<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 March 31, 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
NOT APPLICABLE
(former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
As of May 4, 1998 there were 15,790,832 shares of common stock outstanding.
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<TABLE>
APPLIED INNOVATION INC.
Table of Contents
<CAPTION>
Page
----
<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
March 31, 1998 (unaudited) and December 31, 1997 3
Condensed Consolidated Statements of Operations for the
three months ended March 31, 1998 and 1997 (unaudited) 4
Condensed Consolidated Statement of Stockholders' Equity
for the three months ended March 31, 1998 (unaudited) 5
Condensed Consolidated Statements of Cash Flows for the three
months ended March 31, 1998 and 1997 (unaudited) 6
Note to Financial Statements (unaudited) 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8 - 10
Item 3. Quantitative and Qualitative Disclosure About Market Risk 10
Part II. Other Information
- --------------------------
Items 1 - 5 11
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits 11
(b) Reports on Form 8-K - None
Signatures 12
</TABLE>
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<TABLE>
APPLIED INNOVATION INC.
Condensed Consolidated Balance Sheets
<CAPTION>
Assets
------
(Unaudited)
March 31, 1998 December 31, 1997
-------------- -----------------
<S> <C> <C>
Current assets:
Cash $10,792,310 $ 8,195,156
Accounts receivable, net of allowance 8,421,297 11,944,692
Inventory 3,690,003 3,176,299
Prepaid expenses 197,352 298,361
Deferred income taxes 1,110,000 1,145,000
----------- -----------
Total current assets 24,210,962 24,759,508
Property, plant and equipment - net 12,383,171 12,833,943
Other assets 126,871 114,097
----------- -----------
Total Assets $36,721,004 $37,707,548
=========== ===========
<CAPTION>
Liabilities and Stockholders' Equity
------------------------------------
March 31, 1998 December 31, 1997
-------------- -----------------
<S> <C> <C>
Current liabilities:
Accounts payable $ 2,441,588 $ 3,365,815
Accrued expenses 2,512,100 2,583,426
Accrued warranty expenses 2,280,800 2,155,325
----------- -----------
Total current liabilities 7,234,488 8,104,566
----------- -----------
Deferred income taxes 200,000 200,000
----------- -----------
Stockholders' equity:
Common stock; $.01 par value; 30,000,000 shares
authorized; 15,790,832 shares issued and
outstanding in 1998; 15,772,832 shares issued
and outstanding in 1997 157,908 157,908
Additional paid-in capital 8,407,058 8,407,058
Retained earnings 20,721,550 20,838,016
----------- -----------
29,286,516 29,402,982
----------- -----------
Total Liabilities and Stockholders' Equity $36,721,004 $37,707,548
=========== ===========
</TABLE>
See accompanyuing note to condensed consolidated financial statements.
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<TABLE>
APPLIED INNOVATION INC.
Condensed Consolidated Statements of Operations (Unaudited)
<CAPTION>
Three months ended March 31,
----------------------------
1998 1997
----------- -----------
<S> <C> <C>
Net sales $11,517,749 $ 8,409,853
Cost of sales 4,864,367 3,638,958
----------- -----------
Gross profit 6,653,382 4,770,895
Operating expenses:
Research and development expenses 3,339,010 3,158,974
Selling, general and administrative expenses 3,598,785 2,616,796
----------- -----------
Loss from operations (284,413) (1,004,875)
Other income 107,947 163,644
----------- -----------
Loss before income taxes (176,466) (841,231)
Income taxes (60,000) (312,611)
----------- -----------
Net loss $ (116,466) $ (528,620)
=========== ===========
Basic and diluted net loss per share $ (0.01) $ (0.03)
=========== ===========
Weighted average number of shares
outstanding - basic and diluted 15,790,832 15,772,832
=========== ===========
</TABLE>
See accompanyuing note to condensed consolidated financial statements.
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<PAGE> 5
APPLIED INNOVATION INC.
Condensed Consolidated Statement of Stockholders' Equity (Unaudited)
Three Months Ended March 31, 1998
Common Stock
---------------------
Number Additional
of Paid-in Retained
Shares Amount Capital Earnings
---------- -------- ---------- -----------
Balance January 1, 1998 15,790,832 $157,908 $8,407,058 $20,838,016
Net loss for the period -- -- -- (116,466)
---------- -------- ---------- -----------
Balance - March 31, 1998 15,790,832 $157,908 $8,407,058 $20,721,550
========== ======== ========== ===========
See accompanying note to condensed consolidated financial statements.
