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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 September 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 November 1, 2000 there were 15,808,239 shares of common stock outstanding.
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APPLIED INNOVATION INC.
Table of Contents
<TABLE>
<CAPTION>
Page
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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
September 30, 2000 (Unaudited) and December 31, 1999 3
Condensed Consolidated Income Statements for the
three- and nine-month periods ended September 30, 2000
and 1999 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows for the
nine-month periods ended September 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 - 9
Item 3. Quantitative and Qualitative Disclosure About Market Risk 10
Part II. Other Information
--------------------------
Items 1 - 5 10
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits 11
(b) Reports on Form 8-K - None 11
Signatures 12
</TABLE>
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PART 1. FINANCIAL INFORMATION
-----------------------------
ITEM 1. FINANCIAL STATEMENTS
APPLIED INNOVATION INC.
Condensed Consolidated Balance Sheets
Assets
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<TABLE>
<CAPTION>
(Unaudited)
September 30, 2000 December 31, 1999
-------------------- -------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 19,003,078 $ 11,928,868
Short term investments 3,358,829 1,794,581
Accounts receivable, net of allowance 18,277,459 10,990,025
Inventory 7,369,631 3,913,432
Prepaid expenses 198,813 500,631
Deferred income taxes 1,231,000 1,231,000
-------------------- -------------------
Total current assets 49,438,810 30,358,537
Property, plant and equipment - less accumulated
depreciation of $6,389,501 and $5,941,568, respectively 8,369,494 8,643,068
Investments 5,139,299 5,347,377
Other assets 327,250 245,347
-------------------- -------------------
Total Assets $ 63,274,853 $ 44,594,329
==================== ===================
Liabilities and Stockholders' Equity
------------------------------------
(Unaudited)
September 30, 2000 December 31, 1999
-------------------- -------------------
Current liabilities:
Accounts payable $ 10,468,834 $ 2,224,460
Accrued expenses 4,287,922 3,070,792
Accrued warranty expenses 1,535,696 1,877,731
Deferred revenue 558,794 333,682
-------------------- -------------------
Total current liabilities 16,851,246 7,506,665
-------------------- -------------------
Stockholders' equity:
Common stock; $.01 par value; 30,000,000 shares
authorized; 15,798,382 and 15,371,932 shares
issued and outstanding, respectively 157,998 153,719
Additional paid-in capital 10,052,923 6,801,476
Note receivable for common stock (600,000) -
Retained earnings 36,792,649 30,152,749
Accumulated other comprehensive gain (loss) - net 20,037 (20,280)
-------------------- -------------------
46,423,607 37,087,664
-------------------- -------------------
Total Liabilities and Stockholders' Equity $ 63,274,853 $ 44,594,329
==================== ===================
</TABLE>
See accompanying note to condensed consolidated financial statements.
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APPLIED INNOVATION INC.
Condensed Consolidated Income Statements (Unaudited)
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
------------------------------------------------------------------------------
2000 1999 2000 1999
------------------ ----------------- -------------------- -------------------
<S> <C> <C> <C> <C>
Net sales $ 31,159,738 $ 11,779,417 $ 63,805,968 $ 35,156,048
Cost of sales 20,112,672 4,719,553 35,645,044 14,329,916
------------------ ----------------- -------------------- -------------------
Gross profit 11,047,066 7,059,864 28,160,924 20,826,132
Operating expenses:
Research and development 2,179,525 2,041,484 6,213,527 5,443,025
Selling, general, and administrative 5,103,901 2,946,852 13,148,061 9,085,455
------------------ ----------------- -------------------- -------------------
Income from operations 3,763,640 2,071,528 8,799,336 6,297,652
Other income 353,765 287,584 965,564 669,245
------------------ ----------------- -------------------- -------------------
Income before income taxes 4,117,405 2,359,112 9,764,900 6,966,897
Income taxes 1,318,000 849,000 3,125,000 2,509,000
------------------ ----------------- -------------------- -------------------
Net income $ 2,799,405 $ 1,510,112 $ 6,639,900 $ 4,457,897
================== ================= ==================== ===================
Basic earnings per share $ 0.18 $ 0.10 $ 0.43 $ 0.28
================== ================= ==================== ===================
Diluted earnings per share $ 0.17 $ 0.10 $ 0.42 $ 0.28
================== ================= ==================== ===================
Weighted average shares outstanding
for basic earnings per share 15,695,574 15,526,895 15,528,872 15,657,586
================== ================= ==================== ===================
Weighted average shares outstanding
for diluted earnings per share 16,271,528 15,561,283 15,960,774 15,692,873
================== ================= ==================== ===================
</TABLE>
See accompanying note to condensed consolidated financial statements.
