or another person or entity that owes a duty of
confidentiality to the Company and (ii) twelve months have passed since the
specific information became public. However, you may discuss Confidential
Information with employees of the Company when necessary to perform your duties
to the Company.
b. Upon Employment Separation, you shall deliver to the Company all
copies, notes, documents or records of any kind that relate to any Confidential
Information. As used herein, the term "notes" means written or printed words,
symbols, pictures, numbers or formulae. As used throughout this Agreement, the
term "Employment Separation" means the separation and/or termination of your
employment with the Company, regardless of the time, manner or cause of such
separation or termination.
2
<PAGE> 3
5. INVENTIONS.
a. As used throughout this Agreement, the term "Inventions" means
any inventions, improvements, designs, plans, discoveries or innovations of a
technical or business nature, whether patentable or not, relating in any way to
the Company's business or contemplated business if the Invention is conceived
or reduced to practice by you during your employment by the Company. Inventions
includes all data, records, physical embodiments and intellectual property
pertaining thereto. Inventions reduced to practice within one year following
Employment Separation shall be presumed to have been conceived during
employment.
b. Inventions are the Company's exclusive property and shall be
promptly disclosed and assigned to the Company without additional compensation
of any kind. If requested by the Company, you, your heirs, your executors, your
administrators or legal representative will provide any information, documents,
testimony or other assistance needed for the Company to acquire, maintain,
perfect or exercise any form of legal protection that the Company desires in
connection with an Invention.
c. Upon Employment Separation, you shall deliver to the Company all
copies of and all notes with respect to all documents or records of any kind
that relate to any Inventions.
6. COVENANT NOT TO COMPETE.
a. You acknowledge that the Confidential Information has been and
will be developed and acquired by the Company by means of substantial expense
and effort, that the Confidential Information is a valuable asset of the
Company's business, that the disclosure of the Confidential Information to any
of the Company's competitors would cause substantial and irreparable injury to
the Company's business, and that any customers of the Company developed by you
or others during your employment are developed on behalf of the Company. You
further acknowledge that you have been provided with access to Confidential
Information, including Confidential Information concerning the Company's major
customers, and its technical, marketing and business plans, disclosure or
misuse of which would irreparably injure the Company.
b. During employment by the Company and for a period of 12 months
following Employment Separation, you shall not (as an owner, shareholder,
officer, employee, manager, consultant or otherwise):
(i) Contact any employee of the Company for the purpose of
discussing or suggesting that such employee resign from employment with
the Company for the purpose of becoming employed elsewhere;
(ii) Provide information about individual employees of the Company
or personnel policies or procedures of the Company to any person or
entity, including any individual, agency or company engaged in the
business of recruiting employees, executives or officers; or
3
<PAGE> 4
(iii) If you served as an officer of the Company and/or performed
any duties involving sales, marketing, sales engineering and/or product
line management in the twelve months preceding Employment Separation, you
shall not promote, solicit for sale or sell any product or service in
direct competition with the Company's products or services (A) to any
entity that purchased over $250,000 in goods and/or services from the
Company during the 12 months preceding Employment Separation, (B) to any
entity which you called on for the purpose of promoting or selling the
Company's products or services during the 12 months preceding Employment
Separation, or (C) to any entity which received a sales proposal from the
Company within 12 months of Employment Separation if the goods or services
which you seek to sell, solicit for sale or promote are directly
competitive with the goods and services which are the subject of the
Company's proposal to the entity and the entity has not yet rejected the
Company's sales proposal.
c. The 12-month non-competition period described in Section 6(b) of
this Agreement shall be suspended while you engage in any activities in breach
of the Agreement. In the event that a court grants injunctive relief to the
Company for your failure to comply with Section 6, the non-competition period
shall begin again on the date such injunctive relief is granted.
d. Nothing contained in the Section 6 shall be construed as
limiting your obligations under Section 3 or 4 or this Agreement concerning
Confidential Information and Confidentiality.
7. REMEDIES. Without limiting any of the Company's other remedies, you
agree that, in the event you fail to comply with this Agreement in any way, the
Company shall be entitled to injunctive relief against you to enforce your
obligations under this Agreement and you shall reimburse the Company for it
reasonable expenses, including attorneys' fees, incurred in seeking to enforce
this Agreement. If the Company seeks to enforce its rights under this Agreement
in a court and is denied any relief, the Company shall reimburse you for your
reasonable expenses, including attorneys' fees, in defense of that court action.
8. EXIT INTERVIEW. Prior to Employment Separation, you shall attend an
exit interview if desired by the Company and shall, in any event, inform the
Company at the earliest possible time of the identity of your future employer
and of the nature of your future employment.
9. NO WAIVER. Any failure by the Company to enforce any provision of
this Agreement shall not in any way affect the Company's right to enforce such
provision or any other provision at a later time.
10. SAVING. If any provision of this Agreement is later found to be
completely or partially unenforceable, the remaining part of that provision of
any other provision of this Agreement shall still be valid and shall not in any
way be affected by the finding. Moreover, if any provision is for any reason
held to be excessively broad as to time, duration, geographical scope,
activity or subject, such provision shall be interpreted by limiting and
reducing it to preserve enforceability to the maximum extent permitted by law.
4
<PAGE> 5
11. EMPLOYMENT AT WILL; NO LIMITATION. You acknowledge that your
employment by the Company is at-will and that your employment may be terminated
at any time by the Company or you with or without cause. This Agreement is in
addition to and not in place of other obligations of trust, confidence and
ethical duty imposed on you by law.
12. GOVERNING LAW. This Agreement shall be interpreted and enforced in
accordance with the laws of the State of Ohio without reference to its choice
of law rules.
13. FINAL AGREEMENT. This Agreement replaces any existing agreement
between you and the Company relating to the same subject matter and may be
modified only by an agreement in writing signed by both you and a duly
authorized representative of the Company.
14. FURTHER ACKNOWLEDGMENTS. YOU ACKNOWLEDGE THAT YOU HAVE RECEIVED A
COPY OF THIS AGREEMENT, THAT YOU HAVE READ AND UNDERSTOOD THIS AGREEMENT, THAT
YOU UNDERSTAND THIS AGREEMENT AFFECTS YOUR RIGHTS, AND THAT YOU HAVE ENTERED
INTO THIS AGREEMENT VOLUNTARILY.
APPLIED INNOVATION INC.
By: /s/ Virginia J. Stanley
-------------------------------
Printed:
--------------------------
Its:
------------------------------
EMPLOYEE:
Signed: /s/ William H. Largent
---------------------------
Printed: William H. Largent
--------------------------
<PAGE> 1
Exhibit 10.7
APPLIED INNOVATION INC.
EMPLOYMENT AGREEMENT
--------------------
This Agreement is made this 23rd day of October, 1997, by and between
William J. Mrukowski and APPLIED INNOVATION INC., a Delaware corporation with
its principal office at 5800 Innovation Drive, Dublin, Ohio 43016, its
affiliates, subsidiaries, successors and assigns (the "Company").
RECITALS
--------
A. The Company is engaged in the business of developing, manufacturing
and marketing data communications equipment, internet access devices, software
and services to telephone companies, interexchange telephone carriers, cable
television companies, and electric utilities, for alarm data communications,
network mediation and management, interoperability of networks, and network
switching and routing, and develops and uses valuable technical and nontechnical
trade secrets and other confidential information which it desires to protect.
B. The Company invests considerable resources in recruiting, training
and developing employees to perform specialized services and fill individualized
customer needs in a highly competitive market. The Company has also invested
extensive resources in developing and retaining its major customers and its
contacts with key employees of its major customers.
C. You desire to be employed by the Company in a position of trust and
confidence as Vice President of Sales.
D. The Company desires to maximize your effectiveness and professional
growth by continuing to allow you access to its trade secrets and confidential
information, but at the same time wishes to ensure that you exert your full-time
best efforts on behalf of the Company, except as provided herein, and to ensure
that the Company's trade secrets and confidential information are maintained in
confidence and used only for the benefit of the Company and not for the purpose
of competition with the Company.
