<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file number 0-21352
APPLIED INNOVATION INC.
(Exact name of registrant as specified in its charter)
DELAWARE 31-1177192
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification no.)
5800 INNOVATION DRIVE, DUBLIN, OHIO 43016
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (614)-798-2000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
As of August 6, 1998 there were 15,818,632 shares of common stock outstanding.
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APPLIED INNOVATION INC.
<TABLE>
Table of Contents
<CAPTION>
Page
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<S> <C>
Facing Page 1
Table of Contents 2
Part I. Financial Information
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Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
June 30, 1998 (Unaudited) and December 31, 1997 3
Condensed Consolidated Statements of Operations for the three and six
months ended June 30, 1998 and 1997 (Unaudited) 4
Condensed Consolidated Statement of Stockholders' Equity
for the six months ended June 30, 1998 (Unaudited) 5
Condensed Consolidated Statements of Cash Flows for the
six months ended June 30, 1998 and 1997 (Unaudited) 6
Note to Condensed Consolidated Financial Statements (Unaudited) 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-10
Item 3. Quantitative and Qualitative Disclosure About Market Risk 10
Part II. Other Information
- --------------------------
Items 1 - 5 11
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits 12
(b) Reports on Form 8-K - None
Signatures 13
</TABLE>
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<TABLE>
APPLIED INNOVATION INC.
Condensed Consolidated Balance Sheets
<CAPTION>
Assets
------
(Unaudited)
June 30, 1998 December 31, 1997
------------- -----------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $11,036,955 $ 8,195,156
Accounts receivable, net of allowance 9,697,808 11,944,692
Inventory 3,358,669 3,176,299
Prepaid expenses 103,539 298,362
Deferred income taxes 1,220,000 1,145,000
----------- -----------
Total current assets 25,416,971 24,759,509
Property, plant and equipment - net 12,034,360 12,833,943
Other assets 122,418 114,096
----------- -----------
Total Assets $37,573,749 $37,707,548
=========== ===========
Liabilities and Stockholders' Equity
------------------------------------
June 30, 1998 December 31, 1997
------------- -----------------
Current liabilities:
Accounts payable $ 2,700,845 $ 3,365,815
Accrued expenses 2,573,755 2,583,426
Accrued warranty expenses 2,585,606 2,155,325
----------- -----------
Total current liabilities 7,860,206 8,104,566
----------- -----------
Deferred income taxes 120,000 200,000
----------- -----------
Stockholders' equity:
Common stock; $.01 par value; 30,000,000 shares
authorized; 15,813,882 shares issued and outstanding
in June, 1998; 15,790,832 shares issued and
outstanding in December, 1997 158,139 157,908
Additional paid-in capital 8,427,565 8,407,058
Retained earnings 21,007,839 20,838,016
----------- -----------
29,593,543 29,402,982
----------- -----------
Total Liabilities and Stockholders' Equity $37,573,749 $37,707,548
=========== ===========
</TABLE>
See accompanying note to condensed consolidated financial statements.
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<TABLE>
APPLIED INNOVATION INC.
Condensed Consolidated Statements of Operations (Unaudited)
<CAPTION>
Three months ended June 30, Six months ended June 30,
------------------------------------------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Sales $14,783,826 $12,233,673 $26,301,575 $20,643,526
Cost of sales 6,512,403 5,513,598 11,376,770 9,152,556
----------- ----------- ----------- -----------
Gross profit 8,271,423 6,720,075 14,924,805 11,490,970
Operating expenses:
Research and development 3,948,475 2,678,750 7,287,485 5,837,724
Selling, general, and administrative 4,053,012 3,930,685 7,651,797 6,547,481
----------- ----------- ----------- -----------
Income (loss) from operations 269,936 110,640 (14,477) (894,235)
Other income 164,353 133,008 272,300 296,652
----------- ----------- ----------- -----------
Income (loss) before income taxes 434,289 243,648 257,823 (597,583)
Income taxes 148,000 90,763 88,000 (221,848)
----------- ----------- ----------- -----------
Net income (loss) $ 286,289 $ 152,885 $ 169,823 $ (375,735)
=========== =========== =========== ===========
Basic earnings (loss) per share $ 0.02 $ 0.01 $ 0.01 $ (0.02)
=========== =========== =========== ===========
Diluted earnings (loss) per share $ 0.02 $ 0.01 $ 0.01 $ (0.02)
=========== =========== =========== ===========
Weighted average shares outstanding
for basic earnings (loss) per share 15,802,357 15,790,832 15,796,595 15,781,832
=========== =========== =========== ===========
Weighted average shares outstanding
for diluted earnings (loss) per share 16,212,409 15,874,173 16,038,542 15,781,832
=========== =========== =========== ===========
</TABLE>
See accompanying note to condensed consolidated financial statements.