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APPLIED INNOVATION INC.
Condensed Consolidated Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-----------------------------------------
2000 1999
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<S> <C> <C>
Cash flows from operating activities:
Net income $ 6,639,900 $ 4,457,897
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation 1,265,392 1,450,417
Loss on sale of assets 11,414 69,067
Provision for deferred income taxes - (4,000)
Tax benefit associated with exercise of stock options 402,026 -
Effects of change in operating assets and liabilities:
Accounts receivable (7,287,434) 597,836
Inventory (3,456,199) (1,035,845)
Other current assets 301,818 188,666
Other assets (81,903) 57,969
Accounts payable 8,244,374 1,218,400
Accrued expenses 875,095 (1,129,919)
Deferred revenue 225,112 429,555
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Net cash provided by operating activities 7,139,595 6,300,043
-------------------- -------------------
Cash flows from investing activities:
Purchases of property, plant and equipment (1,006,757) (763,644)
Purchases of available for sale investments (3,987,203) (4,121,759)
Maturities of available for sale investments 1,995,726 -
Sale of available for sale investments 675,624 -
Proceeds from sale of property, plant and equipment 3,525 23,925
-------------------- -------------------
Net cash used by investing activities (2,319,085) (4,861,478)
-------------------- -------------------
Cash flows from financing activities:
Proceeds from issuance of common stock 2,253,700 -
Common stock repurchased - (1,058,154)
-------------------- -------------------
Net cash provided (used) by financing activities 2,253,700 (1,058,154)
-------------------- -------------------
Increase in cash and cash equivalents 7,074,210 380,411
Cash and cash equivalents - beginning of period 11,928,868 17,211,499
-------------------- -------------------
Cash and cash equivalents - end of period $ 19,003,078 $ 17,591,910
==================== ===================
</TABLE>
See accompanying note to condensed consolidated financial statements.
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APPLIED INNOVATION INC.
Notes to Condensed Consolidated Financial Statements
September 30, 2000 and 1999
(Unaudited)
1. Basis of presentation - The condensed consolidated balance sheet as of
September 30, 2000, the condensed consolidated income statements for the three-
and nine-month periods ended September 30, 2000 and 1999, and the condensed
consolidated statements of cash flows for the nine-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 September
30, 2000 are not necessarily indicative of the results for the full year.
2. The Financial Accounting Standards Board Statement No. 133, Accounting for
Derivative Instruments and Hedging Activities was issued with an effective date
of January 1, 2001. The Company believes it will have no impact on financial
reporting.
3. 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 September 30, 2000 and December 31, 1999 are summarized
below:
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
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<S> <C> <C>
Raw materials $ 5,001,176 $ 2,739,379
Work-in-process 1,175,155 142,030
Finished goods 1,383,300 1,192,023
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7,559,631 4,073,432
Reserve for obsolescence (190,000) (160,000)
----------- -------------
$ 7,369,631 $ 3,913,432
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</TABLE>
4. 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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5. Comprehensive income - Comprehensive income for the three- and nine-month
periods ended September 30, 2000 was $2,839,722 and $6,680,217, respectively.