AGREEMENT
---------
NOW, THEREFORE, the parties agree as follows:
1. CONSIDERATION. The Company shall employ you and provide you with
access to certain Confidential Information as defined in this Agreement and
other valuable consideration as provided for in Sections 3, 4, and 5 of this
Agreement.
2. RESTRICTED EMPLOYMENT. While employed by the Company, you shall
devote your best efforts to the business of the Company and shall not engage in
any outside employment or consulting work without first securing the written
consent of the Company. Furthermore, so long as you are employed under this
Agreement, you agree to devote your full time and efforts exclusively on behalf
of the Company and to competently, diligently, and effectively discharge your
duties hereunder. You
<PAGE> 2
shall not be prohibited from engaging in such personal, charitable, or other
nonemployment activities as do not interfere with your full time employment
hereunder and which do not violate the other provisions of this Agreement. You
further agree to comply fully with all reasonable policies of the Company as are
from time to time in effect.
3. COMPENSATION. Your compensation will be at an annual base rate of
$145,000, payable in accordance with the normal payroll practices of the
Company. You will be compensated as an employee as of October 1, 1997. You will
also be eligible for a cash bonus beginning in 1998 under a bonus plan which is
determined annually.
4. STOCK OPTIONS. The Company will grant to you an incentive stock
option to purchase 30,000 shares of common stock at an exercise price equal to
the closing price as quoted by NASDAQ on the day prior to the date of this
Agreement. The option will be granted under the Company's 1996 Stock Option
Plan, and the option agreement will provide that the option will vest and become
exercisable as to 20% of the option shares on each anniversary of the date of
your employment with the Company, and that the option will terminate on the
sixth anniversary of the date of grant.
5. FRINGE BENEFITS. You will be entitled to participate in any employee
benefit plans, including vacation provisions, that the Company maintains during
your employment and which are made generally available to all other management
employees, in accordance with their terms as from time to time amended. This
includes a 401(k) and profit sharing plan, and paid medical insurance. It is
agreed that during your first year of employment, you will be entitled to two
weeks of vacation at any time during such first year. It is agreed that the
Company will pay any necessary COBRA payments on your behalf due to any break in
medical coverage for any reason, including pre-existing conditions.
6. CONFIDENTIAL INFORMATION.
(a) As used throughout this Agreement, the term "Confidential
Information" means any information you acquire during employment by the Company
(including information you conceive, discover or develop) which is not readily
available to the general public and which relates to the business, including
research and development projects, of the Company, its subsidiaries or its
affiliated companies.
(b) Confidential Information includes, without limitation,
information of a technical nature (such as trade secrets, inventions,
discoveries, product requirements, designs, software codes and manufacturing
methods), matters of a business nature (such as customer lists, the identities
of customer contacts, information about customer requirements and preferences,
the terms of the Company's contracts with its customers and suppliers, and the
Company's costs and prices), personnel information (such as the identities,
duties, customer contacts, and skills of the Company's employees) and other
financial information relating to the Company and its customers (including
credit terms, methods of conducting business, computer systems, computer
software, personnel data, and strategic marketing, sales or other business
plans). Confidential Information may or may not be patentable.
(c) Confidential Information does not include information
which you learned prior to employment with the Company from sources other than
the Company, information you develop after
- 2 -
<PAGE> 3
employment from sources other than the Company's Confidential Information or
information which is readily available to persons with equivalent skills,
training and experience in the same fields or fields of endeavor as you. You
must presume that all information that is disclosed or made accessible to you
during employment by the Company is Confidential Information if you have a
reasonable basis to believe the information is Confidential Information or if
you have notice that the Company treats the information as Confidential
Information.
7. CONFIDENTIALITY.
(a) Except in furtherance of the Company's business, you shall
not at any time, either during or for five years following employment with the
Company, make use of, or disclose to any other person or entity, any
Confidential Information unless (i) the specific information becomes public from
a source other than you or another person or entity that owes a duty of
confidentiality to the Company and (ii) twelve months have passed since the
specific information became public. However, you may discuss Confidential
Information with employees of the Company when necessary to perform your duties
to the Company.
(b) Upon Employment Separation, you shall deliver to the
Company all copies, notes, documents or records of any kind that relate to any
Confidential Information. As used herein, the term "notes" means written or
printed words, symbols, pictures, numbers or formulae. As used throughout this
Agreement, the term "Employment Separation" means the separation and/or
termination of your employment with the Company, regardless of the time, manner
or cause of such separation or termination.
8. INVENTIONS.
(a) As used throughout this Agreement, the term "Inventions"
means any inventions, improvements, designs, plans, discoveries or innovations
of a technical or business nature, whether patentable or not, relating in any
way to the Company's business or contemplated business if the Invention is
conceived or reduced to practice by you during your employment by the Company.
Inventions includes all data, records, physical embodiments and intellectual
property pertaining thereto. Inventions reduced to practice within one year
following Employment Separation shall be presumed to have been conceived during
employment.
(b) Inventions are the Company's exclusive property and shall
be promptly disclosed and assigned to the Company without additional
compensation of any kind. If requested by the Company, you, your heirs, your
executors, your administrators or legal representative will provide any
information, documents, testimony or other assistance needed for the Company to
acquire, maintain, perfect or exercise any form of legal protection that the
Company desires in connection with an Invention.
(c) Upon Employment Separation, you shall deliver to the
Company all copies of and all notes with respect to all documents or records of
any kind that relate to any Inventions.
- 3 -
<PAGE> 4
9. TERMINATION AND COVENANT NOT TO COMPETE.
(a) You acknowledge that the Confidential Information has been
and will be developed and acquired by the Company by means of substantial
expense and effort, that the Confidential Information is a valuable asset of the
Company's business, that the disclosure of the Confidential Information to any
of the Company's competitors would cause substantial and irreparable injury to
the Company's business, and that any customers of the Company developed by you
or others during your employment are developed on behalf of the Company. You
further acknowledge that you have been provided with access to Confidential
Information, including Confidential Information concerning the Company's major
customers, and its technical, marketing and business plans, disclosure or misuse
of which would irreparably injure the Company.
(b) During employment by the Company and for a period of
twelve (12) months following Employment Separation, you shall not (as an owner,
shareholder, officer, employee, manager, consultant or otherwise):
(i) Contact any employee of the Company for the
purpose of discussing or suggesting that such employee resign from
employment with the Company for the purpose of becoming employed
elsewhere;
(ii) Provide information about individual employees
of the Company or personnel policies or procedures of the Company to
any person or entity, including any individual, agency or company
engaged in the business of recruiting employees, executives or
officers; or
(iii) If you served as an officer of the Company or
performed any duties involving sales, marketing, sales engineering
and/or product line management in the twelve months preceding
Employment Separation, you shall not promote, solicit for sale or sell
any product or service in direct competition with the Company's
products or services (A) to any entity that purchased over $250,000 in
goods and/or services from the Company during the 12 months preceding
Employment Separation, (B) to any entity which you called on for the
purpose of promoting or selling the Company's products or services
during the 12 months preceding Employment Separation, or (C) to any
entity which received a sales proposal from the Company within 12
months of Employment Separation if the goods or services which you seek
to sell, solicit for sale or promote are directly competitive with the
goods and services which are the subject of the Company's proposal to
the entity and the entity has not yet rejected the Company's sales
proposal.
