<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30. 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 000-23698
APPLIED DIGITAL ACCESS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA 68-0132939
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
9855 SCRANTON ROAD, SAN DIEGO, CALIFORNIA 92121
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, ZIP CODE)
(619) 623-2200
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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__
There were 12,205,868 shares of the registrant's Common Stock, no par value,
outstanding on July 31,1996.
Page 1 of 16
<PAGE> 2
Page 2
APPLIED DIGITAL ACCESS, INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
Page
PART I. FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Financial Statements
Condensed Balance Sheets at June 30, 1996 and
December 31, 1995 3
Condensed Statements of Operations for the three
and six months ended June 30, 1996 and
June 30, 1995 4
Condensed Statements of Cash Flows for the six
months ended June 30, 1996 and
June 30, 1995 5
Notes to Condensed Financial Statements 6-7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-10
Risks and Uncertainties 11-13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 14
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14-15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
</TABLE>
<PAGE> 3
Page 3
Item 1.
APPLIED DIGITAL ACCESS, INC.
CONDENSED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,883 $ 1,673
Investments - current 22,076 25,079
Accounts receivable, net 3,411 5,358
Inventory, net 7,441 6,572
Deferred income taxes 750 750
Prepaid expenses and other current assets 1,646 1,296
-------- --------
Total current assets 37,207 40,728
Investments - non-current 5,972 5,095
Property and equipment, net 4,019 3,361
Deferred income taxes 752 752
Other, net 315 -
-------- --------
$ 48,265 $ 49,936
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,724 $ 1,820
Accrued expenses 1,338 843
Accrued warranty 1,368 1,305
Current portion of obligations under capital leases 23 32
-------- -------
Total current liabilities 4,453 4,000
Obligations under capital leases, net of current portion 41 49
-------- -------
Total liabilities 4,494 4,049
-------- -------
Shareholders' equity:
Preferred stock, no par value, 7,500,000 shares authorized,
no shares issued - -
Common stock, no par value, 30,000,000 shares authorized,
11,999,680 and 11,899,216 shares issued and outstanding at
June 30, 1996 and December 31, 1995, respectively 49,318 49,000
Additional paid-in capital 2,416 2,391
Unrealized gain (loss) on investments (4) 147
Accumulated deficit (7,959) (5,651)
-------- -------
Total shareholders' equity 43,771 45,887
-------- -------
$ 48,265 $49,936
-------- -------
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE> 4
Page 4
APPLIED DIGITAL ACCESS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------------------------------ -----------------------------------------
1996 (Amounts in thousands 1995 1996 (Amounts in thousands 1995
---- except per share data) ---- ---- except per share data) ----
<S> <C> <C> <C> <C>
Revenue $4,516 $4,836 $11,153 $12,856
Cost of revenue 2,047 1,813 5,067 4,869
---------- ------------ ---------- ----------
Gross profit 2,469 3,023 6,086 7,987
Operating expenses:
Research and development 1,905 1,351 3,572 2,646
In-process research and development
related to asset acquisition - - 1,186 -
Sales and marketing 1,760 1,029 3,201 2,011
General and administrative 750 619 1,430 1,329
---------- ------------ ----------- -----------
Total operating expenses 4,415 3,199 9,389 5,986
---------- ------------ ----------- -----------
Operating income (loss) (1,946) (176) (3,303) 2,001
Interest income 479 522 953 1,026
Other income (expense), net 27 5 42 (2)
---------- ------------ ----------- -----------
Income (loss) before income taxes (1,440) 351 (2,308) 3,025
Provision for income taxes - 123 - 1,059
---------- ------------ ----------- ------------
Net income (loss) ($1,440) $228 ($2,308) $1,966
=========== ============ =========== ============
Net income (loss) per share ($0.12) $0.02 ($0.19) $0.15
=========== ============ =========== ============
Number of shares used in per share
computations 11,983 12,772 11,961 12,798
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE> 5
Page 5
APPLIED DIGITAL ACCESS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30,
------------------------
1996 1995
---- ----
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ($2,308) $1,966
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities:
In-process research and development related to asset acquisition 1,186 -
Depreciation and amortization 630 433
Other 25 26
Changes in assets and liabilities:
Accounts receivable 1,947 (1,439)
Inventory (869) (1,690)
Prepaid expenses and other current assets (350) 5
Accounts payable (96) (823)
Accrued expenses 510 264
Accrued warranty 63 (24)
------------ ------------
Net cash provided (used) by
operating activities 738 (1,282)
------------ -------------
Cash flows from investing activities:
Purchases of investments (12,026) (12,852)
Maturities of investments 13,935 16,830
Purchases of property and equipment (838) (1,168)
Purchase costs related to asset acquisition (1,900) -
------------- -------------
Net cash provided (used) by investing activities (829) 2,810
------------ -------------
Cash flows from financing activities:
Principal payments on capital leases (17) (89)
Proceeds from the issuance of common
stock under stock option plans 318 459
------------ ------------
Net cash provided by financing activities 301 370
------------ -------------
Net increase in cash and cash equivalents 210 1,898
Cash and cash equivalents, beginning of period 1,673 2,680
------------ -------------
Cash and cash equivalents, end of period $1,883 $4,578
------------ -------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE> 6
Page 6
APPLIED DIGITAL ACCESS, INC.