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<PAGE> 5
<TABLE>
APPLIED INNOVATION INC.
Condensed Consolidated Statements of Stockholders' Equity (Unaudited)
Six Months Ended June 30, 1998 and 1997
<CAPTION>
Common Stock
--------------------------
Number Additional
of Paid-in Deferred Retained
Shares Amount Capital Compensation Earnings
---------- -------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Balance January 1, 1998 15,790,832 $157,908 $8,407,058 $ -- $20,838,016
Stock options exercised 23,050 231 19,793 -- --
Tax benefit associated with
exercise of stock options -- -- 714 -- --
Net income for the period -- -- -- -- 169,823
---------- -------- ---------- -------- -----------
Balance - June 30, 1998 15,813,882 $158,139 $8,427,565 $ -- $21,007,839
========== ======== ========== ======== ===========
Balance - January 1, 1997 15,764,632 $157,646 $8,360,502 $(51,501) $21,475,211
Stock options exercised 26,200 262 16,863 -- --
Tax benefit associated with
exercise of stock options -- -- 29,693 -- --
Amortization of deferred
compensation -- -- -- 19,288 --
Net loss for the period -- -- -- -- (375,735)
---------- -------- ---------- -------- -----------
Balance - June 30, 1997 15,790,832 $157,908 $8,407,058 $(32,213) $21,099,476
========== ======== ========== ======== ===========
</TABLE>
See accompanying note to condensed consolidated financial statements.
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<PAGE> 6
<TABLE>
APPLIED INNOVATION INC.
Condensed Consolidated Statements of Cash Flows (Unaudited)
<CAPTION>
Six Months Ended June 30,
-------------------------------
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 169,823 $ (375,735)
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation 1,478,552 992,847
Gain on sale of assets (7,368) --
Provision for deferred income taxes (155,000) 25,157
Provision for deferred compensation -- 19,288
Effects of change in operating assets and liabilities:
Accounts receivable 2,246,884 (2,689,961)
Inventory (182,370) (518,925)
Income taxes -- (139,085)
Prepaid expenses 194,823 86,376
Other assets (8,322) (15,337)
Accounts payable (664,970) 1,460,009
Accrued expenses 420,610 (203,173)
----------- -----------
Net cash provided (used) by operating activities 3,492,662 (1,358,539)
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment (700,511) (2,326,644)
Proceeds from sale of assets 28,910 --
----------- -----------
Net cash used by investing activities (671,601) (2,326,644)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock 20,024 17,125
Tax benefit associated with exercise of stock options 714 29,693
----------- -----------
Net cash provided by financing activities 20,738 46,818
----------- -----------
Increase (decrease) in cash and cash equivalents 2,841,799 (3,638,365)
Cash and cash equivalents - beginning of period 8,195,156 12,278,092
----------- -----------
Cash and cash equivalents - end of period $11,036,955 $ 8,639,727
=========== ===========
</TABLE>
See accompanying note to condensed consolidated financial statements.
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APPLIED INNOVATION INC.
Note to Condensed Consolidated Financial Statements (Unaudited)
1. Basis of presentation - The condensed consolidated balance sheet as of June
30, 1998, the condensed consolidated statements of operations for the three and
six months ended June 30, 1998 and 1997, the condensed consolidated statement of
stockholders' equity for the six months ended June 30, 1998, and the condensed
consolidated statements of cash flows for the six month periods then ended have
been prepared by the Company, without audit. In the opinion of management, all
adjustments, which consist solely of normal recurring adjustments, necessary to
present fairly, in accordance with generally accepted accounting principles, the
financial position, results of operations and changes in cash flows for all
periods presented have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. These condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's December 31, 1997 annual
report on Form 10-K. The results of operations for the period ended June 30,
1998 are not necessarily indicative of the results for the full year.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF THE SECOND QUARTER AND SIX MONTHS ENDED JUNE 30, 1998 VS. SECOND
QUARTER AND SIX MONTHS ENDED JUNE 30, 1997
Net sales for the second quarter of 1998 were $14,784,000, an increase of 21%
from net sales of $12,234,000 for the second quarter of 1997. Year-to-date net
sales for 1998 is up 27% over 1997. This increase is attributable to a higher
number of systems sold. Net sales for the second quarter of 1998 include the
first shipment of the AI4800 product offering designed by the Company's Access
Products Group. Sales in the Data Communications Network (DCN) Products Group
accounted for 97% of the second quarter sales with 3% of the sales from the
Access Products Group. Because of the Company's concentration of sales to
Regional Bell Operating Companies (RBOC's) and long distance phone companies, a
small number of customers have represented substantial portions of net sales.
For the first six months of 1998, sales to four companies comprised 63% of net
sales. Each of the four customers contributed between 15% and 16% of net sales.
The Company sells to all of the RBOC's.
