<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
(AMENDMENT NO. 1)
Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
February 29, 1996
----------------------------------------------------
Date of Report (Date of earliest event reported)
APPLIED DIGITAL ACCESS, INC.
-----------------------------------------------------------
(Exact name of registrant as specified in its charter)
California 0-23698 68-0132939
- - ---------------------------- ------------- --------------------
(State or other jurisdiction (Commission (I.R.S. Employer
of incorporation) File Number) Identification No.)
9855 Scranton Road
San Diego, CA 92121
--------------------------------------------
(Address of principal executive offices)
(619) 623-2200
-------------------------------------------------------
(Registrant's telephone number, including area code)
Total number of pages: 20
<PAGE>
The undersigned hereby amends Item 7 of its Current Report on Form 8-K filed
with the Commission on March 15, 1996 to read as follows:
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
<TABLE>
<C> <S> <C>
(a) Report of Independent Accountants.......................... 4
Consolidated Balance Sheets as of April 30, 1995 and 1994... 5
Consolidated Statements of Operations for the years ended
April 30, 1995 and 1994..................................... 6
Consolidated Statements of Cash Flows for the years ended
April 30, 1995 and 1994..................................... 7
Consolidated Statements of Changes in Stockholders' Equity
for the years ended April 30, 1995 and 1994.................. 8
Notes to Consolidated Financial Statements................... 9
(b) Introduction to Pro Forma Financial Statements............... 17
Pro Forma Combined Balance Sheet (Unaudited) as of
December 31, 1995............................................ 18
Pro Forma Combined Statement of Operations (Unaudited)
for the year ended December 31, 1995......................... 19
Notes to Pro Forma Combined Financial Statements (Unaudited). 20
</TABLE>
2
<PAGE>
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 hereunto duly authorized.
Applied Digital Access, Inc.
Dated: May 14, 1996 By: /s/ PETER P. SAVAGE
------------------------------------
Peter P. Savage
President and Chief Executive Officer
3
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Applied Computing Devices, Inc.
We have audited the accompanying consolidated balance sheets of Applied
Computing Devices, Inc. and subsidiary as of April 30, 1995 and 1994 and the
related consolidated statements of operations, cash flows and changes in
stockholders' equity for the years then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Applied
Computing Devices, Inc. and subsidiary as of April 30, 1995 and 1994, and the
consolidated results of their operations and their cash flows for the years
then ended in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Indianapolis, Indiana
June 28, 1995
4
<PAGE>
APPLIED COMPUTING DEVICES, INC.
CONSOLIDATED BALANCE SHEET
AS OF APRIL 30, 1995 AND 1994
<TABLE>
<CAPTION>
ASSETS 1995 1994
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 194,885 $ 524,190
Accounts receivable, net of allowance for
doubtful accounts of $113,000 in 1995 and
$23,000 in 1994 5,737,965 2,524,916
Inventories 299,901 406,150
Deferred income taxes 270,188 223,063
Other current assets 147,693 326,686
------------ ------------
Total current assets 6,650,632 4,005,005
Property and equipment, net 3,702,990 3,801,459
Computer software development costs, net of
accumulated amortization and net realizable value
adjustments 3,440,358 3,288,432
Other assets 26,592 51,441
------------ ------------
$ 13,820,572 $ 11,146,337
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to bank $ 2,905,546 $ --
Accounts payable 460,510 463,246
Contract prepayments 409,369 1,205,141
Accrued payroll and related taxes 465,526 500,366
Current portion of long-term obligations 222,215 312,086
Accrual for product warranty 274,000 225,000
Income taxes payable 123,634 53,635
Other current liabilities 342,244 191,122
------------ ------------
Total current liabilities 5,203,044 2,950,596
Long-term obligations, net of current portion 1,291,606 1,479,337
Deferred income taxes 1,074,504 1,000,205
------------ ------------
7,569,154 5,430,138
------------ ------------
Minority interest 63,115 15,789
------------ ------------
Stockholders' equity:
Common stock, no par value, 250,000 shares
authorized; 105,528 shares issued for 1995 and
105,379 shares issued for 1994, including
treasury shares 1,091,058 1,069,517
Retained earnings 5,758,274 5,291,922