Notes to Condensed Financial Statements
June 30, 1996
(Unaudited)
1. Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared
in accordance with the interim reporting requirements of Form 10-Q, pursuant
to the rules and regulations of the Securities and Exchange Commission
("SEC"). Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements.
In the opinion of management, all adjustments (consisting of only normal
recurring adjustments) considered necessary for a fair presentation have
been included. Operating results for the three and six month periods ended
June 30, 1996 are not necessarily indicative of the results that may be
expected for the year ended December 31, 1996. These financial statements
should be read in conjunction with the Company's audited financial
statements and notes thereto, together with Management's Discussion and
Analysis of Financial Condition and Results of Operations, contained in the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1995 filed with the SEC.
2. Inventory
Inventory is valued at the lower of cost (determined using the first-in,
first-out method) or market. Inventory was as follows:
<TABLE>
<CAPTION>
June 30, 1996 December 31, 1995
------------- -----------------
(Dollars in thousands)
<S> <C> <C> <C>
Raw materials $3,875 $3,483
Work-in-process 2,530 2,314
Finished goods 1,505 1,313
----- ------
7,910 7,110
Less inventory reserve (469) (538)
------ -------
$7,441 $6,572
====== ======
</TABLE>
3. Per Share Information
Per share information is computed using the weighted average number of
common shares and common equivalent shares (when the effect is dilutive)
outstanding during the periods presented. Common equivalent shares result
from outstanding options and warrants to purchase common stock.
<PAGE> 7
Page 7
4. Acquisitions
On February 29, 1996, the Company acquired certain assets of Applied
Computing Devices, Inc. ("ACD"), a company that developed and marketed
operations systems ("OS") software used primarily by independent telephone
companies to manage certain functions in their networks. The customer set
and products of ACD complement those of ADA and ADA intends to continue to
market and enhance these products. The Company acquired the assets for $1.7
million in cash and incurred approximately $.2 million in related costs. The
assets were acquired at an auction held in Federal Bankruptcy Court,
Southern District of Indiana. The transaction, which was accounted for as a
purchase, included the acquisition of in-process research and development
valued at approximately $1.2 million; property and equipment valued at
approximately $.4 million; and purchased technology valued at approximately
$.3 million. The Company recorded a one-time charge in the first quarter of
1996 for the $1.2 million associated with purchased research and development
costs.
The following condensed pro forma results of operations information has been
presented to give effect to the purchase as if such transaction had occurred
at the beginning of the periods presented. The historical results of
operations have been adjusted to reflect additional depreciation and
amortization expense based upon the value allocated to assets acquired in
the purchase. The pro forma results of operations information is presented
for informational purposes only and is not necessarily indicative of the
operating results that would have occurred had the acquisition been
consummated as of the beginning of the periods presented, nor is it
necessarily indicative of future operating results.
CONDENSED PRO FORMA RESULTS OF OPERATIONS
(amounts in thousands except per share data)
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1996 1995
---- ----
<S> <C> <C>
Revenue $11,253 $17,231
Net income (loss) (2,828) (795)
Net income (loss) per share ($0.24) ($0.07)
Weighted average shares used
in computation 11,983 11,742
</TABLE>
5. Subsequent Events
On July 16, 1996, the Company acquired certain assets of MPR Teltech, a
subsidiary of BC TELECOM, Inc. The assets acquired were part of MPR
Teltech's operating unit commonly known as the Special Services Network
division ("SSN"). The Company and its Canadian subsidiary, Applied Digital
Access - Canada, Inc. ("ADA-Canada") acquired the assets for $4.2 million in
cash and 150,000 shares of the Company's common stock. SSN is an operations
systems software development group with expertise in development of network
management systems for public carriers. SSN developed operations systems
software primarily for Northern Telecom ("Nortel"). SSN has become part of
ADA-Canada and will develop network performance management operations
systems software products for the Company and its customers, including
Nortel. The acquisition of the SSN assets acquired will be treated as a
purchase for accounting purposes. The Company intends to take a one-time
charge in the third quarter for purchased research and development related
to the acquisition. As of the filing of this report it was impractical to
provide the financial statements of SSN and pro forma financial
information. The Company will file the required financial statements and
pro forma financial information under cover of Form 8-K/A on or before
September 30, 1996.
<PAGE> 8
Page 8
Item 2.
APPLIED DIGITAL ACCESS, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
June 30, 1996
The following should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Risks and
Uncertainties", contained in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1995 filed with the Securities and Exchange
Commission.