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<TABLE>
APPLIED INNOVATION INC.
Condensed Consolidated Statements of Cash Flows (Unaudited)
<CAPTION>
Three Months Ended March 31,
-------------------------------
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (116,466) $ (528,620)
Adjustments to reconcile net loss to net cash
provided by operating activities
Depreciation 755,770 476,505
Gain on sale of assets (4,458) --
Provision for deferred income taxes 35,000 93,505
Provision for deferred compensation -- 9,644
Effects of change in operating assets and liabilities:
Accounts receivable 3,523,395 768,055
Inventory (513,704) (412,996)
Income taxes -- (200,504)
Prepaid expenses 101,009 78,738
Other assets (12,774) (25,587)
Accounts payable (924,227) 1,065,770
Accrued expenses (25,633) (524,628)
Deferred revenue 79,782 234,255
----------- -----------
Net cash provided by operating activities 2,897,694 1,034,137
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment (326,540) (1,382,534)
Proceeds from sale of assets 26,000 --
----------- -----------
Net cash used by investing activities (300,540) (1,382,534)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock -- 5,125
----------- -----------
Net cash provided by financing activities -- 5,125
----------- -----------
Increase(decrease) in cash and cash equivalents 2,597,154 (343,272)
Cash and cash equivalents - beginning of period 8,195,156 12,278,092
----------- -----------
Cash and cash equivalents - end of period $10,792,310 $11,934,820
=========== ===========
</TABLE>
See accompanying note to condensed consolidated financial statements.
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<PAGE> 7
APPLIED INNOVATION INC.
Note to Condensed Consolidated Financial Statements (unaudited)
1. Basis of presentation - The condensed consolidated balance sheet as of March
31, 1998, the condensed consolidated statements of operations for the three
months ended March 31, 1998 and 1997, the condensed consolidated statement of
stockholders' equity for the three months ended March 31, 1998, and the
condensed consolidated statements of cash flows for the three months ended March
31, 1998 and 1997 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 March 31,
1998 are not necessarily indicative of the results for the full year.
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<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF THE FIRST QUARTER ENDED MARCH 31, 1998 VS. FIRST QUARTER ENDED MARCH
31, 1997
Net sales for the first quarter of 1998 were $11,518,000, an increase of 37%
from net sales of $8,410,000 for the first quarter of 1997. The increase in net
sales is attributable to a higher number of units sold. The Company's
concentration of sales to Regional Bell Operating Companies (RBOC's) and long
distance phone companies results in a small number of customers who represent
substantial portions of net sales. For the first three months of 1998, sales to
four companies comprised 60% of net sales. Each of these four customers
contributed between 11% and 18% of net sales.
Gross profit as a percentage of net sales was 58% for the first quarter of 1998,
versus 57% for the same period in 1997. The increase in gross profit as a
percentage of net sales was due to 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 6% to $3,339,000 for the first
quarter of 1998, from $3,159,000 for the same period in 1997. R&D expenses
decreased as a percentage of net sales to 29% for the first quarter of 1998,
from 38% for the first quarter of 1997. R&D expenses for the Access Products
Group were $2,099,000 for the first quarter of 1998 compared to $1,104,000 for
the first quarter of the prior year. The Company anticipates that R&D expenses
in the second quarter of 1998 will be higher than the first quarter and that the
actual dollars expended on R&D in 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 $3,599,000 in
the first quarter of 1998, from $2,617,000 for the same period in 1997. As a
percentage of net sales SG&A remained constant at 31% for the first quarters of
1998 and 1997. SG&A expenses increased $982,000 over the same period last year
and $333,000 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 commissions due on the sale of products
containing licensed technology ($86,000), sales commissions ($119,000),
depreciation ($77,000), customer seminars ($111,000), and utilities ($148,000).
The Company anticipates that SG&A expenses in the second quarter of 1998 will be
generally consistent with the first quarter. To support continued growth, the
Company expects additional increases in sales and general administrative
personnel and related costs during 1998.
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<PAGE> 9
As a result of the above factors, the Company reported a loss from operations of
$284,000 in the first quarter of 1998 versus a loss from operations of
$1,005,000 for the first quarter of 1997. Loss from operations represents 2% and
12% of net sales in 1998 and 1997, respectively.
The Company's effective income tax rate was 34% for the quarter ended March 31,
1998, versus an effective rate of 37% for the same period in 1997.