Gross profit as a percentage of revenue was 56% for the second quarter of 1998
versus 55% for the same period in 1997. Year-to-date gross profit percentages
were 57% and 56% for 1998 and 1997, respectively. The increase in gross profit
as a percentage of revenue for the first six months was a result of higher
production volumes. The Company anticipates that the gross margin percentage for
1998 will be comparable to the full year of 1997.
Research and development (R&D) expenses increased 47% to $3,948,000 for the
second quarter of 1998 from $2,679,000 for the same period in 1997. R&D
increased as a percentage of net sales to 27% from 22%. Year-to-date R&D
expenses were $7,287,000 for 1998 and $5,838,000 for 1997. As a percentage of
net sales, this represents 28% for 1998 and 1997. R&D expenses for the Access
Products Group were $4,630,000 for the first six months of 1998 compared to
$2,516,000 for the first six months of the prior year. The Company anticipates
that R&D expenses in the third quarter of 1998 will be higher than in 1997 to
support its existing product lines and the development of the Internet access
products.
Selling, general and administrative expenses (SG&A) increased to $4,053,000 in
the second quarter of 1998 from $3,931,000 in 1997. As a percentage of net
sales, this represents 27% in 1998 and 32% in 1997. Year-to-date SG&A was
$7,652,000 for 1998 and $6,547,000 for 1997 and represented 29% of net sales in
1998 and 32% in 1997. SG&A expenses increased $1,104,000 for the six months
ended June 30, 1998 over the same period last year and $650,000 of the increase
was attributable to additional employment expenses for administrative personnel
to support current operations and increased sales, marketing and product
management personnel to support planned growth. Other significant increases in
SG&A were for sales commissions ($117,000), depreciation ($169,000), and
commissions due on the sale of products containing licensed technology
($79,000). To support continued growth, the Company expects additional increases
in sales and general administrative personnel and related costs during 1998.
-8-
<PAGE> 9
As a result of the above factors, income from operations increased to $270,000
in the second quarter of 1998 from $111,000 in the second quarter of 1997.
Second quarter income from operations represents 2% and 1% of net sales in 1998
and 1997, respectively. Year-to-date results of operations was a loss of $14,000
for 1998 versus a loss of $894,000 in 1997. Year-to-date loss from operations
represents less than 1% of net sales in 1998 and 4% in 1997.
The Company's effective income tax rate was 34% for the current quarter versus
an effective rate of 37% for the same period in 1997.
LIQUIDITY AND CAPITAL RESOURCES
Cash increased by $2,842,000 during the first six months of 1998 to $11,037,000
at June 30, 1998. Operating activities produced $3,493,000 in cash. During the
same period in 1997, cash decreased by $3,638,000 to $8,640,000 at June 30,
1997.
Net working capital was $17,557,000 at June 30, 1998 compared to $16,655,000 at
December 31, 1997. Current ratios on those dates were 3.2:1 and 3.1:1,
respectively. The Company had no long-term debt at June 30, 1998 or December 31,
1997.
Net capital expenditures were $701,000 for the first half of 1998 and $2,327,000
for the same period in 1997. A facility was opened in North Carolina in the
first quarter of 1997, which required capital expenditures for leasehold
improvements and office equipment and furnishings.
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. The Company has
retained the investment banking firm of Dain Rauscher Wessels, a division of
Dain Rauscher Incorporated, to assist the Company with the search. Depending on
the success of the search and the structure of any subsequent agreement, the
Company may realize an inflow of capital.
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 through the end of 1998.
-9-
<PAGE> 10
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The foregoing statements in this Management's Discussion and Analysis include
forward-looking statements concerning future gross margins (second paragraph),
SG&A expenses (third paragraph), R&D expenses (fourth paragraph), capital
expenditures (eleventh paragraph), and capital resources (eleventh paragraph),
all of which involve risks and uncertainties. The Company's actual experience
may differ materially from that projected above. Factors that might cause the
Company's present expectations to not materialize or to change include, but are
not limited to, changes in customer needs, demands and buying patterns for
telecommunication equipment; the timely development of new products and product
upgrades and the market's acceptance of such products; technological changes
affecting telecommunications equipment and software; changes in product warranty
experience; competitive pressures from companies with substantially greater
resources; the ability of the Company to hire additional technical personnel for
new product development; the Company's ability to manage its planned new product
development; and other factors discussed in the Company's prior filings with the
Securities and Exchange Commission, including the Annual Report on Form 10-K for
the year ended December 31, 1997.
Item 3. Quantitative and Qualitative Disclosure About Market Risk - inapplicable
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<PAGE> 11
Part II. Other Information
- ---------------------------
Items 1 - 3. Inapplicable
Item 4. Submission of Matters to a Vote of Security Holders
(a) Applied Innovation Inc. held its annual meeting of stockholders on
April 23, 1998, for the purpose of electing three Class II directors
and adopting amendments to the Company's 1996 Stock Option Plan.