Overview
On July 16, 1996, the Company acquired certain assets of MPR Teltech, a
subsidiary of BC TELECOM, Inc. The assets acquired were part of MPR Teltech's
operating unit commonly known as SSN. The Company and its Canadian subsidiary
ADA-Canada acquired the assets for $4.2 million in cash and 150,000 shares of
the Company's common stock. SSN is an operations systems software development
group with expertise in development of network management systems for public
carriers. SSN developed operations systems software primarily for Nortel.
SSN has become part of ADA-Canada and will develop network performance
management operations systems software products for the Company and its
customers, including Nortel. The Company expects to take a one-time charge in
the third quarter for purchased research and development related to the asset
acquisition.
On February 29, 1996, the Company acquired certain assets of ACD, a company that
developed and marketed OS software used primarily by independent telephone
companies to manage certain functions in their networks. The customer set and
products of ACD complement those of ADA, and ADA intends to continue to market
and enhance these products. The Company acquired the assets for $1.7 million
in cash and incurred approximately $.2 million in related costs. The assets
were acquired at an auction held in Federal Bankruptcy Court, Southern District
of Indiana. Since filing for bankruptcy in September 1995, ACD had not
generated significant revenue. The Company recorded a one-time charge of
approximately $1.2 million associated with purchased research and development in
the first quarter of 1996 as a result of the acquisition.
In February 1996, the settlement of a class action lawsuit filed against the
Company and two of its officers in March 1995 was finalized and received court
approval. The settlement had previously been announced in December 1995. The
litigation was settled for approximately $1.5 million, of which the Company was
obligated to pay approximately $.4 million with the remainder paid by the
Company's directors' and officers' liability insurance carrier. Charges
associated with the suit were accrued in 1995.
Factors that may be affecting the Company's results of operations include the
impact of one major customer delaying its reengineering program during 1995.
Although this customer resumed ordering the Company's T3AS products in late
1995, the Company is uncertain whether this customer will continue its
reengineering program beyond its current level, if at all. Other factors include
continued capital spending constraints at several of the Company's other
customers; the impact of reorganizations, restructurings and reductions-in-force
at several of the Company's Regional Bell Operating Company ("RBOC")
customers; deregulation of the telecommunications industry; and the delay in
the receipt of the FCC's informal assessment on the Company's Remote Module
product, received in September 1995 following introduction of the product in
March 1995. The Company believes that deregulation and the resulting increased
number of competitors providing telecommunications services could result in an
expansion of the Company's customer base and increased competition with regard
to service levels and costs, ultimately causing an increased demand for the
Company's products. However, additional delays in the deployment of the
Company's products and continued uncertainty surrounding the telecommunications
industry may have a material adverse impact on the Company's business,
operating results and financial condition. As a result of the uncertainties
faced by the Company's customers, the Company continues to have limited
visibility with regard to future customer orders and the timing of such orders.
Customers have been placing orders quarterly and the Company has been operating
in a book and ship mode. With a small customer base and fluctuating order size,
this trend has resulted in quarter-to-quarter revenue fluctuations that are
likely to continue for the foreseeable future.
<PAGE> 9
Page 9
Results of Operations
Revenue decreased 7% from $4,836,000 for the three months ended June 30, 1995 to
$4,516,000 for the three months ended June 30, 1996. Revenue decreased 13% from
$12,856,000 for the six months ended June 30, 1995 to $11,153,000 for the six
months ended June 30, 1996. The decrease resulted from decreased sales of the
Company's T3AS products compared to the same period in the prior year. Revenue
for the quarter ended June 30, 1996 included approximately $.9 million in
engineering and installation ("E&I") services provided to customers for the
installation of the Company's T3AS products, compared to $.8 million for the
same quarter a year ago and $2.6 million for the six months ended June 30, 1996
compared to $.9 million for the same period last year. One RBOC customer
accounted for the majority of the E&I revenue, and to date, the Company has not
received significant orders for E&I services from any other customer. Although
the Company intends to continue to offer E&I services to its customers, the
Company does not expect to maintain the current level of E&I revenue, and is
uncertain as to the future level of business, if any, related to E&I services.
Revenue for the quarter ended June 30, 1996, included approximately $.8 million
in OS product sales and services. The Company intends to continue to market and
develop OS products and services but is uncertain as to the future level of
business related to these products. The majority of the Company's revenue to
date has been derived from the sale of T3AS products. The Company expects that
revenue from sales of T3AS products will continue to account for the majority of
the Company's revenue for the foreseeable future.