Treasury stock, at cost, 9,282 shares for 1995
and 1994 (661,029) (661,029)
------------ ------------
Total stockholders' equity 6,188,303 5,700,410
------------ ------------
$ 13,820,572 $ 11,146,337
------------ ------------
------------ ------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
5
<PAGE>
APPLIED COMPUTING DEVICES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEARS ENDED APRIL 30, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Revenues:
Sales $ 10,693,973 $ 9,708,003
Service income 3,616,616 2,747,326
------------ ------------
Total revenues 14,310,589 12,455,329
------------ ------------
Cost of product sales 1,782,098 1,519,255
Operating expenses:
Marketing and sales operations 1,781,442 2,008,249
Operations division 2,916,934 2,813,585
General and administrative 1,365,838 991,152
Research and development 5,470,425 4,442,339
------------ ------------
Total costs and operating expenses 13,316,737 11,774,580
------------ ------------
Income from operations 993,852 680,749
Interest expense (315,534) (226,105)
Other income 53,860 54,179
------------ ------------
Income before income taxes, minority interest
and cumulative effect of accounting change 732,178 508,823
Provision for income taxes 218,500 165,000
------------ ------------
Income before minority interest and cumulative
effect of accounting change 513,678 343,823
Minority interest in (income) net loss of
subsidiary (47,326) 47,191
------------ ------------
Income before cumulative effect of accounting
change 466,352 391,014
Cumulative effect of change in method of
accounting for income taxes -- 47,987
------------ ------------
Net income $ 466,352 $ 439,001
------------ ------------
------------ ------------
Net income per common share $ 4.81 $ 4.50
------------ ------------
------------ ------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
6
<PAGE>
APPLIED COMPUTING DEVICES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED APRIL 30, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Cash flows from operating activities:
Net income $ 466,352 $ 439,001
------------ ------------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,627,597 2,333,390
Minority interest in net income of subsidiary 47,326 (8,321)
Deferred income taxes 74,299 (52,023)
Common stock issued as compensation 12,442 21,039
Cumulative effect of accounting change -- (47,987)
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (3,213,048) 639,211
Decrease in inventories 106,249 28,908
Decrease (increase) in other current assets 131,868 (276,228)
Decrease in other assets 24,849 4,971
Decrease in accounts payable (2,736) (129,731)
(Decrease) increase in contract prepayments (795,772) 1,062,651
(Decrease) increase in accrued payroll and
related taxes (34,840) 54,034
(Decrease) increase in income taxes payable (5,001) 18,900
Increase (decrease) in other current
liabilities 185,251 (330,355)
------------ ------------
Total adjustments (841,516) 3,318,459
------------ ------------
Net cash provided by (used in) operating
activities (375,164) 3,757,460
------------ ------------
Cash flows from investing activities:
Purchases of property and equipment (578,256) (269,710)
Computer software expenditures (2,102,799) (1,593,678)
------------ ------------
Net cash used in investing activities (2,681,055) (1,863,388)
------------ ------------
Cash flows from financing activities:
Net borrowing (payments) for notes payable to
bank 2,905,547 (1,093,646)
Principal repayments of long-term obligations (187,732) (367,647)
Proceeds from issuance of common stock 9,099 13,386
------------ ------------
Net cash provided by (used in) financing
activities 2,726,914 (1,447,907)
------------ ------------
Net increase (decrease) in cash (329,305) 446,165
Cash and cash equivalents, beginning of year 524,190 78,025
------------ ------------
Cash and cash equivalents, end of year $ 194,885 $ 524,190
------------ ------------
------------ ------------
Supplemental disclosure of cash flow information:
Cash paid during the year:
Income taxes $ 73,568 $ 209,351
------------ ------------
------------ ------------
Interest $ 287,700 $ 236,121
------------ ------------
------------ ------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
7
<PAGE>
APPLIED COMPUTING DEVICES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED APRIL 30, 1995 AND 1994
<TABLE>
<CAPTION>
COMMON STOCK
---------------------- RETAINED TREASURY
SHARES AMOUNT EARNINGS STOCK TOTAL
-------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance at May 1, 1993 105,126 $ 1,035,092 $ 4,852,921 $ (661,029) $5,226,984
