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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 March 31, 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 April 27, 2000 there were 15,507,292 shares of common stock outstanding.
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APPLIED INNOVATION INC.
Table of Contents
<TABLE>
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PAGE
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Facing Page 1
Table of Contents 2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
March 31, 2000 (unaudited) and December 31, 1999 3
Condensed Consolidated Statements of Income for the
three-months ended March 31, 2000 and 1999 (unaudited) 4
Condensed Consolidated Statements of Cash Flows for the
three-months ended March 31, 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
<TABLE>
<CAPTION>
ASSETS
------
(Unaudited)
March 31, 2000 December 31, 1999
------------------ -------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 15,468,145 $ 11,928,868
Short term investments 1,763,422 1,794,581
Accounts receivable, net of allowance 12,045,112 10,990,025
Inventory 3,838,184 3,913,432
Other current assets 458,986 500,631
Deferred income taxes 1,231,000 1,231,000
------------------ -------------------
Total current assets 34,804,849 30,358,537
Property, plant and equipment - less accumulated 8,404,246 8,643,068
depreciation of $6,425,842 and $5,347,377, respectively
Investments 4,392,842 5,347,377
Other assets 260,368 245,347
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Total Assets $ 47,862,305 $ 44,594,329
================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
(Unaudited)
March 31, 2000 December 31, 1999
------------------ -------------------
Current liabilities:
Accounts payable $ 3,216,435 $ 2,224,460
Accrued expenses 3,262,686 3,070,792
Accrued warranty expenses 1,674,542 1,877,731
Deferred revenue 214,635 333,682
------------------ -------------------
Total current liabilities 8,368,298 7,506,665
------------------ -------------------
Stockholders' equity:
Common stock; $.01 par value; 30,000,000 shares authorized; 15,507,052
shares issued and outstanding in March, 2000; 15,371,932 shares issued and
outstanding in December, 1999 155,071 153,719
Additional paid-in capital 7,685,937 6,801,476
Retained earnings 31,704,788 30,152,749
Accumulated other comprehensive loss - net (51,789) (20,280)
------------------ -------------------
39,494,007 37,087,664
------------------ -------------------
Total Liabilities and Stockholders' Equity $ 47,862,305 $ 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 March 31,
---------------------------------------
2000 1999
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<S> <C> <C>
Net sales $ 14,362,508 $ 10,854,102
Cost of sales 6,826,413 4,265,527
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Gross profit 7,536,095 6,588,575
Operating expenses:
Research and development 1,941,942 1,619,889
Selling, general, and administrative 3,615,872 3,202,234
------------------ -------------------
Income from operations 1,978,281 1,766,452
Other income 304,758 212,503
------------------ -------------------
Income before income taxes 2,283,039 1,978,955
Income taxes 731,000 713,000
------------------ -------------------
Net income $ 1,552,039 $ 1,265,955
================== ===================
Basic earnings per share $ 0.10 $ 0.08
================== ===================
Diluted earnings per share $ 0.10 $ 0.08
================== ===================
Weighted average shares outstanding
for basic earnings per share 15,443,708 15,782,566
================== ===================
Weighted average shares outstanding
for diluted earnings per share 15,862,530 15,821,745
================== ===================
</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>
Three Months Ended March 31,
---------------------------------------
2000 1999
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<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,552,039 $ 1,265,955
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 484,275 509,465
Gain on sale of assets - (7,585)
Provision for deferred income taxes - (88,000)
Effects of change in operating assets and liabilities:
Accounts receivable (1,055,087) 278,408
Inventory 75,248 243,094
Other current assets 41,645 (32,189)
Other assets (15,021) 63,713
Accounts payable 991,975 897,433
Accrued expenses (11,295) (1,172,557)
Deferred revenue (119,047) 429,838
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Net cash provided by operating activities 1,944,732 2,387,575
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Cash flows from investing activities:
Purchases of property, plant and equipment (245,453) (104,863)
Purchases of available for sale investments (872,274) -
Maturities of available for sale investments 1,176,592 -