Gross profit decreased 18% from $3,023,000 for the three months ended June 30,
1995 to $2,469,000 for the three months ended June 30, 1996 and decreased as a
percent of revenue from 62% for the three months ended June 30, 1995 to 55% for
the three months ended June 30, 1996. Gross profit decreased 24% from $7,987,000
for the six months ended June 30, 1995 to $6,086,000 for the six months ended
June 30, 1996 and decreased as a percent of revenue from 62% for the six months
ended June 30, 1995 to 55% for the six months ended June 30, 1996. The decreases
were primarily the result of decreased sales of the Company's T3AS products,
product mix weighted toward lower margin products and services, and the
absorption of relatively fixed manufacturing overhead costs by a lower revenue
base, compared to the same period last year. There can be no assurance that the
Company will be able to maintain current gross profit or gross profit as a
percent of revenue levels. In September 1995, the Company implemented price
reductions on certain components of the Company's T3AS base system to reduce the
cost of initial system deployments in new sites, particularly in
low-circuit-density applications of DS1 circuit applications. In the event
future product mix is weighted toward price-reduced components, there may be a
negative impact on gross profit. There can be no assurance that the price
reductions will result in increased orders for the Company's products. In
addition to the factors discussed above, other factors which may materially and
adversely affect the Company's gross profit in the future include its level of
revenue, competitive pricing pressures in the telecommunication network
management market, new product introductions by the Company or its competitors,
potential inventory obsolescence and scrap, possible recalls, production or
quality problems, timing of development expenditures, changes in material costs,
disruptions in sources of supply, regulatory changes, seasonal patterns of
bookings, capital spending, and changes in general economic conditions.
Research and development expenses increased 41% from $1,351,000 for the three
months ended June 30, 1995 to $1,905,000 for the three months ended June 30,
1996. Research and development expenses increased 35% from $2,646,000 for the
six months ended June 30, 1995 to $3,572,000 for the six months ended June 30,
1996. The increases were primarily due to the additions of research and
development personnel and related recruiting efforts, and increases in
non-recurring engineering (NRE) expenses due to timing of planned development
projects compared to the same period last year. Research and development
personnel expenses for the three and six month periods ended June 30, 1996
increased 43% and 33%, respectively, compared to the same periods in the prior
year. Of these percentage increases, approximately seventeen points and twelve
points, respectively, are attributable to the addition of research and
development personnel related to the ACD asset acquisition. The Company believes
that its future success depends on its ability to maintain its technological
leadership through enhancement of its existing products and development of
innovative new products and services that meet customer needs. Therefore, the
Company intends to continue to make significant investments in research and
product development in association with planned development projects.
In the first quarter of 1996, the Company recorded a one-time charge of
approximately $1.2 million for purchased research and development costs related
to the ACD asset acquisition. The Company expects to take a one-time charge
in the third quarter of 1996 for purchased research and development related to
the SSN acquisition.
Sales and marketing expenses increased approximately 71% from $1,029,000 for the
three months ended June 30, 1995 to $1,760,000 for the three months ended June
30, 1996. Sales and marketing expenses increased approximately 59% from
$2,011,000 for the six months ended June 30, 1995 to $3,201,000 for the six
months ended June 30, 1996. The increases were primarily the result of the
addition of technical support and marketing personnel and increased promotional
expenses. Of the total percentage increases above, approximately 21 and 14
points, respectively, of the total increase are attributable to the addition of
marketing and customer support personnel related to the ACD asset acquisition.
The Company expects that sales and marketing expenses will continue to increase
in absolute dollars as the Company continues to hire additional sales, marketing
and technical support personnel to support planned product introductions.
<PAGE> 10
Page 10
General and administrative expenses decreased approximately 8%, from $819,000
for the three months ended June 30, 1995 to $750,000 for the three months ended
June 30, 1996. This decrease is primarily due to lower legal expenses related to
last year's lawsuit, offset by increased consulting expenses related to the
Company's recruiting efforts for additional personnel. General and
administrative expenses increased approximately 8%, from $1,329,000 for the six
months ended June 30, 1995 to $1,430,000 for the six months ended June 30, 1996.
The increase was mostly the result of increased consulting expenses related to
the Company's recruiting efforts for additional personnel and increased
administrative support. The Company expects that general and administrative
expenses will increase in absolute dollars as the administrative support needs
of the Company increase.
Interest income decreased approximately 8% from $522,000 for the three months
ended June 30, 1995 to $479,000 for the three months ended June 30, 1996.
Interest income decreased approximately 7% from $1,026,000 for the six months
ended June 30, 1995 to $953,000 for the six months ended June 30, 1996. The
decreases are primarily the result of a decrease in cash investments compared to
the same periods last year.
The Company did not provide for income taxes for the six months ended June 30,
1996 due to a net loss, compared to an effective rate of 35% for the six months
ended June 30, 1995. The Company expects to provide for federal and state income
taxes for 1996 at applicable statutory rates, after giving effect to remaining
available net operating loss carryforwards and any available tax credits.
As a result of the factors discussed above, the Company incurred a net loss of
$1,440,000, or $.12 per share, for the three months ended June 30, 1996 compared
to net income of $228,000, or $.02 per share for the three months ended June 30,
1995. The Company incurred a net loss of $2,308,000, or $.19 per share, for the
six months ended June 30, 1996 compared to net income of $1,966,000, or $.15 per
share for the six months ended June 30, 1995. Excluding the $1.2 million charge
associated with the acquisition of ACD assets, the Company would have recorded a
net loss of $1,122,000, or $.09 per share, for the six months ended June 30,
1996.