LIQUIDITY AND CAPITAL RESOURCES
Cash increased by $2,597,000 during the first three months of 1998 to
$10,792,000 at March 31, 1998. Operating activities provided $2,898,000 in cash.
During the same period in 1997, cash decreased by $343,000 to $11,935,000 at
March 31, 1997.
Net working capital was $16,976,000 at March 31, 1998, compared to $16,655,000
at December 31, 1997. Current ratios on those dates were 3.3:1 and 3.1:1,
respectively. The Company had no long-term debt at March 31, 1998 or December
31, 1997.
Net capital expenditures were $327,000 for the first quarter of 1998 and
$1,383,000 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 also purchased
approximately five acres of land adjacent to its headquarters in Dublin, Ohio
for $179,000 in the first quarter of 1997.
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 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.
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<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),
R&D expenses (third paragraph), SG&A expenses (fourth paragraph), strategic
partnering (tenth 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
telecommunications 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 1-5. Inapplicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
APPLIED INNOVATION INC.
Exhibit 11
Statement Regarding Computation of Net Loss Per Share
For the three months ended March 31, 1998 and 1997
1998 1997
(Unaudited) (Unaudited)
----------- -----------
Weighted average number of common
shares outstanding - used for
computation of basic net loss
per share 15,790,832 15,772,832
Add net shares issuable pursuant to stock
option plans less shares assumed
repurchased at the average market price 0 0
----------- -----------
Number of shares for computation of
diluted net loss per share 15,790,832 15,772,832
=========== ===========
Net loss for basic and diluted
loss per share $ (116,466) $ (528,620)
=========== ===========
Basic net loss per share $ (.01) $ (.03)
=========== ===========
Diluted net loss per share $ (.01) $ (.03)
=========== ===========
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K - None
-11-
<PAGE> 12
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
APPLIED INNOVATION INC.
(Registrant)
May 6, 1998 /s/ Gerard B. Moersdorf, Jr.
- ----------- ---------------------------------------
Date Gerard B. Moersdorf, Jr.
Chairman of the Board, President, Chief
Executive Officer, and Treasurer
(Principal Executive/Financial Officer)
May 6, 1998 /s/ William H. Largent
- ----------- ---------------------------------------
Date William H. Largent
Senior Vice President - Operations
and Chief Financial Officer
(Chief Financial Officer)
May 6, 1998 /s/ John M. Spiegel
- ----------- ---------------------------------------
Date John M. Spiegel
Controller
(Principal Accounting Officer)
-12-
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000798399
<NAME> APPLIED INNOVATION INC.
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 10,792,310
<SECURITIES> 0
<RECEIVABLES> 8,628,336
<ALLOWANCES> 207,039
<INVENTORY> 3,690,003
<CURRENT-ASSETS> 24,210,962
<PP&E> 17,376,414
<DEPRECIATION> 4,993,243
<TOTAL-ASSETS> 36,721,004
<CURRENT-LIABILITIES> 7,234,488
<BONDS> 0
0
0
<COMMON> 157,908
<OTHER-SE> 29,128,608
<TOTAL-LIABILITY-AND-EQUITY> 36,721,004
<SALES> 11,517,749
<TOTAL-REVENUES> 11,517,749
<CGS> 4,864,367
<TOTAL-COSTS> 4,864,367
<OTHER-EXPENSES> 6,907,795
<LOSS-PROVISION> 30,000
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (176,466)
<INCOME-TAX> (60,000)
<INCOME-CONTINUING> (116,466)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (116,466)
<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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 11,934,820
<SECURITIES> 0
<RECEIVABLES> 6,990,990
<ALLOWANCES> 112,528
<INVENTORY> 3,418,917
<CURRENT-ASSETS> 23,897,096
<PP&E> 14,798,110
<DEPRECIATION> 2,914,437
<TOTAL-ASSETS> 35,923,792
<CURRENT-LIABILITIES> 6,251,748
<BONDS> 0
0
0
<COMMON> 157,728
<OTHER-SE> 29,270,281
<TOTAL-LIABILITY-AND-EQUITY> 35,923,792
<SALES> 8,409,853
<TOTAL-REVENUES> 8,409,853
<CGS> 3,638,958
<TOTAL-COSTS> 3,638,958
<OTHER-EXPENSES> 5,775,770
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (841,231)
<INCOME-TAX> (312,611)
<INCOME-CONTINUING> (528,620)
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (528,620)
<EPS-PRIMARY> (.03)
<EPS-DILUTED> (.03)
</TABLE>