Common stock issued under Employee Stock Purchase
Plan 98 13,386 -- -- 13,386
Common stock issued as compensation 155 21,039 -- -- 21,039
1994 net income -- -- 439,001 -- 439,001
-------- ----------- ----------- ---------- ----------
Balance at April 30, 1994 105,379 1,069,517 5,291,922 (661,029) 5,700,410
Common stock issued under Employee Stock Purchase
Plan 64 9,099 -- -- 9,099
Common stock issued as compensation 85 12,442 -- -- 12,442
1995 net income -- -- 466,352 -- 466,352
-------- ----------- ----------- ---------- ----------
Balance at April 30, 1995 105,528 $ 1,091,058 $ 5,758,274 $ (661,029) $6,188,303
-------- ----------- ----------- ---------- ----------
-------- ----------- ----------- ---------- ----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
8
<PAGE>
APPLIED COMPUTING DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
a. GENERAL: Applied Computing Devices, Inc. (ACD) is an
Indiana corporation whose principal business is designing and
developing computer software and hardware products for the
telecommunications industry. International Centers for
Telecommunication Technology, Inc. (ICTT), a majority-owned
subsidiary, performs research and development services for the
industry (see Note 2). The companies' manufacturing and research
facilities are located in Terre Haute, Indiana, and sales are
made primarily throughout the United States, with some sales
derived from international customers. Significant accounting
policies are described below.
b. BASIS OF CONSOLIDATION: The consolidated financial
statements include ACD and its majority-owned subsidiary (the
Company). All significant intercompany accounts are eliminated.
Minority ownership in ICTT is reported separately.
c. CASH EQUIVALENTS: For purposes of the consolidated
statement of cash flows, the Company considers all highly liquid
debt instruments purchased with a maturity of three months or
less to be cash equivalents.
d. INVENTORIES: Inventories are stated at the lower of
cost or market, with cost determined utilizing the first-in,
first-out (FIFO) method. Inventories consisted of the following
at April 30, 1995 and 1994:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Purchased materials $145,524 $183,977
Work-in-process 129,303 158,141
Finished goods 25,074 64,032
-------- --------
$299,901 $406,150
-------- --------
-------- --------
</TABLE>
e. PROPERTY AND EQUIPMENT: Property and equipment are stated at
cost. Substantially all assets are depreciated using the
straight-line method over their estimated lives, which range from
3 to 40 years.
f. COMPUTER SOFTWARE DEVELOPMENT COSTS: The Company accounts
for computer software development costs in accordance with the
provisions of Statement of Financial Accounting Standards No. 86,
ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE TO BE SOLD, LEASED
OR OTHERWISE MARKETED. Costs incurred prior to establishing the
technological feasibility of computer software products and
enhancements to such products are expensed as incurred.
Capitalization of software development costs begins upon the
establishment of technological feasibility through detailed
program designs. The establishment of technological feasibility
and the ongoing assessment of the recoverability of capitalized
software development costs requires considerable judgment by
management with respect to certain external factors, including,
but not limited to, anticipated future gross revenues, estimated
economic life, and changes in software and hardware technologies.
9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
Capitalized costs are amortized on a product-by-product basis
once the product is available for general release. Amortization
is the greater of the amount computed using the ratio of the
current year's gross revenues and the total of current and
anticipated future gross revenues for that product or the
straight-line method over the remaining estimated economic life
of the product (see Note 4). The estimated economic lives of the
Company's products range from 24 to 36 months. At each balance
sheet date, the Company compares the unamortized costs of
individual computer software products to the related estimated
net realizable value and writes off any excess amounts.
g. REVENUE RECOGNITION: The Company enters into contracts for a
substantial portion of its revenue from the sale of software
products and other services. Such contracts, which are generally
short-term, are periodically reviewed by management to determine
whether estimated costs to complete exceed contractual revenue.
