<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, 2000
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 July 27, 2000 there were 15,647,712 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
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
June 30, 2000 (unaudited) and December 31, 1999 3
Condensed Consolidated Statements of Income for the
three- and six-month periods ended June 30, 2000 and 1999 (unaudited) 4
Condensed Consolidated Statements of Cash Flows for the
three- and six-month periods ended June 30, 2000 and 1999 (unaudited) 5
Notes to Condensed Consolidated Financial Statements (unaudited) 6 - 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 10-11
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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PART 1. FINANCIAL INFORMATION
-----------------------------
ITEM 1. FINANCIAL STATEMENTS
APPLIED INNOVATION INC.
Condensed Consolidated Balance Sheets
ASSETS
<TABLE>
<CAPTION>
(Unaudited)
June 30, 2000 December 31, 1999
------------------ -------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 14,742,776 $ 11,928,868
Short term investments 1,961,848 1,794,581
Accounts receivable, net of allowance 14,016,537 10,990,025
Inventory 5,862,859 3,913,432
Prepaid expenses 334,603 500,631
Deferred income taxes 1,231,000 1,231,000
------------------ -------------------
Total current assets 38,149,623 30,358,537
Property, plant and equipment - less accumulated
depreciation of $6,031,206 and $5,941,568, respectively 8,376,606 8,643,068
Investments 5,170,426 5,347,377
Other assets 315,552 245,347
------------------ -------------------
Total Assets $ 52,012,207 $ 44,594,329
================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,378,701 $ 2,224,460
Accrued expenses 3,554,619 3,070,792
Accrued warranty expenses 1,659,326 1,877,731
Deferred revenue 567,850 333,682
------------------ -------------------
Total current liabilities 10,160,496 7,506,665
------------------ -------------------
Stockholders' equity:
Common stock; $.01 par value; 30,000,000 shares
authorized; 15,513,832 shares issued and outstanding
in June, 2000; 15,371,932 shares issued and
outstanding in December, 1999 155,138 153,719
Additional paid-in capital 7,720,442 6,801,476
Retained earnings 33,993,244 30,152,749
Accumulated other comprehensive loss - net (17,113) (20,280)
------------------ -------------------
41,851,711 37,087,664
------------------ -------------------
Total Liabilities and Stockholders' Equity $ 52,012,207 $ 44,594,329
================== ===================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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APPLIED INNOVATION INC.
Condensed Consolidated Statements of Income (Unaudited)
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
----------------------------------------------------------------------------
2000 1999 2000 1999
------------------ ----------------- ------------------ -------------------
<S> <C> <C> <C> <C>
Net sales $ 18,283,722 $ 12,522,530 $32,646,230 $23,376,631
Cost of sales 8,705,959 5,344,836 15,532,372 9,610,363
------------------ ----------------- ------------------ -------------------
Gross profit 9,577,763 7,177,694 17,113,858 13,766,268
Operating expenses:
Research and development 2,092,060 1,781,652 4,034,002 3,401,541
Selling, general, and administrative 4,428,288 2,936,369 8,044,160 6,138,603
------------------ ----------------- ------------------ -------------------
Income from operations 3,057,415 2,459,673 5,035,696 4,226,124
Other income 307,041 169,158 611,799 381,661
------------------ ----------------- ------------------ -------------------
Income before income taxes 3,364,456 2,628,831 5,647,495 4,607,785
Income taxes 1,076,000 947,000 1,807,000 1,660,000
------------------ ----------------- ------------------ -------------------
Net income $ 2,288,456 $ 1,681,831 $ 3,840,495 $ 2,947,785
================== ================= ================== ===================
Basic earnings per share $ 0.15 $ 0.11 $ 0.25 $ 0.19
================== ================= ================== ===================
Diluted earnings per share $ 0.15 $ 0.11 $ 0.24 $ 0.19
================== ================= ================== ===================
Weighted average shares outstanding
for basic earnings per share 15,447,334 15,663,296 15,445,521 15,722,931
================== ================= ================== ===================
Weighted average shares outstanding
for diluted earnings per share 15,748,265 15,695,590 15,805,398 15,758,668
================== ================= ================== ===================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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APPLIED INNOVATION INC.