(c) An Employment Separation for Cause will occur upon a determination
by the Company that "Cause" exists for your termination and the Company serves
you written notice of such termination. As used in this Agreement, the term
"Cause" shall refer only to any one or more of the following grounds:
(i) Commission of an act of dishonesty, including,
but not limited to, misappropriation of funds or any property of the
Company;
- 4 -
<PAGE> 5
(ii) Engagement in activities or conduct clearly
injurious to the best interests or reputation of the Company;
(iii) Refusal to perform your assigned duties and
responsibilities;
(iv) Gross insubordination;
(v) The clear violation of any of the material terms
and conditions of this Agreement or any other written agreement or
agreements you may from time to time have with the Company (following
30-days' written notice from the Company specifying the violation and
your failure to cure such violation within such 30-day period);
(vi) Substantial dependence, as determined by the
Board of Directors of the Company, on alcohol, or any narcotic drug or
other controlled or illegal substance; or
(vii) Commission of a crime which is a felony, a
misdemeanor involving an act of moral turpitude, or a misdemeanor
committed in connection with your employment by the Company which
causes the Company a substantial detriment.
You will have the right to submit the Company's determination
of "Cause" to arbitration in Columbus, Ohio before a single arbitrator
under the rules of the American Arbitration Association.
(d) In the event of an Employment Separation as a result of
termination by the Company for Cause or termination by you for any reason, the
Company will pay you the earned but unpaid portion of your base salary through
the termination date.
(e) In the event of an Employment Separation as a result of
termination by you for any reason, you will continue working for the Company
during a 14-day notice period, but only if the Company so desires to continue
your employment and to compensate you during such period.
(f) In the event of an Employment Separation as a result of
termination by the Company without Cause, the Company will pay you the earned
but unpaid portion of your base salary through the termination date and will
continue to pay you your base salary for an additional three months (the
"Severance Period"); provided, however, if you accept other employment during
the Severance Period, the Company shall pay you your base salary until the first
to occur of the expiration of the Severance Period or the commencement of the
other employment.
(g) The noncompetition periods described in Section 9(b) of
this Agreement shall be suspended while you engage in any activities in breach
of this Agreement. In the event that a court grants injunctive relief to the
Company for your failure to comply with Section 9, the noncompetition period
shall begin again on the date such injunctive relief is granted.
- 5 -
<PAGE> 6
(h) Nothing contained in this Section 9 shall be construed as
limiting your obligations under Sections 6 or 7 of this Agreement concerning
Confidential Information and Confidentiality.
(i) If the Company terminates you without Cause, you will be
excused from the noncompetition restrictions contained in Section 9(b)(iii)
hereof.
10. REMEDIES. Without limiting any of the Company's other remedies,
you agree that, in the event you fail to comply with this Agreement in any way,
the Company shall be entitled to injunctive relief against you to enforce your
obligations under this Agreement and you shall reimburse the Company for its
reasonable expenses, including attorneys' fees, incurred in seeking to enforce
this Agreement. If the Company seeks to enforce its rights under this Agreement
in a court and is denied any relief, the Company shall reimburse you for your
reasonable expenses, including attorneys' fees, in defense of that court action.
11. EXIT INTERVIEW. Prior to Employment Separation, you shall attend an
exit interview if desired by the Company and shall, in any event, inform the
Company at the earliest possible time of the identity of your future employer
and of the nature of your future employment.
12. NO WAIVER. Any failure by the Company to enforce any provision of
this Agreement shall not in any way affect the Company's right to enforce such
provision or any other provision at a later time.
13. SAVING. If any provision of this Agreement is later found to be
completely or partially unenforceable, the remaining part of that provision of
any other provision of this Agreement shall still be valid and shall not in any
way be affected by the finding. Moreover, if any provision is for any reason
held to be excessively broad as to time, duration, geographical scope, activity
or subject, such provision shall be interpreted by limiting and reducing it to
preserve enforceability to the maximum extent permitted by law.
14. EMPLOYMENT AT WILL; NO LIMITATION. You acknowledge that your
employment by the Company is at-will and that your employment may be terminated
at any time by the Company or you with or without cause. This Agreement is in
addition to and not in place of other obligations of trust, confidence and
ethical duty imposed on you by law.
15. GOVERNING LAW. This Agreement shall be interpreted and enforced in
accordance with the laws of the State of Ohio without reference to its choice of
law rules.
16. FINAL AGREEMENT. This Agreement replaces any existing agreement
between you and the Company relating to the same subject matter and may be
modified only by an agreement in writing signed by both you and a duly
authorized representative of the Company.
- 6 -
<PAGE> 7
17. FURTHER ACKNOWLEDGMENTS. YOU ACKNOWLEDGE THAT YOU HAVE RECEIVED A
COPY OF THIS AGREEMENT, THAT YOU HAVE READ AND UNDERSTOOD THIS AGREEMENT, THAT
YOU UNDERSTAND THIS AGREEMENT AFFECTS YOUR RIGHTS, AND THAT YOU HAVE ENTERED
INTO THIS AGREEMENT
VOLUNTARILY.
APPLIED INNOVATION INC.
By: /s/ Gerard B. Moersdorf, Jr.
------------------------------------
Gerard B. Moersdorf, Jr., President
EMPLOYEE:
/s/ William J. Mrukowski
---------------------------------------
William J. Mrukowski
- 7 -
<PAGE> 1
APPLIED INNOVATION INC.
Exhibit 11
Statement Regarding Computation of Earnings Per Share
For the years ended December 31, 1997, 1996, and 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ----- ----
<S> <C> <C> <C>
Weighted average number of common
shares outstanding - used for
computation of basic earnings (loss)
per share 15,786,332 15,742,760 15,650,755
Add net shares issuable pursuant to stock
option plans less shares assumed
repurchased at the average market price 0 119,488 269,321
----------- ----------- -----------
Number of shares for computation of
diluted earnings (loss) per share 15,786,332 15,862,248 15,920,076
=========== =========== ===========
Net income (loss) for basic and diluted
earnings (loss) per share $ (637,195) $2,154,568 $6,054,030
=========== =========== ===========
Basic earnings (loss) per share $(.04) $.14 $.39
===== ==== ====
Diluted earning (loss) per share $(.04) $.14 $.38
===== ==== ====
</TABLE>
<PAGE> 1
Exhibit 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
OVERVIEW
Applied Innovation Inc. develops, manufactures, and markets network mediation
and bridging products and services to the telecommunications industry. The
Company's products and services support the operation, maintenance,
administration and provisioning of the internal networks used by
telecommunications companies to manage elements in their customer service
network systems. The Company's primary emphasis is on providing hardware and
software solutions to companies in the telecommunications industry.
The Company's products provide the data network needed to monitor and maintain
thousands of pieces of electronic equipment used to deliver telecommunication
services. The telecommunications companies continually upgrade and expand the
equipment they use to provide service to their customers. As each new piece of
equipment is installed, it is connected to a data-monitoring network that is
used to report alarms, gather performance information, provide test access, and
reprogram equipment to establish and maintain customer service. All these new
components must efficiently communicate with the data-monitoring network if
customer calls and data transmission are to be completed reliably. Older
equipment must also be connected to and integrated with the new components and
the data-monitoring network. The Company's products perform this critical
bridging and mediation function.
The Company sells its products and services through it own sales force. The
Company also markets its products through original equipment manufacturers,
resellers, systems integrators, and distributors. These alternative distribution
channels enable the Company to make sales in markets that its own sales force
cannot reach easily or cost-effectively.
The Company estimates that the regional bell operating companies (RBOCs) control
approximately half of the estimated 20,000 communications central office
locations in the United States. The remaining locations are controlled by a few
large firms (such as GTE, MCI, and Sprint United) and more than 1,000 smaller
independent firms. The Company has historically concentrated its marketing
efforts on the RBOCs because of their relative size, demand for product, and
importance. As a result, the Company has historically received a large
percentage of its annual net sales from RBOCs.
Each RBOC has a finite number of central offices, which limits its total demand
for the Company's existing products. To the extent that the Company achieves
significant penetration with existing products of any one RBOC's central office
facilities, it cannot anticipate substantial additional sales of these products
to the same RBOC. Future domestic sales to these customers will depend on the
development of new products and new releases of existing products. Sales growth
for existing products will be achieved through additional sales to other RBOCs
and continued penetration of the diverse market of independent phone companies.
