<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, 1999
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 April 26, 1999 there were 15,771,632 shares of common stock outstanding.
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APPLIED INNOVATION INC.
Table of Contents
<TABLE>
<CAPTION>
Page
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<S> <C>
Facing Page 1
Table of Contents 2
Part I. Financial Information
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Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
March 31, 1999 (unaudited) and December 31, 1998 3
Condensed Consolidated Statements of Operations for the
three months ended March 31, 1999 and 1998 (unaudited) 4
Condensed Consolidated Statements of Stockholders' Equity for the
three months ended March 31, 1999 and 1998 (unaudited) 5
Condensed Consolidated Statements of Cash Flows for the three
months ended March 31, 1999 and 1998 (unaudited) 6
Note to Condensed Consolidated Financial Statements (unaudited) 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-11
Item 3. Quantitative and Qualitative Disclosure About Market Risk 11
Part II. Other Information
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Items 1 - 5 12
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits 12
(b) Reports on Form 8-K 12
Signatures 13
</TABLE>
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<TABLE>
APPLIED INNOVATION INC.
Condensed Consolidated Balance Sheets
<CAPTION>
Assets
------
(Unaudited)
March 31, 1999 December 31, 1998
-------------- -----------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $19,443,832 $17,211,499
Accounts receivable, net of allowance 7,419,842 7,698,250
Inventory 3,377,561 3,620,655
Prepaid expenses 328,112 295,923
Deferred income taxes 1,484,000 1,410,000
----------- -----------
Total current assets 32,053,347 30,236,327
Property, plant and equipment - net 9,021,638 9,426,240
Other assets 43,393 107,106
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Total Assets $41,118,378 $39,769,673
=========== ===========
<CAPTION>
Liabilities and Stockholders' Equity
------------------------------------
(Unaudited)
March 31, 1999 December 31, 1998
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<S> <C> <C>
Current liabilities:
Accounts payable $ 1,949,355 $ 1,051,922
Accrued expenses 3,323,277 4,355,069
Accrued warranty expenses 2,503,973 2,644,738
Deferred revenue 441,099 11,261
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Total current liabilities 8,217,704 8,062,990
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Deferred income taxes 50,000 64,000
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Stockholders' equity:
Common stock; $.01 par value; 30,000,000 shares
authorized; 15,771,632 shares issued and outstanding
in March, 1999; 15,786,132 shares issued and
outstanding in December, 1998 157,716 157,861
Additional paid-in capital 8,279,335 8,337,154
Retained earnings 24,413,623 23,147,668
----------- -----------
32,850,674 31,642,683
----------- -----------
Total Liabilities and Stockholders' Equity $41,118,378 $39,769,673
=========== ===========
</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 March 31,
------------------------------
1999 1998
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<S> <C> <C>
Net sales $10,854,102 $ 11,517,749
Cost of sales 4,265,527 4,864,367
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Gross profit 6,588,575 6,653,382
Operating expenses:
Research and development 1,619,889 3,339,010
Selling, general, and administrative 3,202,234 3,598,785
----------- ------------
Income (loss) from operations 1,766,452 (284,413)
Other income 212,503 107,947
----------- ------------
Income (loss) before income taxes 1,978,955 (176,466)
Income taxes 713,000 (60,000)
----------- ------------
Net income (loss) $ 1,265,955 $ (116,466)
=========== ============
Basic earnings (loss) per share $ 0.08 $ (0.01)
=========== ============
Diluted earnings (loss) per share $ 0.08 $ (0.01)
=========== ============
Weighted average shares outstanding
for basic earnings (loss) per share 15,782,566 15,790,832
=========== ============
Weighted average shares outstanding
for diluted earnings (loss) per share 15,821,745 15,790,832
=========== ============
</TABLE>
See accompanying note to condensed consolidated financial statements.
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<TABLE>
APPLIED INNOVATION INC.