Liquidity and Capital Resources
At June 30, 1996, the Company had approximately $29,931,000 in cash and
investments, compared to $31,847,000 at December 31, 1995. The decrease in cash
and investments is primarily due to cash payments related to the ACD asset
acquisition.
Working capital decreased approximately $3,974,000 from $36,728,000 at December
31, 1995 to $32,754,000 at June 30, 1996. The decrease in working capital was
primarily the result of the ACD asset acquisition, an increase in long-term
investments and an increased inventory level.
For the six months ended June 30, 1996, the Company generated $738,000 from
operating activities primarily as a result of decreased accounts receivable
compared to the use of $1,282,000 by operating activities for the six months
ended June 30, 1995.
Net cash used in investing activities was $829,000 for the six months ended June
30, 1996 compared to cash provided from investing activities of $2,810,000 for
the same period a year ago. The increased use of cash was primarily due to cash
payments related to the ACD asset acquisition and cash used for capital
expenditures. Cash used for capital expenditures was approximately $838,000 for
the six months ended June 30, 1996 compared to $1,168,000 for the six months
ended June 30, 1995. Most of the additions were for the purchase of computer and
lab equipment to support the Company's expanded research and development
efforts. The majority of tangible assets acquired from ACD consisted of
computer equipment. The Company expects the level of capital expenditures will
increase in 1996 in proportion to increases in planned development projects and
increased personnel levels.
In July 1996, the Company and its Canadian subsidiary, ADA-Canada, purchased the
assets of MPR Teltech's SSN division for $4.2 million in cash and 150,000
shares of the Company's common stock. The majority of the tangible assets
acquired from MPR Teltech consisted of computer equipment.
Assuming no material changes in the Company's current operating plans, the
Company believes that cash generated from operations and the total of its cash
and investments, will be sufficient to meet its working capital and capital
expenditure requirements for at least the next twelve months. Significant
additional capital resources, however, may be required to fund acquisitions of
complementary businesses, products or technologies. Alternatively, the Company
may need to issue additional shares of its capital stock or incur indebtedness
in connection with any such acquisitions. At present, the Company does not have
any agreements or commitments with respect to any such acquisition.
The Company believes the impact of inflation on its business activities has not
been significant to date.
<PAGE> 11
Page 11
RISKS AND UNCERTAINTIES
Concentration of Major Customers; Telephone Company Qualification
Requirements. The market for telephone network test and performance monitoring
systems consists primarily of telephone companies, including the seven RBOCs,
other local telephone companies and long distance telephone companies. The
Company's marketing efforts have focused on the RBOCs. Accordingly, at present
the Company's customer base is highly concentrated and there can be no assurance
that its customer base will become less concentrated. Further, the Company's
customers are significantly larger than the Company and may be able to exert a
high degree of influence over the Company. The loss of one or more of the
Company's major customers, the reduction of orders, or a delay in deployment of
the Company's products could materially and adversely affect the Company's
business, operating results and financial condition. Prior to selling products
to a telephone company, a vendor must first undergo a product qualification
process for its products with the telephone company. Although the qualification
process for a new product varies somewhat among these prospective customers, the
Company's experience is that the process often takes a year or more. Currently,
six of the seven RBOCs have qualified and deployed the Company's T3AS products.
Further, any failure on the part of any of the RBOCs or other telephone
companies to maintain their qualification of the Company's T3AS products,
failure of any of the RBOCs or other telephone companies to deploy the Company's
T3AS products, or any attempt by any of the RBOCs or other telephone companies
to seek out alternative suppliers could have a material adverse effect on the
Company's business, operating results and financial condition. BellSouth,
Ameritech, Southwestern Bell and U S West have entered into purchase contracts
with the Company. Other RBOCs, independent telephone companies, and other
telephone service providers purchase the Company's T3AS products under standard
purchase orders. Since the RBOC contracts may be terminated at the convenience
of the RBOC, the Company believes that the purchase contracts are not materially
different than purchasing under purchase orders. There can be no assurance that
the Company's T3AS products will be qualified by new customers, or that such
qualification will not be significantly delayed. Furthermore, telephone company
work force reductions and staff reassignments have in the past delayed the
product qualification process, and the Company expects such reductions and
reassignments to continue in the future. There can be no assurance that such
reductions and reassignments will not have a material adverse effect on the
Company's business, operating results and financial condition.
High Dependence on Single Product Line. The majority of the Company's
revenue to date has been derived from the sale of T3AS products and services and
the Company expects that this will continue for the foreseeable future. Failure
by the Company to enhance its existing T3AS products and to develop new product
lines and new markets could materially and adversely affect the Company's
business, operating results and financial condition. There is no assurance that
the Company will be able to develop and market new products and technology or
otherwise diversify its source of revenue.