The Company also invested in the development of Internet access products during
1997. The products are designed to assist telecommunications companies in
off-loading data traffic from the congested voice traffic lines onto a data
network, relieving communications lines originally designed to carry voice, not
data. No sales of the access products occurred in 1997.
<PAGE> 2
YEAR ENDED DECEMBER 31, 1997, COMPARED TO YEAR ENDED DECEMBER 31, 1996
Net sales rose to $46,661,000 in 1997 from $41,146,000 in 1996, an increase of
13%. Most of the increase resulted from additional unit sales of the AISwitch
Series 180. Because sales are concentrated among the RBOCs and long distance
phone companies, a small number of customers have accounted for substantial
portions of the Company's annual net sales. Five companies accounted for 76% of
the Company's net sales in 1997. Each of these five customers contributed
between 14% and 22% of net sales.
Cost of sales as a percentage of net sales decreased to 43% in 1997 from 50% in
1996, and gross profit increased to 57% in 1997 from 50% in 1996. The increase
in gross profit as a percentage of net sales was due to increased production
efficiencies gained through an increase in sales volume. Additionally, gross
profit in 1996 was adversely impacted by increased warranty expense attributable
to units which the Company agreed to repair to avoid future product
difficulties, and demonstrate the Company's quality assurance commitment to
customers. The Company expects 1998 gross profit, as a percentage of net sales,
to be lower than in 1997 due to the scheduled release of a new product line
which will initially be sold at a lower profit margin than the Company's
existing product line.
Research and development (R&D) expenses increased to $12,897,000 in 1997 from
$7,647,000 in 1996, and increased as a percentage of net sales to 28% in 1997
from 19% in 1996. A substantial portion of the increase resulted from the hiring
of additional personnel and the opening of a R&D facility in North Carolina in
1997. During 1997 the Company incurred approximately $6,500,000 in R&D expense
to develop Internet access products for its telecommunication company customers.
The Company anticipates that in 1998 the actual dollars expended for research
and development will be higher than in 1997 to support its existing product
lines and the ongoing development of the Internet access products.
Selling, general, and administrative (SG&A) expenses increased to $15,091,000 in
1997 from $10,213,000 in 1996. As a percentage of net sales, these expenses
increased to 32% in 1997 from 25% in 1996. Approximately $1,975,000 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. Other
significant increases to SG&A in 1997 were for commissions due on the sale of
products containing licensed technology ($718,000), bad debts ($724,000),
consulting ($463,000), travel and entertainment ($440,000), and office and
computer supplies ($354,000). To support continued growth, the Company expects
additional increases in sales, general, and administrative personnel and related
costs during 1998.
As a result of the above changes in sales and expenses, there was a loss from
operations of $1,419,000 in 1997 compared to an income from operations of
$2,883,000 in 1996. As a percentage of net sales, income (loss) from operations
was (3%) in 1997 and 7% in 1996.
Net other income decreased by $127,000 to $401,000 in 1997. The decrease is
attributable to losses of $134,000 recognized upon the disposal of assets in
1997.
There was a loss before income taxes in 1997 of $1,017,000 compared to an income
before income taxes of $3,411,000 in 1996.
The Company's effective income tax rate was 37% in 1997 and 1996.
<PAGE> 3
YEAR ENDED DECEMBER 31, 1996, COMPARED TO YEAR ENDED DECEMBER 31, 1995
Net sales rose to $41,146,000 in 1996 from $36,014,000 in 1995, an increase of
14%. Most of the increase resulted from additional unit sales of the AISwitch
Series 180. Because sales are concentrated among the RBOCs and long distance
phone companies, a small number of customers have accounted for substantial
portions of the Company's annual net sales. Three companies accounted for 53% of
the Company's net sales in 1996. Each of these three customers contributed
between 15% and 20% of net sales.
Cost of sales as a percentage of net sales increased to 50% in 1996 from 35% in
1995, and gross profit decreased to 50% in 1996 from 65% in 1995. The reduction
in gross profit as a percentage of net sales was due in part to costs incurred
to support and upgrade certain installed products pending the release of new
products and selected price competition. Additionally, gross profit in 1996 was
adversely impacted by increased warranty expense attributable to units which the
Company agreed to repair to avoid future product difficulties, and demonstrate
the Company's quality assurance commitment to customers.
Research and development expenses increased to $7,647,000 in 1996 from
$5,979,000 in 1995, and increased as a percentage of net sales to 19% in 1996
from 17% in 1995. A substantial portion of the increase resulted from the hiring
of additional personnel.
Selling, general, and administrative expenses increased to $10,213,000 in 1996
from $7,852,000 in 1995. As a percentage of net sales, these expenses increased
to 25% in 1996 from 22% in 1995. The increase is 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.
As a result of the above changes in net sales and expenses, income from
operations decreased by 70% to $2,883,000 in 1996 from $9,472,000 in 1995. As a
percentage of net sales, income from operations was 7% in 1996 and 26% in 1995.
Net other income increased by $117,000 to $528,000 in 1996. The increase is
attributable to interest income earned on higher average cash balances.
Income before income taxes decreased in 1996 by 65% to $3,411,000 from
$9,883,000.
The Company's effective income tax rate was 37% in 1996 and 39% in 1995.
<PAGE> 4
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities totaled $309,000 and $5,211,000 for
1997 and 1996, respectively. In 1997, net loss plus depreciation provided
$1,811,000 of operating cash flow. In 1996, net income plus depreciation
provided $3,580,000 of operating cash flow.
Net working capital was $16,655,000 at December 31, 1997, compared to
$19,091,000 at December 31, 1996. Current ratios on those dates were 3.1:1 and
4.5:1 respectively. The Company had no long-term debt in 1997 or 1996.
Capital expenditures equaled $4,454,000 and $2,532,000 in 1997 and 1996,
respectively. Net capital expenditures in 1997 and 1996 included $3,173,000 and
$2,342,000, respectively, for the purchase of equipment and furniture. The
Company opened a research and development facility in North Carolina in 1997 to
focus on the development of Internet access products. The Company has expended
approximately $3,548,000 for capital assets to be used in the development of the
Company's Internet access products. These capital assets include leasehold
improvements, office equipment and furnishings, test equipment, and computer and
network equipment.
The Company has greatly increased its investment in the development of Internet
access products. The Company is actively seeking a strategic partner to assist
in the expanded development of its Internet access products. Depending on the
success of the search and the structure of any subsequent agreement, the Company
may realize an inflow of a significant amount of capital.
The Company has an unsecured line of credit from a bank totaling $5,000,000.
Interest on the outstanding balance is payable monthly at the London Interbank
Offered Rate plus 2 percent. Unpaid principal is due March 31, 1998.
At December 31, 1997, the full $5,000,000 amount of the line was available.
The Company believes that its existing cash, cash equivalents, cash to be
generated from future operations, and funds which may be obtained from future
financing activities will provide sufficient capital to meet the business needs
of the Company.
<PAGE> 5
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
With the exception of historical information, the matters discussed in this
annual report concerning future gross margins, R&D expenses, SG&A expenses,
capital expenditures, development of Internet access products, and capital
resources are forward-looking statements that involve risks and uncertainties
including, but not limited to, the continued acceptance of the Company's
existing telecommunications network management products by regional bell
operating companies and other telecommunications carriers; 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; 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, 1997, all of which factors and risks may cause actual results to
differ materially from management's current expectations. The Company undertakes
no obligation to publish, update, or revise any forward-looking statements.
<PAGE> 6
APPLIED INNOVATION INC.
AND SUBSIDIARY
-----------------------
Consolidated Financial Statements
December 31, 1997 and 1996
(With Independent Auditors' Report Thereon)
<PAGE> 7
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Applied Innovation Inc.:
We have audited the accompanying consolidated balance sheets of Applied
Innovation Inc. and subsidiary as of December 31, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the years in the three year period ended December 31, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Applied Innovation
Inc. and subsidiary as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three year period
ended December 31, 1997 in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Columbus, Ohio
February 11, 1998
<PAGE> 8
APPLIED INNOVATION INC.