Provisions for anticipated losses are recorded in the period they
become determinable.
Revenues from the sale of the Company's products are generally
recognized as products are shipped. Revenues related to services
and installation are recognized upon completion and billing of
the specific project phases. The Company also sells professional
services ("development services"), in addition to its internal
product development activities, for customer application
development using the Company's standard products. Revenue
related to such development services is recognized when the
development services are rendered using the percentage of
completion, cost-to-cost method.
During fiscal 1995, two customers represented an aggregate of 83%
of the Company's revenue, and during fiscal 1994, two customers
represented an aggregate of 61% of the Company's revenue.
In accordance with the terms of contracts with certain customers,
ACD may require payments in advance of product shipment or
completion of services. Such prepayments are deferred and
recognized as revenue when the terms of the related contracts
have been met.
h. ACCRUAL FOR PRODUCT WARRANTY: ACD warrants most products for one
year from the date of sale or installation. The estimated cost
of repairs under such warranties, which includes consideration of
the Company's prior experience and other factors, has been
provided in the consolidated financial statements.
i. DEFERRED INCOME TAXES: Effective May 1, 1993, the Company adopted
Statement of Financial Accounting Standards No. 109, ACCOUNTING
FOR INCOME TAXES, (SFAS No. 109), which requires recognition of
deferred tax liabilities and assets for the expected future tax
consequences of events that have been included in the Company's
financial statements or tax returns. Under SFAS No. 109,
deferred tax liabilities and assets are determined based on the
difference between the financial statement and tax bases of
assets and liabilities using enacted tax rates in effect for the
year in which the differences are expected to reverse.
The cumulative effect of the change in the method of accounting
for income taxes was a benefit of $47,987 for fiscal year 1994.
10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
j. EARNINGS PER COMMON SHARE: Earnings per common share are
computed based on the weighted average number of shares
outstanding during the year, including the dilutive effect of
common stock equivalents for stock options.
2. CONSOLIDATION OF MAJORITY-OWNED SUBSIDIARY:
Summary financial data for ICTT, the Company's consolidated,
sixty percent-owned subsidiary as of April 30, 1995 and 1994 is
shown below. Total revenues include sales to ACD of $1,789,000
and $1,049,417 for 1995 and 1994, respectively. These
intercompany sales and related profits are eliminated in the
consolidated financial statements.
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Total assets $ 386,606 $ 519,600
---------- ----------
---------- ----------
Total liabilities $ 228,819 $ 480,128
---------- ----------
---------- ----------
Total revenues $1,809,772 $1,211,179
---------- ----------
---------- ----------
Net income (loss) $ 118,315 $ (117,978)
---------- ----------
---------- ----------
</TABLE>
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following at April 30, 1995
and 1994:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Building $ 2,802,742 $ 2,802,742
Office furniture and fixtures 1,328,711 1,245,864
Manufacturing and test equipment 707,192 585,681
Research and development equipment 3,085,894 2,866,663
Operations division equipment 1,263,970 1,157,984
Other equipment 609,604 560,924
----------- -----------
9,798,113 9,219,858
Less accumulated depreciation (6,095,123) (5,418,399)
----------- -----------
$ 3,702,990 $ 3,801,459
----------- -----------
----------- -----------
</TABLE>
Depreciation expense for the years ended April 30, 1995 and 1994
was $676,724 and $811,765, respectively.
11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
3. PROPERTY AND EQUIPMENT, CONTINUED:
ACD leases land and office space from Aleph Park Corporation (the
Corporation), an Indiana not-for-profit corporation, which is
controlled by certain members of the Company's management. Annual
rentals of $177,888 were paid in both 1995 and 1994 (the Articles of
Incorporation of Aleph Park Corporation prohibit its officers and
directors from personally and/or directly profiting from control of
the Corporation). The land is leased under a lease agreement which
provides for a 20-year initial lease term with renewal options. The
initial land lease term expires in April 2005. The office space is
leased under a lease agreement which expires in April 1996 and has
renewable options. Office space is also leased by ICTT under a
lease agreement with the Corporation which expires in April 1996 and
has renewable options. Annual rentals under the ICTT lease were
$41,688 in both 1995 and 1994.