Comprehensive income for the three- and nine-month periods ended September 30,
1999 was $1,491,093 and $4,438,878, respectively. The sole adjustment necessary
to reconcile net income with comprehensive income is for the net unrealized
gains or losses, net of taxes, on investment securities.
6. Earnings per share - Basic earnings (loss) per share is calculated using the
weighted average number of common shares outstanding during the periods. Diluted
earnings (loss) per share is calculated using the weighted average number of
common and common equivalent shares outstanding during the periods.
Outstanding shares of common stock used in calculating earnings per share
differed from those amounts reported in the consolidated financial statements as
follows:
<TABLE>
<CAPTION>
Three months ended Three months ended
September 30, 2000 September 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 15,798,382 15,798,382 15,497,732 15,497,732
Effect of weighting changes
in outstanding shares (102,808) (102,808) 29,163 29,163
Stock options - - 575,954 - - 34,388
---------- ---------- ---------- ----------
Adjusted shares 15,695,574 16,271,528 15,526,895 15,561,283
========== ========== ========== ==========
Nine months ended Nine months ended
September 30, 2000 September 30, 1999
------------------- ------------------
Basic earnings Diluted earnings Basic earnings Diluted earnings
per share per share per share per share
---------- ---------- ---------- ----------
Outstanding shares 15,798,382 15,798,382 15,497,732 15,497,732
Effect of weighting changes
in outstanding shares (269,510) (269,510) 159,854 159,854
Stock options - - 431,902 - - 35,287
---------- ---------- ---------- ----------
Adjusted shares 15,528,872 15,960,774 15,657,586 15,692,873
========== ========== ========== ==========
</TABLE>
7. Equity - On July 13, 2000, the Company appointed Robert L. Smialek as
President and Chief Executive Officer. As part of his Employment Agreement
("Agreement"), the Company sold 100,000 unregistered shares of its common
stock at $12 per share, the closing market price on the date of the
Agreement. Mr. Smialek paid for the stock with $600,000, of cash, and a
five year interest-bearing note, payable in five equal annual installments
of principal and interest commencing July 13, 2001 and continuing through
July 13, 2005. Interest accruing at a rate of 6.62 percent, shall be
calculated on the basis of a 365-day year for the actual number of days the
principal sum is unpaid. The note receivable is reflected in the
Stockholders' Equity section of the accompanying balance sheet.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF THE THREE- AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2000 COMPARED
TO THREE- AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1999
Net sales for the third quarter of 2000 were $31,160,000, an increase of 165%
from net sales of $11,779,000 for the third quarter of 1999. Net sales of
$63,806,000 for the nine-months ended September 30, 2000 are up 81% from
$35,156,000 last year. The increase in sales was largely attributed to higher
demand for the Company's AIscout, AISwitch 180, and AI130 products which
accounted for approximately $4.2 million of the third quarter increase, while
strong demand for the Company's integration and services business, including
integrated digital subscriber line ("DSL") solutions, increased revenue during
the most recent quarter by $15.2 million. The Company believes that fourth
quarter 2000 sales will significantly exceed both third quarter 2000 and fourth
quarter 1999 amounts, driven by substantial digital subscriber line system
integration orders received late in the third quarter.
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 nine months of 2000, sales to
three companies comprised 57% of net sales. Each of the three customers
contributed between 11% and 32% of net sales. One of these customers, Mcleod
USA, comprises a large portion of the Company's integration and services
revenues.
Gross profit as a percentage of net sales was 35% for the third quarter of 2000,
versus 60% for the third quarter of 1999. Year-to-date gross profit percentages
were 44% and 59% for 2000 and 1999, respectively. The lower overall gross profit
margin as a percentage of net sales is principally due to integration and
services which contributes lower incremental profitability than product sales,
but increases the Company's business opportunities. Gross profit on product
sales was 56% of net sales for the third quarter 2000, compared with 58% of net
sales for the same period last year. Year-to-date gross profit percentages were
56% and 60% for 2000 and 1999, respectively. The slight decrease in gross profit
as a percentage of net product sales is primarily attributed to a higher sales
mix of products that have slightly lower gross margins, such as the AIscout and
the AI130. Integration and services revenues gross profit for the three months
ended September 30, 2000 was 15% versus 88% a year ago. The difference between
the two quarters is attributed to a higher sales mix of system integration
business in 2000, which includes third-party equipment costs. For the remainder
of 2000, the Company expects system integration and services revenues to
continue to increase at a faster rate than product sales, thereby decreasing
overall gross margin as a percentage of net sales.