Rapid Technological Change and Dependence on New Products. The market for
the Company's products is characterized by rapid technological advances,
evolving industry transmission standards, changes in customer requirements, and
frequent new product introductions and enhancements. The introduction of
telephone network test and performance- monitoring products involving superior
technologies or the evolution of alternative technologies or new industry
transmission standards could render the Company's existing products, as well as
products currently under development, obsolete and unmarketable. The Company
believes its future success will depend in part upon its ability, on a
cost-effective and timely basis, to continue to enhance T3AS products, to
develop and introduce new products for the telephone network test and
performance-monitoring market and other markets, to address new industry
transmission standards and changing customer needs, and to achieve broad market
acceptance for its products. In particular, the Company anticipates that the
SONET and SDH optical transmission standards will become the industry
transmission standards over the coming years for the North American and
international networks, respectively. The Company's current T3AS products do not
address either the SONET or SDH transmission standard. The Company intends to
extend its current products and develop new products to accommodate such new
transmission standards, as they evolve. The widespread adoption of SONET and/or
SDH as industry transmission standards before the Company is able to
successfully develop a product which addresses such transmission standards could
adversely affect the sale and deployment of the Company's T3AS products. Any
failure by the Company to anticipate or respond on a cost-effective and timely
basis to technological developments, changes in industry transmission standards
or customer requirements, or any significant delays in product development or
introduction could have a material adverse effect on the Company's business.
There can be no assurance that the Company will be able to successfully develop
new products to address new industry transmission standards and technological
changes or to respond to new product announcements by others, or that such
products will achieve market acceptance. The Company may acquire from time to
time, complementary businesses, products or technologies. In connection with
such acquisitions, the Company may be required to commit substantial capital and
human resources and may incur increased expenses. In February 1996, the Company
acquired certain assets of ACD and in July 1996, the Company acquired certain
assets of MPR Teltech. As the Company invests in product development, marketing,
and sales support for the acquired assets, the associated expenses could have an
adverse effect on the Company's business, operating results and financial
condition.
Dependence on Suppliers and Subcontractors; Need to Make Advance Purchase
Commitments. Certain components used in the Company's T3AS products and Remote
Module product, including its VLSI ASICs and other components, are
<PAGE> 12
Page 12
available from a single source or a limited number of sources. The Company has
no supply agreements and generally makes its purchases with purchase orders.
Further, certain components require an order lead time of up to one year. Other
components that currently are readily available may become difficult to obtain
in the future. Failure of the Company to order sufficient quantities of these
components in advance could prevent the Company from increasing production in
response to customer orders in excess of amounts projected by the Company. In
the past, the Company has experienced delays in the receipt of certain of its
key components, which have resulted in delays in product deliveries. There can
be no assurance that delays in key component and part deliveries will not occur
in the future. The inability to obtain sufficient key components as required or
to develop alternative sources if and as required in the future could result in
delays or reductions in product shipments, which in turn could have a material
adverse effect on the Company's customer relationships and operating results.
Additionally, the Company uses third-party subcontractors for the manufacture of
its subassemblies. This reliance on third-party subcontractors involves several
risks, including the potential absence of adequate capacity, the unavailability
of or interruption in access to certain process technologies, and reduced
control over product quality, delivery schedules, manufacturing yields and
costs. Shortages of raw materials or production capacity constraints at the
Company's subcontractors could negatively affect the Company's ability to meet
its production obligations and could result in increased prices for affected
parts. To procure adequate supplies of certain components, the Company must make
advance commitments to purchase relatively large quantities of such components
in a number of circumstances. A large portion of the Company's purchase
commitments consist of custom parts, some of which are sole-source such as VLSI
ASICs, for which there is no alternative use or application. The inability of
the Company to incorporate such components in its products could have a material
adverse effect on the Company's business, operating results and financial
condition.
Product Recall. Producers of telephone network equipment, including test
access and performance monitoring systems such as those being marketed by the
Company, are often required to meet rigorous standards imposed by Bellcore, the
research and development entity created following the divestiture of AT&T to
provide ongoing engineering support to the RBOCs. In addition, the Company must
meet specialized standards imposed by its customers. The Company's systems are
also required to interface in a complex and changing environment with
telecommunication network equipment made by numerous suppliers. In the event
there are material deficiencies or defects in the design or manufacture of the
Company's systems, or if the Company's systems become incompatible with existing
third-party network equipment, the affected products could be subject to a
recall. The Company has experienced two significant product recalls in its
history and there can be no assurance that the Company will not experience any
product recalls in the future. The cost of any subsequent product recall and
associated negative publicity could have a material adverse effect on the
Company's business, operating results and financial condition.