Sale of available for sale investments 649,867 -
Proceeds from sale of property, plant and equipment - 7,585
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Net cash provided (used) by investing activities 708,732 (97,278)
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Cash flows from financing activities:
Proceeds from issuance of common stock 640,600 -
Tax benefit associated with exercise of stock options 245,213 -
Common stock repurchased - (57,964)
------------------ -------------------
Net cash provided (used) by financing activities 885,813 (57,964)
------------------ -------------------
Increase in cash and cash equivalents 3,539,277 2,232,333
Cash and cash equivalents - beginning of period 11,928,868 17,211,499
------------------ -------------------
Cash and cash equivalents - end of period $ 15,468,145 $ 19,443,832
================== ===================
</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 March
31, 2000, the condensed consolidated statements of operations for the
three-months ended March 31, 2000 and 1999, and the condensed consolidated
statements of cash flows for the three-months 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 March 31,
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 March 31, 2000 and December 31, 1999 are summarized
below:
March 31, 2000 December 31, 1999
-------------- -----------------
Raw materials $ 2,759,491 $ 2,739,379
Work-in-process 524,212 142,030
Finished goods 714,481 1,192,023
------------ -----------
3,998,184 4,073,432
Reserve for obsolescence (160,000) (160,000)
----------- -----------
$ 3,838,184 $ 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-month period ended
March 31, 2000 was $1,520,530. There was no comprehensive income adjustment for
the three-months ended March 31, 1999. The sole adjustment necessary to
reconcile net income with comprehensive income is for the net unrealized losses,
net of taxes, on investment securities, which was $31,509 for the three months
ended March 31, 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
March 31, 2000 March 31, 1999
--------------- --------------
Basic earnings Diluted earnings Basic earnings Diluted earnings
per share per share per share per share
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Outstanding shares 15,507,052 15,507,052 15,771,632 15,771,632
Effect of weighting changes
in outstanding shares (63,344) (63,344) 10,934 10,934
Stock options -- 418,822 -- 39,179
----------- ------------ ------------ ------------
Adjusted shares 15,443,708 15,862,530 15,782,566 15,821,745
========== ========== ========== ==========
</TABLE>
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF THE THREE-MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE-MONTHS ENDED
MARCH 31, 1999
Net sales for the first quarter of 2000 were $14,363,000, a 32% increase from
net sales of $10,854,000 during the first quarter of 1999. The increase in sales
is largely attributed to sales of the Company's AIscout product, a large order
for other products from a new competitive local exchange carrier ("CLEC")
customer, and a large volume of integration orders from a regional bell
operating company ("RBOC") customer. The Company believes that 2000 sales will
continue to exceed 1999 amounts for the remainder of the year, with an overall
expected increase of 20 - 25% compared to 1999.
Because of the Company's concentration of sales to RBOCs and long distance phone
companies, a small number of customers have represented substantial portions of
net sales. For the first three months of 2000, sales to four companies comprised
60% of net sales. Each of the four customers contributed between 10% and 20% of
net sales. The Company sells to all of the RBOCs.
Gross profit as a percentage of net sales was 52% for the first quarter of 2000,
versus 61% for the first quarter of 1999. The decrease in gross profit can be
attributed to lower gross profit realized on recently introduced products. As
new product sales increase in volume, the gross profits realized are expected to
increase. Also, first quarter 2000 sales included a larger percentage of system
integration work than in the corresponding prior year quarter. System
integration work generates lower gross profits than product sales. During the
remainder of 2000, the Company expects gross profit as a percentage of net sales
to increase from the first quarter amount.
Research and development (R&D) expenses increased 20% to $1,942,000 for the
first quarter of 2000, from $1,620,000 for the same period in 1999. Although R&D
expenses increased in comparison to the corresponding prior year quarter,
expenses as a percentage of net sales remained relatively flat in comparison to
the first quarter of 1999, or 14% and 15% respectively. The increase in R&D is
largely due to additional staffing and expenditures on new product initiatives.