Research and development ("R&D") expenses increased 7% to $2,180,000 for the
third quarter of 2000, from $2,041,000 for the same period in 1999. R&D
decreased as a percentage of net sales to 7% for the third quarter of 2000, from
17% for the same period in 1999. Year-to-date R&D expenses were $6,214,000 for
2000 and $5,443,000 for 1999. As a percentage of net sales, this represents 10%
for 2000 and 15% for 1999. The increase in R&D expenses is attributable to
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additional staffing and expenditures on new product initiatives, including
LuxPath Networks fiber optic products. R&D expenses for the fourth quarter 2000
are expected to exceed fourth quarter 1999.
Selling, general and administrative expenses ("SG&A") increased to $5,104,000 in
the third quarter of 2000, from $2,947,000 in 1999. As a percentage of net
sales, this represents 16% in 2000 and 25% in 1999. Year-to-date SG&A was
$13,148,000 for 2000 and $9,085,000 for 1999, which represented 21% of net sales
in 2000 and 26% in 1999. The increase in SG&A spending is primarily related to
new sales, sales engineering and senior management positions, increased
expenditures for our integration and services division, and higher marketing
expenditures. The Company believes that fourth quarter SG&A will exceed both
third quarter 2000 and fourth quarter 1999.
As a result of the above factors, income from operations increased to $3,764,000
in the third quarter of 2000, from $2,072,000 in the third quarter of 1999.
Third quarter income from operations represents 12% of net sales versus 18% of
net sales in 2000 and 1999, respectively. Year-to-date income from operations
was $8,799,000 for 2000, versus $6,298,000 in 1999. Year-to-date income from
operations represents 14% of net sales in 2000, versus a loss from operations of
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. During 2000, the Company
anticipates generating higher research and experimentation tax credits, thereby
lowering, the effective tax rate from the prior year.
LIQUIDITY AND CAPITAL RESOURCES
The Company had $27,501,000 of cash and cash equivalents and short- and
long-term investments at September 30, 2000. During the nine-month period then
ended, operating activities provided $7,139,000 in cash. During the same period
the Company purchased $1,007,000 of equipment to support operations and
purchased $1,316,000 of investment securities, net of maturities and sales.
Net working capital was $32,588,000 at September 30, 2000, compared to
$22,852,000 at December 31, 1999. At September 30, 2000, the current ratio was
2.9:1 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 September 30, 2000. No shares were repurchased during the
nine-month period ended September 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 2001. However, if the
Company's working capital needs significantly increase due to faster than
expected growth, or should the Company acquire another business, the Company may
seek to fund these requirements through a line of credit or other debt, or by
issuing additional equity.
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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 sales growth in the fourth quarter of 2000 (paragraph 1),
future gross profit margins (paragraph 3), future R&D expenditures (paragraph
4), future SG&A spending (paragraph 5), the expected effective tax rate for 2000
(paragraph 7), 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 which 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 the MD&A 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 September 30, 2000.
Part II. Other Information
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Items 1 - 5. Inapplicable
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Part II. Other Information
-------- -----------------
Item 6. Exhibits
Exhibit 10.1 -Employment Agreement between the Company and
Robert L. Smialek
Exhibit 11 - Earnings Per Share
Exhibit 27 - Financial Data Schedule
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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)
November 13, 2000 /s/ Robert L. Smialek
----------------- ----------------------
Date Robert L. Smialek
President and Chief Executive Officer
(Principal Executive Officer)
November 13, 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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