4. COMPUTER SOFTWARE DEVELOPMENT COSTS:
During fiscal 1995 and 1994, the Company incurred amortization
expense of $1,950,873 and $1,521,621, respectively, for capitalized
computer software development costs. Such amortization is included
in operating expenses in the accompanying Consolidated Statement of
Operations. There were no net realizable value adjustments required
during fiscal 1995 or 1994.
5. NOTES PAYABLE TO BANK:
ACD's revolving credit agreement (Agreement) provides for aggregate
borrowings of up to $4,500,000 as of April 30, 1995. Amounts
outstanding are due on demand and are collateralized by
substantially all of ACD's assets not otherwise encumbered.
Interest is payable monthly at the bank's applicable prime rate,
plus .5% per annum (9.5% at April 30, 1995).
The Agreement includes certain restrictions and other covenants, the
most significant of which is that the principal balance outstanding
cannot exceed an amount based on percentages of ACD's eligible
accounts receivable and inventories. The agreement also requires
that ACD maintain a minimum net worth of $6,000,000 and adhere to
certain other financial ratios.
12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
6. LONG-TERM OBLIGATIONS:
Long-term obligations at April 30, 1995 and 1994 consist of the
following:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
City of Terre Haute Economic Development First
Mortgage Revenue Bonds; monthly payments include
principal of $13,170 plus interest at 75% of the
prime rate established by Terre Haute First National
Bank adjusted on each June 1 and December 1 (6.375%
at April 30, 1995), payable through December 2003 $1,369,607 $1,527,643
Various equipment notes payable; interest
ranging from 8% to 12.5%, aggregate monthly
principal and interest payments of $20,306, maturing
at various dates through November 1997. All
equipment notes payable are collateralized by
the specific equipment acquired. 144,214 263,780
---------- ----------
1,513,821 1,791,423
Less current portion (222,215) (312,086)
---------- ----------
$1,291,606 $1,479,337
---------- ----------
---------- ----------
</TABLE>
The Economic Development First Mortgage Revenue Bonds are
collateralized by a building and all property and equipment purchased
with the proceeds of the bonds (see Note 5).
At April 30, 1995, the aggregate maturities of the above long-term
obligations are as follows:
<TABLE>
<S> <C>
Year ending April 30:
1996 $ 222,215
1997 216,254
1998 179,854
1999 158,036
2000 158,036
Thereafter 579,426
----------
$1,513,821
----------
----------
</TABLE>
The Company is also obligated under certain noncancelable operating
leases. Future minimum payments at April 30, 1995 are as follows:
<TABLE>
<S> <C>
Year ending April 30:
1996 $ 684,039
1997 336,307
1998 239,346
1999 182,861
2000 26,400
Thereafter 129,800
----------
$1,598,753
----------
----------
</TABLE>
Rent expense charged to operations amounted to $669,174 and $603,287
in 1995 and 1994, respectively.
13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
7. STOCKHOLDERS' EQUITY:
a. EMPLOYEE STOCK PURCHASE PLAN: All employees of ACD, except those
who are members of the Board of Directors, who meet certain
eligibility requirements, may participate in ACD's voluntary
employee stock purchase plan. Eligible employees may elect to
participate in the plan by executing a stock purchase agreement,
which provides ACD with a right of first refusal to repurchase
such shares in the event plan participants choose to sell the
shares. The agreement provides that plan participants may
designate up to 10% of their salary to purchase shares of common
stock at the price determined quarterly by the Board of
Directors.
b. COMMON STOCK OPTION PLAN: In connection with the terms of
an employment agreement, one employee has stock options, which
expire in 1997, to purchase 1,000 shares of ACD common stock at a
price of $33 per share. The exercise price of the options when
granted was fair market value, as estimated by the Board of
Directors and the option price equaled or exceeded the price per
share of the employee stock purchase plan. Sales of stock
obtained under the options are subject to ACD's right of first
refusal.
