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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 March 31. 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 11,982,623 shares of the registrant's Common Stock, no par value,
outstanding on April 30,1996.
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APPLIED DIGITAL ACCESS, INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
Page
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets at March 31, 1996 and
December 31, 1995 3
Condensed Statements of Operations for the three
months ended March 31, 1996 and
March 31, 1995 4
Condensed Statements of Cash Flows for the three
months ended March 31, 1996 and
March 31, 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 10-13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities 13
Item 3. Defaults Upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13-14
SIGNATURES 15
</TABLE>
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Item 1.
APPLIED DIGITAL ACCESS, INC.
CONDENSED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
-------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4,106 $ 1,673
Investments - current 24,104 25,079
Accounts receivable, net 3,091 5,358
Inventory, net 6,547 6,572
Deferred income taxes 750 750
Prepaid expenses and other current assets 1,145 1,296
-------- --------
Total current assets 39,743 40,728
Investments - non-current 5,021 5,095
Property and equipment, net 3,685 3,361
Deferred income taxes 752 752
Other, net 332 --
-------- --------
$ 49,533 $ 49,936
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,983 $ 1,820
Accrued expenses 1,011 843
Accrued warranty 1,342 1,305
Current portion of obligations under capital leases 28 32
-------- --------
Total current liabilities 4,364 4,000
Obligations under capital leases, net of current portion 45 49
-------- --------
Total liabilities 4,409 4,049
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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,
11,979,552 and 11,899,216 shares issued and outstanding at
March 31, 1996 and December 31, 1995, respectively 49,191 49,000
Additional paid-in capital 2,404 2,391
Unrealized gain on investments 48 147
Accumulated deficit (6,519) (5,651)
-------- --------
Total shareholders' equity 45,124 45,887
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$ 49,533 $ 49,936
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</TABLE>
The accompanying notes are an integral part of the financial statements.
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APPLIED DIGITAL ACCESS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
1996 1995
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(AMOUNTS IN THOUSANDS
EXCEPT PER SHARE DATA)
<S> <C> <C>
Revenue $ 6,637 $ 8,019
Cost of revenue 3,020 3,056
-------- --------
Gross profit 3,617 4,963
Operating expenses:
Research and development 1,667 1,295
In-process research and development
related to asset acquisition 1,186 --
Sales and marketing 1,441 981
General and administrative 680 510
-------- --------
Total operating expenses 4,974 2,786
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Operating income (loss) (1,357) 2,177
Interest income 474 504
Other income (expense), net 15 (6)
-------- --------
Income (loss) before income taxes (868) 2,675
Provision for income taxes -- 936
-------- --------
Net income (loss) ($ 868) $ 1,739
-------- --------
Net income (loss) per share ($ 0.07) $ 0.14
-------- --------
Number of shares used in per share
computations 11,939 12,857
</TABLE>
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APPLIED DIGITAL ACCESS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
------------------
1996 1995
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(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ($ 868) $ 1,739
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 255 199
Other 15 (32)
Changes in assets and liabilities:
Accounts receivable 2,266 (3,740)
Inventory 94 (324)
Prepaid expenses and other current assets 151 (74)
Accounts payable 163 (342)
Accrued expenses 168 670
Accrued warranty 37 79
------- -------
Net cash provided (used) by
operating activities 3,467 (1,825)
------- -------
Cash flows from investing activities:
Purchases of investments (8,042) (7,954)
Maturities of investments 8,926 8,933
Purchases of property and equipment (200) (702)
Purchase costs related to asset acquisition (1,900) --
------- -------
Net cash provided (used) by investing activities (1,216) 277
------- -------
Cash flows from financing activities:
Principal payments on capital leases (9) (52)
Proceeds from the issuance of common
stock under stock option plans 191 303
------- -------
Net cash provided by financing activities 182 251
------- -------
Net increase (decrease) in cash and cash equivalents 2,433 (1,297)
Cash and cash equivalents, beginning of period 1,673 2,680
------- -------
Cash and cash equivalents, end of period $ 4,106 $ 1,383
------- -------
</TABLE>
The accompanying notes are an integral part of the financial statements.
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APPLIED DIGITAL ACCESS, INC.
Notes to Condensed Financial Statements
March 31, 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 month period ended March 31, 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>
March 31, 1996 December 31, 1995
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(Dollars in thousands)
<S> <C> <C>
Raw materials $3,124 $3,483
Work-in-process 3,224 2,314
Finished goods 668 1,313
------ ------
7,016 7,110
Less inventory reserve (469) (538)
------ ------
$6,547 $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.