Condensed Consolidated Statements of Stockholders' Equity (Unaudited)
Three Months Ended March 31, 1999 and 1998
<CAPTION>
Common Stock
----------------------
Number Additional
of Paid-in Retained
Shares Amount Capital Earnings
---------- --------- ---------- -----------
<S> <C> <C> <C> <C>
Balance - January 1, 1999 15,786,132 $ 157,861 $8,337,154 $23,147,668
Common stock repurchased (14,500) (145) (57,819) --
Net income for the period -- -- -- 1,265,955
---------- --------- ---------- -----------
Balance - March 31, 1999 15,771,632 $ 157,716 $8,279,335 $24,413,623
========== ========= ========== ===========
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
========== ========= ========== ===========
</TABLE>
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,
-------------------------------
1999 1998
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<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 1,265,955 $ (116,466)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities
Depreciation 509,465 755,770
Gain on sale of assets (7,585) (4,458)
Provision for deferred income taxes (88,000) 35,000
Effects of change in operating assets and liabilities:
Accounts receivable 278,408 3,523,395
Inventory 243,094 (513,704)
Prepaid expenses (32,189) 101,009
Other assets 63,713 (12,774)
Accounts payable 897,433 (924,227)
Accrued expenses (1,172,557) (25,633)
Deferred revenue 429,838 79,782
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Net cash provided by operating activities 2,387,575 2,897,694
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Cash flows from investing activities:
Purchases of property and equipment (104,863) (326,540)
Proceeds from sale of assets 7,585 26,000
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Net cash used by investing activities (97,278) (300,540)
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Cash flows from financing activities:
Common stock repurchased (57,964) --
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Net cash used by financing activities (57,964) --
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Increase in cash and cash equivalents 2,232,333 2,597,154
Cash and cash equivalents - beginning of period 17,211,499 8,195,156
----------- -----------
Cash and cash equivalents - end of period $19,443,832 $10,792,310
=========== ===========
</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 March
31, 1999, the condensed consolidated statements of operations for the three
months ended March 31, 1999 and 1998, the condensed consolidated statements of
stockholders' equity for the three months ended March 31, 1999 and 1998, and the
condensed consolidated statements of cash flows for the three 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, 1998 Annual
Report on Form 10-K. The results of operations for the period ended March 31,
1999 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 FIRST QUARTER ENDED MARCH 31, 1999 VS. FIRST QUARTER ENDED MARCH
31, 1998
Net sales for the first quarter of 1999 were $10,854,000, a decrease of 6% from
net sales of $11,518,000 for the first quarter of 1998. The decrease is
attributable to a lower number of systems sold as a result of competition and
order delays. 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
three months of 1999, sales to four companies comprised 66% of total net sales.
Each of the four customers contributed between 12% and 23% of net sales. The
Company sells to all of the RBOC's.
Gross profit as a percentage of net sales was 61% for the first quarter of 1999
versus 58% for the same period in 1998. The increase in gross profit as a
percentage of net sales for the first three months was a result of ongoing cost
improvement programs which were implemented in 1998. Gross profit as a
percentage of net sales is expected to decrease over the remainder of 1999 due
to competitive pressure to reduce product pricing.
Research and development (R&D) expenses decreased 51% to $1,620,000 for the
first quarter of 1999 from $3,339,000 for the same period in 1998. R&D decreased
as a percentage of net sales to 15% for the first quarter of 1999 from 29% for
the first quarter of 1998. R&D expenses for the first quarter of 1998 included
$2,099,000 for the Access Products Group. The Company announced the termination
of the Access Products Group on September 14, 1998. The Company anticipates
decreased R&D expenses for 1999 due to the termination of the Access Products
Group.
Selling, general and administrative expenses (SG&A) decreased to $3,202,000 in
the first quarter of 1999 from $3,599,000 for the same period in 1998. As a
percentage of net sales, this represents 30% in the first quarter of 1999 and
31% in the first quarter of 1998. The decrease in SG&A expenses was primarily
attributable to the termination of the Access Products Group and closing of the
Raleigh facility in September 1998.
As a result of the above factors, income from operations increased to $1,766,000
in the first quarter of 1999 from a loss from operations of $284,000 in the
first quarter of 1998.