During 1995, ACD issued stock options to purchase an aggregate of
5,500 shares of ACD common stock to two employees at an exercise
price of $100 per share. Under the agreements, the employees'
right to exercise these options vest ratably over three years, in
the absence of certain events. If, in the vesting period, ACD
were involved in a transaction that could result in a change in
control with terms sufficiently favorable to shareholders, the
options vest immediately at an exercise price of $50 per share.
If unexercised, 500 of the options expire in the year 2000, and
the remainder expire in 2005. At April 30, 1995, no options were
exercisable.
8. INCOME TAXES:
The provision for income taxes for the years ended April 30, 1995
and 1994 is as follows:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Federal:
Current $101,500 $ 72,000
Deferred 26,000 2,000
-------- --------
127,500 74,000
-------- --------
State:
Current 38,000 41,000
Deferred 4,000 --
-------- --------
42,000 41,000
Foreign--current 49,000 50,000
-------- --------
Total income tax provision $218,500 $165,000
-------- --------
-------- --------
</TABLE>
14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
8. INCOME TAXES, CONTINUED:
As described in Note 1, in 1994, the Company adopted the provisions
of SFAS No. 109. The components of the deferred tax asset and
liability computed under the accounting method as of April 30, 1995
are as follows:
<TABLE>
<CAPTION>
CURRENT LONG-TERM TOTAL
-------- ----------- -----------
<S> <C> <C> <C>
Deferred tax assets:
Research and experimentation credits $ -- $ 1,123,897 $ 1,123,897
Accrual for product warranty 107,408 -- 107,408
Accrued payroll 71,985 -- 71,985
Other 90,795 12,059 102,854
-------- ----------- -----------
270,188 1,135,956 1,406,144
Less valuation reserve -- (350,000) (350,000)
-------- ----------- -----------
270,188 785,956 1,056,144
-------- ----------- -----------
Deferred tax liabilities:
Computer software development costs -- (1,347,128) (1,347,128)
Property and equipment -- (462,790) (462,790)
Other -- (50,542) (50,542)
-------- ----------- -----------
-- (1,860,460) (1,860,460)
-------- ----------- -----------
$270,188 $(1,074,504) $ (804,316)
-------- ----------- -----------
-------- ----------- -----------
</TABLE>
The following table accounts for the difference between the actual
tax provision and the amount obtained by applying the statutory
federal income tax rate of 34% to income before income taxes:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Tax provision computed at statutory rate $ 249,000 $173,000
Increase (reductions) in taxes due to:
Research and experimentation credits (169,272) (71,073)
Prior years' taxes 75,150 --
State taxes, net of federal benefit 31,780 27,060
Other 31,842 36,013
--------- --------
Income tax provision $ 218,500 $165,000
--------- --------
--------- --------
</TABLE>
The Company has been subject to alternative minimum tax for income
tax reporting purposes primarily because of ACD's available tax
credits for research and experimentation expenditures. Because
utilization of these credits is limited for alternative minimum tax
purposes, a valuation allowance of $350,000 was recorded at April 30,
1994 to reduce the value of the related deferred tax asset.
For federal income tax reporting purposes, ACD and ICTT file separate
income tax returns. ACD has research and experimentation tax credit
carryforwards for federal income tax purposes of approximately
$1,123,897, which expire commencing in 1999.
15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
9. PROFIT SHARING PLAN:
ACD has a profit sharing retirement plan which incorporates the
salary-deferral provisions of Section 401(k) of the Internal Revenue
Code. All full-time employees are eligible to participate. ACD's
contributions to the plan are discretionary and are determined and
approved by the Board of Directors. The contribution expense
included in the accompanying consolidated statement of operations was
approximately $119,577 and $62,000 for fiscal 1995 and 1994,
respectively.