Condensed Consolidated Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
---------------------------------------
2000 1999
------------------ -------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 3,840,495 $ 2,947,785
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation 907,097 992,843
Loss (gain) on sale of assets 12,239 68,057
Provision for deferred income taxes - (54,000)
Tax benefit associated with exercise of stock options 247,541 -
Effects of change in operating assets and liabilities:
Accounts receivable (3,026,512) 225,861
Inventory (1,949,427) 580,499
Other current assets 166,028 120,329
Other assets (70,205) 58,849
Accounts payable 2,154,241 480,855
Accrued expenses 265,422 (2,238,256)
Deferred revenue 234,168 522,064
------------------ -------------------
Net cash provided by operating activities 2,781,087 3,704,886
------------------ -------------------
Cash flows from investing activities:
Purchases of property, plant and equipment (655,574) (416,286)
Purchases of available for sale investments (2,449,309) (3,280,834)
Maturities of available for sale investments 1,794,125 -
Sale of available for sale investments 668,035 -
Proceeds from sale of property, plant and equipment 2,700 23,434
------------------ -------------------
Net cash provided (used) by investing activities (640,023) (3,673,686)
------------------ -------------------
Cash flows from financing activities:
Proceeds from issuance of common stock 672,844 -
Common stock repurchased - (887,324)
------------------ -------------------
Net cash provided (used) by financing activities 672,844 (887,324)
------------------ -------------------
Increase (decrease) in cash and cash equivalents 2,813,908 (856,124)
Cash and cash equivalents - beginning of period 11,928,868 17,211,499
------------------ -------------------
Cash and cash equivalents - end of period $ 14,742,776 $ 16,355,375
================== ===================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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APPLIED INNOVATION INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Basis of presentation - The condensed consolidated balance sheet as of June
30, 2000, the condensed consolidated statements of income for the three- and
six-month periods ended June 30, 2000 and 1999, 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 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, 1999 Annual
Report on Form 10-K. The results of operations for the period ended June 30,
2000 are not necessarily indicative of the results for the full year.
Certain reclassifications have been made to the 1999 balance sheet data to
conform to the 2000 presentation.
2. Inventory - Inventory is stated at the lower of cost or market using the
first-in, first-out method, net of allowances for estimated obsolescence. Major
classes of inventory at June 30, 2000 and December 31, 1999 are summarized
below:
JUNE 30, 2000 DECEMBER 31, 1999
------------- -----------------
Raw materials $ 3,326,641 $ 2,739,379
Work-in-process 1,725,736 142,030
Finished goods 970,482 1,192,023
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6,022,859 4,073,432
Reserve for obsolescence (160,000) (160,000)
------------ -------------
$ 5,862,859 $ 3,913,432
=========== ===========
3. Income taxes - The Company has recorded its interim income tax provision
based on estimates of the Company's effective tax rate expected to be applicable
for the full fiscal year. Estimated effective rates recorded during interim
periods may be periodically revised, if necessary, to reflect current estimates.
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4. Comprehensive income - Comprehensive income for the three- and six-month
periods ended June 30, 2000 was $2,291,623 and $3,843,662, respectively.
Comprehensive income for the three- and six-month periods ended June 30, 1999
was $1,653,331 and $2,919,286, respectively. The sole adjustment necessary to
reconcile net income with comprehensive income is for the net unrealized gain,
net of taxes, on investment securities, which was $3,167 for the six months
ended June 30, 2000.
5. Earnings per share - Basic earnings per share is calculated using the
weighted average number of common shares outstanding during the periods. Diluted
earnings per share is calculated using the weighted average number of common and
common equivalent shares outstanding during the periods.