AND SUBSIDIARY
Consolidated Balance Sheets
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------------------
ASSETS 1997 1996
------ ---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 8,195,156 $ 12,278,092
Accounts receivable, net of allowance of $228,284 in 1997 and $112,528 in 1996 11,944,692 7,646,517
Inventory 3,176,299 3,005,921
Prepaid expenses 298,362 270,611
Deferred income taxes 1,145,000 1,366,025
---------------- ----------------
Total current assets 24,759,509 24,567,166
---------------- ----------------
Property, plant and equipment:
Land 1,639,303 1,458,296
Building 4,851,032 4,843,165
Leasehold improvements 266,040
Vehicles 40,143 40,143
Equipment 8,060,637 5,164,077
Furniture 2,218,569 1,942,545
---------------- ----------------
17,075,724 13,448,226
Less accumulated depreciation 4,241,781 2,470,584
---------------- ----------------
Net property, plant and equipment 12,833,943 10,977,642
Other assets 114,096 117,436
---------------- ----------------
$ 37,707,548 $ 35,662,244
================ ================
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Current liabilities:
Accounts payable $ 3,365,815 $ 1,517,191
Accrued expenses:
Royalties 1,001,323 76,036
Commissions 440,461 315,830
Property taxes 336,568 133,415
Payroll taxes and withholdings 117,632 65,839
Income taxes 107,522 289,612
Payroll 508,817 98,448
Profit sharing plan 38,272 218,391
Warranty 2,155,325 2,761,589
Deferred revenue 32,831
---------------- ----------------
Total current liabilities 8,104,566 5,476,351
Deferred income taxes 200,000 244,035
---------------- ----------------
Total liabilities 8,304,566 5,720,386
---------------- ----------------
Stockholders' equity:
Common stock, $.01 par value. Authorized 30,000,000 shares; issued and outstanding
15,790,832 in 1997 and 15,764,632 shares in 1996 157,908 157,646
Additional paid-in capital 8,407,058 8,360,502
Deferred compensation (51,501)
Retained earnings 20,838,016 21,475,211
---------------- ----------------
Total stockholders' equity 29,402,982 29,941,858
---------------- ----------------
$ 37,707,548 $ 35,662,244
================ ================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 9
APPLIED INNOVATION INC.
AND SUBSIDIARY
Consolidated Statements of Operations
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1997 1996 1995
---- ---- -----
<S> <C> <C> <C>
Net sales $ 46,661,054 $ 41,145,876 $ 36,013,535
Cost of sales 20,091,096 20,403,555 12,710,850
---------------- --------------- ---------------
Gross profit 26,569,958 20,742,321 23,302,685
---------------- --------------- ---------------
Operating expenses:
Selling, general and administrative 15,091,470 10,212,917 7,851,747
Research and development 12,897,072 7,646,796 5,979,252
---------------- --------------- ---------------
27,988,542 17,859,713 13,830,999
---------------- --------------- ---------------
Income (loss) from operations 2,882,608 9,471,686
(1,418,584)
---------------- --------------- ---------------
Other income (expense):
Interest income 535,409 523,956 420,367
Gain (loss) on disposal of assets (134,020) 4,004 (9,023)
---------------- --------------- ---------------
401,389 527,960 411,344
---------------- --------------- ---------------
Income (loss) before income taxes (1,017,195) 3,410,568 9,883,030
Income taxes (380,000) 1,256,000 3,829,000
---------------- --------------- ---------------
Net income (loss) $ (637,195) $ 2,154,568 $ 6,054,030
================ =============== ===============
Earnings (loss) per share:
Basic earnings (loss) per share $ (.04) $ .14 $ .39
================ =============== ===============
Diluted earnings (loss) per share $ (.04) $ .14 $ .38
================ =============== ===============
Weighted average shares outstanding for basic
earnings (loss) per share 15,786,332 15,742,760 15,650,755
================ =============== ===============
Weighted average shares outstanding for diluted
earnings (loss) per share 15,786,332 15,862,248 15,920,076
================ =============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 10
APPLIED INNOVATION INC.
AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Common stock
---------------------------
Additional
Number paid-in Deferred Retained
of shares Amount capital compensation earnings
-------------- ------------ --------------- ---------------- -----------------
<S> <C> <C> <C> <C> <C>
Balance-December 31, 1994 15,549,628 $ 155,496 $ 6,610,403 $ (105,900) $ 13,266,613
Stock options exercised 125,000 1,250 150,853
Tax benefit associated with exercise
of stock options 1,148,000
Amortization of deferred compensation
34,185
Net income 6,054,030
Restricted stock awards 8,636 86 70,868 (70,954)
-------------- ------------ --------------- ---------------- -----------------
Balance-December 31, 1995 15,683,264 156,832 7,980,124 (142,669) 19,320,643
Stock options exercised 77,120 771 223,958
Tax benefit associated with exercise
of stock options 192,000
Amortization of deferred compensation
55,631
Net income 2,154,568
Restricted stock awards 4,248 43 (35,580) 35,537
-------------- ------------ --------------- ---------------- -----------------
Balance-December 31, 1996 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
51,501
Net loss (637,195)
-------------- ------------ --------------- ---------------- -----------------
Balance-December 31, 1997 15,790,832 $ 157,908 $ 8,407,058 $ 0 $ 20,838,016
============== ============ =============== ================ =================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 11
APPLIED INNOVATION INC.
AND SUBSIDIARY
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (637,195) $ 2,154,568 $ 6,054,030
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation 2,448,009 1,425,381 717,169
(Gain) loss on disposal of assets 134,020 (4,004) 9,023
Provision for deferred compensation 51,501 55,631 34,185
Provision for deferred income taxes 80,000 (699,000) 18,000
Effects of changes in operating assets and liabilities:
Accounts receivable (4,298,175) (1,074,191) 1,676,639
Inventory (170,378) 1,055,018 2,025,746
Prepaid expenses (27,751) (41,923) (147,612)
Other assets 3,340 (50,171) (41,668)
Accounts payable 1,848,624 (139,774) 416,453
Accrued expenses 843,750 2,529,783 (1,023,134)
Deferred revenue 32,831 (3,939)
---------------- --------------- ---------------
Net cash provided by operating activities 308,576 5,211,318 9,734,892
---------------- --------------- ---------------
Cash flows from investing activities:
Purchases of property, plant and equipment (4,453,540) (2,531,577) (5,409,009)
Proceeds from sale of property, plant and equipment 15,210 5,335 673
Proceeds from sale of marketable securities 422,322
---------------- --------------- ---------------
Net cash used by investing activities (4,438,330) (2,526,242) (4,986,014)
---------------- --------------- ---------------
Cash flows from financing activities:
Tax benefit associated with exercise of stock options 29,693 192,000 1,148,000
Proceeds from issuance of common stock 17,125 224,729 152,103
---------------- --------------- ---------------
Net cash provided by financing activities 46,818 416,729 1,300,103
---------------- --------------- ---------------
Increase (decrease) in cash and cash equivalents (4,082,936) 3,101,805 6,048,981
Cash and cash equivalents-beginning of year 12,278,092 9,176,287 3,127,306
---------------- --------------- ---------------
Cash and cash equivalents-end of year $ 8,195,156 $ 12,278,092 $ 9,176,287
================ =============== ===============
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Income taxes paid $ 75,801 $ 1,558,832 $ 3,613,032
================ =============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 12
APPLIED INNOVATION INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following accounting principles and practices of Applied Innovation
Inc. and subsidiary (the Company) are set forth to facilitate the
understanding of data presented in the consolidated financial
statements:
DESCRIPTION OF BUSINESS ACTIVITY
The Company is a leading provider of network solutions for
telecommunications service providers. The Dublin, Ohio, based
company designs and manufactures products for network
management, protocol conversion, mediation and data
communication between network elements and operations support
systems. The Company's products enable operations systems to
manage all the elements in multivendor, multiprotocol
telecommunications networks. The majority of the Company's
customers are regional bell operating companies, long distance
phone companies and competitive access providers.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of
Applied Innovation Inc. and its wholly owned subsidiary. All
significant intercompany balances and transactions have been
eliminated in consolidation.