Competition. The Company believes the principal competitive factors in
its market are conformance with Bellcore and other industry transmission
standards and specifications; product features, including price, performance and
reliability; technical support; and the maintenance of close working
relationships with customers. The Company believes it has competed favorably, to
date, with respect to each of these factors. There can be no assurance, however,
that the Company will compete successfully in the future. The Company believes
there are currently no competitors that provide an integrated comprehensive
solution to performance monitoring and testing of the DS3 circuit as does the
Company's T3AS system. The Company believes there are fewer than 10 current
competitors that provide partial solutions to either performance monitoring or
testing of the DS1 or DS0 circuits that make up the DS3 circuit. Such
competitors and prospective competitors include a number of companies, such as
manufacturers of DS1 test and monitoring equipment, manufacturers of NIUs,
manufacturers of digital cross-connect test and performance monitoring equipment
and manufacturers of large transmission equipment. Additionally, the Company
believes there are currently fewer than 20 current competitors that provide OS
applications for network systems management. Many of these competitors have
significantly greater technical, financial, manufacturing and marketing
resources than the Company, and several of them have long-established
relationships with telephone companies. In addition, product price reductions
resulting from market share penetration initiatives or competitive pricing
pressures could have a material and adverse effect on the Company's business,
operating results, and financial condition. There can be no assurance that the
Company will have the financial resources, technical expertise or manufacturing,
marketing, distribution and support capabilities to compete successfully in the
future.
Proprietary Technology. The Company relies on a combination of technical
leadership, trade secret, copyright and trademark protection and non-disclosure
agreements to protect its proprietary rights. Although the Company has pursued
and intends to continue to pursue patent protection of inventions that it
considers important and for which such protection is available, the Company
believes its success will be largely dependent on its reputation for technology,
product innovation, affordability, marketing ability and response to customer's
needs. Currently, the Company has two U.S. patents granted and three U.S. patent
applications allowed. One of the allowed patent applications relates to the
Company's Remote Module product. Additionally, the Company has seven pending
U.S. patent applications and two international (Patent Cooperation Treaty)
applications on file covering various circuit and system aspects of its
products. There can be no assurance that the Company will be granted additional
patents or that, if any patents are granted, they will provide the Company with
significant protection or will not be challenged. As part of its confidentiality
procedures, the Company generally enters into non-disclosure
<PAGE> 13
Page 13
agreements with its employees and suppliers, and limits access to and
distribution of its proprietary information. Despite these precautions, it may
be possible for a third party to copy or otherwise obtain and use the Company's
technology without authorization. Accordingly, there can be no assurance that
the Company will be successful in protecting its proprietary technology or that
ADA's proprietary rights will preclude competitors from developing products or
technology equivalent or superior to that of the Company. The telecommunications
industry is characterized by the existence of a large number of patents and
frequent litigation based on allegations of patent infringement. The Company is
not aware of infringement by its products or technology of the proprietary
rights of others. There can be no assurance that third parties will not assert
infringement claims against the Company in the future or that any such
assertions will not result in costly litigation or require the Company to obtain
a license to intellectual property rights of such parties. There can be no
assurance that any such licenses would be available on terms acceptable to the
Company, if at all. Further, litigation, regardless of outcome, could result in
substantial cost to and diversion of efforts by the Company. Any infringement
claims or litigation against the Company could materially and adversely affect
the Company's business, results of operations and financial condition. Moreover,
the laws of some foreign countries do not protect the Company's proprietary
rights in the products to the same extent as do the laws of the United States.
Management of Changing Business. In February 1996, the Company acquired
certain assets of ACD and in July 1996, the Company acquired certain assets of
MPR Teltech. As a result of these acquisitions, the Company obtained additional
office space and hired additional personnel in both Indiana and British
Columbia, Canada to support the business operations of the new products,
services and technologies acquired. In addition, over the past three years, the
Company has experienced significant growth in its infrastructure as the Company
seeks to expand its business. Such growth has placed, and is expected to
continue to place, a significant strain on the Company's management,
information systems and operations. The strain experienced to date has chiefly
been in hiring sufficient numbers of qualified personnel to support the
expansion of the business. The Company is not able to forecast additional
strains that may be placed on the Company's management, information systems and
operations as a result of either the ACD and MPR Teltech asset acquisitions or
in the future in the event that growth continues. The Company's potential
inability to manage its changing business effectively could have a material
adverse effect on the Company's business, results of operations and financial
condition.
Dependence on Key Personnel. The success of the Company is dependent, in
part, on its ability to attract and retain highly qualified personnel.
Competition for such personnel is intense and the inability to attract and
retain additional key employees or the loss of one or more current key employees
could adversely affect the Company. There can be no assurance that the Company
will be successful in hiring or retaining requisite personnel.
Volatility of Stock Price. The Company's future earnings and stock price
may be subject to significant volatility, particularly on a quarterly basis. Any
shortfall in revenue or earnings from levels expected by public market analysts
and investors could have an immediate and significant adverse effect on the
trading price of the Company's common stock.
<PAGE> 14
Page 14
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
From time to time, ADA may be involved in litigation relating to claims
arising out of its operations in the normal course of business. As of the date
of this Quarterly Report, the Company is not a party to any legal proceedings.
ITEM 2. CHANGES IN SECURITIES.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
The Annual Meeting of Shareholders was held on May 23, 1996. At the
meeting, the shareholders elected Patricia L. Higgins, Christopher B.