10. CONTINGENCIES AND COMMITMENTS:
In the normal course of business, ACD is subject to various claims
and other pending and possible legal actions. Management believes
that the results of these claims and possible legal actions will not
have a material adverse effect on the financial condition of the
Company.
As part of a 1991 settlement agreement with two customers, ACD
committed to pay one of the customers a percentage (up to an
aggregate of two million dollars) of future payments ACD may receive
in license fees from the other customer through January 1, 1997. No
payments are required unless ACD receives license fees from the other
customer. The commitment expires January 1, 1997 regardless of
whether or not an aggregate of two million dollars has been paid.
Payments expensed under this agreement were $61,119 in fiscal 1994.
No payments were made under this agreement in 1995, and cumulative
payments under this commitment were $236,604 at April 30, 1995.
16
<PAGE>
APPLIED DIGITAL ACCESS, INC. AND APPLIED COMPUTER DEVICES, INC.
INTRODUCTION TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
----------
On February 29, 1996, Applied Digital Access, Inc. ("ADA"), acquired certain
assets of Applied Computing Devices, Inc. ("ACD") for $1,700,000 in cash and
incurred $200,000 in related costs. The assets were acquired at an auction
held in Federal Bankruptcy Court, Southern District of Indiana. The
transaction has been accounted for as a purchase.
ACD developed and marketed operations support software used primarily by
independent telephone companies to manage certain functions in their
networks. Since filing bankruptcy in September 1995, ACD had not generated
significant revenue. ADA intends to continue to market and enhance the ACD
software products.
The attached unaudited pro forma combining financial statements for the year
ended December 31, 1995 give effect to the acquisition accounted for by the
purchase method. The pro forma combining statements of operations assume
that the acquisition took place as of January 1, 1995.
The pro forma combining financial information is presented for illustrative
purposes only and is not necessarily indicative of the operating results that
would have occurred had the acquisition been consummated at the beginning of
the periods presented, nor is it necessarily indicative of future operating
results. The pro forma combining financial information should be read in
conjunction with the historical financial statements and the related notes
thereto of ADA, previously filed, and the historical financial statements and
related notes thereto of ACD included herein.
17
<PAGE>
APPLIED DIGITAL ACCESS, INC. AND APPLIED COMPUTER DEVICES, INC.
PRO FORMA COMBINING BALANCE SHEET (UNAUDITED)
DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADA ACD ADJUSTMENTS COMBINED
------- ------- ----------- --------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,673 $ - $ - $ 1,673
Investments - current 25,079 - (1,700)(a) 23,379
Accounts receivable, net 5,358 2,616 (2,616)(b) 5,358
Inventory, net 6,572 30 (30)(b) 6,572
Deferred income taxes 750 - - 750
Prepaid expenses and other current assets 1,296 21 (21)(b) 1,296
------- ------ ------- -------
Total current assets 40,728 2,667 (4,367) 39,028
Investments, non-current 5,095 - - 5,095
Property and equipment, net 3,361 3,331 (2,954)(b) 3,738
Computer software development costs, net - 1,235 (1,235)(b) -
Other 752 44 293 (b) 1,089
------- ------ ------- -------
$49,936 $7,277 $(8,263) $48,950
------- ------ ------- -------
------- ------ ------- -------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable to bank and long-term
obligations $ - $5,953 $(5,953)(b) $ -
Accounts payable 1,820 1,384 (1,384)(b) 1,820
Accrued expenses 843 1,182 (982)(a,b) 1,043
Accrued warranty 1,305 274 (274)(b) 1,305
Current portion of obligations under
capital lease 32 - - 32
------- ------ ------- -------
Total current liabilities 4,000 8,793 (8,593) 4,200
Obligations under capital leases, net of
current portion 49 - - 49
------- ------ ------- -------
Total liabilities 4,049 8,793 (8,593) 4,249
Shareholders' equity:
Common stock 49,000 1,095 (1,095)(b) 49,000
Additional paid-in capital 2,492 - - 2,492
Unrealized gain on investments 147 - - 147
Deferred compensation (101) - - (101)
Accumulated deficit (5,651) (1,950) 764 (a,b) (6,837)
Treasury stock - (661) 661 (b) -
------- ------ ------- -------
Total shareholders' equity 45,887 (1,516) 330 44,701
------- ------ ------- -------
$49,936 $7,277 $(8,263) $48,950
------- ------ ------- -------
------- ------ ------- -------
</TABLE>
18
<PAGE>
APPLIED DIGITAL ACCESS, INC. AND APPLIED COMPUTER DEVICES, INC.