Shares of common stock used in calculating earnings per share differed from
outstanding shares reported in the consolidated financial statements as follows:
<TABLE>
<CAPTION>
Three months ended Three months ended
June 30, 2000 June 30, 1999
-------------- -------------
Basic earnings Diluted earnings Basic earnings Diluted earnings
Per Share Per Share Per Share Per Share
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Outstanding shares 15,513,832 15,513,832 15,540,732 15,540,732
Effect of weighting changes
in outstanding shares (66,498) (66,498) 122,564 122,564
Stock options - - 300,931 - - 32,294
----------- ----------- ----------- ----------
Adjusted shares 15,447,334 15,748,265 15,663,296 15,695,590
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Six months ended Six months ended
June 30, 2000 June 30, 1999
-------------- -------------
Basic earnings Diluted earnings Basic earnings Diluted earnings
Per Share Per Share Per Share Per Share
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Outstanding shares 15,513,832 15,513,832 15,540,732 15,540,732
Effect of weighting changes
in outstanding shares (68,311) (68,311) 182,199 182,199
Stock options - - 359,877 - - 35,737
----------- ---------- ---------- ----------
Adjusted shares 15,445,521 15,805,398 15,722,931 15,758,668
========== ========== ========== ==========
</TABLE>
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF THE THREE-AND SIX-MONTH PERIODS ENDED JUNE 30, 2000 COMPARED TO
THREE- AND SIX-MONTH PERIODS ENDED JUNE 30, 1999
Net sales for the second quarter of 2000 were $18,284,000, a 46% increase from
net sales of $12,523,000 during the second quarter of 2000. Year-to-date, net
sales of $32,646,000 for 2000 increased 40% over 1999 year-to-date sales of
$23,377,000. The increase in sales was largely attributed to higher demand for
the Company's AIscout, AISwitch 180, and AI130 products, which accounted for
approximately $3.9 million of the second quarter 2000 increase, while Enhanced
Services revenues rose $1.9 million during the most recent quarter. The Company
believes that 2000 sales will continue to exceed 1999 amounts for the remainder
of the year, with an overall expected increase of nearly 40% compared to 1999.
Because of the Company's concentration of sales to Regional Bell Operating
Companies (RBOCs), long distance phone companies, and large Competitive Local
Exchange Carriers ("CLECs"), a small number of customers have represented
substantial portions of net sales. For the first six months of 2000, sales to
three companies comprised 47% of net sales. Each of the three customers
contributed between 12% and 19% of net sales.
Gross profit as a percentage of net sales was 52% for the second quarter of
2000, versus 57% for the second quarter of 1999. Year-to-date gross profit
percentages were 52% and 59% for 2000 and 1999, respectively. The lower overall
gross margin as a percentage of net sales is principally due to Enhanced
Services, which contributes lower incremental profitability than product sales,
but increase the Company's business opportunities. Gross profit on product sales
was 58% of net sales for second quarter 2000, compared with 58% of net sales for
the same period last year. Increased sales of the recently introduced AIscout
contributed to higher gross profit on product sales than the 52% achieved in
first quarter 2000. Enhanced Services gross profit for the three-month period
ended June 30, 2000 was 18% of Enhanced Services net sales, versus 36% of
Enhanced Services net sales a year ago. The difference between the two quarters
is attributed to a much larger mix of system integration orders in 2000, which
achieve lower overall gross profits. For the remainder of 2000, the Company
expects Enhanced Services net sales to continue to increase, thereby decreasing
overall gross margin as a percentage of net sales.
Research and development (R&D) expenses increased 17% to $2,092,000 for the
second quarter of 2000, from $1,782,000 for the same period in 1999. R&D
decreased as a percentage of net sales to 11% for the second quarter, from 14%
for the same period in 1999. Year-to-date R&D expenses were $4,034,000 for 2000
and $3,401,000 for 1999. As a percentage of net sales, this represents 12% for
2000 and 15% for 1999. The increase in R&D expenses is primarily attributed to
additional staffing and expenditures on new product initiatives. For the
remainder of 2000, R&D expenses are expected to exceed prior year amounts, and
to increase as a percentage of net sales compared to the second quarter 2000
amount.
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Selling, general and administrative expenses (SG&A) increased to $4,428,000 in
the second quarter of 2000, from $2,936,000 in 1999. As a percentage of net
sales, this represents 24% in 2000 and 23% in 1999. Year-to-date SG&A was
$8,044,000 for 2000 and $6,139,000 for 1999, which represented 25% of net sales
in 2000 and 26% in 1999. The increase in SG&A spending is primarily related to
new sales and sales engineering positions, increased expenditures for Enhanced
Services, as well as higher marketing expenditures. The Company anticipates that
SG&A expenses for 2000 will be higher than 1999 to support the planned
expenditures in these areas.
As a result of the above factors, income from operations increased to $3,058,000
in the second quarter of 2000, from $2,460,000 in the second quarter of 1999.