The Company's effective income tax rate was 36% for the first quarter of 1999
versus an effective rate of 34% for the same period in 1998.
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LIQUIDITY AND CAPITAL RESOURCES
Cash increased by $2,232,000 during the first three months of 1999 to
$19,444,000 at March 31, 1999. Operating activities provided $2,388,000 in cash
in the first quarter of 1999. During the same period in 1998, cash increased by
$2,597,000 to $10,792,000 at March 31, 1998.
Net working capital was $23,836,000 at March 31, 1999 compared to $22,173,000 at
December 31, 1998. Current ratios on those dates were 3.9:1 and 3.8:1,
respectively. The Company had no long-term debt at March 31, 1999 or December
31, 1998.
Net capital expenditures were $97,000 for the first three months of 1999 and
$301,000 for the same period in 1998.
On October 22, 1998, the Company's Board of Directors approved a stock
repurchase program which allows the Company to repurchase up to one million
shares of its Common Stock, $.01 par value, through October 22, 1999. As of
March 31, 1999, 48,300 shares had been purchased under this program. The Company
intends to finance any additional stock purchases under the program using
existing cash reserves.
The Company believes that existing cash and cash equivalents and cash to be
generated from future operations will provide sufficient capital to meet the
business needs of the Company through the next 12 months.
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<PAGE> 10
YEAR 2000
The Company faces year 2000 compliance issues similar to those faced by other
companies which design, manufacture, and sell equipment used in the
telecommunications industry. Year 2000 compliance issues typically arise with
respect to computer software systems and programs that use only two digits,
rather than four digits, to represent a particular year. Consequently, these
systems and programs may not process dates beyond the year 1999 and may result
in miscalculation or system failures causing disruptions of business operations.
The Company's product development processes currently contain steps to include
year 2000 compliance verification for all current and future products. Most of
the Company's products are currently year 2000 compliant, and the Company
believes that compliance for all of its products will be achieved prior to
January 1, 2000. Customers may upgrade non-compliant products to existing
compliant products. Although the products currently offered by the Company have
been tested for year 2000 compliance, any failure of the Company's products to
perform, including the failure to process dates beyond the year 1999, could have
a material adverse effect on the Company's business, financial condition, and
results of operations. The Company's future revenue could be impacted if
customers divert portions of their capital expenditure budgets toward the year
2000 issue and away from programs that include purchases of the Company's
products.
The Company has completed its initial assessment of its internal computer
information systems and non-computer systems, which contain embedded computer
technology, to determine if such systems are year 2000 compliant. Non-compliant
systems have been categorized by their importance to the Company's operations as
critical, moderate, and non-critical. The Company is currently correcting known
non-compliant systems and presently believes that the amount of remediation work
required to address year 2000 problems is not extensive. The Company has
replaced certain of its financial and operational systems in the last several
years, and management believes that the new equipment and software substantially
address year 2000 issues.
The Company currently estimates that the total cost of addressing year 2000
issues will be approximately $700,000. The Company has already incurred
approximately $200,000 through March 31, 1999 in addressing year 2000 evaluation
and remediation work. All costs related to year 2000 evaluation and compliance
are being expensed by the Company as incurred. The Company cannot guarantee that
its efforts will prevent all consequences and there may be undetermined future
costs due to business disruption that may be caused by customers, suppliers, or
unforeseen circumstances.
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<PAGE> 11
The Company is still in the process of developing a contingency plan addressing
its most likely year 2000 worst case scenario. The Company believes that the
potential impact of a failure of its products in its customers'
telecommunications networks would be minimal due to the function that its
products serve. The Company's products assist customers in managing their
telecommunications networks but do not carry customer telecommunications
traffic.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The foregoing Management's Discussion and Analysis of Financial Condition and
Results of Operations contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, which are intended to be
covered by the safe harbors created thereby. These statements include, but may
not be limited to, all statements regarding intent, beliefs, expectations,
projections, forecasts, and plans of the Company and its management, and include
statements regarding future gross profit margins (paragraph 2), future R&D
expenditures (paragraph 3), implementation and financing of the stock repurchase
program (paragraph 10), sufficiency of capital resources (paragraph 11) and
preparedness and compliance with year 2000 issues (paragraphs 12 through 16).