4. Contingencies
In March 1995, a class action lawsuit was filed against the Company and two of
its officers, one of whom is also a director of the Company, in the U.S.
District Court for the Southern District of Southern California. The suit
alleged violations of Section 10(b) and Rule 10b-5 of the Securities Exchange
Act of 1934, as amended ("the Act"), arising out of alleged misrepresentations
and omissions by the Company and the named officers. The suit also alleged
violation of Section 20(a)
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of the Act arising out of the alleged "control" of the Company by the officer
defendants. The suit was brought on behalf of purchasers of the Company's
securities during the period October 10, 1994 through March 29, 1995, and sought
unspecified damages. In December 1995, the Company entered into a settlement
agreement pursuant to which all claims were dismissed with prejudice subject to
finalization of formal settlement documents and court approval which was
received in February 1996. The litigation was settled for approximately $1.5
million, of which the Company was obligated to pay approximately $446,000 with
the remainder paid by the Company's directors' and officers' liability insurance
carrier. Charges associated with the suit were accrued in 1995.
5. Acquisition of Certain Assets of Applied Computing Devices, Inc. ("ACD")
On February 29, 1996, the Company acquired certain assets of 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>
Three Months Ended
March 31,
1996 1995
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<S> <C> <C>
Revenue $ 6,737 $11,799
Net income/(loss) (1,388) 935
Net income/(loss) per share ($ 0.12) $ 0.07
Weighted average shares used
in computation 11,939 12,857
</TABLE>
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Item 2.
APPLIED DIGITAL ACCESS, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
March 31, 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 February 29, 1996, the Company acquired certain assets of 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. 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, one of whom is also a director, 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 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.
Results of Operations
Revenue decreased 17% from $8,019,000 for the three months ended March 31, 1995
to $6,637,000 for the three months ended March 31, 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 March 31, 1996 included
approximately $1,825,000 in service revenue for engineering and installation
("E&I") services provided to customers for the installation of the Company's
T3AS products, compared to $134,000 for the same quarter a year ago. One
Regional Bell Operating Company ("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. For the quarter ended March
31, 1996, the Company did not have any sales of OS products acquired in the ACD
asset acquisition. The majority of the Company's revenue to date has been
derived from the sale of T3AS products. The Company
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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 27% from $4,963,000 for the three months ended March 31,
1995 to $3,617,000 for the three months ended March 31, 1996 and decreased as a
percent of revenue from 62% for the three months ended March 31, 1995 to 54% for
the three months ended March 31, 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 29% from $1,295,000 for the three
months ended March 31, 1995 to $1,667,000 for the three months ended March 31,
1996. The increase was 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 month period ended March 31, 1996 increased 24%
compared to the same period in the prior year. Approximately seven points of the
total personnel expense increase 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 quarter ended March 31, 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.
Sales and marketing expenses increased approximately 47% from $981,000 for the
three months ended March 31, 1995 to $1,441,000 for the three months ended March
31, 1996. The increase was primarily the result of the addition of technical
support and marketing personnel, and increased travel expenses offset by lower
promotional activity due to timing of industry trade shows compared to the same
period last year. Approximately 8 points 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.
General and administrative expenses increased approximately 33%, from $510,000
for the three months ended March 31, 1995 to $680,000 for the three months ended
March 31, 1996. The increase was mostly the result of increased consulting
expenses related to the Company's recruiting efforts for additional personnel,
increased legal and professional services, and increased travel expenses. 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 6% from $504,000 for the three months
ended March 31, 1995 to $474,000 for the three months ended March 31, 1996. The
decrease is primarily the result of a decrease in cash investments compared to
the same period last year.
The Company did not provide for income taxes for the three months ended March
31, 1996 due to a net loss, compared to an effective rate of 35% for the three
months ended March 31, 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
$868,000, or $.07 per share, for the three months ended March 31, 1996 compared
to net income of $1,739,000, or $.14 per share for the three months ended March
31, 1995.
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Excluding the $1.2 million charge associated with the acquisition of ACD assets,
the Company would have recorded net income of approximately $197,000, or $.02
per share based on an effective tax rate of 38%.
Liquidity and Capital Resources
At March 31, 1996, the Company had approximately $33,231,000 in cash and
investments, compared to $31,847,000 at December 31, 1995. The increase in cash
and investments is primarily due to decreased accounts receivable offset by cash
payments related to the ACD asset acquisition.
Working capital decreased approximately $1,349,000 from $36,728,000 at December
31, 1995 to $35,379,000 at March 31, 1996. The decrease in working capital was
primarily the result of the ACD asset acquisition.