CASH EQUIVALENTS
Cash equivalents of $5,293,731 and $6,104,874 at December 31, 1997
and 1996, respectively, consist of taxable and tax exempt
bonds with seven-day put options. For purposes of the
statement of cash flows, the Company considers all highly
liquid investments with original maturities of three months or
less to be cash equivalents.
REVENUE RECOGNITION
Sales revenue is recognized when products are shipped. Field
service revenue is recognized as projects are completed.
INVENTORY
Inventory is stated at the lower of cost or market using the
first-in, first-out method.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Depreciation
is provided on the straight-line method over the estimated
useful lives as follows:
<TABLE>
<CAPTION>
LIVES (IN YEARS)
----------------
<S> <C>
Building 40
Vehicles 5
Equipment 3-5
Furniture 7
</TABLE>
<PAGE> 13
APPLIED INNOVATION INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
WARRANTY
The Company warrants its products for one year after sale.
Additionally, the Company may agree to repair, replace or
service its products beyond the one-year warranty period.
Accordingly, the Company accrues the estimated costs of such
warranties and services.
INCOME TAXES
Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences
between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases and
operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of
a change in tax rates is recognized in income in the period
that includes the enactment date.
EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings per Share. Statement 128 replaced
the calculation of primary and fully diluted earnings per
share with basic and diluted earnings per share. Unlike
primary earnings per share, basic earnings per share excludes
any dilutive effects of options, warrants and convertible
securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. All
earnings per share amounts for all periods have been
presented, and where appropriate, restated to conform to the
Statement 128 requirements.
STOCK OPTION PLANS
Prior to January 1, 1996, the Company accounted for its stock
option plans in accordance with the provisions of Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock
Issued to Employees, and related interpretations. As such,
compensation expense would be recorded on the date of grant
only if the current market price of the underlying stock
exceeded the exercise price.
On January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based
Compensation (Statement 123), which permits entities to
recognize as expense over the vesting period the fair value of
all stock-based awards on the date of grant (fair-value-based
method). Alternatively, Statement 123 also allows entities to
continue to apply the provisions of APB Opinion No. 25 and
provide pro forma net income and pro forma earnings per share
disclosures for employee stock option grants made in 1995 and
future years as if the fair-value-based method defined in
Statement 123 had been applied. The Company has elected to
continue to apply the provisions of APB Opinion No. 25 and
provide the pro forma disclosure provisions of Statement 123.
<PAGE> 14
APPLIED INNOVATION INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
RESEARCH AND DEVELOPMENT
Research and development costs are charged to operations when
incurred.
GENERAL CREDIT RISK
The Company grants credit on open account to its customers,
substantially all of whom are in the telecommunications
industry.
USE OF ESTIMATES
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and
liabilities and the disclosure of contingent assets and
liabilities to prepare these consolidated financial statements
in conformity with generally accepted accounting principles.
Actual results could differ from those estimates.
(2) INVENTORY
Major classes of inventory at December 31, 1997 and 1996 are summarized
below:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Raw materials $ 1,715,268 $ 1,831,708
Work-in-process 1,092,754 456,137
Finished goods 480,393 793,076
------------- -------------
3,288,415 3,080,921
Reserve for obsolescence (112,116) (75,000)
------------- -------------
$ 3,176,299 $ 3,005,921
============= =============
</TABLE>
(3) FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values of all financial instruments approximate carrying values
because of the short maturities of those instruments.
(4) LINE OF CREDIT
The Company has a $5 million revolving line of credit available.
Effective August 1, 1996, the line was extended and it expires on
March 31, 1998. The outstanding principal bears interest at the
London Interbank Offered Rate plus 2% (7.7% at December 31, 1997).
Borrowings under this line are unsecured. No amounts were
outstanding under this line of credit at December 31, 1997 and 1996.
At December 31, 1997, the Company was either in compliance with or had
obtained waivers for all covenants applicable to the line of credit
arrangement.
<PAGE> 15
APPLIED INNOVATION INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(5) STOCK SPLIT
On July 27, 1995 the Board of Directors declared a two-for-one common
stock split in the form of a 100% common stock dividend to
stockholders of record on August 17, 1995, payable August 31, 1995.
All share and per share amounts in the accompanying consolidated
financial statements have been adjusted for the split. In connection
with the stock split, the par value has remained $.01 per share.
(6) EARNINGS (LOSS) PER SHARE
The calculations of earnings (loss) per share for the years ended
December 31, 1997, 1996, and 1995 are based upon the weighted
average shares outstanding during the periods and, when applicable,
those stock options that are dilutive, using the treasury stock
method, after giving retroactive effect for the two-for-one split on
August 17, 1995. Reconciliations of the numerators and denominators
of the basic and diluted earnings (loss) per share calculations
follow:
<TABLE>
<CAPTION>
Year ended December 31, 1997
------------------------------------------------
Loss Shares Per share
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
Basic and diluted loss per share $ (637,195) 15,786,332 $ (.04)
=============== ================= =============
Year ended December 31, 1996
------------------------------------------------
Income Shares Per share
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
Basic earnings per share-
Net income available to common stockholders $ 2,154,568 15,742,760 $ .14
==============
Effect of dilutive securities-
Stock options 119,488
-------------- ------------------
Diluted earnings per share-
Net income available to common stockholders
including assumed conversions $ 2,154,568 15,862,248 $ .14
============== ================== ==============
Year ended December 31, 1995
------------------------------------------------
Income Shares Per share
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
Basic earnings per share-
Net income available to common stockholders $ 6,054,030 15,650,755 $ .39
=============
Effect of dilutive securities-
Stock options 269,321
--------------- -----------------
Diluted earnings per share-
Net income available to common stockholders
including assumed conversions $ 6,054,030 15,920,076 $ .38
=============== ================= =============
</TABLE>
<PAGE> 16
APPLIED INNOVATION INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
Stock options to purchase 1,034,250 shares of common stock ranging from
$.69 to $7.31 per share were outstanding in 1997 but were not
included in the 1997 calculation of diluted loss per share because
the Company experienced a net loss and the effect of such options
would be antidilutive.
Stock options to purchase 378,360 shares of common stock ranging from
$9.75 to $14.25 per share were outstanding in 1996 but were not
included in the 1996 calculation of diluted earnings per share
because the options' exercise price was greater than the average
market price of the common shares and the effect of such options
would be antidilutive.
(7) MAJOR CUSTOMERS
During the year ended December 31, 1997, revenues to five major
customers comprised 76% of total net sales. The revenues to these
five customers individually ranged from 13% to 22% of total net
sales. At December 31, 1997, the amount due from these customers,
included in trade accounts receivable, was $9,374,203.
During the year ended December 31, 1996, revenues to three major
customers comprised 53% of total net sales. The revenues to these
three customers individually ranged from 15% to 20% of total net
sales. At December 31, 1996, the amount due from these customers,
included in trade accounts receivable, was $2,306,795.
During the year ended December 31, 1995, revenues to four major
customers comprised 67% of total net sales. The revenues to these
four customers individually ranged from 13% to 20% of total net
sales.
(8) STOCK OPTION PLANS
The Company's 1996 Stock Option Plan (the 1996 Plan) was adopted by the
Board of Directors on February 1, 1996 and approved by the
stockholders of the Company as of April 25, 1996. A total of
1,000,000 shares of common stock have been reserved for issuance
under the 1996 Plan. Options granted under the 1996 Plan may be
either incentive stock options or nonstatutory stock options, with
maximum terms of ten years. The exercise price of each incentive
stock option must be at least 100% of the fair market value per
share of the Company's common stock as determined by the Stock
Option and Compensation Committee on the date of grant.