PRO FORMA COMBINING STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
----------
<TABLE>
<CAPTION>
ADA ACD ADJUSTMENTS COMBINED
------- ------- ----------- --------
<S> <C> <C> <C> <C>
Revenue $20,470 $ 7,865 $ - $28,335
Cost of revenue 8,717 1,141 67 (c) 9,925
------- ------- ------- -------
Gross profit 11,753 6,724 (67) 18,410
Operating expenses:
Research and development 5,807 7,740 (2,045)(c) 11,502
In-process research and development
related to acquisition - - 1,186 (a) 1,186
Sales and marketing 4,234 3,264 (228)(c) 7,270
General and administrative 2,985 4,245 (45)(c) 7,185
------- ------- ------- -------
Total operating expenses 13,026 15,249 (1,132) 27,143
------- ------- ------- -------
Operating loss (1,273) (8,525) 1,065 (8,733)
Interest income 2,023 - - 2,023
Interest expense - (302) 302 (c) -
Other income, net 9 144 - 153
------- ------- ------- -------
Loss before income taxes 759 (8,683) 1,367 (6,557)
Income tax benefit - 810 (810)(c) -
------- ------- ------- -------
Net loss $ 759 $(7,873) $ 557 $(6,557)
------- ------- ------- -------
------- ------- ------- -------
Income (loss) per common share $.06 $(.56)
------- -------
------- -------
Shares used in per share computations 12,848 11,806
------- -------
------- -------
</TABLE>
19
<PAGE>
APPLIED DIGITAL ACCESS, INC. AND APPLIED COMPUTER DEVICES, INC.
NOTE TO PRO FORMA COMBINING FINANCIAL STATEMENTS (UNAUDITED)
----------
PRO FORMA FINANCIAL STATEMENTS:
The pro forma financial statements are provided as of December 31, 1995 and
for the year then ended. ACD had a fiscal year end of April 30. Financial
information for ACD is as of January 31, 1996 and for the twelve months then
ended.
In September 1995, after incurring a $2.3 million pre-tax loss on a
receivable previously believed to be fully collectible, ACD violated the
credit agreement with its major financial institution and filed for
protection under Chapter 11 of the bankruptcy code. While in bankruptcy,
ACD's management significantly reduced the number of its personnel,
reevaluated the company's products and strategic direction and, as a result,
significantly reduced the net carrying value of capitalized software.
The pro forma combined financial statements have been prepared to reflect the
acquisition of certain assets of ACD by ADA. Pro forma adjustments are made
to reflect the following:
<TABLE>
<S> <C>
a. Cash price paid $1,700,000
Transaction costs incurred 200,000
----------
Total purchase price $1,900,000
----------
----------
Purchase price allocation:
In-process research and development acquired $1,186,000
Purchased technology 337,000
Property and equipment 377,000
----------
Total $1,900,000
----------
----------
</TABLE>
b. Reflects the adjustment of ACD's assets, liabilities and capital not
acquired.
c. Reflects adjustments of ACD's results for the write-off of capitalized
software, interest expense, income taxes and depreciation as a result of
the acquisition.
Property and equipment of $377,000 with a three year life results in
annual depreciation of $126,000 (allocated to research and development,
sales and marketing, and general and administrative expenses at $60,000,
$55,000 and $11,000, respectively).
Purchased technology of $337,000 with a five year life results in annual
amortization of $67,000.
20