For the three months ended March 31, 1996, the Company generated $3,467,000 from
operating activities primarily the result of decreased accounts receivable
compared to the use of $1,825,000 by operating activities for the three months
ended March 31, 1995.
Net cash used in investing activities was $1,216,000 for the three months ended
March 31, 1996 compared to cash provided from investing activities of $277,000
for the same period a year ago. The increased use of cash was primarily due to
cash payments related to the ACD asset acquisition offset by a decrease in cash
used for capital expenditures. Cash used for capital expenditures was
approximately $200,000 for the three months ended March 31, 1996 compared to
$702,000 for the three months ended March 31, 1995. Most of the additions were
for the purchase of computer and lab equipment for research and development. 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.
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.
The Company believes the impact of inflation on its business activities has not
been significant to date.
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.
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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
in the future 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. As the
Company invests in product development, marketing, and sales support for the
acquired ACD products, 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
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
<PAGE> 12
Page 12
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. 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. ADA 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 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. 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. In
February 1996, the Company acquired certain assets of ACD. As a result of the
acquisition, the Company obtained office space and hired personnel in Indiana to
support the business operations of the new products acquired. 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
asset acquisition 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
<PAGE> 13
Page 13
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.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
In March 1995, a class action lawsuit was filed against the Company and
two of its officers, one of whom is also a director of the Company, in the U.S.
District Court for the Southern District of Southern California. The suit
alleged violations of Section 10(b) and Rule 10b-5 of the Securities Exchange
Act of 1934, as amended ("the Act"), arising out of alleged misrepresentations
and omissions by the Company and the named officers. The suit also alleged
violation of Section 20(a) of the Act arising out of the alleged "control" of
the Company by the officer defendants. The suit was brought on behalf of
purchasers of the Company's securities during the period October 10, 1994
through March 29, 1995, and sought unspecified damages. In December 1995, the
Company entered into a settlement agreement pursuant to which all claims were
dismissed with prejudice subject to finalization of formal settlement documents
and court approval which was received in February 1996. The litigation was
settled for approximately $1.5 million, of which the Company was obligated to
pay approximately $446,000 with the remainder paid by the Company's directors'
and officers' liability insurance carrier. Charges associated with the suit were
accrued in 1995.
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.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Exhibit
Number Description
11.1 Statement regarding computation of net income (loss)
per share.
27.1 Financial Data Schedule.
(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 Applied Computing Devices, Inc. ("ACD") at an
auction held in Federal Bankruptcy Court, Southern District of
<PAGE> 14
Page 14
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.
<PAGE> 15
Page 15
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: May 15, 1996 /s/ Peter P. Savage
------------------------------
Peter P. Savage
Director
President and Chief Executive
Officer
Date: May 15, 1996 /s/ Richard W. Carter
------------------------------
Richard W. Carter
Vice President Finance and
Administration and Chief
Financial Officer
<PAGE> 1
Applied Digtial Access, Inc.
FORM 10-Q
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
Ended March 31,
1996 1995
-------- -------
<S> <C> <C>
Net income (loss) ($ 868) $ 1,739
======== =======
Reconciliation of weighted average
number of shares outstanding to
amount used in net income (loss)
per share computation:
Weighted average number of
shares outstanding 11,939 11,655
Weighted average number of
options and warrants outstanding -- 1,202
-------- -------
Weighted average number of
shares outstanding 11,939 12,857
======== =======
Net income (loss) per share ($ 0.07) $ 0.14
======== =======
</TABLE>
See Note 3 to Condensed Financial Statements
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 4,106
<SECURITIES> 24,104
<RECEIVABLES> 3,141
<ALLOWANCES> (50)
<INVENTORY> 6,547
<CURRENT-ASSETS> 39,743
<PP&E> 7,162
<DEPRECIATION> (3,477)
<TOTAL-ASSETS> 49,533
<CURRENT-LIABILITIES> 4,364
<BONDS> 0
0
0
<COMMON> 49,191
<OTHER-SE> 2,452
<TOTAL-LIABILITY-AND-EQUITY> 49,533
<SALES> 6,637
<TOTAL-REVENUES> 6,637
<CGS> 3,020
<TOTAL-COSTS> 3,020
<OTHER-EXPENSES> 4,974
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (2)
<INCOME-PRETAX> (868)
<INCOME-TAX> 0
<INCOME-CONTINUING> (868)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (868)
<EPS-PRIMARY> (0.07)
<EPS-DILUTED> (0.07)
</TABLE>