Previously, the Company had adopted the 1986 Incentive Stock Option Plan
and the 1986 Non-statutory Stock Option Plan (the 1986 Plans).
Options granted under the 1986 Plans have maximum terms of ten
years. The exercise price of each incentive stock option must be at
least 100% of the fair market value per share of the Company's
common stock as determined by the Stock Option and Compensation
Committee on the date of grant.
Tax benefits realized by the Company for deductions in excess of
compensation expense under these plans are credited to additional
paid-in capital.
<PAGE> 17
APPLIED INNOVATION INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
Effective March 1, 1997, the Company repriced all stock options
outstanding with exercise prices exceeding the fair market value per
share of the Company's common stock on that date. The stock options
were repriced at $5, the fair market value on March 1, 1997.
At December 31, 1997, there were 447,550 additional shares available
for grant under the 1996 Plan. The per share weighted-average fair
value of stock options granted during 1997, 1996, and 1995 was
$2.35, $6.33, and $6.55, respectively, on the date of grant using
the Black Scholes option-pricing model with the following
weighted-average assumptions used for grants in the years ended
December 31, 1997, 1996, and 1995, respectively: dividend yield of
0% for all years; expected volatility of 67%, 66%, and 71%;
risk-free interest rate of 6% for all years; and expected life of
4.2, 4.3, and 3.1 years.
The Company applies APB Opinion No. 25 in accounting for its plans and,
accordingly, no compensation cost has been recognized for its stock
options in the financial statements. Had the Company determined
compensation cost based on the fair value at the grant date for its
stock options under Statement 123, including the impact of the
options repriced in 1997, the Company's net income and earnings per
share, net of related income tax effects, would have been reduced to
the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net income (loss) As reported $ (637,195) $ 2,154,568 $ 6,054,030
Pro forma (1,664,539) 1,709,554 5,813,856
Basic earnings (loss) per share As reported $ (.04) $ .14 $ .39
Pro forma (.11) .11 .36
Diluted earnings (loss) per share As reported $ (.04) $ .14 $ .38
Pro forma (.11) .11 .36
</TABLE>
Pro forma net income (loss) reflects only options granted since January
1, 1995. Therefore, the full impact of calculating compensation cost
for stock options under Statement 123 is not reflected in the pro
forma net income (loss) amounts presented above because compensation
cost is reflected over the options' vesting period, and compensation
cost for options granted prior to January 1, 1995 is not considered.
<PAGE> 18
APPLIED INNOVATION INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
Stock option activity during the periods indicated is as follows:
<TABLE>
<CAPTION>
Number of Weighted-average
SHARES EXERCISE PRICE
--------- ----------------
<S> <C> <C>
Balance at December 31, 1994 620,000 $ 6.48
Granted 90,000 12.75
Exercised (125,000) 1.22
Canceled/expired (12,000) 4.79
--------------
Balance at December 31, 1995 573,000 8.65
Granted 265,000 11.19
Exercised (77,120) 2.91
Canceled/expired (58,480) 8.39
--------------
Balance at December 31, 1996 702,400 10.26
Granted 1,179,150 5.20
Exercised (26,200) .65
Canceled/expired (821,100) 9.98
--------------
Balance at December 31, 1997 1,034,250 4.96
==============
</TABLE>
The following table summarizes information about options outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
------------------------------------------------- ----------------------------
Weighted-average
remaining Weighted- Weighted-
contractual average average
Range of Number of LIFE exercise Number of exercise
EXERCISE PRICES SHARES PRICE SHARES PRICE
--------------- --------- ---------------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
$ .69 22,000 .4 $ .69 22,000 $ .69
$ 4.25 - 4.88 130,950 2.6 4.76 83,400 4.78
$ 5.00 741,300 4.6 5.00 336,600 5.00
$ 5.25 - 7.31 140,000 5.6 5.63
------------ ------------
1,034,250 4.4 4.96 442,000 4.74
============ ============
</TABLE>
(9) DEFINED CONTRIBUTION PLAN
The Company sponsors a defined contribution 401(k) and profit sharing
plan which covers all eligible employees. In 1997, 1996, and 1995
the Company matched 25% of each participant's contribution, up to 6%
of that participant's compensation. The Company may also make profit
sharing contributions at the discretion of the Board of Directors.
For 1997, 1996, and 1995, the profit sharing contribution was $0,
$200,000, and $200,000, respectively, and the total expense related
to the plan was $141,798, $259,061, and $232,885, respectively.
<PAGE> 19
APPLIED INNOVATION INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(10) INCOME TAXES
Income tax expense (benefit) consists of:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
------- -------- -----
<S> <C> <C> <C>
Year ended December 31, 1997:
Federal $ (460,000) $ 36,000 $ (424,000)
State and local 44,000 44,000
------------- -------------- --------------
$ (460,000) $ 80,000 $ (380,000)
============= ============== ==============
Year ended December 31, 1996:
Federal $ 1,706,000 $ (631,000) $ 1,075,000
State and local 249,000 (68,000) 181,000
------------- ============== --------------
$ 1,955,000 $ (699,000) $ 1,256,000
============= ============== =============
Year ended December 31, 1995:
Federal $ 3,220,000 $ 15,300 $ 3,235,300
State and local 591,000 2,700 593,700
------------- -------------- --------------
$ 3,811,000 $ 18,000 $ 3,829,000
============= ============== ==============
</TABLE>
A reconciliation of income tax expense (benefit) at the expected
federal statutory rate (34%) to income tax expense (benefit) at the
Company's effective rates for continuing operations is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Computed tax at the expected federal statutory rate $ (346,000) $ 1,160,000 $ 3,360,000
State and local income taxes, net of federal income
tax effect 43,000 97,000 390,000
Meals and entertainment expenses 66,000 38,000 27,000
Research and experimentation credit (104,000)
Tax-exempt interest income (43,000) (35,000) (24,000)
Other 4,000 (4,000) 76,000
------------- ------------- -------------
$ (380,000) $ 1,256,000 $ 3,829,000
============= ============= =============
</TABLE>
<PAGE> 20
APPLIED INNOVATION INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1997 and 1996 are presented below:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Deferred tax assets:
Warranty reserve $ 798,000 $ 1,063,000
Accounts receivable allowance 84,000 43,000
Inventory, principally due to additional costs inventoried for
tax purposes 263,000 260,000
Other 20,000
------------- -------------
Total gross deferred tax assets 1,145,000 1,386,000
Deferred tax liabilities:
Plant and equipment, principally due to differences in
depreciation 200,000 244,000
State income taxes 20,000
------------- -------------
Total gross deferred tax liabilities 200,000 264,000
------------- -------------
Net deferred tax asset $ 945,000 $ 1,122,000
============= =============
</TABLE>
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or
all of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the utilization
of loss carrybacks or the generation of future taxable income during
the periods in which those temporary differences become deductible.
Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income, and tax planning
strategies in making this assessment. Based upon the level of
historical taxable income and projections for future taxable income
over the periods which the deferred tax assets are deductible,
management believes that it is more likely than not the Company will
realize the benefits of these deductible differences and, therefore,
no valuation allowance has been provided.
(11) BONUS PLAN
In 1996 and 1995, the Company offered a bonus plan to certain officers
and managers. Depending on the level of pretax, prebonus earnings
achieved, participants were entitled to specified percentages of
their base salaries as bonuses. The bonuses were payable on March 15
following the year end with 50% payable in cash and 50% payable in
restricted, forfeitable shares of common stock at specified values.
The shares vest and become nonforfeitable if the participants are
still employed by the Company three years after the payable date. In
1997, the Company modified the bonus plan to make bonuses 100%
payable in cash.
The deferred compensation represents a contra equity account to be
amortized over the three-year vesting period. The related shares of
common stock are included as common stock equivalents in the
earnings per share calculation.
<PAGE> 21
APPLIED INNOVATION INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(12) LEASE COMMITMENTS
The Company is obligated for office space in North Carolina under a
five-year operating lease, with termination rights after three years
upon payment of a specified termination fee. Rental payments include
minimum base rent plus payments for taxes, insurance and certain
operating, repair, and maintenance expenses of the facility. The
Company did not occupy the office space until 1997.