(b) At the annual meeting of stockholders, all directors nominated were
elected.
(c) The table shows the voting tabulation for each matter voted upon at the
annual meeting of stockholders.
ACTION FOR WITHHELD
- ------ --- --------
Election of Class II Directors:
Curtis A. Loveland 14,235,273 517,421
Gerard B. Moersdorf, Sr. 14,224,357 528,337
Thomas W. Huseby 14,241,943 510,751
ACTION FOR AGAINST WITHHELD
- ------ --- ------- --------
Approval and adoption of amendments
to the Company's 1996 Stock Option
Plan: 8,827,601 1,039,745 102,484
Item 5. Other Information
Any stockholder proposal submitted outside the processes of Rule 14a-8 under the
Securities Exchange Act of 1934 for presentation to the Company's 1999 Annual
Meeting of Stockholders will be considered untimely for purposes of Rule 14a-4
and 14a-5 if notice thereof is received by the Company after February 6, 1999.
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<PAGE> 12
Part II. Other Information
- ---------------------------
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
APPLIED INNOVATION INC.
Exhibit 11
Statement Regarding Computation of Earnings (Loss) Per Share
For the six months ended June 30, 1998 and 1997
1998 1997
(Unaudited) (Unaudited)
----------- -----------
Weighted average number of common
shares outstanding - used for
computation of basic earnings
(loss) per share 15,796,595 15,781,832
Add net shares issuable pursuant to stock
option plans less shares assumed
repurchased at the average market price 241,947 0
----------- -----------
Number of shares for computation of
diluted earnings (loss) per share 16,038,542 15,781,832
=========== ===========
Net income (loss) for basic and diluted
earnings (loss) per share $ 169,823 $ (375,735)
=========== ===========
Basic earnings (loss) per share $ .01 $ (.02)
=========== ===========
Diluted earnings (loss) per share $ .01 $ (.02)
=========== ===========
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K - None
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<PAGE> 13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
APPLIED INNOVATION INC.
-----------------------
(Registrant)
August 6, 1998 /s/ Gerard B. Moersdorf, Jr.
- -------------- --------------------------------------
Date Gerard B. Moersdorf, Jr.
Chairman of the Board, President,
Chief Executive Officer and Treasurer
(Principal Executive Officer)
August 6, 1998 /s/ William H. Largent
- -------------- --------------------------------------
Date William H. Largent
Senior Vice President - Operations
and Chief Financial Officer
(Chief Financial Officer)
August 6, 1998 /s/ John M. Spiegel
- -------------- --------------------------------------
Date John M. Spiegel
Controller
(Principal Accounting Officer)
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<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000798399
<NAME> APPLIED INNOVATION INC.
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 11,036,955
<SECURITIES> 0
<RECEIVABLES> 9,934,834
<ALLOWANCES> 237,026
<INVENTORY> 3,358,669
<CURRENT-ASSETS> 25,416,971
<PP&E> 17,750,384
<DEPRECIATION> 5,716,024
<TOTAL-ASSETS> 37,573,749
<CURRENT-LIABILITIES> 7,860,206
<BONDS> 0
0
0
<COMMON> 158,139
<OTHER-SE> 29,435,404
<TOTAL-LIABILITY-AND-EQUITY> 37,573,749
<SALES> 26,301,575
<TOTAL-REVENUES> 26,301,575
<CGS> 11,376,770
<TOTAL-COSTS> 11,376,770
<OTHER-EXPENSES> 14,879,282
<LOSS-PROVISION> 60,000
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 257,823
<INCOME-TAX> 88,000
<INCOME-CONTINUING> 169,823
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 169,823
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<CIK> 0000798399
<NAME> APPLIED INNOVATION INC.
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 8,639,728
<SECURITIES> 0
<RECEIVABLES> 10,452,641
<ALLOWANCES> 116,163
<INVENTORY> 3,524,846
<CURRENT-ASSETS> 24,107,558
<PP&E> 15,742,218
<DEPRECIATION> 3,430,779
<TOTAL-ASSETS> 36,551,770
<CURRENT-LIABILITIES> 6,733,188
<BONDS> 0
0
0
<COMMON> 157,908
<OTHER-SE> 29,474,321
<TOTAL-LIABILITY-AND-EQUITY> 36,551,770
<SALES> 20,643,526
<TOTAL-REVENUES> 20,643,526
<CGS> 9,152,556
<TOTAL-COSTS> 9,152,556
<OTHER-EXPENSES> 12,385,205
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (597,583)
<INCOME-TAX> (221,848)
<INCOME-CONTINUING> (375,735)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (375,735)
<EPS-PRIMARY> (.02)
<EPS-DILUTED> (.02)
</TABLE>