The Company expects R&D for 2000 as a percentage of net sales to be generally
consistent with the first quarter amount.
Selling, general and administrative expenses (SG&A) increased to $3,616,000 in
the first quarter of 2000, from $3,202,000 in 1999. As a percentage of net
sales, this represents 25% in 2000 and 30% in 1999. The increase in SG&A
spending is attributed to new sales and sales engineering positions, 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 two
areas.
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As a result of the above factors, income from operations increased to $1,978,000
in the first quarter of 2000, from $1,766,000 in the first quarter of 1999.
First quarter income from operations in 2000 represents 14% of net sales versus
16% 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 $21,624,000 of cash and cash equivalents and short- and
long-term investments at March 31, 2000. During the three-month period then
ended, operating activities provided $1,945,000 in cash. During the same period
the Company purchased $245,000 of equipment to support operations and purchased
$954,000 of investment securities, net of maturities and sales.
Net working capital was $26,437,000 at March 31, 2000, compared to $22,852,000
at December 31, 1999. At March 31, 2000, the current ratio was 4.2:1 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 March 31, 2000. No shares were repurchased during the quarter
ended March 31, 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
statements regarding sales growth in the year 2000 (paragraph 1), future 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
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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 March 31, 2000.
PART II. OTHER INFORMATION
Items 1 - 5. Inapplicable
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - Exhibit 11
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
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APPLIED INNOVATION INC.
EXHIBIT 11
Statement Regarding Computation of Earnings Per Share
For the three-months ended March 31, 2000 and 1999
(unaudited)
<TABLE>
<CAPTION>
2000 1999
Three-months Three-months
------------ ------------
<S> <C> <C>
Weighted average number of common
shares outstanding - used for
computation of basic earnings per share 15,443,708 15,782,566
Add net shares issuable pursuant to stock
option plans less shares assumed
repurchased at the average market price 418,822 39,179
---------- ----------
Number of shares for computation of
diluted earnings per share 15,862,530 15,821,745
========== ==========
Net income for basic and diluted
earnings per share $1,552,039 $1,265,955
Basic earnings per share $ 0.10 $ .08
======== ======
Diluted earnings per share $ 0.10 $ .08
======== ======
</TABLE>
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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 11, 2000 /S/ Gerard B. Moersdorf, Jr.
- ------------ -----------------------------
Date Gerard B. Moersdorf, Jr.
Chairman of the Board, President,
Chief Executive Officer and Treasurer
(Principal Executive Officer)
May 11, 2000 /S/ Michael P. Keegan
- ------------ ----------------------
Date Michael P. Keegan
Vice President and Chief Financial Officer
(Principal Financial Officer)
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<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000798399
<NAME> APPLIED INNOVATION INC.
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 15,468,145
<SECURITIES> 1,763,422
<RECEIVABLES> 12,338,189
<ALLOWANCES> 347,547
<INVENTORY> 3,838,184
<CURRENT-ASSETS> 34,804,849
<PP&E> 14,830,088
<DEPRECIATION> 6,425,842
<TOTAL-ASSETS> 47,862,305
<CURRENT-LIABILITIES> 8,368,298
<BONDS> 0
0
0
<COMMON> 155,071
<OTHER-SE> 39,338,936
<TOTAL-LIABILITY-AND-EQUITY> 47,862,305
<SALES> 14,362,508
<TOTAL-REVENUES> 14,362,508
<CGS> 6,826,413
<TOTAL-COSTS> 6,826,413
<OTHER-EXPENSES> 5,557,814
<LOSS-PROVISION> 30,000
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,283,039
<INCOME-TAX> 731,000
<INCOME-CONTINUING> 1,552,039
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,552,039
<EPS-BASIC> .10
<EPS-DILUTED> .10
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