Second quarter income from operations in 2000 represents 17% of net sales versus
20% of net sales in 1999. Year-to-date income from operations was $5,036,000,
versus $4,226,000 in 1999. Year-to-date income from operations represents 15% of
net sales in 2000, versus 18% of net sales in 1999.
The Company's effective income tax rate was 32% for the current quarter versus
an effective rate of 36% for the same period in 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company had $21,875,000 of cash and cash equivalents and short- and
long-term investments at June 30, 2000. During the six-month periods then ended,
operating activities provided $2,781,000 in cash. During the same period the
Company purchased $656,000 of equipment to support operations and purchased
$13,000 of investment securities, net of maturities and sales.
Net working capital was $27,990,000 at June 30, 2000, compared to $22,852,000 at
December 31, 1999. At June 30, 2000, the current ratio was 3.8:1 and the Company
had no debt outstanding.
On October 21, 1999, the Company's Board of Directors approved a one year
extension of the Company's 1,000,000 share stock repurchase program originally
adopted in October 1998. Under this program, the Company has repurchased 448,000
shares through June 30, 2000. No shares were repurchased during the six-month
period ended June 30, 2000.
The Company believes that its existing cash, cash equivalents, investments, and
cash to be generated from future operations will provide sufficient capital to
meet the business needs of the Company through the end of 2000.
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
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statements regarding sales growth in the year 2000 (paragraph 1), future
Enhanced Services revenue and gross profit margins (paragraph 3), future R&D
expenditures (paragraph 4), future SG&A expenditures (paragraph 5),
implementation and financing of the stock repurchase program (paragraph 10) and
sufficiency of capital resources (paragraph 11). These forward-looking
statements involve numerous risks and uncertainties, including, without
limitation, general economic and business conditions, 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,
current and future mergers of key customers 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 for the fiscal
year ended December 31, 1999. One or more of these factors have affected, and
could in the future affect, the Company's business and financial results 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 -
The Company does not have any material exposure to interest rate changes,
commodity price changes, foreign currency fluctuation, or similar market risks.
Furthermore, the Company has not entered into any derivative contracts and the
Company has no debt outstanding as of June 30, 2000.
PART II. OTHER INFORMATION
Items 1 - 3. Inapplicable
Items 4. Submission of Matters to a Vote of Security Holders
(a) Applied Innovation Inc. held its Annual Meeting of Stockholders on
April 27, 2000, for the purpose of electing three Class I directors.
(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.
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ACTION FOR WITHHELD
------ --- --------
Election of Class I Directors
James H. Blough 14,709,161 72,228
William H. Largent 14,708,789 72,600
Richard W. Oliver 14,712,161 69,228
Item 5. Inapplicable
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 Per Share
For the three- and six-month periods ended June 30, 2000 and 1999
(unaudited)
<TABLE>
<CAPTION>
2000 1999
Three-months Six-months Three-months Six-months
------------- ---------- ------------- ----------
<S> <C> <C> <C> <C>
Weighted average number of common
shares outstanding - used for
computation of basic earnings per share 15,447,334 15,445,521 15,663,296 15,722,931
Add net shares issuable pursuant to stock
option plans less shares assumed
repurchased at the average market price 300,931 359,877 32,294 35,737
---------- ---------- ---------- ----------
Number of shares for computation of
diluted earnings per share 15,748,265 15,805,398 15,695,590 15,758,668
========== ========== ========== ==========
Net income (loss) for basic and diluted
earnings per share $2,288,456 $3,840,495 $1,681,831 $2,947,785
Basic earnings (loss) per share $ 0.15 $ 0.25 $ 0.11 $ 0.19
======== ======= ======= =======
Diluted earnings (loss) per share $ 0.15 $ 0.24 $ 0.11 $ 0.19
======== ======= ======= =======
</TABLE>
Exhibit 27 - Financial Data Schedule
(a) 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)
AUGUST 11, 2000 /S/ ROBERT L. SMIALEK
--------------- ----------------------
Date Robert L. Smialek
President and Chief Executive
Officer (Principal Executive
Officer)
AUGUST 11, 2000 /S/ MICHAEL P. KEEGAN
--------------- ----------------------
Date Michael P. Keegan
Vice President, Chief Financial
Officer and Treasurer (Principal
Financial Officer and Principal
Accounting Officer)
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