The Company is also obligated for space in Colorado, Georgia, and Texas
under various operating leases.
Future minimum lease payments under the operating leases as of December
31, 1997 are:
<TABLE>
<CAPTION>
Year ending December 31:
------------------------
<S> <C>
1998 $ 298,282
1999 279,640
2000 264,057
2001 245,640
2002 20,470
-------------
Total minimum lease payments $ 1,108,089
=============
</TABLE>
Total rent expense in 1997, 1996, and 1995 was $283,040, $47,069, and
$21,658, respectively.
(13) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
A summary of quarterly financial information follows (in thousands,
except per share amounts):
<TABLE>
<CAPTION>
1997 Q1 Q2 Q3 Q4
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Net sales $ 8,410 $ 12,234 $ 10,527 $ 15,490
Gross profit 4,771 6,720 5,659 9,420
Income (loss) before income taxes (841) 244 (2,099) 1,679
Net income (loss) (528) 153 (1,319) 1,057
Net income (loss) per share $ (0.03) $ .01 $ (0.08) $ .07
1996 Q1 Q2 Q3 Q4
----------- ----------- ------------ -----------
Net sales $ 8,913 $ 11,428 $ 10,888 $ 9,917
Gross profit 5,746 6,089 5,378 3,529
Income (loss) before income taxes 1,946 2,147 1,135 (1,817)
Net income (loss) 1,196 1,321 699 (1,061)
Net income (loss) per share $ 0.08 $ 0.08 $ 0.04 $ (0.07)
</TABLE>
<PAGE> 22
FINANCIAL HIGHLIGHTS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net sales $16,105 $32,805 $36,014 $41,146 $46,661
Income (loss) before income taxes 6,691 11,558 9,883 3,411 (1,017)
Net income (loss) 3,991 7,058 6,054 2,155 (637)
Diluted earnings (loss) per share 0.26 0.44 0.38 0.14 (0.04)
Total assets 11,771 23,894 30,532 35,662 37,708
Stockholders' equity 10,368 19,927 27,315 29,942 29,403
</TABLE>
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors
Applied Innovation Inc.:
We consent to incorporation by reference in the registration statements (No.
33-62646, 33-94582 and 333-4432) on Form S-8 of Applied Innovation Inc. of our
report dated February 11, 1998, relating to the consolidated balance sheets of
Applied Innovation Inc. and subsidiary as of December 31, 1997 and 1996, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the years in the three-year period ended December 31,
1997, which report appears in the December 31, 1997, annual report on Form 10-K
of Applied Innovation Inc.
/s/ KPMG PEAT MARWICK LLP
Columbus, Ohio
March 23, 1998
<PAGE> 1
Exhibit 24
POWER OF ATTORNEY
-----------------
Each of the undersigned officers and directors of Applied Innovation
Inc., a Delaware corporation (the "Company"), hereby appoints Gerard B.
Moersdorf, Jr. and Curtis A. Loveland as his true and lawful attorneys-in-fact,
or either of them, with power to act without the other, as his true and lawful
attorney-in-fact, in his name and on his behalf, and in any and all capacities
stated below, to sign and to cause to be filed with the Securities and Exchange
Commission the Company's annual report on Form 10-K, for the fiscal year ended
December 31, 1997, and any and all amendments thereto, hereby granting unto said
attorneys, and to each of them, full power and authority to do and perform in
the name and on behalf of the undersigned, in any and all such capacities, every
act and thing whatsoever necessary to be done in and about the premises as fully
as each of the undersigned could or might do in person, hereby granting to each
such attorney full power of substitution and revocation, and hereby ratifying
all that either such attorney or his substitute may do by virtue hereof.
IN WITNESS WHEREOF, the undersigned have executed this Power of
Attorney in counterparts if necessary, effective as of March 1998.
DIRECTORS/OFFICERS:
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ Gerard B. Moersdorf, Jr. Chairman, President and Treasurer
- ------------------------------- (Principal Executive Officer)
Gerard B. Moersdorf, Jr.
/s/ William H. Largent Senior Vice President - Operations, Chief Financial
- ------------------------------- Officer
William H. Largent (Principal Financial Officer)
/s/ John M. Spiegel Comptroller
- ------------------------------- (Principal Accounting Officer)
John M. Spiegel
/s/ James H. Blough
- ------------------------------- Director
James H. Blough
/s/ Curtis A. Loveland
- ------------------------------- Director
Curtis A. Loveland
/s/ Gerard B. Moersdorf, Sr.
- ------------------------------- Director
Gerard B. Moersdorf, Sr.
/s/ Richard W. Oliver
- ------------------------------- Director
Richard W. Oliver
/s/ Thomas H. Huseby
- ------------------------------- Director
Thomas H. Huseby
/s/ Alexander B. Trevor
- ------------------------------- Director
Alexander B. Trevor
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000798399
<NAME> APPLIED INNOVATION INC.
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 8,195,156
<SECURITIES> 0
<RECEIVABLES> 12,172,976
<ALLOWANCES> 228,284
<INVENTORY> 3,176,299
<CURRENT-ASSETS> 24,759,509
<PP&E> 17,075,724
<DEPRECIATION> 4,241,781
<TOTAL-ASSETS> 37,707,548
<CURRENT-LIABILITIES> 8,104,566
<BONDS> 0
0
0
<COMMON> 157,908
<OTHER-SE> 29,245,074
<TOTAL-LIABILITY-AND-EQUITY> 37,707,548
<SALES> 46,661,054
<TOTAL-REVENUES> 46,661,054
<CGS> 20,091,096
<TOTAL-COSTS> 20,091,096
<OTHER-EXPENSES> 27,988,542
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,017,195)
<INCOME-TAX> (380,000)
<INCOME-CONTINUING> (637,195)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (637,195)
<EPS-PRIMARY> (.04)
<EPS-DILUTED> (.04)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 12,278,092
<SECURITIES> 0
<RECEIVABLES> 7,759,045
<ALLOWANCES> 112,528
<INVENTORY> 3,005,921
<CURRENT-ASSETS> 24,567,166
<PP&E> 13,448,226
<DEPRECIATION> 2,470,584
<TOTAL-ASSETS> 35,662,244
<CURRENT-LIABILITIES> 5,476,351
<BONDS> 0
0
0
<COMMON> 157,646
<OTHER-SE> 29,784,212
<TOTAL-LIABILITY-AND-EQUITY> 35,662,244
<SALES> 41,145,876
<TOTAL-REVENUES> 41,145,876
<CGS> 20,403,555
<TOTAL-COSTS> 20,403,555
<OTHER-EXPENSES> 17,859,713
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,410,568
<INCOME-TAX> 1,256,000
<INCOME-CONTINUING> 2,154,568
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,154,568
<EPS-PRIMARY> .14
<EPS-DILUTED> .14
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 9,176,287
<SECURITIES> 0
<RECEIVABLES> 6,672,326
<ALLOWANCES> 100,000
<INVENTORY> 4,060,939
<CURRENT-ASSETS> 20,591,685
<PP&E> 11,058,717
<DEPRECIATION> 1,185,940
<TOTAL-ASSETS> 30,531,727
<CURRENT-LIABILITIES> 3,093,002
<BONDS> 0
0
0
<COMMON> 156,832
<OTHER-SE> 27,158,098
<TOTAL-LIABILITY-AND-EQUITY> 30,531,727
<SALES> 36,013,535
<TOTAL-REVENUES> 36,013,535
<CGS> 12,710,850
<TOTAL-COSTS> 12,710,850
<OTHER-EXPENSES> 13,830,999
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 9,883,030
<INCOME-TAX> 3,829,000
<INCOME-CONTINUING> 6,054,030
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,054,030
<EPS-PRIMARY> .39
<EPS-DILUTED> .38
</TABLE>