These forward-looking statements involve numerous risks and uncertainties,
including, without limitation, the Company's ability to develop new products as
planned and on budget, the impact of competitive products and services, the fact
that the Company may decide to substantially increase R & D expenditures to meet
the needs of its business and customers, currently unforeseen circumstances
could require the use of capital resources, year 2000 issues are not fully
determined and resolved and could require additional efforts and expenditures
and could impose additional and unknown risks, and the various risks inherent in
the Company's business and other risks and uncertainties detailed from time to
time in the Company's periodic reports filed with the Securities and Exchange
Commission, including, the Company's Annual Report on Form 10-K. One or more of
these factors have affected, and could in the future affect, the Company's
business and financial results in future periods and could cause actual results
to differ materially from plans and projections. Therefore, there can be no
assurance that the forward-looking statements included in this press release
will prove to be accurate. In light of the significant uncertainties inherent in
the forward-looking statements included herein, the inclusion of such
information should not be regarded as a representation by the Company, or any
other person, that the objectives and plans of the Company will be achieved. All
forward-looking statements are based on information presently available to the
management of the Company. The Company assumes no obligation to update any
forward-looking statements.
Item 3. Quantitative and Qualitative Disclosure About Market Risk -
inapplicable
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Part II. Other Information
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Items 1 - 5. Inapplicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
<TABLE>
APPLIED INNOVATION INC.
Exhibit 11
Statements Regarding Computation of Earnings Per Share (unaudited)
For the three months ended March 31, 1999 and 1998
<CAPTION>
1999 1998
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<S> <C> <C>
Weighted average number of common shares outstanding -
used for computation of basic earnings (loss) per share 15,782,566 15,790,832
Add net shares issuable pursuant to stock option plans less
shares assumed repurchased at the average market price 39,179 0
----------- -----------
Number of shares for computation of diluted earnings
(loss) per share 15,821,745 15,790,832
=========== ===========
Net income (loss) for basic and diluted earnings (loss) per share $ 1,265,955 $ (116,466)
=========== ===========
Basic earnings (loss) per share $.08 $(.01)
==== =====
Diluted earnings (loss) per share $.08 $(.01)
==== =====
</TABLE>
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K - None
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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)
May 7, 1999 /s/ Gerard B. Moersdorf, Jr.
- ----------- ----------------------------
Date Gerard B. Moersdorf, Jr.
Chairman of the Board, President,
Chief Executive Officer and Treasurer
(Principal Executive Officer)
May 7, 1999 /s/ William H. Largent
- ----------- ----------------------
Date William H. Largent
Senior Vice President - Operations
and Chief Financial Officer
(Chief Financial Officer)
May 7, 1999 /s/ John M. Spiegel
- ----------- -------------------
Date John M. Spiegel
Controller
(Principal Accounting Officer)
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<TABLE> <S> <C>
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<CIK> 0000798399
<NAME> APPLIED INNOVATION INC.
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<CASH> 19,443,832
<SECURITIES> 0
<RECEIVABLES> 7,664,055
<ALLOWANCES> 244,213
<INVENTORY> 3,377,561
<CURRENT-ASSETS> 32,053,347
<PP&E> 14,803,540
<DEPRECIATION> 5,781,902
<TOTAL-ASSETS> 41,118,378
<CURRENT-LIABILITIES> 8,217,704
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0
0
<COMMON> 157,716
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<TOTAL-LIABILITY-AND-EQUITY> 41,118,378
<SALES> 10,854,102
<TOTAL-REVENUES> 10,854,102
<CGS> 4,265,527
<TOTAL-COSTS> 4,265,527
<OTHER-EXPENSES> 4,782,123
<LOSS-PROVISION> 40,000
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,978,955
<INCOME-TAX> 713,000
<INCOME-CONTINUING> 1,265,955
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