Paisley, Peter P. Savage, Edward F. Tuck and Geoffrey Y. Yang as
directors of the Company for the ensuing year and until their
respective successors are elected. The following table sets forth the
voting in this election:
<TABLE>
<CAPTION>
For Against Withheld
<S> <C> <C> <C>
Patricia L. Higgins 9,662,231 - 284,691
Christopher B. Paisley 9,662,531 - 284,391
Peter P. Savage 9,663,506 - 283,416
Edward F. Tuck 9,665,397 - 281,525
Geoffrey Y. Yang 9,664,097 - 282,825
</TABLE>
In addition, the shareholders voted on the following proposals:
(a) To approve an amendment to the 1994 Stock Option/Stock Issuance
Plan increasing the number of shares of Common Stock authorized to be
issued by 1,000,000 shares:
<TABLE>
<CAPTION>
For Against Abstain Broker Non-Votes
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
5,008,466 1,850,315 41,456 2,952,085
</TABLE>
This proposal was approved.
(b) To approve an amendment to the 1994 Employee Stock Purchase Plan
increasing the number of shares of Common Stock authorized to be issued
by 100,000 shares:
<TABLE>
<CAPTION>
For Against Abstain Broker Non-Votes
<S> <C> <C> <C> <C>
6,692,532 370,467 41,456 2,747,867
</TABLE>
<PAGE> 15
Page 15
This proposal was approved.
(c) To ratify the appointment of Coopers and Lybrand L.L.P. as the
Company's independent public accountants for the fiscal year ending
December 31, 1996:
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C> <C>
9,908,232 15,925 22,765
</TABLE>
This proposal was approved.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
<TABLE>
<CAPTION>
Exhibit
Number Description
<S> <C> <C>
10.1* Applied Digital Access 1994 Stock Option/Stock
Issuance Plan, as amended (Exhibit 99.1).
10.2* Applied Digital Access 1994 Employee Stock Purchase
Plan, as amended (Exhibit 99.4).
10.3* Applied Digital Access 1996 Non-Qualified Stock
Option Plan (Exhibit 99.6).
11.1 Statement regarding computation of net income (loss) per share.
27.1 Financial Data Schedule.
</TABLE>
* Incorporated by reference to the same numbered exhibit (except as
otherwise referenced) in the Company's registration statement on
Form S-8 (No. 333-08297) filed by the Company with the SEC on
July 17, 1996.
(b) Reports on Form 8-K.
On March 15, 1996, the Company filed a report on Form 8-K in connection
with the acquisition of certain assets of ACD at an auction held in
Federal Bankruptcy Court, Southern District of Indiana. ACD developed
and marketed operations systems software used primarily by independent
telephone companies to manage certain functions in their networks.
On May 14, 1996, the Company filed a report on Form 8-K/A to provide
financial statements of ACD as required by Regulation S-X, along with
applicable pro forma financial information required pursuant to Article
11 of Regulation S-X.
On July 31, 1996, the Company filed a report on Form 8-K in connection
with the acquisition of certain assets of MPR Teltech.
<PAGE> 16
Page 16
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Applied Digital Access, Inc.
Date: August 14, 1996 /s/ Peter P. Savage
--------------- --------------------
Peter P. Savage
Director
President and Chief Executive
Officer
Date: August 14, 1996 /s/ James L. Keefe
--------------- -------------------
James L. Keefe
Vice President Finance and
Administration and Chief
Financial Officer
<PAGE> 1
EXHIBIT 11.1
APPLIED DIGITAL ACCESS, INC.
STATEMENT REGARDING COMPUTATION OF NET INCOME (LOSS) PER SHARE
(UNAUDITED)
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income (loss) ($1,440) $228 ($2,308) $1,966
=============== ============= ================= ===================
Reconciliation of weighted average
number of shares outstanding to
amount used in net income
per share computation:
Weighted average number of
shares outstanding 11,983 11,828 11,961 11,742
Weighted average number of
options and warrants outstanding, - 944 - 1,056
--------------- ------------- ----------------- -------------------
Weighted average number of
shares outstanding 11,983 12,772 11,961 12,798
=============== ============= ================= ===================
Net income (loss) per share ($0.12) $0.02 ($0.19) $0.15
=============== ============= ================= ===================
</TABLE>
See Note 3 to Condensed Financial Statements
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 1,883
<SECURITIES> 22,076
<RECEIVABLES> 3,461
<ALLOWANCES> (50)
<INVENTORY> 7,441
<CURRENT-ASSETS> 37,207
<PP&E> 7,800
<DEPRECIATION> (3,781)
<TOTAL-ASSETS> 48,265
<CURRENT-LIABILITIES> 4,453
<BONDS> 0
0
0
<COMMON> 49,318
<OTHER-SE> 2,412
<TOTAL-LIABILITY-AND-EQUITY> 48,265
<SALES> 11,153
<TOTAL-REVENUES> 11,153
<CGS> 5,067
<TOTAL-COSTS> 5,067
<OTHER-EXPENSES> 9,387
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (4)
<INCOME-PRETAX> (2,308)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,308)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,308)
<EPS-PRIMARY> (0.19)
<EPS-DILUTED> (0.19)
</TABLE>
